KARAHA BODAS CO AND ANOTHER v. PERUSAHAAN PERTAMBANGAN MINYAK DAN GAS BUMI NEGARA

HCCT 28/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 28 OF 2002

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J U D G M E N T

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I.  Introduction

1.  On 3 June 2004 I appointed Receivers to ascertain from Petral, Tugu and KIPCO (the 3 companies) what monies have (or will) become due from them to Pertamina since 24 May 2002 and to receive any such monies not already paid.  KBC now applies for an extension of the Receivers’ powers.  This morning I said that I was not minded to extend the Receivers’ powers.  I now give my reasons.

2.  Further, as against Tugu, KBC applies for the payment of US$156,750.  That amount represents a dividend due to Pertamina from Tugu at the time when a garnishee order nisi had been served on Tugu.  Tugu’s shareholders (including Pertamina) purported to rescind the dividend on 29 July 2003.  The question is whether, despite such rescission, KBC can claim payment of Pertamina’s share of the dividend from Tugu. 

II.  Discussion

A.  The Extension Summons

3.  The extent of the Receivers’ powers had previously been canvassed before me at a hearing on 27 May 2004.  That led to my Order of 3 June 2004. 

4.  The Judgment gives rise to issue estoppel on matters that could have been argued before me in May 2004.  In effect I can only extend the Receivers’ powers on the basis of events after my Judgment that alter the premises on which my decision was based.  If KBC feel that, on the material before the Court at the May 2004 hearing, I should have granted more extensive powers, the proper course is for KBC to appeal against my Order.

5.  Mr Shieh SC (appearing for KBC) points to 2 subsequent matters as justifying an extension of powers.

6.  First, the Receivers wrote to the 3 companies on about 23 June 2004 asking them to state what debts “have become due and payable to KBC … from 23 May 2002 to the date of this letter”.  In essence, the replies received were that no debts had been or would ever be due and owing to KBC.

7.  Second, on 23 July 2004 KBC’s lawyers (Messrs Clyde & Co.) fortuitously received a copy of Tugu’s financial statement for the year ended 31 December 2003.  In the statement they discovered that on 29 July 2003 Tugu’s shareholders had passed a unanimous resolution to rescind a total dividend of US$330,000 (US$0.0165 per share) payable to them.  The resolution had been made even though a garnishee order nisi had been served on Tugu in late May 2002. 

8.  On 18 July 2003 Tugu had asked Master Woolley for time to file an affirmation in response to KBC’s garnishee order nisi.  Leave having been granted, Mr Santoso of Tugu filed an affirmation on 1 August 2003 stating that “Tugu is not indebted to the Judgment Debtor for any sum at all”.  Mr Santoso said nothing about the rescission of the dividend.

9.  As a result of the affidavit, on 11 September 2003 Master Yuen SC refused to make KBC’s garnishee order absolute and discharged the garnishee order nisi.

10.  Mr Shieh submits that the 3 companies’ responses to the Receivers and the Tugu dividend incident show a collective “mindset” to obstruct KBC’s enforcement of its arbitration award against Pertamina.  He says that this shows bad faith on the part of the 3 companies. 

11.  The only effective way to deal with this unhelpful attitude (Mr Shieh suggests) is to extend the Receivers’ powers.  Greater powers would enable the Receivers to inspect the 3 companies’ books and verify the accuracy and truth of their statements to the Receivers.

12.  I am not persuaded by Mr Shieh’s argument. 

13.  The replies to the Receivers’ inquiries were strictly accurate.  The Receivers had asked the wrong question.  They asked about the 3 companies’ indebtedness to KBC, rather than Pertamina.

14.  It is true (as Mr Shieh argues) that the 3 companies might have suspected or known that what the Receivers were after was information about debts due from the 3 companies to Pertamina.  But the 3 companies were not under any legal obligation to tell the Receivers what questions they ought to be asking and to volunteer answers to such questions without being asked.

15.  It was (and remains) open to the Receivers to ask about debts due from the 3 companies to Pertamina since 23 May 2002.  However, the Receivers have not done so to date, even though it has long since been pointed out by the 3 companies’ solicitor that the Receivers asked the wrong question.

16.  As for the Tugu incident, it appears that Tugu on legal advice believed that, by the shareholders’ decision to rescind the dividend, it could legally and truthfully say that no debt “is” owing.  As will be apparent in my consideration of the 2nd issue before, I believe that advice to have been wrong.

17.  Nonetheless, I do not think that one can infer bad faith from the mere fact that Tugu, acting on erroneous legal advice, stated a wrong conclusion in Mr Santoso’s affirmation.  On the slim evidence of the letters to the Receiver and the Tugu dividend alone, I am unable to conclude that Tugu deliberately misled the Court.

18.  Thus, I do not accept that the 2 matters raised by Mr Shieh establish a recalcitrance that cries out for extension of the Receivers’ powers.  Obviously, the 3 companies must respond honestly and in good faith to the Receivers’ proper inquiries.  But there is no additional obligation on the 3 companies to “make life easy” for KBC and the Receivers.

19.  The above is my principal reason for refusing KBC’s application for an extension of powers.  To that main reason, I would add a few observations by way of footnotes.

20.  First, §1(b) of KBC’s Summons asks that the Receiver have the power to inspect the books and financial records of the 3 companies. 

21.  That is a question that was raised in the earlier hearing.  Then, Mr Shieh pointed out that he was content simply to have the audited financial statements of the 3 companies.  I mentioned this in my earlier Judgment at §17.  There I concluded that there was no apparent legal or practical impediment to KBC’s obtaining audited financial statements of KIPCO, Tugu and Petral.  

22.  In the absence of a major change of circumstance since the Judgment, I cannot revisit that question now and give the Receivers access to more documents.  In June 2004, I was concerned that the extended powers sought would endow KBC with more powers than Pertamina could itself exercise as a shareholder of the 3 companies.  I remain so concerned.

23.  Second, §2(b) of KBC’s Summons asks that the Receivers be authorised to show potential purchasers of the 3 companies’ shares any confidential information obtained from the use of their powers. 

24.  There was a debate among the parties as to whether by §23 of my Judgment I was:-

(1)     ruling out Objective A (the obtaining of further information to facilitate a sale of Pertamina’s shares in the 3 companies) altogether; or,

(2)     merely refusing the attempt to appoint Receivers capable of exercising Pertamina’s powers as shareholder of the 3 companies.

For what is worth, I believed that I was doing the latter, rather the former.

25.  Nonetheless, that does not mean that I should, without more, now sanction greater powers for the Receivers.  As just discussed, I do not think that the subsequent events relied on by Mr Shieh, justify the extension sought.

26.  Third, §3(b) of KBC’s Summons asks for an Order that the 3 companies:-

“immediately inform the Receivers of any intended transaction(s) to be entered into with the Judgment Debtor when any of the Garnishees becomes aware of such transaction(s) or becomes aware that such transaction(s) will be entered into;...”

27.  The provision sought is to vague to be enforceable in practice.  Literally read, KBC is asking that the 3 companies report any contemplated transaction whether or not it will lead to some legal right or chose in action capable of being enforced by Pertamina against any of the 3 companies.  That could potentially encompass anything that the 3 companies did in relation to Pertamina.  As such, the provision would be oppressive.

28.  Mr Shieh suggests that the provision should be read narrowly as relating, for instance, to contracts which the 3 companies are about to sign with Pertamina.  But I do not see how any clear wording can be drawn up to make the distinction which Mr Shieh has in mind.  No alternative wording has been offered.  Imprecise wording can only lead to problems of enforcement and endless argument, with no party having any clear idea what does or does not constitute compliance or breach of the proposed order.

29.  Fourth, for the avoidance of doubt, I should expressly state that §24(1) of my Judgment should refer to “what monies or amounts have (or will) become due or payable to Pertamina” instead of “what monies or amounts have (or will) become due or payable to KBC”.  The reference to “KBC” in place of “Pertamina” was a slip for which I apologise.

B.  The Tugu dividend application

30.  KBC seeks to appeal out of time against the decision of Master Yuen discharging the garnishee order nisi served on Tugu.  Tugu does not contest the application for leave to appeal out of time, but only argues the substance of the appeal.

31.  Dividends were declared on 10 May 2002.  That gave rise to a debt payable to Tugu’s shareholders, including Pertamina.  See Potel v. IRC [1971] 2 All ER 504 (at 511 g-h).

32.  The making of the garnishee order nisi on 23 May 2002 gave rise to an equitable charge in respect of the dividend payable to Pertamina.  See, for example, Galbraith v. Grimshaw [1910] 1 KB 339 (at 343).

33.  On 29 July 2003 when the resolution to rescind the dividend was passed, both Pertamina and Tugu would have had knowledge of the garnishee order nisi.  Any act on their part to rescind the dividend, without KBC’s permission, could therefore only take effect subject to KBC’s equitable charge over the debt created by the declaration of the dividend.

34.  In purporting to treat the dividend as rescinded without consulting KBC, Tugu interfered with KBC’s equitable right. 

35.  In consequence, the fact that Pertamina has released Tugu from Tugu’s obligation to pay the dividend to Pertamina, cannot have operated to discharge Tugu from its liability to pay Pertamina’s share of the dividend to KBC.

36.  Had the facts behind the rescission of the dividend come to Master Yuen’s attention, he could not have discharged the garnishee order absolute.  He would instead have been obliged at law to make the garnishee order absolute.

37.  It follows that Tugu should now pay to KBC the sum of US$156,750, namely, the dividend attributable to Pertamina’s shares.

38.  Mr Hunsworth (appearing for Tugu) argues that such a result would penalise Tugu for the acts of its shareholders.

39.  I disagree with that analysis. 

40.  Tugu declared a dividend which gave rise to a debt.  Tugu’s officers then learned of the garnishee order nisi.  They would have known that they could not deal with the debt created by the dividend without involving KBC.  Nonetheless, they allowed Pertamina to cancel the debt and treated the debt as rescinded without reference at all to KBC.  They even caused Mr Santoso to affirm that there was no debt.

41.  For the above reasons, it cannot be said that Tugu had no involvement in the events leading to nullification of the dividend in disregard of KBC’s equitable rights.

42.  I note finally that in Galbraith v. Grimshaw, Farwell LJ warned (at 343) that “the garnishee cannot pay the debt to anybody but the garnishor without incurring the risk of having to pay it over again”.  I think that Tugu allowing Pertamina to rescind the dividend was equivalent to a garnishee paying or disposing of a debt to a party other than the garnishor.  The consequence is that Tugu must “pay over” the debt to KBC.

III.  Conclusion

43.  KBC’s Summons to extend the Receivers powers is dismissed.

44.  Leave to appeal out of time against Master Yuen’s order of 11 September 2003 is granted.  KBC’s appeal is granted.  Tugu shall pay US$156,750 to KBC.  I wish to hear from KBC and Tugu on the question of interest on that amount.

45.  I shall also hear all parties on costs and any consequential orders.