AMERITAX PLUS LTD v. DENICE Y FOSTER HARRIS

DCMP 1298/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 1298 OF 2012

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D E C I S I O N

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1.  This is an appeal from the master’s order dismissing the plaintiff’s application for an order for sale of the shares in a private company subject to a charging order absolute.

BACKGROUND

2.  By an order made absolute on 10 April 2012, the interest of the defendant in the 9,999 ordinary shares held in Joymark International Limited, a private limited company (“Joymark”) stands charged with the payment of the sum of HK$1,720,033.16 with interest at the judgment rate until full payment, that being the judgment debt due from the defendant to the plaintiff pursuant to the judgment in DCCJ 3001/2007 dated 20 July 2010 together with costs.  The judgement debt with the assessed costs remains unpaid.  Hence the application for an order for sale.

3.  The amended originating summons was eventually heard on 18 September 2012 when the master dismissed the same with no order as to costs.

4.  By notice of appeal filed on 25 September 2012, the plaintiff appeals.

5.  Pursuant to O.58 of the Rules, this is a re-hearing of the plaintiff’s application; yet the plaintiff’s solicitors somehow set out in the notice the grounds of the appeal.  It is argued that the master erred in dismissing the application by reference to the restriction in the articles of association and section 21D of the High Court Ordinance, Cap 4.

JURSIDICTION TO GIVE THE ORDER FOR SALE

6.  Applicable in the present case should be section 68B of the District Court Ordinance (which is similar in terms to section 21D of the High Court Ordinance).  It provides that:

“68B. Sale of property in execution of judgment

(1) The property of the judgment debtor is liable to attachment and sale in execution of a judgment other than –

(a) shares in the capital or joint stock of any private company within the meaning of section 29 of the Companies Ordinance (Cap 32);

……”

7.  At the same time, section 52AA of the District Court Ordinance (which is similar in terms to section 20A of the High Court Ordinance) provides that:

“52AA. Property which may be charged

(1) …… a charge may be imposed by a charging order under this Ordinance only on –

(a) an interest held by the judgment debtor beneficially –

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

……

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

……

(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 in Hong Kong;

......

(3) ……

(4) In this section –

……

“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 the body and any rights or options to subscribe for or be allotted any of them;

……”

8.  As far as shares in a private company are concerned, it would appear that whilst they may be subject to a charging order pursuant to section 52AA, they may not be subject to attachment and sale pursuant to section 68B.

9.  It was precisely because of that did Downey DJ in Cheung Koon Ping v Muneyoshi Michiyoshi, DCMP 307/1989 (5 June 1991) find that the District Court had jurisdiction to make charging orders on shares in private companies but none to enforce the charging order by sale of the shares.

10.  10 years later, a different view was taken when the Court of First Instance had the chance to visit the question of the similar jurisdiction of the High Court. In Timmar Co Ltd & Anor v Erwin Hardy Corp Ltd [2001] 3 HKLRD 651, Recorder Kwok SC respectfully disagreed with Downey J’s construction of the relevant statutory provisions; and found that section 21D (as section 68B of the District Court Ordinance) does not apply to charging orders.  Section 20B(3) of the High Court Ordinance applies, which provides that a charging order would have like effect and would be enforceable in the same courts and in the same manner as an equitable charge created by the debtor by writing.  Such order gives the creditor the right of realisation by judicial process in case of non-payment of a debt.

11.  If it were not for the case of Timmar, anyone reading the sections could have fairly arrived at the same conclusion as those of Downey DJ and the master.  As I understand, the master did not have the benefit of assistance with reference to the above cases.

12.  The judgment of Downey DJ was dated the time when the current District Court Ordinance was yet to take shape and therefore the applying party there still had to resort to the general ancillary jurisdiction of the court under section 48 of the District Court Ordinance as well as section 21D of the High Court Ordinance.  Further, as Recorder Kwok SC noted, the point was fully and ably argued by counsel on both sides in Timmar as opposed to the one-sided argument in Cheung Koon Ping.  The meticulous study of the legislative history and construction of the relevant statutory provisions in Timmar causes me to agree with Recorder Kwok SC and to decline to follow Cheung Koon Ping with respect.

13.  Pursuant to section 52AB(3) of the District Court Ordinance (which is similar in terms to section 20B(3) of the High Court Ordinance), I am satisfied that the court has jurisdiction to order the sale of the shares in a private company subject to the charging order.

EXERCISE OF THE JURISDICTION

14.  As in most private companies, transfer of shares is restricted.  Unlike Timmar (above), there is no suggestion of any shareholders agreement in respect of Joymark.  There are only the articles of association that govern the relationship between the shareholders and the company as well as among the shareholders themselves.  Based on the rather outdated annual returns of Joymark, the shares subject to the charging order represent 99.99% of the total issued share capital.  The remaining 1 share, according to the same return, is actually vested in the defendant (in her personal capacity).

15.  The articles of association incorporated Table A in the First Schedule to the Cap 32 subject to exceptions and modifications (arts.1-2).  Art. 3 provides that:

“The Company is a Private Company and accordingly:-

(a) the right to transfer shares is restricted in manner hereinafter prescribed;

(b) the number of members of the company ……

(c) any invitation to the public to subscribe for any shares or debentures of the company is prohibited;

(d)……”

16.  Art. 4 provides for the transfer of shares in the following terms:

“The directors may, in their absolute discretion and without assigning any reason therefor, decline to register any transfer of any share, whether or not it is a fully paid share.”

17.  Art.3(c) concerns invitation to the public for subscription for shares of the company which may happen in the case of a public company.  What seems to cause concern is art.4.  The directors may refuse to register any transfer of shares in their absolute discretion.

18.  The outdated annual return mentioned above shows that the deceased and the other shareholder were then the 2 directors of the company.  However a more recent letter dated 11 March 2011 from the company’s banker suggests that there has been change in the directorship.  In any event, any transferee of the defendant’s shares may be faced with the refusal of the directors of Joymark, whoever they are now, to register such transfer.

19.  Having said that, I take into account the substantial overdue judgment debt and the position of the plaintiff as a judgment creditor.  Further, as the articles of association do not require the directors’ prior approval for sale of the shares, a transferee of the shares may in any event be faced with the refusal of the directors to register the transfer, irrespective of the manner of sale.  I would not be surprised that such risk will be reflected on the market for the shares and hence their value.  So long as the plaintiff is aware of such risk, I am not prepared to deny the plaintiff this means of enforcement of the charging order.

20.  The next question is on what terms the order for sale should be given.  Both the master and I have not been provided with any proposed directions consequential upon the making of the order for sale.  In an attempt to follow the initiative taken by Recorder Kwok SC in Timmar, I would give directions to the extent permitted by the circumstances as at today.

21.  I think opportunity should be given to the existing shareholders to purchase the shares in question at a price agreed with the plaintiff.  Success in that means saving costs.

22.  The plaintiff proposes sale by auction by the Registrar.  I doubt whether the situation will be similar to the ordinary case involving seizure of property by the bailiff and auction thereafter.  I prefer that the plaintiff has the conduct of the sale arrangement.

23.  A reserve price will have to be fixed.  The plaintiff’s director by affidavits provided his view of the financial situation of Joymark.  He managed to do so mainly because he is a certified public accountant; and it was exactly because the plaintiff was engaged to provide tax and business advice to the defendant that led to the plaintiff’s claim in the original action.

24.  It is suggested that the gross price range of the shares could be as little as HK$1 to as much as perhaps HK$100,000.  Such view of the financial situation of Joymark was given on the basis of the company’s account statements back in 2005.  References to the existence of undisclosed assets were made but without disclosure of sources of the information.  The current situation of the company is simply far from known.  Independent valuation, if can be obtained, should not be dispensed with.

25.  The considerations of the learned Recorder in Timmar (at §§23-25) reminds me of the need to pay heed to the contractual arrangement among the shareholders of the company regarding transfer of shares, if any.  The fact that the shares are sold upon the court’s order does not put the court or the judgment creditor into a position to override the regulations of the private company.  In particular, arts.22, 23 and 25 of Table A (and incorporated into the articles) provide for the execution of the instrument of transfer.

ORDER

26.  Considering the above, I make the following order:

(1)  The order of the master dated 18 September 2012 be set aside;

(2)  An order for sale of 9,999 ordinary shares of Joymark International Limited (“Joymark”) standing in the name of the estate of John Charles Harris (of whom the defendant is the personal representative) and the subject of a charging order absolute dated 10 April 2012 (“the Shares”);

(3)  Unless the Shares are sold and transferred to the existing shareholders by agreement with the plaintiff within 42 days from the date of service of this order on the defendant and Joymark, the plaintiff shall have liberty to proceed with the sale of the shares by auction;

(4)  The plaintiff shall have the conduct of the auction arrangement; and for such purpose, the plaintiff shall have liberty to apply to the Registrar for further directions including:

(a) the fixing of the reserve price for sale in accordance with independent valuation of the Shares or as the court otherwise directs;

(b) the provision for the cost of the auction;

(c) the provision for the execution of instrument of transfer in accordance with the articles of association of Joymark by the defendant or the Registrar, if the court directs;

(d) the disposal of the proceeds of sale of the Shares; and

(e) any other directions as may be necessary.

(5)  Costs of the application before the master and this appeal be paid by the defendant to the plaintiff to be taxed, if not agreed.

27.  The court expects the plaintiff to provide the necessary evidence in support of the application for further directions as aforesaid with proposals.