TIMMAR CO. LTD. AND ANOTHER v. ERWIN HARDY CORPORATION LTD.

HCMP2875/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.2875 OF 2000

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J U D G M E N T

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1. The main issue in this appeal is whether the Court of First Instance has jurisdiction to order the sale of shares of a private company within the meaning of section 29 of the Companies Ordinance, Cap. 32, charged under a charging order. After hearing the able and helpful submissions of Mr Paul Shieh, counsel for the plaintiffs, and Mr Ashok Sakhrani (who also adopted the submission of Mr Thomas Au, counsel for the defendant at the hearing before the Registrar), counsel for the defendant, I told the parties that judgment would be handed down (and deemed to have been pronounced by reason of O.42, r.5B) in open Court on 12 June 2001.

The facts

2. By a judgment dated 13 April 1999, as amended on 14 June 1999, Master Lok entered judgment in favour of the 1st plaintiff against the defendant in High Court Action No. A9430 of 1996 for $1,380,000 with interest and costs. The judgment remains unsatisfied. The defendant is the registered owner of 1,754,026 shares ("the Shares") of Starform Services Limited, a private company within the meaning of section 29 of the Companies Ordinance. The Shares were charged under a Charging Order to show cause dated 4 October 1999, which Order was made absolute on 9 December 1999. The sum charged under the Charging Order is $1,978,131.30, comprising principal and interest, but not costs which had not been taxed. The defendant is a party to a shareholders agreement ("the Shareholders Agreement") dated 26 February 1993, entered into by the defendant with three other shareholders, one of which is the 2nd plaintiff. One of the original four shareholders had sold out its shares. The plaintiffs issued the Originating Summons in these proceedings on 14 June 2000 seeking an order for sale of the Shares. On 27 November 2000, the Registrar dismissed the plaintiffs' application with costs. The plaintiffs appealed.

Section 21D of the High Court Ordinance, Cap. 4

3. The defendant's contention is that the Court of First Instance has no jurisdiction by reason of section 21D of the High Court Ordinance, Cap. 4, which provides that :

"21D Sale of property in execution of judgment

(1) The following property is liable to attachment and sale in execution of a judgment, namely, land, goods, money, bank notes, cheques, bills of exchange, promissory notes, Government stock, bonds, or other securities for money, debts, shares in the capital or joint stock of any company or corporation, (other than a private company within the meaning of section 29 of the Companies Ordinance (Cap. 32)) and all other property whatsoever, whether movable or immovable, belonging to the judgment debtor, and whether the same is held in his own name or by another person in trust for him or on his behalf:

Provided that the following property shall not be so liable, namely, the tools (if any) of the trade of the judgment debtor and the necessary wearing apparel and bedding of him and his family dependent on and residing with him, to a value, inclusive of tools and apparel and bedding, not exceeding $10,000 in the whole.

(2) Where any goods in the possession of an execution debtor at the time of seizure by the bailiff charged with the enforcement of a writ, warrant or other process of execution, are sold by such bailiff without any claim having been made to them, the purchaser of the goods so sold shall, subject to subsection (3), acquire a good title to such goods and no person shall be entitled to recover against the bailiff, or anyone lawfully acting under his authority, except as provided by section 46 of the Bankruptcy Ordinance (Cap. 6), for any sale of such goods or for paying over the proceeds thereof prior to the receipt of a claim to the said goods, unless it is proved that the person from whom recovery is sought had notice or might by making reasonable inquiry have ascertained that the goods were not the property of the execution debtor:

Provided that nothing in this subsection shall affect the right of any claimant who may prove that at the time of sale he had title to any goods so seized and sold to any remedy to which he may be entitled against any person other than such bailiff or purchaser as aforesaid.

(3) Notwithstanding the preceding provisions of this section the Court may, subject to rules of court, set aside the sale of any immovable property in execution of a judgment on the ground of material irregularity in the conduct of the sale.

(Added 52 of 1987 s.18)"

4. Mr Sakhrani's submission is that there is a distinction between "attachment" and "attachment and sale"; that the word "and" in "attachment and sale" in section 21D is conjunctive; that section 21D deals with "attachment and sale", not "attachment"; that section 21D applies to charging orders; and that the Court has no jurisdiction to "attach and sell" shares of a private company within the meaning of section 29 of the Companies Ordinances ("HK private shares"), but has jurisdiction to charge HK private shares under sections 20 and 20A.

5. If section 21D confers jurisdiction to "attach and sell" but not to "attach" without sale, then the Court has no jurisdiction merely to attach any of the properties mentioned in section 21D, i.e. land, goods, money, bank notes, cheques, bills of exchange, promissory notes, Government stock, bonds, or other securities for money, debts, shares in the capital or joint stock of any company or corporation, (other than HK private shares) or any other property whatsoever, whether movable or immovable, unless jurisdiction can be found elsewhere, such as sections 20, 20A, 20B, 21, and 21C. This means that a lot of movable or immovable properties cannot be attached, unless they are attached and sold. It also means that judgment creditors may "attach and sell" but may not "attach", and are bound to sell properties attached under section 21D. This construction reduces the usefulness of section 21D. It is not uncommon that a judgment debtor satisfies a judgment upon attachment of his properties. To construe "attachment and sale" in a way as to exclude attachment without sale defeats the clear intention of the legislative to make all movable or immovable properties (other than HK privates shares) liable to attachment, with or without sale. In my judgment, "attachment and sale" includes "attachment", whether or not followed by a sale.

6. The next question is whether section 21D applies to a charging order. If it does, then section 21D provides that the Court has no jurisdiction to "attach" HK private shares by a charging order. We have a head on collision with sections 20(1) and 20A(2)(b)(ii) which expressly provide that the Court may impose charging orders on "stock of any body incorporated in Hong Kong" which include HK private shares. Sections 20, 20A, and 20B provide as follows :

"20 Power of Court of First Instance to impose charging order

(1) Where, under a judgment or order of the Court of First Instance, a person (in this section and in sections 20A and 20B referred to as the 'debtor') is required to pay a sum of money to another person (in this section and in section 20A referred to as the 'creditor') then, for the purpose of enforcing that judgment or order, the Court of First Instance may make an order imposing on any such property of the debtor as may be specified in the order a charge for securing the payment of any money due or to become due under the judgment or order. (Replaced 52 of 1987 s.13)

(2) An order under subsection (1) is referred to in this Ordinance as a 'charging order'. (Replaced 52 of 1987 s.13)

(3) In deciding whether to make a charging order the Court of First Instance shall consider all the circumstances of the case and, in particular, any evidence before it as to-

(a) the personal circumstances of the debtor; and

(b) whether any other creditor of the debtor would be likely to be unduly prejudiced by the making of the order. (Replaced 52 of 1987 s.13)

(4) This section shall apply to a judgment, order, decree or award however called of any court or arbitrator, including any foreign court or foreign arbitrator, which is or has become enforceable, whether wholly or to a limited extent, as it applies to a judgment or order of the Court of First Instance.

(Amended 25 of 1998 s.2)

[cf. 1979 c.53 s.1 U.K.]

20A Property which may be charged

(1) Subject to subsection (3), a charge may be imposed by a charging order only on-

(a) an interest held by the debtor beneficially-

(i) in any asset of a kind mentioned in subsection(2); or

(ii) under any trust; or

(b) an interest held by a person as trustee of a trust (in this paragraph referred to as "the trust"), if the interest is in an asset of a kind mentioned in subsection (2) or is an interest under another trust and-

(i) the judgment or order in respect of which a charge is to be imposed was made against that person as trustee of the trust;

(ii) the whole beneficial interest under the trust is held by the debtor unencumbered and for his own benefit; or

(iii) in a case where there are 2 or more debtors all of whom are liable to the creditor for the same debt, they together hold the whole beneficial interest under the trust unencumbered and for their own benefit.

(2) The assets referred to in subsection (1) are-

(a) land;

(b) securities of any of the following kinds-

(i) Government stock;

(ii) stock of any body incorporated in Hong Kong;

(iii) stock of any body incorporated outside Hong Kong or of any state or territory outside Hong Kong, being stock registered in a register kept at any place within Hong Kong;

(iv) units of any unit trust in respect of which a register of the unit holders is kept at any place within Hong Kong; or

(c) funds in court.

(3) In any case where a charge is imposed by a charging order on any interest in an asset of a kind mentioned in subsection (2)(b) or (c), the Court of First Instance may provide for the charge to extend to any interest, dividend or other distribution payable and any bonus issue in respect of the asset. (Amended 25 of 1998 s.2)

(4) In this section-

'dividend' includes any distribution in respect of any unit of a unit trust; [cf. 1979 c.53 s.6 U.K.]

'stock' includes shares, debentures, loan stocks, funds, bonds, notes, any other securities issued by the body concerned, whether or not constituting a charge on the assets of that body and any rights or options to subscribe for or be allotted any of the foregoing; and

'unit trust' means any trust established for the purpose, or having the effect, of providing, for persons having funds available for investment, facilities for the participation by them, as beneficiaries under the trust, in any profits or income arising from the acquisition, holding, management or disposal of any property whatsoever.

(Added 52 of 1987 s.14)

[cf. 1979 c.53 s.2 U.K.]

20B Provisions supplementary to sections 20 and 20A

(1) A charging order may be made either absolutely or subject to conditions as to notifying the debtor or as to the time when the charge is to become enforceable, or as to other matters.

(2) The Land Registration Ordinance (Cap 128) shall apply in relation to charging orders as it applies in relation to other orders or writs issued or made for the purpose of enforcing judgments.

(3) Subject to the provisions of this Ordinance, a charge imposed by a charging order shall have the like effect and shall be enforceable in the same courts and in the same manner as an equitable charge created by the debtor by writing under his hand.

(4) The Court of First Instance may at any time, on the application of the debtor or of any person interested in any property to which the order relates, make an order discharging or varying the charging order. (Amended 25 of 1998 s.2)

(5) In the case of a charging order registered pursuant to the Land Registration Ordinance (Cap. 128), if an order under subsection (4) discharging the charging order is made, the Land Registrar shall on the filing with him of a memorial and an office copy of such order, enter a discharge of such charging order on the register, and may issue certificates of such entry. (Amended 8 of 1993 s.3)

(Added 52 of 1987 s.14)

[cf. 1979 c.53 s.3 U.K.]"

7. There is no reason why the legislature should introduce express provisions in the Ordinance itself to provide for the making of charging orders on HK private shares on the one hand and then go on to provide that HK private shares may not be attached by charging orders. Sections 20(1), (2) and (3), 20A, 20B, 21C and 21D were added by the Supreme Court (Amendment) Ordinance, 1987, Ord. No. 52/87.

8. If section 21D applies to charging orders, there are further inconsistencies between section 21D and sections 20 and 20A in respect of shares of overseas companies. Under section 20A(2)(iii), only shares registered in a register kept at any place within Hong Kong of offshore companies may be charged. This covers both public and private companies. The shares must be locally registered. In contrast, under section 21D, the shares of all offshore companies, both public and private companies, with or without any register of shares in Hong Kong, are liable to "attachment and sale" by charging orders in Hong Kong.

9. In my judgment, section 21D does not apply to charging orders.

The explanatory memorandum and Hansard

10. Counsel's research has taken me to the explanatory memorandum to the Supreme Court (Amendment) Bill 1987 and the Attorney General's speech in the Legislative Council on 24 June 1987 when he moved the second reading of the Bill. Counsel told me that despite diligent search, they had not been able to locate a copy of the 1984 report of the Kempster sub-committee of the Supreme Court Rules Committee.

11. What the Attorney said was :

"The purpose of this Bill is to improve and streamline the practice and procedure of the Supreme Court which is comprised of the High Court and the Court of Appeal.

The Supreme Court Ordinance in its present form derives essentially from the Supreme Court (Consolidation) Act 1925 of the United Kingdom. Although the United Kingdom legislation has been substantially amended over the years and was consolidated by the Supreme Court Act in 1981, few corresponding amendments have been made to the Hong Kong Ordinance. Accordingly, there are now substantial differences between the two pieces of legislation. By 1984 it had become apparent that a thorough review of the Supreme Court Ordinance was required to ascertain whether any of the amendments to the United Kingdom legislation should be adopted in Hong Kong.

Sir, one of the advantages to Hong Kong of having a legal system based upon the common law is that we are able to take advantage of experience of developments of the law in other common law jurisdictions. And where, as with the Supreme Court Ordinance, a Hong Kong Ordinance is based on a United Kingdom precedent we are able to decide whether to amend our law in the light of United Kingdom experience. No one suggests that Hong Kong should slavishly adopt all United Kingdom reforms. Any amendment that is proposed on the basis of developments in the United Kingdom must be evaluated in the light of local needs and Hong Kong's special circumstances.

Sir, in 1984 a sub-committee of the Supreme Court Rules Committee, being a panel of judges and legal practitioners, was established under the chairmanship of the hon. Mr. Justice KEMPSTER to undertake a thorough review of the Rules of the Supreme Court and to ascertain whether the amendments introduced to the United Kingdom legislation and consolidated in the 1981 Act also should be made to the Hong Kong Ordinance. This Bill derives from the sub-committee's work. Virtually all of the substantive changes to the law recommended by the sub-committee, with one notable exception that I shall address later, have been included in this Bill. The Bill incorporates some changes suggested by developments in the United Kingdom jurisdiction and includes other proposals of the sub-committee which appear to be sensible, to reflect desirable trends and to clarify the law.

...

Sir, whilst I appreciate that the Bill will primarily be of interest to lawyers I should like to outline briefly some of the more important, substantive changes that it will introduce.

...

Most of the provisions of this Bill will clarify and improve the practice of the court. The Bill will introduce provisions to overcome existing defects in the court's power to order a debtor's property to be charged as security for his debts, to grant the court wider power to attach monies owed to a debtor by a third party to be used in payment of creditors, and to codify the existing common law governing the court's power to provide relief against forfeiture of leases when a tenant has failed to pay the rent on the due date.

...

Sir, there are many other changes in civil procedure effected by this Bill. Hon. Members will find that they are summarised and explained in the accompanying briefing material, and in the Explanatory Memorandum and its appendices."

12. Significantly, what the Attorney said on charging orders was that the "Bill will introduce provisions to overcome existing defects in the court's power to order a debtor's property to be charged as security for his debts". What he did not say was that the Bill changed the law by introducing a prohibition against ordering sale of HK private shares attached by a charging order.

13. The explanatory memorandum reads as follows :

"The Supreme Court Ordinance, which was enacted in 1976, is derived from the Supreme Court (Consolidation) Act 1925 of the United Kingdom, as amended from time to time. The United Kingdom legislation relating to the Supreme Court was consolidated in the Supreme Court Act 1981 and the main purpose of this Bill is to update the Supreme Court Ordinance in line with the 1981 Act. The opportunity is also taken to incorporate the Administration of Justice (Miscellaneous Provisions) Ordinance (Cap. 349); to adopt the provisions of the Charging Orders Act 1979 of the United Kingdom and the provisions relating to relief against forfeiture for non-payment of rent contained in the County Courts Act 1984 of the United Kingdom; and to expand the rule making powers of the Rules Committee. Also, in line with the new name of the Supreme Court of England and Wales, the Supreme Court of Judicature becomes the Supreme Court of Hong Kong (Clause 3).

2. The more important changes made by the Bill are as follows-

...

(d) Clauses 13 and 14 introduce new provisions [i.e. sections 20(1), (2) and (3), 20A and 20B] relating to the making of charging orders for the enforcement of judgments or orders of the Supreme Court. These provisions are based on the Charging Orders Act 1979 of the United Kingdom. The new provisions will enable a beneficial interest in land held on trust for sale to be the subject of a charging order and give the High Court specific power to make an order discharging a charging order.

...

(f) Clause 18 introduces a number of new sections. The following are the most important-

[no mention of section 21D]

3. Appendix 1 contains a Table of Amendments which sets out the effect of each clause of the Bill and also the corresponding provisions which have been followed in the Bill without modification or subject only to minor modifications."

14. Appendix 1 is a table with four columns, the relevant parts of which are as follows :

* References are to U. K. statutes unless a Hong Kong enactment is indicated, e.g. 'Cap. 219, s.2 (H.K.)'. The references are intended to indicate corresponding provisions which have been followed in the Bill without modification or subject only to minor modifications."

15. Thus, according to the explanatory memorandum, section 21D followed the old O.47, r.7 without modification or with only minor modification.

16. The old O.47 was an order on "Writs of Fieri Facias" and r.7 was in these terms :

"Sale of property in execution of judgment

7. (1) The following property is liable to attachment and sale in execution of a judgment, namely, land, houses, goods, money, bank notes, cheques, bills of exchange, promissory notes, government securities, bonds, or other securities for money, debts, shares in the capital or joint stock of any public company or corporation, and all other property whatsoever, whether movable or immovable, belonging to the judgment debtor, and whether the same is held in his own name or by another person in trust for him or on his behalf.

(2) Every sale in execution of a judgment shall be made under the direction of the Registrar and shall be conducted according to such orders, if any, as the Court may make on the application of any party concerned and shall be made by public auction: Provided that the Court may in any case authorize the sale to be made in such other manner as it may deem advisable.

(3) Where any goods in the possession of an execution debtor at the time of seizure by the bailiff or other officer charged with the enforcement of a writ, warrant or other process of execution are sold by such bailiff or other officer without any claim having been made to the same, the purchaser of the goods so sold shall acquire a good title to the goods so sold and no person shall be entitled to recover against the bailiff or other officer, or anyone lawfully acting under the authority of either of them, except as provided by section 46 of the Bankruptcy Ordinance, for any sale of such goods or for paying over the proceeds thereof prior to the receipt of a claim to the said goods, unless it is proved that the person from whom recovery is sought had notice or might be making reasonable inquiry have ascertained that the goods were not the property of the execution debtor: Provided that nothing in this rule contained shall affect the right of any claimant who may prove that at the time of sale he had a title to any goods so seized and sold to any remedy to which he may be entitled against any person other than such bailiff or other officer or purchaser as aforesaid.

(4) At any time within 10 days from the date of sale of any immovable property in execution of a judgment, application may be made to the Court to set aside the sale on the ground of any material irregularity in the conduct of the sale, but no such sale shall be set aside on the ground of such irregularity unless the applicant proves to the satisfaction of the Court that he has sustained substantial injury by reason of such irregularity.

..."

17. If section 21D were intended to apply to charging orders in addition to fi fa, and if section 21D were, as Mr Sakhrani submitted, intended to change to the pre-1987 law so as to disallow the sale of HK private shares charged, I would have expected the Attorney and the explanatory memorandum to say so. The fact that neither did and the fact that section 21D was introduced as following the old O.47, r.7 on fi fa, without modification or with only minor modification, support my view that section 21D does not apply to charging orders.

Sections 21C and 21D

18. Section 21C provides as follows :

"21C Effect of writs of execution against goods

(1) Subject to subsection (2), a writ of fieri facias or other writ of execution against goods issued from the Court of First Instance shall bind the property in the goods of the execution debtor as from the time when the writ is delivered to the bailiff to be executed. (Amended 25 of 1998 s.2)

(2) A writ of a kind referred to in subsection (1) shall not prejudice the title to any goods of the execution debtor acquired by a person in good faith and for valuable consideration unless he had, at the time when he acquired his title, notice that that writ or any other such writ by virtue of which the goods of the execution debtor might be seized or attached had been delivered to and remained unexecuted in the hands of the bailiff.

(3) For the better manifestation of the time mentioned in subsection (1), it shall be the duty of the bailiff (without fee) on receipt of any such writ as is there mentioned to endorse on its back the hour, day, month and year when he received it.

(4) In this section and in section 21D-

(a) 'property' means the general property in goods, and not merely a special property;

(b) 'bailiff' includes any officer charged with the enforcement of a writ of execution;

(c) any reference to the goods of the execution debtor is to be deemed a reference to property liable to attachment and sale in execution of a judgment;

(d) an act shall be treated as done in good faith if it is in fact done honestly, whether it is done negligently or not.

(Added 52 of 1987 s.18)

[cf. 1981 c.54 s.138 U.K.]"

19. Section 21C(4) indicates that both sections 21C and 21D are to be read together. Section 21C is on fi fa. Section 21C(4) lends further support for my view that section 21D does not apply to charging orders.

Cheung Koon Ping v. Muneyoshi Michiyoshi

20. This is a judgment of His Honour Judge Downey pronounced on 5 June 1971 and reported in [1994] 3 HKC 563 where the learned judge held that the words in brackets in section 21D excluded shares in private companies from any sale in execution, although they could be the subject of a charging order by virtue of sections 20 and 20A. I have the privilege, which the learned Judge did not, of having the able and helpful assistance and submissions of 3 counsel. I have carefully considered the judgment and, for reasons given above, respectfully disagree.

Effect of the charging order

21. Section 20B(3) provides that subject to the provisions of the Ordinance, "a charge imposed by a charging order shall have the like effect and shall be enforceable in the same courts and in the same manner as an equitable charge created by the debtor by writing under his hand". A charge is a security whereby real or personal property is appropriated for the discharge of a debt or other obligation, but which does not pass either an absolute or a special property in the subject of the security to the creditor, nor any right to possession, but only a right of realisation by judicial process in case of non-payment of the debt, see Fisher & Lightwood's Law of Mortgage, 10th Edn, p. 23.

Whether jurisdiction should be exercised in this case

22. Having concluded that I have jurisdiction to order the sale of the Shares, the next question is whether I should order a sale, and if so, on what terms. The shareholders had freely entered into the Shareholders Agreement which contained provisions on the sale of shares by a shareholder and the determination of the price in default of agreement between the selling shareholder and the buying shareholder(s). Clause 11.6 provides that the board of directors "shall be bound to register the transfer". In any event, the 2nd plaintiff is the controlling shareholder and has expressed an interest in acquiring the Shares. Mr Sakhrani has advanced no argument why I should not order a sale in this case. In my judgment a sale should be ordered and the appeal must be allowed.

23. Mr Sakhrani submitted that I should fix the minimum price for the sale of the Shares and that it should be "determined by an independent valuer (to be appointed jointly by the 1st plaintiff and the defendant) which should reflect the fair market value of the Shares". This is not what the parties agreed under the Shareholders' Agreement. Their agreement is that in default of agreement between the parties, the price is what the auditors determine to be the fair value of the Shares. The fair value is defined as the higher of the net asset value of the Shares at the date of the transfer notice (after taking full account of any element of control) or the open market value on the assumption, inter alia, that the Shares are capable of being transferred without restriction. Mr Sakhrani has made no submission on whether, and if so, how, such definition is in any way unjust or unfair. I also see no reason why I should bring in "an independent valuer". I am told that the present auditing firm is one of the "big 5" accounting firms and no criticism has been made of the auditors by the defendant. There is no reason to allow an outsider to have access to the state and affairs of what is a private company.

24. In an attempt to save the costs of a further hearing on directions, I propose to give directions in my order, with a stay on the sealing and perfection of the order for 14 days in case any of the parties wishes to address me on the directions. The parties agreed that costs should follow the event. Nevertheless, I will make an order nisi on costs.

25. I order that :

(1) The Order of the Registrar dated 27 November 2000 be set aside.

(2) An Order for sale of 1,754,026 ordinary shares of Starform Services Limited ("the Starform Shares") standing in the name of the defendant and the subject of a Charging Order Absolute dated 9 December 1999.

(3) The defendant do give notice in writing to Starform and to the Shareholders that the Starform Shares are to be sold ("the Transfer Notice") and the defendant shall not withdraw the same thereafter.

(4) The Transfer Notice should not contain a Total Transfer Condition as defined in clause 11.2(b) of the Shareholders Agreement.

(5) The defendant shall endeavour to agree with Shareholders a price for the sale of the Starform Shares within one month of the Transfer Notice.

(6) Failing agreement on the price, the defendant do forthwith request the Auditors of Starform to determine and verify the fair value of the Starform Shares in accordance with clause 11.3 of the Shareholders Agreement.

(7) The sale proceeds be lodged in an interest bearing account with the Court and up to $1,978,131.30 of the sale proceeds shall be for the benefit of the plaintiff.

(8) The parties be at liberty to apply to a Master for further directions.

(9) An order nisi that costs of these proceedings, including the costs of this appeal and of the application before the Registrar, be paid by the defendant to the plaintiffs.