CHUNG FAI ENGINEERING CO (a firm) v. MAXWELL ENGINEERING LTD

HCA10504/1996
and HCA10631/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.10504 OF 1996

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(Consolidated pursuant to the Order of Mr Registrar Betts dated 10 October 1996)

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REASONS FOR DECISION

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1. At the conclusion of the hearing of the garnishee's summons, dated 25 July 2003, to set aside the garnishee order nisi, I granted the application. I now give my reasons for so doing.

2. The judgment creditor ("Maxwell") is owed just over $6 million plus interest and costs by the judgment debtor ("Chung Fai") following judgment being given in their favour after a trial in June 2000. After an unsuccessful appeal, Maxwell have attempted to execute the judgment by various proceedings. These include the garnishee proceedings which are the subject of this summons. In September 2001, a garnishee order nisi was made. The garnishee is Chung Fai Engineering Co. Ltd. The only difference in name between the judgment debtor and the garnishee is the addition of the word limited in the garnishee's name.

3. The "garnishee to show cause" was listed on 28 July 2003 for a three-day hearing. The directors of the garnishee have attended court for the purpose of cross-examination. However, at the 11th hour, the garnishee issued a summons to set aside the garnishee order nisi. Ms Teresa Cheng, SC, on their behalf, relies on two grounds for the setting aside. First, that Maxwell did not comply with the requirement of full and frank disclosure at the time of the ex parte order nisi. Second, that, even accepting Maxwell's allegations at their highest, there is no "debt" due from the garnishee to the judgment debtor for the purposes of garnishee proceedings.

4. The trial between Maxwell and Chung Fai concerned a construction contract. The events took place in 1996. The trial was in 2000. Chung Fai ceased operations soon after 1996 and were not trading at the time of the trial. The garnishee, in effect, had replaced Chung Fai. The two companies have similar, but not identical, directors and shareholders. They are however different legal entities.

5. In these garnishee proceedings, Maxwell claim that the garnishee owes money to the judgment debtor and the debt is greater than the judgment debt. It therefore applies for an order that the garnishee satisfies the judgment debt.

6. Under Order 49, rule 1 the court may order a garnishee to pay "the amount of any debt due ... to the judgment debtor from the garnishee". Maxwell do not rely in this case on any future debt that will accrue in due course. Therefore there must be "a debt" which is "due". Brett MR in Webb v. Stenton (1883) 11 QBD at 527 stated simply "if it is not a debt it will not do. It must be something which the law recognizes as a debt".

7. What, then, do Maxwell say is the "debt due" from the garnishee to the judgment debtor? Mr Wong Po Wing, for Maxwell, acknowledges that the money in respect of which he seeks an attachment order is money which was, allegedly, wrongfully or fraudulently transferred from the judgment debtor to the garnishee in or about 1996. His case, put simply, is that, if it was wrongly transferred, it should be repaid and is therefore a debt, within the meaning of a debt in garnishee proceedings.

8. The starting point of Maxwell's claim can be found in an affirmation filed in these proceedings, dated 20 August 2001, which states :

"On 31st December 1996 it was disclosed in the ledger statement of (the judgment debtor) that (the garnishee) owed the sum of HK$15,273,244.90 to (the judgment debtor)."

9. Ms Cheng makes the following submission about this, all of which are correct.

(1) The sum referred to is in the judgment debtor's internal accounting document under a heading of "account receivable", between itself and the garnishee. The same ledger reveals, under the heading of accounts payable, i.e. from the judgment debtor to the garnishee, sums totalling $16.5 million. The net result, in 1996, was that the garnishee owed the judgment debtor nothing. Subsequent audited accounts show that this position remained the same, but for very small amounts, in the following years.

(2) Even if this accounting arrangement was improper or unlawful or fraudulent (none of which are conceded by the judgment debtor) it does not give rise to a debt due from the garnishee. To construe it as a "debt" (incurred seven years ago) still "due" would be stretching the scope of Order 49 proceedings far beyond their intended purpose.

(3) The alleged wrongful transfer was made in 1996, four years before the trial of the action. It could not therefore have been made with the intention of avoiding the payment of a judgment debt. It is worth noting also that the original proceedings were commenced by the judgment debtor against Maxwell. Their case (albeit unsuccessful) was that Maxwell owed them money. This scenario militates against the suggestion that money was transferred, in 1996, from one company to another to avoid current liabilities. In any event, such allegations, even if true, would not convert the transfer of monies, into "something which the law recognizes as a debt".

(4) Ms Cheng also complains about a lack of disclosure in September 2001 when the nisi order was granted. Having considered the history of the matter my conclusion is that there probably was a lack of disclosure, although it cannot be said that it was deliberate.

10. The exhibits to which Ms Cheng has referred, in relation to the $15,273,244.90 sum of money, are those attached to an affirmation from the judgment debtor which post dates the ex parte order. Mr Wong therefore submits that the additional documents she has referred to were not in Maxwell's possession at the material time. This submission appears unlikely to be correct. In January 2001, the judgment debtor was ordered to discover all material documents within 28 days. The order also directed the garnishee to discover documents. That part of the order which related to the garnishee was successfully appealed in March 2001. The part which related to the judgment debtor was not appealed. It may be assumed therefore that there was adequate discovery thereafter. No complaint was made by Maxwell of non-compliance in respect of the unappealed part of the Order.

11. Moreover, Maxwell relied on a particular page of a ledger in support of their ex parte claim. Ms Cheng, in explaining the entry, refers to different pages of the same ledger. These pages, plus later audited accounts, which would in all probability have been discovered, were not disclosed to the master when the ex parte order was made.

12. In my judgment, the garnishee has made out a good case of non-disclosure which would enable the court to set aside the order under Order 32, rule 6. However, the primary reason for setting it aside is that Maxwell's own case does not demonstrate that any debt, within the meaning of Order 49, rule 1, is due to the judgment debtor.

13. Of course, the court is very conscious of the fact that, seven years after the contract and three years after the trial, Maxwell have still not received any money. Their cause need not be a lost one. Other avenues leading to a just result may be available.

14. I was addressed by counsel on the question of costs after the hearing. The order I make is therefore a final one. The costs of the garnishee's setting aside summons be to the garnishee in any event. There be no order as to costs on the garnishee to show cause summons save that the costs of and occasioned by the preparation of the affidavits in respect thereof be to the garnishee in any event.