HUA CHIAO COMMERCIAL BANK LTD. v. ALPHA PLUS INTERNATIONAL DEVELOPMENT LTD.

HCA 14714 of 1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

Civil Action No. 14714 of 1999

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REASONS for DECISION

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1. The proceedings before me commenced as the oral examination of a judgment debtor company pursuant to Order 48 of the Rules of the High Court, Cap 4.

2. The plaintiff judgment creditor had obtained judgment against the defendant judgment debtor company for $401,130.00 with interest and costs.

3. At the conclusion of the oral examination under Order 48 on 4th January 2001, Miss Siron, appearing for the judgment creditor, asked the Court to make a finding that the judgment debtor was able to satisfy the whole of the judgment debt; order the judgment debtor to pay that sum over together with the costs of the Order 48 application; and, if there was default of payment of the sum in satisfaction of the debt, to make an order committing the director of the judgment debtor Mr Lo Fu Man to prison pursuant to Order 49B 1B (3).

4. The applications were adjourned to enable the parties to prepare submissions. On 9th February, I heard the parties briefly and received their written submissions.

Summary of the evidence

5. Mr Herman LO Fu Man a director of the defendant company ("Alpha Plus") was examined pursuant to Order 48 RHC. For convenience, I will refer to this director as "Herman".

6. The evidence showed that Herman, his wife Huen Kit Chun and his brother Lo Fu Hop were the directors of the judgment debtor, Alpha Plus.

7. Herman had beneficial interests in several companies. For example he had a 100% interest in Buji Nan Ling Alpha Plus Plastic Manufactory in China; an 80% controlling interest in a Hong Kong company called Fu Hong Industries Ltd; and others called Tri-One, and Jadeball.

8. Herman was able control the amount of business channeled through these companies (see pages 19 and 20 of the transcript). The judgment debtor company stopped trading because Herman did not refer any further business its way. When Herman by-passed the judgment debtor and channeled the business through his other companies the judgment debtor company went dormant.

9. During the examination under O48, Miss Siron was able to identify a sum of money sufficiently large to satisfy the judgment debt. This "account receivable" sum was a loan that the judgment debtor company had made to Buji (the PRC company owned by Herman).

10. The examination also revealed "accounts payable" by the judgment debtor company to others. To complicate matters further, there was evidence indicating the funds that the judgment debtor had loaned to Buji originated from Fu Hong. Therefore the sum identified by Miss Siron could not be regarded as a simple, straightforward loan.

11. The judgment debtor was a trading company. There were no assets of value such as plant or machinery, stock, or property. Even the "asset" of goodwill that the judgment debtor had built up by years of trading in the name of Alpha Plus had been taken away from it. Herman had named another of his companies "Alpha Plus", and had caused the judgment debtor's name to be changed back to "Ruby Source". Therefore at the time of the examination, Herman had even stripped the judgment debtor company of everything of value. There were no available assets to satisfy the judgment debt, unless, as suggested by the judgment creditor, Herman could be ordered to call in the "accounts receivable".

12. The crux of the judgment creditor's argument was that since it has been shown from the oral examination of Herman that there were accounts receivable by the judgment debtor Alpha Plus in the sum of approximately $1.8 million, those sums could be regarded as "debts owing to the judgment debtor"; or, alternatively, the accounts receivable could be regarded as "property or means of satisfying the judgment" under Order 48 r1. Therefore, it was argued, it is possible on the evidence for the Court to make a finding pursuant to Order 49B r1B(1)(a) that the judgment debtor is "able to satisfy the judgment".

Means of satisfying the judgment or order

13. How then are the words "means of satisfying the judgment or order" in Order 48 r1 construed?

14. Order 48 r1(1) RHC provides :-

EXAMINATION OF JUDGMENT DEBTOR, ETC.

Order for examination of judgment debtor (O.48, r.1)

(1) Where a person has obtained a judgment or order for the payment by some other person (hereinafter referred to as "the judgment debtor") of money, the Court may, on an application made by the person entitled to enforce the judgment or order, order the judgment debtor or, if the judgment debtor is a body corporate, an officer thereof, to attend before the Registrar or such officer as the court may appoint and be orally examined on the questions-------

(a) whether any and, if so, what debts are owing to the judgment debtor, and

(b) whether the judgment debtor has any and, if so, what other property or means of satisfying the judgment or order, and the court may also order the judgment debtor or officer to produce any books or documents in the possession of the judgment debtor relevant to the questions aforesaid at the time and place appointed for the examination."

15. In Watkins v Ross (1893) 68 LT 423, the court was of the view that the term "means" referred to the pecuniary resources available to the judgment debtor for the satisfaction of the judgment debt. At the time the court was considering Order XLII, r.32 of the English Rules of the Supreme Court 1883 : -

"When a judgment or order is for the recovery or payment of money, the party entitled to enforce it may apply to the court or a judge for an order that the debtor liable under such judgment or order, or, in the case of a corporation, that any officer thereof, be orally examined, as to any and what debts are owing to the debtor, and whether the debtor has any and what other property or means of satisfying the judgment or order, before a judge or an officer of the court, as the court or judge shall appoint; and the court or judge may make an order for the attendance and the examination of such debtor, or of any other person, and for the production of any books or documents."

16. The version considered in Watkins is drafted in very nearly the same terms as our own Order 48. Watkins must be authority to say that the scope of the examination of the judgment debtor must be limited to the assets the judgment debtor has currently available for the satisfaction of the judgment debt.

17. This view is reinforced by the decision in McCormack v National Australia Bank Ltd (1992) 106 ALR 647. In that case the Australian Court of Appeal considered the meaning of the words "means of satisfying the judgment" in Order 43, rule 31 of the Rules of the Supreme Court of Australian Capital Territory. This rule provided inter alia for the oral examination of a judgment debtor by a judgment creditor on the following questions :

"(c) whether any, and if so, what debts are owing to the judgment debtor; and

(d) whether the judgment debtor has any, and, if so, what other property or means of satisfying the judgment or order."

18. It can be seen that the Australian provision is in para materia with our own Order 48 rule 1.

19. The Australian case has certain parallels to the present action. There the bank obtained judgment for some $2.6 million against Mr McCormack. During the oral examination counsel for the bank sought to ask about a maintenance agreement dealing with the transfer of some real properties made between Mr McCormack and his former wife. Counsel wanted to inquire in general whether there was any ground on which the transfer of property and assets to the wife of the judgment debtor could be set aside or avoided. Such questions would have assisted the bank in taking steps to recover assets which could be used for the satisfaction of the judgment debt.

20. The master ruled against the bank stating (at p.648 line 48) :

" If the deed were set aside the judgment debtor would then have means. That seems to be not the same thing as to say that he now has the means of satisfying the judgment debt or that that nascent possibility of those sort of proceedings mean that he has means within the meaning, as I understand it, of that word contrasted with the word 'property'. I think that questions can only go to some method presently available to him to satisfy the judgment debt to be the subject of examination. I would therefore disallow the questions."

21. The master held that the questions posed to the judgment debtor had to be directed the ascertainment of available assets against which execution could be levied. The bank appealed against the master's decision and was successful before the judge. The Court of Appeal reversed the judge's decision. The appellate court referred to the English authority of Watkins v Ross and held that the term "means" refers to the pecuniary resources which may be available for satisfaction of the judgment debt.

22. The analysis by the Australian Court of the scope of the examination under the rule is particularly helpful. The Court said (at p.649 line 38) :-

"We would not read the term "means" as limited to pecuniary resources presently, in the sense of instantly or currently, available. Order 43 r 31 uses no such description. The term "means" of its very nature denotes not only existing property or assets but also resources or sources whereby assets or property may become available for satisfaction of the judgment debt. But nevertheless, the rule allows only an examination as to the property and means which the judgment debtor has to satisfy the judgment.

Order 43 r 31 does not, as does s81 of the Bankruptcy Act 1966 (Cth), allow for a general, wide ranging inquiry into the financial transactions the debtor. The purpose of the examination is to ascertain from what sources the debtor may satisfy the judgment debt. The term "means" does not denote other possible methods by which the judgment creditor may obtain satisfaction of the debt. It is the means of the debtor which are the subject of the examination."

23. One finds that in interpreting very similar provisions, both the English and the Australian courts have come to similar conclusions. The "means" would refer to assets that are instantly or currently available to the judgment debtor, and the rule only allows for the examination as to the property and means the judgment debtor "has". The Australian judgment helpfully explained that even though the term "means" may encompass assets that may become available to the judgment debtor, the rule confines the examination to what is currently available.

24. That point was reinforced by the Australian Court's comparison of an examination of a judgment debtor with the examination conducted under the Bankruptcy Act. That left no room for doubt that an examination under the former is not nearly as wide ranging as in the latter circumstances.

Committal

25. Miss Siron had also asked the court to consider the making an order of committal under O49B r1B (3) should Herman, the director of the judgment debtor default in satisfying the judgment debt.

26. Order 49B rule 1B is a local provision. There is no equivalent provision in English legislation. Order 49B 1B (1) provides :-

(HK) EXECUTION AND ENFORCEMENT OF JUDGMENT

FOR MONEY BY IMPRISONMENT

Power of Court following examination (O. 49B, r.1B)

(1) Where the Court is satisfied, following the examination conducted under rule 1A or following an examination conducted under Order 48, that the judgment debtor--------

(a) is able to satisfy the judgment, wholly or partly; or

(b) has disposed of assets with a view to avoiding satisfaction of the judgment or the liability which is the subject of the judgment, wholly or partly, or

(c) has willfully failed to make a full disclosure as required under rule 1A(2) or at the examination under Order 48 or to answer any question provided under that rule or Order, it may, in its discretion, order the imprisonment of the judgment debtor for a period not exceeding 3 months.

(2) (a) Where the court is satisfied, following the examination conducted under rule 1A or following an examination conducted under Order 48, that the judgment debtor is able or will be able to satisfy the judgment, wholly or partly, by instalments or otherwise, it may order him to satisfy the judgment in such manner as it thinks fit.

(3) (a) Where the judgment debtor fails to comply with an order made under paragraph (2), the judgment creditor may apply to the Court, on not less than 2 clear days notice to the judgment debtor, for an order for the imprisonment of the judgment debtor and the Court may, unless the judgment debtor shows good cause, order the imprisonment of the judgment debtor for a period not exceeding 3 months.

27. One must remember that O49B 1B is penal since it provides for the imprisonment of a judgment debtor. As such, the circumstances invoking the court's discretion to imprison a director of a judgment debtor must be proved on the criminal standard of proof.

28. The words of the provision must be construed strictly if one seeks to invoke the rule to imprison a judgment debtor, see Luen Hing Fat Textile Ltd v Lam Shing-chin t/a New Cotton Trading Company [1990] 1 HKLR 737.

29. One can see that for Order 49B rule 1B (1)(a) to be satisfied, it must be proved that "the judgment debtor....is able to satisfy the judgment wholly or partly". The operative word is "is"; the provision must have been put in the present tense for a purpose. The means to pay must relate to existing assets that are instantly or currently available to the judgment debtor.

30. In the circumstances of the present case the "means" are not instantly or currently available. Because of this, the judgment creditor's application must fail. The judgment debtor has no currently available "means" to satisfy the judgment debt.

31. The application must fail for the additional reason that sub-paragraph (3) cannot apply in the present circumstances. No order for payment was ever made under sub-paragraph (2). The provision does not begin to bite until there has been a failure to comply with an order made under sub-paragraph (2).

32. Finally, it is conceptually difficult to apply the provisions of Order 49B rule 1B to commit directors of corporate entities. A distinction has to be drawn between the judgment debtor company and Herman. Since the case of Salomon v A. Saloman Ltd [1897] AC 22 the common law has recognized that the legal identity of an incorporated company is distinct from its members and directing mind. There is insufficient evidence here to make the distinction in order to consider the application for committal.

33. For all the reasons given, the application for an order that the judgment debtor satisfy the judgment debt fails. By parity of reasoning the application under O49B r1B(3) also fails.

Costs

34. Counsel for the judgment debtor had asked for the costs of the hearings on the basis that the hearings were not necessary. He submitted that the financial documents had been provided in advance of the substantive hearings, and that the defendant had admitted that there were accounts receivables. He argued that since the judgment creditor had obtained no further information from the hearings, the defendant should be awarded its costs.

35. Costs are always in the discretion of the court. In deciding the exercise of its discretion, the court must consider all the circumstances of the case. Upon receipt of the financial documents, the judgment creditor would have noticed that the finances of the judgment debtor had been manipulated. The solicitors for the bank must have been struck by the movement of funds in and out of the judgment debtor, and between associated companies. The financial picture was not straightforward at all. An oral examination of at least one of the directors was called for. The initial hearing on 4th January 2001 was therefore quite justified in the circumstances. For the reasons given, there will be an order nisi that the judgment creditor should be awarded costs of the hearing on 4th January, to be taxed if not agreed.

36. I regard the costs of the half-hour hearing on 9th February 2001 to be a separate issue. The court had asked the parties to come back with their written submissions after Miss Siron had made an application for the committal of a director of the judgment debtor. This application was a serious matter and not one to be undertaken lightly.

37. In page 113 of the photocopy of "Enforcement of Judgments in Hong Kong" by Heilbronn, Booth & McCook supplied by Miss Siron, it was stated therein that :

"...imprisonment under Orders 48 and 49B now hinges upon a finding of misconduct over and above an initial failure to satisfy the debt. Thus the court's power to order imprisonment is now analogous to its power to commit for contempt...".

38. I find that the application of O49B rule 1B to be problematic. The rule does not sufficiently differentiate between the personal debtor and the corporate debtor. It is bedeviled by a lack of clarity, and its application to corporate entities as opposed to individuals is not precisely defined. Conceptually, the committal to prison of a company director for the "misconduct" of the corporate entity is not entirely clear. According to the learned authors of "Enforcement of Judgments in Hong Kong", not only must the "misconduct" must be proved on the criminal standard, the misconduct must be such that is over and above the failure to satisfy the judgment debt. I agree that that view must be correct in principle.

39. For these reasons the hearing on the 9th of February was a necessary one, if only to enable the parties to marshal their points for submission on these difficult questions of law.

40. I am satisfied that an order nisi that there should be no order as to the costs of the hearing on the 9th February would be appropriate.

41. Unless there is an application made within 7 days of the handing down of this judgment, the costs orders nisi in relation to the hearings on 4th January 2001, and on 9th February 2001 will become absolute.