Joe Zhixiong Zhou v. Saif Partners Ii L P and Anothers
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HCA 1551/2010 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1551 OF 2010 ____________ BETWEEN
____________ Before: Mr Recorder Patrick Fung SC in Chambers Date of Hearing: 24 July 2014 Date of Handing Down Decision: 31 October 2014 ________________________ D E C I S I O N ________________________ 1.This is an application by the plaintiff by Summons issued on 27 February 2014 (“the Summons”) against the defendants for specific discovery of documents and for a consequential direction to extend the time for the parties to exchange witness statements. BACKGROUND 2.The 1st defendant (“D1”) is and was at all material times an exempted limited partnership registered under the partnership law of the Cayman Islands. The 2nd defendant (“D2”) is the general partner of D1. The plaintiff was formerly a limited partner of D1. 3.The person in control of D2 was and is someone by the name of Andrew Yan (“Yan”). He is the sole director and shareholder of D2. 4.D1 is itself the sole general partner of another exempted limited partnership in the Cayman Islands by the name of SAIF II GP L P (“SAIF II Partnership”). 5.SAIF II Partnership is in turn the sole general partner of yet another exempted limited partnership in the Cayman Islands by the name of SB Asia Investment Fund II L P (“Fund II”). Fund II is a private equity fund which has invested over US$640 million in companies mainly in China, India and Korea. There seems to be some argument by the defendants as to whether the plaintiff was a former principal of Fund II as opposed to being just a limited partner. 6.In or around 2001, the plaintiff first met Yan. He later worked for companies controlled by Yan. 7.Subsequently, a Partnership Agreement dated 9 December 2004 (“the Partnership Agreement”) was entered into between the plaintiff and D2 in relation to D1. 8.After about 6 months, the plaintiff and D2 entered into another agreement to amend the terms of the Partnership Agreement. This was the Amended and Restated Limited Partnership Agreement dated 29 June 2005 (“the Amended LPA”). 9.In or around mid‑2006, Yan was contemplating starting a new private equity fund (“Fund III”) with D1. The plaintiff informed Yan that he was not interested in Fund III. Eventually, the plaintiff, D1 and D2 entered into a Separation Agreement dated 11 December 2006 (“the Separation Agreement”) providing for the plaintiff’s departure from D1 for the purposes of forming a new fund and for his non‑participation in D1’s Fund III. 10.Under Clause 6 of the Amended LPA, the plaintiff was entitled to Capital Distributions and Other Non‑Carry Distributions as well as Carried Interest Distributions. 11.Clause 8 of the Separation Agreement which refers to the plaintiff as “Joe” provides as follows:
12.It is the plaintiff’s case that:
13.The plaintiff claims damages, all necessary accounts and inquiries, interest and costs against the defendants. 14.The defendants have filed a very substantial Amended Defence and Counterclaim (“AD & C”). 15.Paragraph 30 of the AD & C gives a summary of the case of D1 and D2 as follows:
16.I will refer to the specific allegations when I come to deal with each category of documents the specific discovery of which is sought. 17.The Counterclaim by the defendants against the plaintiff is very sizeable as can be seen from paragraphs 61.4 and 61.5 of the AD & C:
18.With the above background, I now proceed to deal with the application. THE LAW 19.I do not discern that there is very much controversy between Mr Lo, counsel for the plaintiff, and Mr Harry, counsel for the defendants, on the legal principles applicable to an application such as the present. Both sides have referred to one of most recent authorities on the topic which is the case of Lee Sai Nam v Li Shu Chung (unreported Decision of DHCJ Marlene Ng in HCA 1711/2009 handed down on 10 January 2014). 20.In that case, the learned deputy judge carefully reviewed and analysed a number of the well‑known authorities on the topic of specific discovery and set out the relevant principles in paragraphs 30 – 57 of her Decision. I respectfully take guidance from that part of the Decision. 21.For present purposes, it suffices for me to refer to paragraphs 30 and 31 of the learned Deputy Judge’s Decision which set out the general principles and approach as follows:
THE APPLICATION 22.I now proceed to deal with the various categories of documents sought under the nine paragraphs in the Schedule to the Summons. Paragraph 1 23.Paragraph 1 reads as follows:
24.Since the main claim of the plaintiff is for damages for breach of contract as a result of the defendants’ failure to make Carried Interest distributions to him under the Amended LPA and the Separation Agreement, the documents asked for must be relevant to the issues between the parties. Furthermore, there ought to be such documents in the possession, custody or power of the defendants. 25.Mr Lo on behalf of the plaintiff also makes the point that, although by the time of the Summons the defendants had made disclosure of some Distribution Notices, the figures contained therein are only asserted figures. Furthermore, documents relating to some 10 historical distributions were disclosed by the defendants only after the plaintiff had taken legal proceedings against them in October 2009. The plaintiff is justifiably sceptical of such documents. 26.I agree with Mr Lo that the plaintiff is entitled to such discovery and that there should be no difficulty on the part of the defendants in making such discovery. 27.I take the view, however, that asking for “all documents” is slightly too wide a request. At this stage, I am only prepared to order discovery of all the documents as specified under sub‑paragraphs (a) – (d) in paragraph 1. This would of course not preclude the plaintiff from making an application for further discovery in future should the same be justified. 28.Hence, the order for discovery which I will make in relation to paragraph 1 of the Schedule to the Summons is for:
Paragraph 2 29.Paragraph 2 reads as follows:
30.Paragraphs 24 – 26 of the AD & C allege that the plaintiff owed fiduciary duties to “SAIF Partners (including the 1st and 2nd Defendants and Fund II)” and had breached such fiduciary duties. Paragraph 3 of the AD & C pleads that “SAIF Partners, being a reference to the group of entities (which includes the Defendants and Fund II) trading under the name of “SAIF Partners”, as opposed to any specific entities within the SAIF Partners Group, currently manages approximately US$4 billion in capital through a number of funds.” 31.The defendants clarified by further and better particulars of the AD & C that “SAIF Partners” comprise of the seven entities listed in paragraph 2 of the Schedule to the Summons. 32.The plaintiff’s case is that those entities are all separate and distinct entities with disparate interests and that there is no basis for treating them as a group. 33.In such circumstances and bearing in mind that the counterclaim by the defendants against the plaintiff is to the tune of between US$105 million and US$208.3 million, I take the view that the discovery sought in paragraph 2 is justified except for its scope. 34.At this stage, I am only prepared to order discovery in relation to paragraph 2 of the Schedule to the Summons for:
Paragraph 3 35.Paragraph 3 reads as follows:
36.The discovery sought relates to the counterclaim. 37.The defendants allege that plaintiff had been in breach of his duties (including fiduciary duties) owed to the defendants and Fund II in relation to Xinrui, My Show Ad, Mobile Winks and My Show Loans. Mr Lo has pointed out that three of the alleged wrongdoings were alleged to have been committed or continued until after the date when the Separation Agreement was signed on 11 December 2006 and the month of March 2007 in which the plaintiff severed his relationship with the defendants. 38.There is no dispute between the parties regarding the last‑mentioned two dates. 39.In such circumstances, I do not see the relevance of the discovery sought under paragraph 3. 40.If the defendants wish to advance their case on the basis that somehow the duties or fiduciary duties owed by the plaintiff to them continued beyond March 2007 after the severance of relationship between the plaintiff and them, they will have to justify it. If they do not produce the necessary documentation to prove that such duties continued beyond March 2007, it is their own lookout and their claim may be much weakened. 41.I therefore do not make any order for discovery under paragraph 3 of the Schedule to the Summons. Paragraph 4 42.Paragraph 4 reads as follows:
43.The Separation Agreement contains the following provisions:
44.It is obvious that the “Marketing Date” is very important for the purpose of regulating the rights and duties of the parties under the Separation Agreement. 45.Under paragraph 68.1 of the AD & C, the defendants plead as follows:
46.There can therefore be no doubt as to the relevance of documents relating to the “second closing” and the “Marketing Date” under the Separation Agreement. 47.As Mr Lo has pointed out, the defendants originally pleaded that the second closing of Fund III occurred on “7 February 2007”. It was subsequently amended to read “16 February 2007”. 48.The defendant’s answer is basically that there is no need for discovery to be made because they “have already clarified that the second closing of Fund II (sic) in fact took place on 16 February 2007.” They also say that it is a fishing expedition by the plaintiff. 49.I do not agree with the defendants’ submission. Furthermore, they must have in their possession, custody or power the relevant documents. 50.On the other hand, I think that the application is couched in terms which are wider than necessary. I do not think that documents relating to and/or evidencing the marketing of Fund III other than for the purpose of showing the time of the second closing are strictly necessary. 51.I therefore make an order for discovery of the documents under paragraph 4 of the Schedule to the Summons in the following terms:
Paragraphs 5 and 6 52.The parties have chosen to deal with paragraphs 5 and 6 together. I agree with such approach. They read as follows:
53.Basically, the position is as follows: The plaintiff is seeking discovery of the primary documents. The defendants answer by saying they have already delivered five lever‑arch files of documents and two audit reports and therefore no more should be disclosed. Furthermore, they have no more relevant documents. 54.The defendants have made very serious allegations of wrongdoing by the plaintiff in relation to the companies in question. Such allegations are contained in a lengthy pleading, the AD & C. They claim very substantial sums in damages and/or equitable compensation and also an order for an account against the plaintiff. In such circumstances, in my judgment, it is fair for the plaintiff to be given every opportunity to check the veracity of the defendants’ allegations. 55.If the defendants really do not have the documents asked for by the plaintiff, they can simply swear an affidavit deposing to that fact. 56.I think, however, that the scope of the discovery sought is wider than necessary. Since the wrongdoings alleged against the plaintiff go up to August 2008, I propose to limit the scope of the discovery to up to 4 April 2009. 57.I therefore make an order for discovery in the terms of paragraphs 5 and 6 of the Schedule to the Summons but limited to the period between 5 April 2006 and 4 April 2009 under both paragraphs. Paragraph 7 58.Paragraph 7 reads as follows:
59.In light of the nature and size of the counterclaim, I am of the view that some of the documents asked for are clearly relevant to the issues between the parties. 60.The defendants say that no directors’ reports and annual reports were created or kept by them. This, however, has only been said by the solicitor acting for them, Mr Yuen Po Kwong, Peter, who has deposed in paragraph 98 of his Affirmation filed on 17 April 2014 that he “is instructed by the Defendants that no directors’ reports were created or kept by the Defendants in relation to My Show, WOFE and Show World.” I take the view that the non‑existence of any document asked for should be sworn to by the lay clients rather than the solicitor. 61.At this juncture, I also think that the scope of the application is wider than necessary. 62.I am only prepared at this stage to make an order for discovery under paragraph 7 of the Schedule to the Summons in the following terms:
Paragraph 8 63.Paragraph 8 reads as follows:
64.One of the defendants’ complaints against the plaintiff is that he had acted in breach of his duty in approving the third of the three loans by My Show to Mr Zhou Yang, namely, a loan of US$2.5 million. 65.The plaintiff’s defence is that the said loan as well as the two earlier loans were made for the sole purpose of providing working capital to Show World and related entities in the Show World transaction and that the relevant loan agreement was entered into on the advice of My Show’s lawyer and approved by its board of directors. 66.In the above circumstances, I agree with Mr Lo that what happened in the arbitration between My Show and Mr Zhou Yang in which the former was claiming for repayment of the said loan of US$2.5 million would be relevant to the issues between the parties. 67.I think, however, that the terms of the request are wider than necessary. 68.I therefore grant an order for discovery under paragraph 8 of the Schedule to the Summons in the following terms:
Paragraph 9 69.Paragraph 9 reads as follows:
70.In view of the matters set out in relation to paragraph 8 of the Schedule to the Summons above, I am of the view that the documents asked for are relevant to the issues between the parties. 71.The defendants oppose the application on the basis that the matter has been covered by the witness statement of Lydia Lau. In my judgment, the plaintiff is entitled to ask for discovery of the primary documents. I do not think that requiring the discovery of the documents relating to this single loan would in any way be oppressive to the defendants. 72.I therefore make an order for discovery in the terms of paragraph 9 of the Schedule to the Summons. Conclusion 73.The parties ask for consequential directions for an extension of time for them to exchange witness statements. I direct that the parties should consult with each other and produce a draft order for my approval within 14 days from the date of handing down of this Decision. 74.The plaintiff has largely succeeded on his application. I see no reason why costs should not follow the event. I therefore make an order nisi that the defendants do pay to the plaintiff the costs of and incidental to the Summons. 75.Lastly, I am indebted to counsel on both sides for their able assistance.
Mr Benny Lo, instructed by Reed Smith Richards Butler, for the plaintiff Mr Timothy Harry, instructed by Peter Yuen & Associates in association with Fangda Partners, for the 1st and 2nd Defendants |
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