EXECTPADE LTD. v. LEE WING COTTON GOODS CO. AND ANOTHER

1987 No. A8549

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The Judgment Creditor commenced these proceedings in December 1987 against the Judgment Debtor for the sum of $312,758.55 under a dishonoured cheque issued by the Judgment Debtor to the Judgment Creditor in purported payment for goods gold and delivered. In the Defence and Counterclaim the Judgment Debtor alleged that the said goods were shipped to mainland China and were found by the Chinese purchasers to be "not fit for sale". The Judgment Debtor counterclaimed for $200,500.00, as to $194,000.00 being compensation claimed by the Chinese purchasers and as to $6,500.00 being transportation charges. The Judgment Creditor took out an application under Order 14 and obtained summary judgment for the said sum of $312,758.55 with interest thereon and costs. The Judgment Debtor was granted leave to appeal against the judgment out of time. The appeal was heard in April 1988 and was dismissed with costs.

2. The Judgment Creditor then resorted to various means to procure satisfaction of the said judgment against the Judgment Debtor, including garnishee proceedings and an examination under Order 48 of the Rules of the Supreme Court. Garnishee proceedings against the Judgment Debtor's bankers proved unfruitful. Thus, Poon Si Lok, the sole proprietor of the Judgment Debtor, was examined under Order 48 on 28th September 1988 and 8th October 1988 as to his assets. He was sent to prison on 8th October 1988 for 2 months by the Master at the conclusion of the said examination. It appeared from the record that the Master was satisfied that Poon had disposed of his assets with a view to avoid payment under the judgment and had wilfully failed to make a full disclosure at the examination.

3. During the course of his examination, Poon testified, inter alia, that the goods sold by the Judgment Creditor to him were resold to one Lin Fung Company. In support of his allegation, an invoice, a page of the ledger of the Judgment Debtor listing accounts receivables and other documents were produced. Based on the said information and subsequent search by the Judgment Creditor's solicitors at the Business Registration Office, garnishee proceedings were instituted against the present Garnishee.

4. The Order Nisi to show cause was made on 4th April 1989 on an ex parte application. On 2nd May 1989 when the matter came before the Master on the usual Chamber List, a further supportive affidavit by the Judgment Creditor's solicitors, Miss Delahunty, dated 28th April 1989; and an affirmation by one Chan Wing Fat, the present sole proprietor of Lin Fung Trading Company, dated 1st May 1989 disputing liability were before the Master. The following order was made by the Master at the hearing:-

"1 The Plaintiff do have leave to file a further affidavit.

2. These garnishee proceedings be adjourned to a date to be fixed by the Senior Master after the filing of the said affidavit, the estimated length of hearing being half a day.

3. The garnishee order nisi of Master Perrior dated 4th April do continue until further order.

4. Costs of this application be reserved."

5. The matter was then refixed for hearing before a Master in chambers on 18th July 1989, with one day set aside. On 18th July 1989, it transpired that service on the Judgment Debtor was defective and the matter had to be further adjourned. From the record kept by the Master, the following order was made:-

"Adjourned to date to be fixed for argument in consultation with counsel's diaries.

Mr. Chong's estimate ½ day - if Judgment Creditor wants longer, must put case to Master fixing hearing."

Costs for the hearings was awarded to the Carnishee. 29th September 1989 was then fixed for the adjourned hearing of the proceedings. However, as counsel for the Garnishee was not available on that day, the Judgment Creditor consented to the vacation of the said date and refixing the hearing to 11th December 1989.

6. The matter first came before me on 11th December 1989. Counsel for the Garnishee took 2 issues as preliminary points at the hearing which accounts for the necessity for me to set out hereinabove the history of the proceedings in such detail. Firstly, it was submitted that the hearing ought not be permitted to proceed any further without the filing of formal pleadings. Subsequent to the pleadings, it was argued, the matter should be tried by a judge of the High Court in court and not by a Master. Secondly, it was submitted that Mr. Chan ought not to be allowed to be cross-examined by the Judgment Creditor on his affirmation notwithstanding notice to that effect had been given to the Garnishee.

7. On the first point, I have already set out the detail history of the case leading up to the heaning before me. At the first inter parte hearing on 2nd May 1989 the matter was adjourned to a Master with a direction that the estimated length of hearing be half a day. At that stage, 2 affidavits from the Judgment Creditor and 1 affirmation from the Carnishee were before the court. There was an obvious dispute to be resolved between the Garnishee and the Judgment Creditor. Further direction was given by the Master for leave to file a further affidavit by the Judgment Creditor. There is no record of anyone making any application for the issue to be tried by a Judge on pleadings, nor for the matter to be determined on anything but affidavits. When the parties appeared again before a Master on 18th July 1989, the matter was further adjourned to a Master for argument with similar directions. No one ever suggested to the Master that there should be any change in the mode of determination of the dispute as directed in May 1989. Further, while corresponding with the Court to vacate the hearing date on 29th September 1989, there was no suggestion from anyone that there was to be any change in the position understood by all parties. The matter came before me with no change in the directions given. Despite the several opportunities for the Garnishee to seek for different directions as regard the mode of disposal of the dispute, he chose to make it at the eleventh hour. It is understandable that the Judgment Creditor took great exception to the said application. Counsel for the Garnishee further argued that consent from the Garnishee is required before the Master has jurisdiction to try the matter pursuant to Order 36. He sought to rely on the following passage in the White Book at note 49/5/1 on page 749, 1988 edition:-

"If the garnishee disputes liability ...... the Master may take any of the following courses in the O.B.D.:

1. Determined the issue as to the garnishee's liability summarily, without the consent of the parties, and whether the issue is one of fact or of law;

2. Direct an issue to be tried by a Judge or, if the parties consent, by a Master (O.36 r.9) and give directions ......"

However, Order 49 rule 5 provides:-

"5. Where on the further consideration of the matter the garnishee disputes liability to pay the debt due or claimed to be due from him to the judgment debtor, the Court may summarily determine the question at issue or order that any question necessary for determining the liability of the garnishee be tried without, if it orders trial before a master, the need for any consent by the parties."

8. With all due respect to the learned editor of the White Book, I fail to see how the underlined portion of the commentary can be correct in the light of the very plain words of Rule 5. I came to the conclusion that directions were in fact given on 2nd May 1989 for the matter to be determined in a summary manner by a Master on affidavits. In the premises, I do not have jurisdiction to overrule the said directions. I am further satisfied that even in the absence of the garnishee's consent, a Master has jurisdiction under Rule 5 to proceed to a determination or trial of the dispute. In the event I am wrong in holding that I am bound by the directions given on 2nd May 1989, I would in the light of the said history of the case refuse to further delay the matter by ordering formal pleadings to be filed and for the matter to be transferred to a Judge of the High Court. I am satisfied that the issues in dispute are manageable without the assistance of formal pleadings. I would, in that event, order the matter to proceed to a determination before a Master on the affidavits filed without pleadings.

9. On the second issue of the Garnishee's refusal to be cross-examined, I had also ruled against the Garnishee. Counsel for the Garnishee referred me to page 592 of the White Pook which states:

    "There can be no cross-examination under para. (3) on an affidavit showing cause against a garnishee order nisi (Jeffris v. Tomlinson (1887) 3 T.L.R. 193)."

10. However, upon a careful examination of the actual report, what Mr. Justice Cave actually held was that "it would be perfectly montrous that where an issue had been arrived at between two parties, one of them alleged that money was due from the other to the judgment debtor and the other denied that allegation, the person who alleged that the money was due should be able to summon the other before the Registrar for the purpose of examining him about matters which really had to be tried in the issue." That is of course a totally different factual situation from the present proceedings when the court was in the process of an actual determination of the issue itself.

11. Indeed, it was held in Be Smith and Eawcett [1942] Ch. 304 by the Court of Appeal that where there is a question of motive or of good faith of the deponent, the court ought not to be asked to act without cross-examination. In the premises, an order was made pursuant to Order 49 Rule 5 and Order 38 R. 2(3), that the affirmations of Chan Fat Wing cannot be used without the deponent being available for cross-examination.

12. At the request of the garnishee and without the objection of the Judgment Creditor the proceedings were adjourned from chambers into open court.

13. Before I go into the real substance of the dispute, there are 2 further issues on admissibility of evidence which I would like to deal with. At the conclusion of the case for the Judgment Creditor, counsel for the Garnishee applied for an order that unless Poon be called by the Judgment Creditor as a witness to be cross-examination by him, his evidence as contained in the deposition was not to be admissible as evidence at all. Such an application was made after the deposition had already been placed before the court as evidence without any objection. Though it is too late to object to admissibility as such, in the interest of justice, it is obviously necessary to permit cross-examination of Poon. In the premises, an order was made pursuant to Order 49 R.5 and Order 39 R.2(3) and on the authority of Strauss v. Goldsmith (1892) 8 T.L.R. 239, to permit cross-examination of Poon.

14. In the course of making his final submission, counsel for the Garnishee objected, for the first time, to the admissibility of the evidence of Poon as regard the alleged sale and delivery of the said goods to Lin Fung Trading Copmany. It transpired during the cross-examination of Poon that the invoice he compiled charging Lin Fung Trading Company for the purchase of the said goods was based wholly on what he was told by an intermediate, one Chan Wah. The objection was based on the rules against hearsay, and was said to be solely against the same being admitted as evidence of the truth of the contents of the oral statements.

15. The rules against hearsay evidence have been eroded substantially in civil proceedings by the enactment of the Evidence Ordinance, Cap. 8. Under S.47(1) hearsay evidence are now admissible as evidence in civil proceedings. Sub-section 3 of the said section limited such to first-hand hearsay. No hearsay notice could have been served by the Judgment Creditor in respect of the hearsay evidence relating to what Chan Wah told Poon as the situation was only revealed during his cross-examination. The Judgment Creditor was as surprised as the Garnishee of his new revelation. I am satisfied that the failure to serve such a notice was not deliberate. In view of the unusual nature of these proceedings, the Judgment Creditor can hardly be blamed for not being able to obtain full co-operation from Poon. I was catisfied that if necessary my discretion under Order 38 Rule 29(1) would be exercised in favour of the Judgment Creditor and that such evidence should be admissible despite the failure to serve the appropriate notice. However, it should not be overlooked that the objection only came after the Judgment Creditor had closed its case and the Garnishee was addressing the court in his closing speech. As the evidence was admissible subject to certain procedural requirements, the same had in fact become admitted as evidence when it was given in evidence without objection being raised as to the lack of compliance with such requirements. The liberal approach of the courts towards admissibility of hearsay evidence in civil proceedings is evident in speeches of learned judges such as Denning L.J. (as he then was), in Jarman v. Lambert and Cooke (Containers) Ltd. [1951] 2 K.B. 937 at 947, and Devlin L.J. in Bearmans Ltd. v. Metropolitan Police District Receiver [1961] 1 AER 384 at 393.

16. I was prepared to proceed to rule on the said objection when counsel for the Garnishee urged me not to do so at that stage but to reserve such ruling until all final speeches and submissions are closed. In the premises, I now rule that such evidence relating to oral statements made by Chan Wah to Poon are admissible and had been admitted as evidence of the truth of the contents. If need be, I would exercise my discretion under Order 38 Rule 29(1) to admit such despite the absence of notice of hearsay being served by the Judgment Creditor.

17. Now that I have dealt with all the various preliminary points and objections raised by the Garnishee, I shall proceed to deal with the substance of the dispute. To facilitate the determination of the dispute, I had framed 2 questions to be answered by the court:-

(a) Whether Lin Fung Trading Company is indebted to the Judgment Debtor in the sum of $320,486.40 under an invoice, No.1301, and dated 27th June 1987; for cotton batting cloth allegedly sold by the Judgment Debtor to Lin Fung Trading Company?

(b) If the answer to the first question is in the affirmative, then whether the Garnishee is indebted to the Judgment Debtor in respect of the same?

Both parties were in agreement that the said 2 questions as framed would sufficiently dispose of the dispute between them.

18. The Judgment Creditor's case, via the evidence of Poon, is that the said goods were sold by the Judgment Debtor, via an intermediate agent Chan Wah, to one Cheung Wing Yip of Lin Fung Trading Company. At that time Lin Fung Trading Company was registered as a partnership between the said Cheung Wing Yip, and one Chan Sing Ming, the son of Chan Fat Wing. Poon did not handle the sale himself but transacted through a commission broker, the said Chan Wah, in the customary manner. Based on information he obtained from the said broker he prepared the said invoice dated 27th June 1987 (No. 1301) addressed to -

"Lin Fung Trading Company Mr. Cheung Wing Yip Luk Yuen Hong Kong Economic & Resources Division"

Poon also entered in his company's ledger for "accounts receivable (unpaid)" the following entry -

14"

He confessed, however, he prepared the documents based solely on information he obtained from the said Chan Wah. He agreed it is possible for Cheung Wing Yip to have entered into a side deal on his own and was not purchasing for Lin Fung. He said in his deposition that he and Cheung Wing Yip were old friends and had many business transactions prior to that sale. The goods were always sold on credit and the price was always paid on previous occasions. He was told by Chan Wah that the goods were not paid on this occasion as the ultimate purchaser, one Luk Yuen Company in mainland China, complained of defects. A letter dated 15th August 1987 from the said Chinese purchaser complaining of defects were given to him, a copy of which had been produced in the Order 14 proceedings. The said letter tend to suggest the goods were sold by the Judgment Debtor to the said Chinese purchaser under a contract. There was an inconsistency in Poon's evidence as to whether it was Chan Wah or Cheung Wing Yip who gave the said letter to him. Mr. Poon further said in his deposition he "last asked Cheung for payment in about November 1987. After that I have never seen him again and I can't locate him." Poon was never cross-examined on this allegation of direct communication he had with Cheung. There is nothing before me to suggest that Cheung ever denied the transaction. Poon was put under lengthy cross-examination by the Garnishee.

19. The Garnishee called no oral testimony to deny a sale of the said goods to Lin Fung Trading Company. The only evidence came in the form of oral hearsay statement, made by the said Chan Sing Ming denying the purchase of the said goods by the partnership, deposed to in Chan Fat Wing's affirmation filed to show cause against the Order Nisi. His said son is now working for him in his firm, the Garnishee. It was alleged that Cheung had absconded after cheating many tradesmen of their money. The said son was never called to deny on oath the purchase of the said goods by Cheung whether acting on his own behalf or for the partnership. The father's explanation was that it was because his son was not invited to be a witness by his solicitors.

20. I am satisfied that Poon is an honest and truthful witness in these proceedings despite the fact that he was found to be guilty of a failure to give full disclosure of his assets and was imprisoned for that in the action. He had no motive to lie to implicate the Carnishee. It would have been more beneficial to him simply to agree that the goods were sold directly to the Chinese purchaser, and that he was not paid. In such event the goods and the price would be a total loss and that would be the end of the matter for the Judgment Creditor, and no more trouble for him. I have not lost sight of the fact that the information Poon relied on was hearsay. There is however nothing to indicate that Chan Wah had been otherwise than an ordinary booker doing his job to sell goods for his principal. I am unable to find fault with the truthfulness of the information he related to Poon. The letter from the Chinese purchaser is ambiguous and is not sufficient to raise any doubt to outweigh the said hearsay evidence. The said hearsay evidence is corroborated by the unchallenged evidence from Poon of his direct communication with Cheung for payment for the said goods. I am satisfied at the end of the day that the said goods were sold to Cheung who was acting on behalf of Lin Fung Trading Company, which was at the material time a partnership between Chan Fat Wing's said son and Cheung.

21. The Garnishee also submitted that Lin Fung Trading Company, the said partnership, had ceased business on 15th July 1987 as per a letter dated 5th August 1987 giving notice of such to the Business Registration Office. The Garnishee is in fact an entirely new business established by the father which commenced business on 1st August 1987 as per an application for registration of the said business as a sole proprietorship dated 5th August 1987. The father said the 2 businesses are completely separate and distinct. He denied he had done anything dishonourable in the matter. However, upon cross-examination, he finally admitted that one of the 2 reasons for his establishing the so-called new business in the same name as his son's partnership was to enable trade debts due to his son's business to be collected after the closure of that business. For a while, the father carried on his business at the same premises as the son's business. The father attributed the reason to inability to find premises at that time. Despite the date of commencement of the sole proprietorship by the father was stated by him to be 1st August 1987 in his application for registration, he said in evidence that he had commenced business in the name of Lin Fung Trading Company in July 1987. He said he was the person who handled the procedure of notifying the Business Registration Office (on the same day) of the closure of the son's partnership business and the commencement of his sole proprietorship under the same name. He said the partnership's tenancy was not formally transferred to him after July 1987. He simply moved into the partnership's premises and paid the rent. Despite alleging in his affirmation that within 10 days of commencement of business in the partnership's premises he was able to find alternative accommodation, he continued to carry on his business at the partnership's premises under the same name as the partnership for a few months until December 1987. He said his wife gave money to his said son to establish the partnership. Cheung did not put up any capital. He said it was his wife's idea to use the same name for his sole proprietorship. He said "my wife said we can use the same name Lin Fung so that those people can repay those debts to us". He was referring to trade debtors of the son's partnership. He said he was not collecting debts on behalf of the son. He also said the use of the same name for his sole proprietorship was to enable his son to collect the money trade debtors owed him. He denied the son's partnership and his own sole proprietorship under the same name of Lin Fung Trading Company were one and the same family business. He said the son sold off the goods and furnishings at the premises after the closure of the partnership business. I do not accept Chan Fat Wing to be a truthful witness. I reject all the various pretexts he put up for the establishment of the so-called new business under his sole proprietorship in the same name as his son's partnership. I find as a fact that the son's partnership was established with funds of the family, and the family really regarded the said business as part of the family business. I am also satisfied that the father's said "sole proprietorship" was and is in fact the same business as the son's partnership. I find the scheme of closing down the business and re-establishing another one under the same name to be a sham for the purpose of avoiding payment of debts due by the business. The purported closure of the son's partnership and the establishment of the father's proprietorship in the said family business was in reality but a mere change of management. Chan Fat Wing has, by registering himself as the proprietor of the said business, held out to the world to be the proprietor of the same. The close down of business of the son's partnership followed by the commencement of the father's proprietorship under the same name at the same business premises under the same tenancy; would at least amount to a transfer of business from the son to the father. There is no evidence of a s.4 notice being given under the Transfer of Business (Protection of Creditors) Ordinance Cap.49. Pursuant to S.3 of the said Ordinance the transferee would be liable for the debts of the transferor even if the same were incurred solely by the transferor orior to the transfer.

22. In the premises, the answer to both questions must be in the affirmative. I am satisfied that the Garnishee i.e. Lin Fung Trading Co under the role propnetorship of Chan Fat Wing is liable to the Judgment Creditor for the outstanding price in the sum of $320,486.40 in respect of goods sold by the Judgment Debtor to the said business at a time when it was being run as a partnership between Chan Sing Ming and Cheung Wing Yip. The garnishee order nisi must then be made absolute, and I do make an order to that effect. I will hear parties on the question of costs.

23. Dated this 12th day of January, 1990.