Chung Pui Tak and Antoher v. Tam Chi Leung Nolan and Others

HCA 1439/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1439 OF 2012

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BETWEEN

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D E C I S I O N

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I. INTRODUCTION

1.The 1^st and 2^nd plaintiffs (“P1” and “P2”, collectively “Ps”) claimed that P1 used to own/control a Hong Kong company called Everbest Printing Company Limited (“Everbest”) which carried on business of printing and packing, but it was sold to a third party in 2005 with P1 remaining as its consultant until June 2006. 

2.There was no dispute that:

(a) in/about 1992/1993, P1 became acquainted with the 1^st defendant (“D1”);

(b) in/about 1995, P1 and D1 invested in equal shares in 2 shops in Sin Tat Plaza, Mongkok (“Mongkok Shops”) held via Kid Art Limited (“Kid Art”).[1]

(c) D1 and his wife owned/controlled Kid Art;[2]

(d) P2 was acquired for the purpose of giving effect to the business cooperation between P1 and D1;

(e) D1 via the 3^rd defendant (“D3”) acquired the 2^nd defendant (“D2”) to engage in the business of printing and supply of packing materials,[3] and D3 and D1 respectively held 20,999 shares and 1 share in D2;

(f) D1 and his wife respectively held 6 shares and 4 shares[4] in D3, and they were the directors of D2 and D3;

(g) at all material times, D1 exercised/exercises de facto control over D2 (since its acquisition) and D3;

(h) Kid Art, P2, D2 and D3 were Hong Kong companies.

3.The Ps and D1/D2/D3 (collectively, “Ds”) disagreed over the basis upon which D1 exercised de facto control over D2.  Ps’ pleadings averred that at the end 2003, P1 (who reposed substantial trust and confidence in D1) discussed with D1 about a possible business joint venture, and as a result they reached an oral agreement in the following terms:

(a) P1 and D1 would set up a new company in Mainland China (“Proposed Company”) to engage in the business of production and supply of carton boxes and packaging materials;

(b) D1 would be responsible for the daily management and running of the Proposed Company;

(c) P1 would be responsible for the bulk of the initial capital required for setting up the Proposed Company to enable it to reach a state of substantive operation;

(d) P1 would direct sub-contracting business from Everbest to the Proposed Company to ensure its initial profitability as a going concern;

(e) P1 and D1 would respectively own 60% and 40% of the shareholding in the Proposed Company, and be entitled to its profits proportionate to their respective shareholding;

(f) P1 did not wish his share in the Proposed Company to become known to others, so his 60% shareholding would be held indirectly by another company or by D1 in trust for him;

(g) in consideration of D1 being given 40% shareholding in the Proposed Company and sharing 40% of its profits, D1 would hold 40% of D2’s issued shares (or cause the same to be so held) in trust for P1 (“Trust for D2 Shares”).

4.The Ps denied any option to purchase 40% shareholding in D2 was raised or discussed between P1 and D1 as alleged by the Ds in the paragraph below or at all since P1 had already acquired 40% interest in D2 pursuant to the Trust for D2 Shares under the aforesaid agreement.  The Ps also denied P1 ever agreed to invest or at any time invested HK$400,000 in D1 by paying a cheque in the sum of HK$400,000 as alleged by the Ds in the paragraph below or at all.  The Ps averred that on/about 24 November 2003 he gave a cheque in the sum of HK$400,000 in favour of Kid Art drawn on Dao Heng Bank Limited (“Cheque”) for the express purpose of setting up the Proposed Company and not for any other purpose.

5.On the other hand, the Ds pleaded that D1 acquired D2 (and hence its business) for the purchase price of HK$2,800,000 (“D2 Price”), and also acquired D3 to hold all of D2’s assets and to pay salaries to D2’s management staff.  The D2 Price comprised HK$1,900,000 invested by D1 (“D1 Investment”), HK$400,000 invested by P1 (“P1 Investment”) and HK$500,000 financed by Kid Art via a loan from Pacific Finance (Hong Kong) Limited (“Lender”) (“KA Investment”).[5] The Ds averred that P1 effected the P1 Investment by giving the Cheque in the sum of HK$400,000, and in late November 2003 at Everbest’s office in Nansha, Mainland China (“Everbest Office”) P1 handed over to D1 a copy deposit slip evidencing the deposit of the Cheque and D1 acknowledged receipt by signing on such copy deposit slip.[6]

6.The Ds went on to plead that in October 2003 at the Everbest Office, P1 and D1 orally agreed that P1 would have an option to acquire 40% shareholding in D2 if he would pay D1 HK$520,000 (ie 40% of the HK$1,300,000 invested by D1) within 3 years from November 2003 (“Option”), but if P1 did not exercise the Option, the sum he had invested in acquiring D2 would be regarded as a loan of such sum to D2.  On 15 November 2003, D1 started to run/operate D2’s business of printing and supply of packing materials.  P1 did not pay D1 the sum of HK$520,000 within the 3 years’ option period, and on various occasions in 2006-2007 he intimated to D1 he did not want to exercise the Option and would opt for treating the sum(s) he invested as monies he lent to D2.

7.The Ds further averred that in late 2003 P1 and D1 discussed a possible business joint venture and reached an oral agreement on the terms set out in paragraph 3(a)-(b) and (d)-(f) above.  The Ds claimed (but the Ps denied)[7] it was further agreed that D1 would direct sub‑contracting business from D2 to the Proposed Company. The Ds denied the existence and/or eventual breach of the Trust for D2 Shares or the existence of any trust in respect of D2’s shares as alleged or at all.

8.There was no dispute that:

(a) on/about 16 June 2004 D1 obtained formal approval from the PRC government to establish a wholly owned foreign enterprise company 廣州市匯光包裝材料有限公司 (“Hui Guang”) that engaged in the business of production/supply of carton boxes and packaging materials;

(b) D1 was appointed the legal representative and director of Hui Guang with complete control over the accounts and management of the company;

(c) P1 and D1 agreed that Kid Art (then still wholly owned/ controlled by D1 and his wife) would be used as the nominal sole corporate shareholder/investor of Hui Guang even though the initial capital all came from P1;

(d) on various occasions in 2004, P1 further injected a total sum of RMB810,000 (or about US$98,780 at the then exchange rate) into Hui Guang for its initial expenses of setting up an operational factory (including employment of staff and purchase of machines), and Hui Guang’s remaining capital would be met by initial income received from orders placed by Everbest;[8]

(e) on/after 29 June 2004 when Hui Guang received the business permit, P1 procured Everbest to place orders with Hui Guang, thus ensuring a steady source of income for the company;

(f) P1 and D1 agreed Kid Art would hold 60% and 40% of the shares in Hui Guang respectively in trust for P1 and D1 even though Kid Art was then wholly owned/controlled by D1 and his wife.

9.In respect of paragraph 8(c) above, the Ds pleaded that P2 was acquired for implementation of the agreement pleaded by them and to receive payment from the customers of the Proposed Company including Everbest.  Initially, it was intended that P2 would be the corporate owner/investor of the Proposed Company, but upon discovery that PRC law did not permit a newly formed company with no prior business dealings to become the owner/investor of the Proposed Company, P1 and D1 agreed that Kid Art would be the nominal sole corporate owner/investor of the Proposed Company.  The Ds further averred that (a) a service agreement was entered into between P2 and Hui Guang whereby Hui Guang would pay P2 service fee based on 11% of the monthly net sales figures for banking/financial services that P2 rendered to Hui Guang, and (b) on various occasions between March and August 2004 D1 injected a total sum of RMB373,850 (equivalent to HK$351,658.76) into Hui Guang.

10.The Ps accepted D1 did make an indirect contribution to the setting up of Hui Guang by paying HK$100,000 for the share capital of P2 which was set up for the purpose of receiving income from Hui Guang.  Such capital contribution of HK$100,000 by D1 for the share capital of P2 was initially effected by D1 making a short term loan of about HK$300,000 to P2, which short term loan was repaid to D1 by P2 by way of (a) payment of a sum of HK$36,600 on one occasion and (b) 2 subsequent payments in the form of dividends (with adjustments), leaving an outstanding balance of HK$100,000 that was treated as D1’s contribution to P2’s share capital.

11.The Ps pleaded that D1 paid the purchase price for D2 in a sum unknown to P1.  In/about late 2003 or early 2004, P1 and D1 jointly raised a second mortgage with the Lender on the Mongkok Shops via Kid Art for a loan of HK$500,000 (“KA Loan”) in aid of setting up the business of D2.  But given his 40% interest in D2 under the Trust for D2 Shares, P1 was only liable to contribute HK$200,000 out of the KA Loan and was entitled to withdraw HK$50,000 out of such loan for his own use.  But D1 asked P1 to lend such sum of HK$50,000 to D2 for use for the time being, and D1 (to assure P1) on his own volition wrote an unsigned cheque of D2 for HK$50,000 in favour of North Pine Ltd (wholly owned by P1) and issued a note dated 25 February 2004 in his own handwriting/signature with D2’s chop to expressly acknowledge that P1 was owed HK$50,000 out of the KA Loan from the Lender in accordance with the respective shares of D1 (60%) and P1 (40%) as to D2’s share capital. 

12.There was no dispute that Kid Art maintained an account with The Hongkong and Shanghai Banking Corporation Ltd (“HSBC Account”)[9] and another one with DBS Bank Ltd (“DBS Account”).  The Ds claimed that the DBS Account was under P1’s control, but the Ps denied this, claiming that both P1 and D1 were signatories of the DBS Account, and that for business purpose P1 (who never withdrew money from the DBS Account) entrusted the operation/management of the DBS Account to D1.

13.The Ps averred that on/about 16 March 2006 D1 caused the transfer of a sum of HK$200,000 from the HSBC Account to the DBS Account (but in 2008 P1 discovered from certain accounting documents of Hui Guang and P2 he obtained and he believed that the HSBC Account was operated solely by D1 for his own purpose, that it was already closed down after Hui Guang became fully operational, and that D1 surreptiously used such account to receive funds from D2).[10] In June 2006, D1 caused D2 to declare a dividend of HK$200,000 out of the monies in the DBS Account, and P1’s share under the Trust for D2 Shares was HK$80,000.  After deducting P1’s share in respect of Kid Art’s tax liability of HK$25,000, D1 gave P1 a personal cheque dated 6 June 2006 drawn on Bank of East Asia Ltd (“BEA”) for HK$55,000 as P1’s entitlement to the dividend declared by D2, and D1 was believed to have paid himself the sum of HK$55,000 from monies in the DBS Account.

14.On the other hand, the Ds claimed Kid Art borrowed the KA Loan of HK$500,000 from the Lender to finance D1’s purchase of D2 and D3.  Each of P1 and D1 was entitled to HK$250,000 of the KA Loan, but P1 only lent HK$200,000 to D2, so D1 wrote an unsigned cheque of D2 in the sum of HK$200,000 in favour of North Pine Ltd (wholly owned by P1).  Such unsigned cheque was later signed with amendment of the name of the payee to P1.  In January/February 2006, P1 was in need of money for his real property investment in Beijing, and he requested D2 by telephone to repay the sum of HK$200,000 lent as aforesaid.  On 16 March 2006, D1 issued a cheque of Kid Art to transfer HK$200,000 from the HSBC Account to the DBS Account for repayment to P1.[11] D1 issued a personal cheque dated 6 June 2006 payable to P1 drawn on the BEA in the sum of HK$55,000. Ds denied Ps’ allegations including the averment that D1 had withdrawn HK$200,000 from the DBS Account or at all.

15.The Ps claimed (but the Ds did not admit) that D1 provided P1 with D2’s Report and Financial Statement for the year ended 31 March 2005 (“D2 04/05 Report”) to P1 on the basis that P1 was 40% beneficial owner of D2.

16.P1 claimed against D1 and/or D3 inter alia for (a) a declaration that D1 through D3, or alternatively D3, was the trustee under the Trust for D2 Shares holding 40% of all the issued shares of D2 in favour of P1, and (b) an order that D1 do forthwith cause D3 to transfer and D3 do transfer 40% of all the issued shares of D2 to P1 or his nominee(s) at the cost of D1 and/or D3.  The Ps also claimed against each of the Ds for all further proper accounts, inquiries and tracing remedies.  The Ds denied these claims for relief.

17.There are other pleas and averments in the parties’ pleadings, but Mr Chiu, counsel for the Ps, and Mr Ng, counsel for the Ds, assured this court that the above were the key pleas and averments relevant to the present appeal.  The crux of the relevant dispute was whether the Trust for D2 Shares was part of the joint venture or cooperation agreement between P1 and D1 as the Ps alleged in paragraphs 3-4 above (“Ps’ Agreement”) or whether the Option was part of the joint venture or cooperation agreement between P1 and D1 as the Ds alleged in paragraphs 5-7 above (“Ds’ Agreement”).

II.  PROCEEDINGS

18.By a summons filed on 22 May 2014 (“Summons”) pursuant to Order 24 rule 7 of the Rules of the High Court (“RHC”), the Ps applied for an order that D2 do within 14 days from the date of such order make and serve on the Ps a further and better list of documents which are or have been in its possession, custody or power relating to any matter in question in this action, namely, audited accountant reports and financial statements of D2 for the year ended 31 March 2004 (“Subject Document”). 

19.By a summons filed on 10 June 2014 (“Amendment Summons”), the Ps applied for leave to amend the Summons to refer to Order 24 rule 3 rather than Order 24 rule 7 of the RHC.

20.The Ps relied on the 1^st, 2^nd and 3^rd affidavits of their solicitor Fan Man Chong Clement (“Fan”) filed on 13 and 22 May and 6 June 2014 for the purpose of the Summons (“Fan 1^st, 2^nd and 3^rd Affs”).  D2 filed D1’s affidavit in opposition on 20 May 2014 (“D1 Aff”).

21.On 26 January 2015 (“Master Hearing”), Master J Wong granted inter alia the following orders (“Master Order”):

(a) there be no order as to costs of the Amendment Summons;

(b) D2 do within 14 days from the date of such order make and serve on the Ps a further and better list of documents that are or have been in its possession, custody or power relating to any matter in question in this action, ie the Subject Document;

(c) D2 do pay the costs of the Summons to the Ps including costs reserved with certificate for counsel for the Master Hearing assessed at HK$107,900 and payable within 28 days from the date thereof.

22.Mr Ng confirmed D2 did not make any application for extension of time to comply with or for stay of execution of the Master Order.  On 9 February 2015, D2 complied with the Master Order by filing/serving a Further and Better List of Documents (“Further List”) disclosing the Subject Document.  Pursuant to inspection by the Ps, D2 provided a copy of the Subject Document to the Ps.

23.On the same day, D2 filed Notice of Appeal against the Master Order in paragraph 21(b)-(c) above (“Appeal”), and asked for (a) an order that the Summons be dismissed, (b) costs of and occasioned by the Summons (including all costs reserved and costs of the hearing before the Master Hearing) to be D2, and (c) costs of and occasioned by the Appeal be to D2.  The hearing of the Appeal came before me on 17 June 2015 (“Hearing”).

24.At the Hearing, Mr Ng explained that D2 still maintained that the Subject Document was not relevant and/or necessary, but since D2 did not mind disclosing such document, D2 filed the Further List pursuant to the Master Order without prejudice to the Appeal.  Since the Ps now have a copy of the Subject Document pursuant to their inspection of the Further List, Mr Ng confirmed D2 had no objection if the Ps were to make discovery of and use such document now in the Ps’ possession, custody or control for the purpose of the present action (subject to eventual argument as to admissibility and/or relevance at trial).  So in practical terms, the Ps achieved their purpose of getting hold of and utilising the Subject Document, and D2’s pursuit of the Appeal was essentially for costs.

25.On 15 May 2015, the Ps filed a summons (“Leave Summons”) for leave to rely on the affirmation by a certified public accountant Yeung Kwok Keen (“Yeung”) filed on 10 April 2015 (“Yeung Aff”) for the purpose of the Appeal.  Such affirmation set out Yeung’s observations on the Subject Document, and exhibited the Subject Document as exhibit “YKK-1”.  At the Hearing, Mr Ng and Mr Chiu agreed that this court could sight the Subject Document for considering its relevance and/or necessity for the purpose of the Appeal, and on such basis Mr Chiu confirmed that the Ps would not rely on the rest of the Yeung Aff.

26.In the circumstances,  at the Hearing I granted the following orders in respect of the Leave Summons:

(a) subject to (b) below, retrospective leave be granted for the Ps to file and serve the Yeung Aff;

(b) no leave was granted for the Ps to adduce and/or rely on paragraphs 3-13 and exhibit “YKK-2” of the Yeung Aff which parts shall not stand as evidence for the purpose of D2’s Appeal.

I reserved the question of costs of the Leave Summons to be dealt with in this Decision. 

III.  LEGAL PRINCIPLES 

27.It is trite that an appeal from the master to judge in chambers is dealt with by an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time.  The judge will give the weight it deserves to the previous decision of the master; but he is in no way bound by it.[12]

28.There is no essential dispute between Mr Ng and Mr Chiu over the legal principles as to discovery as set out in my decisions in Lee Sai Nam v Li Shu Chung & anor[13] and UOB Kay Hian Futures (Hong Kong) Limited v Lai, Lawrence & anor,[14] which I adopt without repeating them in this Decision.

IV.  DISCUSSION

29.Even though the Ds regarded D2’s audited financial reports from 1 April 2004 to 31 March 2008[15] to be irrelevant, D2 agreed to provide copies to the Ps for the purpose of saving time and costs, but D2 refused to discover the Subject Document (which did exist) on the basis that it was not relevant and/or necessary. 

30.Mr Ng complained that the solicitors’ correspondence and the Fan 1^st, 2^nd and 3^rd Affs revealed that the Ps had shifted their grounds for seeking discovery of the Subject Document. Mr Ng submitted this clearly exposed the irrelevance of the Subject Document.  But in my view, the essential issue was whether the Subject Document was properly discoverable.  If it was, then quite irrespective whether it took the Ps a while to put their finger on the true ground of relevance/necessity, D2 on its own still had an obligation to make discovery of documents in its possession, custody or power that were relevant in the Peruvian Guano sense, and it was no answer for the Ds to defer disclosure of a properly discoverable document until such time as the other party stumbled upon the true ground of relevance/necessity.  Anyway, by the time the Fan 1^st Aff was filed, the Ps already asserted that the Subject Document was relevant to the dispute over the existence or otherwise of the Trust for D2 Shares and/or the Option.

31.But notwithstanding the Summons and the Fan 1^st Aff, the D1 Aff still denied the Subject Document was relevant for proving or disproving the existence of the Trust for D2 Shares, and insisted Ds’ discovery should not extend to such document created outside the period of alleged wrongdoings as pleaded in paragraph 27 of the Re‑Re‑Amended Statement of Claim because:

(a) The mere fact the Ds pleaded in the Amended Defence and Counterclaim that D2’s business started in the year 2003 would not render the Subject Document relevant to issue of whether the Trust for D2 Shares existed or not.

(b) Since the Ps averred that (i) the Trust for D2 Shares was created in consideration of a percentage of the shareholding in the Proposed Company received by D1, (ii) the activities of the Proposed Company only started in June 2004, and (iii) D1 provided the D2 04/05 Report to P1 on the basis that he was a beneficial owner of 40% shareholding in D2, the Subject Document was plainly not relevant to the question of existence or non-existence of the Trust for D2 Shares otherwise P1 would have asked for it when the D2 04/05 Report was given to him or at some earlier time.

32.There was no dispute that D1 acquired/purchased D2 from a third party for the purpose of engaging in the business of printing and supply of packaging materials, and D1 (and not P1) handled such acquisition/purchase.  But there was substantial dispute as to whether the joint venture or cooperation arrangement between P1 and D1 was upon terms as alleged by the Ps (ie the Ps’ Agreement) or whether it was upon terms as alleged by the Ds (ie the Ds’ Agreement).  Since the Trust for D2 Shares was one of the essential terms and an integral part of the Ps’ Agreement and the Option was one of the essential terms and an integral part of the Ds’ Agreement, the existence or otherwise of the Trust for D2 Shares and/or the Option would very much turn on the overall vitality of the Ps’ Agreement or the Ds’ Agreement. 

33.But the vitality of either the Ps’ Agreement or the Ds’ Agreement would turn on a number of other disputes, not least of which was how the acquisition/purchase of D2 was financed.  Under the Ds’ Agreement, it was alleged that D1 via D3 purchased D2 for the D2 Price funded by the D1 Investment (HK$1,900,000), the P1 Investment (being the Cheque in the sum of HK$400,000 in favour of Kid Art, which gave rise to the Option) and the KA Investment (being the KA Loan of HK$500,000 in favour of Kid Art).  The Ps denied such allegations, and claimed the Cheque was for setting up the Proposed Company and not for investing in D2, and there was no Option at all because by virtue of the Trust for D2 Shares under the Ps’ Agreement P1 had already acquired 40% beneficial shareholding in D2.  In my view, it is plain that (a) the contest between the terms of the Ps’ Agreement and the Ds’ Agreement, (b) the contest between the allegations by the Ps and the Ds as to how the acquisition/purchase of D2 was financed, (c) the disputes over the purpose/destination of the Cheque, the KA Loan and the D3 Loan,[16] and (d) the contest between the Trust for D2 Shares and the Option were all

interwined issues that would impact on one another. 

34.Hence, a real subject of controversy between the parties would be the circumstances of the acquisition/purchase of D2 and how it was financed.  This was of particular significance since it was D1 (and not P1) who handled such acquisition/purchase.  Indeed, the Ps pleaded in paragraph 2 of the Reply and Defence to Counterclaim filed on 19 March 2013 that they had no idea of the amount of the purchase price for D2 at all.  Hence, Mr Chiu submitted that in order to properly understand, assess and weigh the parties’ respective case on the matters referred to above, it would be necessary for D2 to discover relevant documents that would shed light on D3’s manner of acquisition/purchase of D2 with corresponding paper trail of the sources and payments of the D2 Price.

35.The Fan 3^rd Aff contended that the relevance of the Subject Document to the dispute over the existence or otherwise of the Trust for D2 Shares was highlighted by 3 documents already discovered by the Ds (“Ds’ Documents”):

(a) copy sales contract dated 1 December 2003 between Fine Arts Offset Printing Company Limited (“Fine Arts”) as seller and D3 (owned/controlled by D1) as buyer of 1 unit of “used “Roland” Two Colour Offset Printing M/C” (“2-colours Machine”) and 1 unit of “used “Roland” Four Colour Offset Printing M/C” (4-colours Machine”) (collectively, “Machines”) for the price of HK$2,800,00 (“2003 Sales Contract”);

(b) copy receipt dated 15 December 2003 issued by Fine Arts to D3 for the sum of HK$800,000 “for payment balance”(“2003 Receipt”);

(c) copy repayment record with a process date of 23 December 2004 in respect of a HK$2,000,000 loan from the Lender to D3 (“D3 Loan”) together with a copy letter dated 16 January 2004 from the Lender to D3 noting that D3 had entered into a loan agreement with the Lender in relation to the Machines on the same date (“D3 Loan Documents”).

Further, D2’s annual return made up to 18 March 2004 (“D2 Annual Return”) showed that D2’s entire share capital was transferred to D3 on 15 December 2003[17]  although D1 claimed he had already started to run D2’s business since 15 November 2003.

36.The Fan 3^rd Aff explained that the Ps had no idea about Fine Arts since it did not feature in Ds’ pleadings at all.  Upon reading Ds’ Documents, Fan inferred that (a) the Ds must have discovered and disclosed Ds’ Documents because they were somehow connected with D1’s acquisition/purchase of D2 via D3 for the D2 Price (HK$2,800,000) since (i) the 2003 Receipt for HK$800,000 and the D3 Loan Documents for HK$2,000,000 added up to HK$2,800,000, which matched the total sale price of HK$2,800,000 for the Machines that D3 (as buyer) was liable to pay to Fine Arts (as seller) under the 2003 Sales Contract, and which further matched the D2 Price for D3’s acquisition/purchase of D2, and (ii) the Machines were so bought by D3 from Fine Arts within the same period (ie November/December 2003) as when D1 via D3 acquired/purchased D2, and (b) such Machines were somehow required for D2’s business that was just started up by D1. 

37.The Fan 3^rd Aff surmised it must have been the Ds’ case that (a) D1 via D3 purchased D2 for the D2 Price (that according to Ds’ pleadings was somehow partly paid by D1 and also partly paid by P1 by the Cheque and by the KA Loan) by purchasing the Machines (as purportedly shown in Ds’ Documents) otherwise it would have been pointless to disclose Ds’ Documents, and (b) the Machines must have close connection with D2’s business such that D2 should have claimed for depreciation allowance in respect of the newly acquired Machines to reduce its profit tax liability. 

38.The Fan 3^rd Aff directed attention to the balance sheet in the D2 04/05 Report which revealed that “[property], plant and equipment” was valued at HK$283,746 and HK$69,224 respectively for the years ended 31 March 2005 and 31 March 2004.  According to Note 9 of the D2 04/05 Report,[18] the additions of “plant and machinery” were valued at HK$43,000 and the depreciation charge for the year was HK$683, so the net book value of D2’s “plaint and machinery” as at 31 March 2005 was HK$42,317, but the cost and/or accumulated depreciation for “plant and equipment” as at 1 April 2004 was nil.  Fan claimed the D2 04/05 Report did not reveal the connection between D2’s business and the Machines, but Ds’ Documents suggested that the consideration payable by D3 for the purchase of the Machines somehow represented the D2 Price payable by D3 for the acquisition of D2 in late 2003.[19]

39.The Fan 3^rd Aff next referred to the income statement for the year ended 31 March 2005 in the D2 04/05 Report that revealed an item for “Gain on change of major shareholder” for the year ended 31 March 2005 (nil) and the year ended 31 March 2004 (HK$3,433,457), but complained that no further document was disclosed by the Ds to account for such “gain”. 

40.Fan contended that the Subject Document would be highly relevant in throwing light on (a) whether the Machines purchased in December 2003 were connected to D2’s business operation for the year ended 31 March 2004, and (b) how the “Gain on change of major shareholders” at HK$3,433,457 for the year ended 31 March 2004 was made up when it was said that D1 via D3 purchased D2 in late 2003 for the D2 Price.  Fan further contended that should the Subject Document reveal the connection between the Machines and D2’s operations prior to 31 March 2004 and/or how the “Gain on change of major shareholders” was made up, such document might well support the Ds’ Agreement that D1 did contribute to the D2 Price for acquiring D2, and might add weight to the Ds’ averments as to the Option.  But should the Subject Document reveal otherwise, it might cast doubt on the integrity of the Ds’ Agreement and consequently the Option, and thereby it might add weight to Ps’ contention as to the Trust for D2 Shares.

41.The Ds responded to this by filing their 2^nd Supplemental List of Documents on 24 September 2014 to make discovery of the following documents:

(a) D2’s profit tax computation for the year ended 31 March 2005 submitted to the Inland Revenue Department (“IRD”) for the year of assessment 2004/2005 (“D2 04/05 Computation”);

(b) D2’s Notice of Assessment and Demand for Tax – year of assessment 2004/2005;

(c) D2’s Profits Tax Return for Final Assessment 2004/2005 and Provisional Payment 2005/2006;

(d) D2’s profit tax computation for the year ended 31 March 2007 submitted to the IRD for the year of assessment 2006/2007 (“D2 06/07 Computation”);

(e) D2’s Profits Tax Return for Final Assessment 2006/2007 and Provisional Payment 2007/2008.

42.In the letter from Ds’ solicitors to Ps’ solicitors dated 23 September 2014 (ie after the Ds filed the Fan 3^rd Aff) (“D2 Letter”), the Ds noted that schedule 4 on “Disposal of Fixed Assets” of the D2 04/05 Computation for the year ended 31 March 2005 recorded that the sale proceeds (and hence profit on disposal) for the 2-colours Machine were HK$510,000, and schedule 5 on “Disposal of Fixed Assets” of the D2 06/07 Computation for the year ended 31 March 2007 recorded that the consideration (and hence profit on disposal) for the 4-colours Machine was HK$880,000.  It was further noted in both documents that the buyer of both Machines was “Grandwin Development Ltd”, and “[the] profit on disposal is capital gain as the fixed asset is purchase from previous holding company and written off at the same year.  And these asset have not put into the pool system”. 

43.The D2 Letter further claimed that (a) the “fixed asset …… purchase from previous holding company [of D2]” included the Machines, which machines were those referred to in the 2003 Sales Contract, and (b) “the previous owner of [D2] had already fully depreciated the value of the [Machines] at the year of their purchase and no more depreciation could be allowed for the same [Machines] by [D2] in the years after [D1] via [D3] purchased [D2]”, so neither the Subject Document nor the D2 04/05 Report would reveal the purchase price of the Machines, and the Subject Document would not “throw any light on whether the [Machines] purchased in December 2003 were connected with the business operation of [D2]”.

44.The D2 Letter explained that the “Gain on change of major shareholders” in the sum of HK$3,433,457 revealed in the D2 04/05 Report was irrelevant as it was “a gain realized in the book when the previous owner of [D2] agreed to write off the liability owed to them by [D2] when the ownership of [D2] was transferred to [D3]”, which had nothing to do with the Machines. 

45.As regards the Subject Document, the balance sheet showed that the value of “[fixed] assets” as at 31 March 2003 and 31 March 2004 was HK$1,400,465 and HK$69,224 respectively.  According to Note 11 on fixed assets, the net book value of HK$69,224 as at 31 March 2004 comprised the sums of HK$27,390 (furniture, fixtures and equipment) and HK$41,834 (computer equipment), ie there was nil value for plant and machinery.  Information on plant and machinery was recorded as follows:

	Plant and machinery
Cost	HK$
At 1 April 2003	4,386,006
Additions	100,100
Sold/ written off	(4,486,106)
At 31/3/2004	-
Accumulated depreciation
At 1 April 2003	4,379,405
Written back	(4,379,405)
Charge for the year	-
	-
Net book value
At 31/3/2004	-
At 31/3/2003	6,601

46.Note 8 (Gain on Change of Major Shareholders) in the Subject Document stated as follows:

	31/3/2004	31/2/2003
	HK$	HK$
Gain on amount due to net receivables written off	3,489,379	-
Gain on disposal of investment	520,000	-
(Loss) on disposal of land and building	(575,922)	-
	3,433,457	-

Pursuant to a shares sales and purchases agreement dated 8 December 2003, the former shareholders disposed of their shares to the existing shareholders, but retained the assets and liabilities of the Company as at 15 November 2003, except for certain plant and equipment as specified in the sales and purchases agreements, which gave rise to the abovementioned gain.

47.Up to this stage, there was little information in Ds’ pleadings and/or in the D1 Aff as to (a) how exactly D1 (via D3) acquired/ purchased D2, (b) who exactly was the seller of D2, (c) how exactly the D2 Price was paid to the seller, (d) how D1 contributed the D1 Investment (HK$1,900,000) and channeled such “investment” to D3 as part of D3’s funds for onward payment of the D2 Price to the seller, (e) how the alleged P1 Investment (by way of the Cheque) was channeled from Kid Art as payee of the Cheque to D3 as part of D3’s funds for onward payment of the D2 Price to the seller, (f) how the KA Loan proceeds (HK$500,000) was channeled from Kid Art (as borrower) to D3 as part of D3’s funds for onward payment of the D2 Price to the seller (especially when on the Ds’ own case P1 lent HK$200,000 to D2 which was eventually repaid).[20]

48.The D2 Annual Return showed that D2’s shares were transferred from Tang Kwok Kwong Samson and Fung Yuen Mei (former shareholders of D2, “Ex-Shareholders”) to D3 in December 2003.  There was also paucity of direct information from the Ds as to who exactly was the seller from whom D1 via D3 acquired/purchased D2’s entire share capital.  Logically, it should be the Ex-Shareholders as now borne out by Note 8 of the Subject Document which referred to a “shares sales and purchases agreement dated 8 December 2003” by which “the former shareholders disposed of their shares to the existing shareholder”.  However, the D2 Letter suggested that Fine Arts was D2’s “previous holding company”, which would lead one to wonder whether the seller of D2’s entire share capital was in fact Fine Arts with the Ex-Shareholders holding D2’s shares as nominees.  In the absence of other information on the Ds’ case, one would therefore expect D3 (on behalf of D1) to have paid the D2 Price to the Ex‑Shareholders or Fine Arts for the sale and transfer of D2’s entire share capital to D3. 

49.On such basis and given the aforesaid disputes between the parties, one would expect the Ds to have already discovered/disclosed the paper trail of documents relating to the matters in paragraph 47(c)-(f) above, which documents must be relevant and necessary in view of, say, the Ps’ dispute as to the purpose/destination of the Cheque, and the nature and amount of the D1 and KA Investments allegedly for the acquisition/purchase of D2, but I am unable to trace any such document in the Ds’ various Lists of Documents.  Apart from such paper trail, D3’s 2003/2004 audited financial statements (“D3 03/04 Report”) also appeared to be relevant pursuant to the Ds’ pleadings as one would expect the D3 03/04 Report might possibly have recorded (a) the entry of funds being the P1, D1 and KA Investments to make up the D2 Price which D3 (on behalf of D1) was liable to pay for the acquisition/purchase of D2, and (b) the acquisition of D2’s entire share capital, ie D2 becoming its wholly owned subsidiary. As will be elaborated below, the D3 03/04 Report might well also reveal accounting treatment in relation to D3’s purchase of the Machines.  However, I was told by Mr Ng at the Hearing that to date the Ds had not discovered/disclosed the D3 03/04 Report.  In my view, the absence of the D3 03/04 Report further highlights the significance and importance of the Subject Document.

50.In my view, Ds’ Documents discovered/disclosed by the Ds lead to more questions than enlightenment on matters raised in paragraphs 47-49 above.  Quite simply, Ds’ Documents did not evidence any sale and purchase of D2’s entire share capital for the D2 Price (HK$2,800,000) between D3 as buyer and the Ex-Shareholders or Fine Arts as seller.  Rather, they revealed a sale and purchase of the Machines for a consideration of HK$2,800,000 between D3 as buyer and Fine Arts as seller without any mention about D2’s share capital. 

51.Absent any averment in Ds’ pleadings as to Ds’ Documents and the transactions revealed therein, the Ps must be forgiven for surmising it was the Ds’ case that (a) the consideration (HK$2,800,000) for the Machines payable by D3 (as buyer) to Fine Arts (as seller) under the 2003 Sales Contract comprising the sum of HK$800,000 that D3 paid to Fine Arts and the D3 Loan of HK$2,000,000 that the Lender granted to D3 (which was plainly different from the KA Loan of HK$500,000 granted by the Lender to Kid Art as pleaded by the Ds) and (b) the sale of the Machines from Fine Arts to D3 must somehow be connected to the sale of D2’s entire share capital from the Ex-Shareholders or Fine Arts to D3 given (i) the similarity in amount in respect of the consideration for purchasing the Machines and the D2 Price, (ii) the temporal proximity of the 2003 Sales Contract (1 December 2003) and the acquisition/purchase of D2 (November/December 2003), and (iii) the fact that the Ex-Shareholders transferred D2’s entire share capital to D3 on the very date of the 2003 Receipt.

52.In fact, Ps’ surmise as to such correlation was not wrong for at the Master Hearing Mr Ng confirmed (a) the Ds disclosed/discovered Ds’ Documents to show that D3 (on behalf of D1) paid the consideration for the Machines (HK$2,800,000) to obtain D2’s shares, and (b) the Machines then formed part of D2’s assets and were subsequently “written off” as shown in D2 04/05 Computation. 

53.But such submissions (not found in Ds’ pleadings and/or the D1 Aff) still did not explain how a sale and purchase of the Machines translated into a sale and purchase of D2’s share capital or vice versa.  In fact, Mr Ng’s submissions raised more questions than answers.  After all, if D3 was contractually obliged to pay the consideration of HK$2,800,000 to Fine Arts under 2003 Sales Contract to buy the Machines, one would expect Fine Arts (as seller) rather than D2 to be the legal/beneficial owner of the Machines so as to properly transfer ownership of the Machines to D3 upon such sale. Likewise, one would also expect (in line with D’s pleadings as to the P1, D1 and KA Investments) that D3’s payment of the sum of HK$2,800,000 to Fine Arts (be it consideration of the purchase of the Machines or the D2 Price) to have been sourced (a) independently of D2 (being the subject matter of the acquisition/purchase), (b) by the P1 and KA Investments as pleaded by the Ds, and (c) by the D1 Investment drawn from D1’s personal resources in order to count as his own contribution to the D2 Price.  Even if D1/D3 had to borrow in order to put up the D1 Investment of HK$1,900,000, one would expect (unless otherwise explained) D1/D3 to borrow monies on their own account and not utilise resources/collateral by D2, P1, Ex-Shareholders and/or Fine Arts. 

54.But Ds’ Documents suggested that D3 (a) agreed to “buy” the Machines for HK$2,800,000 under the 2003 Sales Contract dated 1 December 2003, (b) then used such Machines to apply for a hire purchase loan of HK$2,000,000 from the Lender which loan application was processed on 23 December 2003, and (c) when the D3 Loan of HK$2,000,000 was granted on 16 January 2004 its proceeds were used to pay Fine Arts for the Machines.  This, of course, did not sit well with Ds’ pleadings that D1 put up his own D1 Investment of HK$1,900,000.  But even if the D3 Loan of HK$2,000,000 was in fact the D1 Investment for the acquisition/purchase of D2, one would expect (unless otherwise explained) the aforesaid D3 Loan scheme to be a private funding arrangement between D3 (on behalf of D1) and Fine Arts to enable D1 via D3 to raise finance through a hire purchase loan from the Lender in favour of D3 in order to fund D1’s own D1 Investment (which together with the P1 and KA Investments would make up the D2 Price for the acquisition/purchase of D2) that should have nothing to do P1, the KA Loan and/or D2.  After all, D3 in applying for the D3 Loan must have presented itself as the true hirer/owner of the Machines. 

55.However, the D2 04/05 and 06/07 Computations clearly showed (and Mr Ng also submitted) that after their acquisition by D3 the Machines somehow formed part of D2’s assets, ie D2’s plant and machinery, which were eventually sold by D2 in the financial years ended 31 March 2005 and 31 March 2007 with capital gain and profits on disposal for D2.  Hence, the Ps could be forgiven for thinking that (a) there was somehow connection between the Machines and D2’s business, and (b) D3 must have injected the Machines into D2 after having acquired them from Fine Arts under the 2003 Sales Contract and having paid the consideration of HK$2,800,000 thereunder.  On such basis, given that the Machines were newly acquired plant and machinery injected by D3 into D2 for which D3 paid the consideration of HK$2,800,000, the Ps’ suggestion that D2 was entitled to claim and should have claimed for depreciation allowance to reduce profits tax liability was also logical.  The fact that Fine Arts had fully depreciated the value of the Machines when Fine Arts purchased them would not logically affect the right by D3 (or D2 upon injection of the Machines by D3 into D2) being a legal entity distinct from the seller Fine Arts to claim depreciation allowance for its new purchase of plant and machinery (ie the Machines) upon capital expenditure (ie the purchase price) paid up in that financial year. 

56.But according to the D2 04/05 Report, the value of plant and machinery as at 31 March 2004 was HK$69,224, which obviously did not reflect any injection of the Machines worth HK$2,800,000 into D2.  This is now also borne out by the information in the Subject Document which showed that although the cost of D2’s plant and machinery was HK$4,486,106, it was totally “sold/written off” in the year ended 31 March 2004, and the accumulated depreciation of HK$4,379,405 was entirely “written back” in the year ended 31 March 2004, leaving nil value for plant and equipment for that financial year.  This, at least on its face, suggested that the Machines were somehow not included the books of D2.

57.Such objective information when viewed against the explanations in the D2 Letter and in the D2 04/05 and 06/07 Computations as to why no more depreciation could be allowed for the Machines (ie the Machines were not put into the “pool system” because their depreciation value had already been used up by the previous owner and the Machines were written off) necessarily raised further doubt and query,[21] which logically and necessarily led to the call for the Subject Document to see how “plant and machinery” as well as “depreciation” were treated in the audited accounts in the very financial year in which the acquisition/purchase of D2 and the Machines took place.  It cannot be said that the Subject Document was irrelevant and/or unnecessary.

58.Interestingly, Mr Ng submitted at the Hearing that in fact the Machines were all along existing plant and equipment that belonged to D2 and not Fine Arts, and that D1/D3 and Fine Arts entered into the 2003 Sales Contract merely to enable or facilitate D3 to raise finance by way of a hire purchase loan of HK$2,000,000 from the Lender (ie the D3 Loan) ostensibly to pay for the purchase of the Machines but in fact was for the acquisition/purchase of D2’s entire share capital.

59.There was, of course, nothing in the Ds’ pleadings and/or the D1 Aff to such effect.  Mr Chiu complained this was the first time the Ps were told the Machines all along belonged to D2, but he was prepared to proceed with the Appeal on the basis of Ds’ assertions in the above paragraph without prejudice to Ps’ rights to put the Ds to strict proof and/or to raise positive defence against such assertions in the present action in due course.

60.Whilst the Ds’ new assertion that the Machines all along belonged to D2 might provide an explanation as to why no depreciation allowance was claimed by D2 after D3’s acquisition/purchase of the Machines (if D2 had already fully depreciated the value of the Machines – but this would only be evident from the Subject Document), a big question arises as to how Fine Arts (a separate legal entity distinct from D2) was able to “sell” the Machines that all along belonged to D2 by way of the 2003 Sales Contract to D3.  Moreover, if the Machines all along belonged to D2, there was little point in D3 purchasing the Machines.  A sale and purchase of D2’s entire share capital between the Ex-Shareholders or Fine Arts (as sellers) and D3 (as buyer) would transfer control of the Machines (which were all along D2’s assets) from the Ex-Shareholders or Fine Arts to D3.  It appeared therefore (and Mr Ng frankly accepted) this was merely a scheme by D1 via D3 to use D2’s assets (rather than his own assets/resources) to raise finance for contribution for the D2 Price.  This, in turn, raised questions as to whether, how and by whom the D3 Loan was repaid (if at all). Still further, if the Machines all along belonged to D2, D3 by applying to the Lender for the D3 Loan as hirer/owner must have presented the Machines as its own property acquired from Fine Arts under the 2003 Sales Contract.  This immediately raised questions as to the nature of the sale of the Machines between D3 and Fine Arts and whether D1’s “investment” via D3 could be regarded as his own investment. 

61.It must be remembered that D2, D3 and Fine Arts were separate legal entities.  In my view, the metamorphosis in the Ds’ explanations as to money trail of D1’s “investment” in the acquisition/purchase of D2 and the lacuna in the paper trail that tracked how the D2 Price was made up cry out for discovery/disclosure of the Subject Document which was clearly relevant and necessary to see how plant and machinery (which, according to Mr Ng’s submissions at the Hearing, included the Machines) were costed, depreciated and/or written off (if at all).  The accounting treatment of the Machines (now said to belong to D2 all along) in the Subject Document might well reflect on how they came to be assets for sale by Fine Arts,[22] how they later “returned” (or according to Mr Chiu, “injected”) to D2 for subsequent sale by D2 to Grandwin Development Ltd for merely HK$510,000 and HK$880,000 in the year ended 31 March 2005 and 31 March 2007,[23] why they were “not put into the pool system” and written off in the same year of purchase,[24] and why the D2 04/05 and 06/07 Computations referred to purchase of the Machines “from the previous holding company”. 

62.As Mr Chiu also noted, Note 8 of the Subject Document stated that “[pursuant] to a shares sales and purchases agreement dated 8 December 2003, the former shareholders disposed of their shares to the existing shareholders, but retained the assets and liabilities of [D2] as at 15 November 2003, except for certain plant and equipment as specified in the sales and purchases agreements, which gave rise to [the gain on change of major shareholders of HK$3,489,379]” (my emphasis).

63.I agree with Mr Chiu that even if the Subject Document might not provide absolute answers to the various disputes and queries discussed above, it is necessarily a key document that went to the integrity and vitality of the parties’ differing explanations as to how the acquisition/purchase of D2 was effected and how the purchase of the Machines interacted with the acquisition of D2, and it is plainly a document that might lead to a chain of inquiry on an important and relevant issue in dispute in the Peruvian Guano sense.

64.Mr Ng’s only answer to this was that D1 was the ultimate owner of D3, but in my view that is neither here nor there.  D2, D3 and Fine Arts were separate legal entities, and each company was/is required to prepare annual audited financial statements based on accepted accounting principles.  Hence, the treatment of the Machines as plant and machinery in the Subject Document in the financial year when the very sale and purchase of the Machines and the very acquisition/purchase of D2 took place clearly would shed light on the veracity of Ds’ contentions as to how the acquisition/purchase of D2 took place and/or was financed.

65.I have no doubt that the Subject Document is both relevant and necessary, and Master Order should be upheld.

V.  CONCLUSION

66.In the circumstances, the Appeal is dismissed.  There is no reason why costs should not follow event.  I grant a costs order nisi that D2 do pay the Ps’ costs of the Appeal (including all costs reserved, if any) to be taxed if not agreed.

67.As regards the Leave Summons, I order the Ps to pay costs of the Leave Summons (including all costs reserved if any) to D2 to be taxed if not agreed.  I am not persuaded it was necessary or appropriate to adduce evidence as to Yeung’s expert observations, and a simple enquiry to D2 for their agreement to refer to the Subject Document at the Hearing would have sufficed and, in my view, would have elicited a helpful answer (as evident from D2’s ready agreement at the Hearing for the court to sight the Subject Document).

Mr Simon Chiu, instructed by Kam & Fan, for the 1^st and 2^nd plaintiffs

Mr Alan Ng, instructed by Philip Tam & Co, for the 1^st, 2^nd and 3^rd defendants