PALOMA CO LTD v. CAPXON ELECTRONIC INDUSTRIAL CO LTD

HCCT 53/2017

[2020] HKCFI 754

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 53 OF 2017

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D E C I S I O N

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The
“Charging Order Decision”

A. The applications

1.  There are two matters before the court:

 (a) the substantive hearing for the Charging Order: Notice to Show Cause dated 23 November 2017 (the “Charging Order Hearing” and the “Charging Order Nisi”); and

 (b) the first hearing for the summons dated 26 September 2018 taken out by Paloma Company Limited (“Paloma”) for discovery of documents and disclosure of certain information (the “Disclosure Summons”).

B.     Adjournment of the Disclosure Summons

2.  The Disclosure Summons was filed by Paloma on 26 September 2018. It is supported by the 3^rd affirmation of Mr Kouichi Yamaura (“Yamaura” and “Yamaura 3^rd”) filed on the same date.

3.  On 5 November 2018, Mr Lin (“Lin”, the chairman of Capxon Electronic Industrial Company Limited (“Capxon”) up to 10 April 2018 and since that date its liquidator) filed an affirmation in opposition of the Disclosure Summons, while at the same time furnishing some of the information sought.

4.  Mr Joffe, who together with Mr Jason Yu appear for Paloma, submits that it is inappropriate and premature for the Disclosure Summons to be dealt with substantively at the first call‑over hearing because:

 (a) Paloma is entitled to have the last word by way of reply evidence;

 (b) there has been no indication from either party that the Disclosure Summons was to be dealt with substantively at the first call‑over hearing, and the same ought to be adjourned to allow the parties to properly and fully prepare for the same; and

 (c) the appropriateness of the divers disclosure and discovery sought in the Disclosure Summons will be dependent upon the Court’s finding upon the Charging Order Hearing.

5.  Mr Mike Yeung, counsel for Capxon, invites the Court to proceed with the hearing of the Disclosure Summons and to dismiss the same.  However, and upon my enquiry, Mr Yeung confirms that there has been no prior notice from his side that they would be making that invitation during the call‑over hearing.   

6.  In the circumstances, I accept Mr Joffe’s submissions.  I adjourn the substantive hearing of the Disclosure Summons to a date to be fixed.  I give parties directions along the line of the draft placed before me by Mr Joffe.

C.     Background leading to the Charging Order Hearing

7.  The parties first came before me on 2 May 2018.  On that occasion, I adjourned the Charging Order Hearing but proceeded to hear Capxon’s summons (the “Setting Aside Summons”) to set aside the Order of Mimmie Chan J dated 12 October 2017 (the “Enforcement Order”) granting leave to enforce the Arbitral Award dated 6 August 2014 (the “Award”).  Having heard parties, I dismissed that application of Capxon on the same day.  I stated my reasons in my Reasons for Decision handed down on 25 May 2018 (the “25/5 Reasons”[1]). I have also stated therein the relevant background leading to the various applications before me, which I will not repeat.  I will just recapitulate briefly as follows.

8.  Capxon is a subsidiary of Capxon International Electronic Company Limited, a company listed on the Main Board of the Hong Kong Stock Exchange. The registered address of Capxon is in Taiwan.

9.  On 6 August 2014, Paloma obtained in Japan the Award against Capxon in the sum of JPY2,427,186,647 plus interest and costs.

10.  On 12 October 2017, Mimmie Chan J granted the Enforcement Order.

11.  On 23 November 2017, the Charging Order Nisi was granted in respect of 85,137,200 shares in Lancom Limited held by Capxon (the “Lancom Shares”).

12.  The Lancom Shares are the major assets of Capxon.

13.  On 2 May 2018, I adjourned the Charging Order Hearing, proceeded to hear the Settling Aside Summons and dismissed it on the same day.

14.  Now the Charging Order Hearing resumes before me.

D.     The evidence filed

15.  Capxon has filed:

 (a) in support of the Setting Aside Summons, Lin’s 1^st affirmation (“Lin 1^st”).  Lin 1^st remains relevant for the purpose of the present hearing;

 (b) For the Charging Order Hearing, and pursuant leave I granted when adjourning the same:

 (1) on facts, Lin’s 2^nd and 3^rd affirmations (“Lin 2^nd” and “Lin 3^rd” respectively); and

 (2) on Taiwanese law, the 2^nd, 3^rd, and 4^th affirmations of Mr Albert Kao (“Kao”, “2^nd Kao”, “3^rd Kao” and “4^th Kao” respectively).  Kao is a partner of Formosa Transnational, Attorneys at law, a firm of attorneys qualified to practice law in Taiwan;

16.  Paloma has filed for the purpose of the Charging Order Hearing:

 (1) on fact, the 4^th affirmation of Yamaura (“Yamaura 4^th”); and

 (2) on Taiwanese law, the affirmation of Mr Edward YC Liu (“Liu” and “Liu Aff”).  Liu is a partner of Chen & Lin Attorneys‑at‑Law, a firm of attorneys qualified to practice law in Taiwan.

E.     The winding-up of Capxon in Taiwan, and its financial position

17.  As I have set out in the 25/5 Reasons (at §13), during an extraordinary general meeting of shareholders of Capxon convened on 10 April 2018 (the “10/4/18 EGM”), a resolution was passed that Capxon be dissolved, and Lin be appointed as the liquidator for the conduct of the dissolution and liquidation procedure (the “Taiwan Winding‑up”).  That is akin to a members’ voluntary winding‑up in Hong Kong.

18.  In respect of the financial position of Capxon, Lin said at §13 of Lin 1^st that:

“ 13. The balance sheet and property inventory of [Capxon] is now being prepared by Deloitte & Touche for the purpose of the dissolution and liquidation process. I shall make further affirmation to exhibit such document to this Honourable Court once it is ready. Yet, for ease of this Honourable Court’s reference, the financial statements and accountant’s report of [Capxon], prepared by Deloitte & Touche dated 19 March 2018 (the ‘Accountant’s Report’) show that assets of [Capxon] exceeds its liabilities as at 31 December 2017 … In particular, as at 31 December 2017, [Capxon] had total assets of NT$1,425,686,000 and its total liabilities amounted to NT$1,180,178,000. However, 87% of [Capxon’s] total assets at 31 December 2017 were made up by its interests in Lancom Limited. The financial status of [Capxon] has not undergone any material change since 31 December 2017 up to now, and thus the said figures representing [Capxon’s] assets and liabilities would still be applicable for the present application. Accordingly, if the [Lancom Shares] are charged and removed from its assets, [Capxon] will not have enough assets to satisfy its outstanding liabilities owed to its other creditors as at 31 December 2017.”

In that same paragraph, Lin also said that the amount owed to Paloma as at 31 December 2017, converted into NT$, was NT$886,036,000.

19.  In Lin 2^nd, Lin produced the updated financial statements of Capxon as at 10 April 2018 (“Updated Financial Statements”). It shows that although Capxon’s assets had decreased from NT$1,425,686,514 to NT$1,394,327,438 (NT$1,234,998,432 being attributed to the interest in the Lancom Shares) as at 10 April 2018, and its liabilities increased from NT$1,180,178,024 to NT$1,202,738,325 during that same period, Capxon remained balance sheet solvent as at 10 April 2018 when the voluntary winding-up commenced.

F.     Parties’ stances, and the main legal issue arising

20.  Mr Yeung summarizes his position at §3 of his written submissions:

“ In gist, the Charging Order Application comes down to this question — whether, under the present circumstances, making a ruling that ‘solvency for the time being’ is conclusively an exception to the general rule (that an order nisi should not be made absolute if the judgment debtor in the interim enters into voluntary winding up) is fair and equitable to all the various parties involved. [Capxon] submits that the answer is in the negative, in light of: (i) the liquidator’s duty of loyalty and care on the part of the liquidator to satisfy the creditors on a pari passu basis under Taiwanese law; and (ii) … the absolute certainty of fair and unbiased distribution where the Charging Order Nisi is discharged, against the possibility of putting [Paloma] in a more advantageous position to the detriment of all other creditors where the Charging Order Nisi is perfected. In the circumstances, the Charging Order Nisi should be discharged.”

21.  Mr Joffe submits, and not disputed by Mr Yeung, that Capxon bears the burden of showing cause why the Charging Order Nisi should not be made absolute: Hong Kong Civil Procedure 2020 §50/9A/23 p 1065.

22.  The following paragraphs of Mr Joffe’s written submissions summarize his stance:

“ 5. One can observe from the new evidence that it is Capxon’s own case that:

(1) Capxon is balance-sheet solvent …

(2) The Taiwan Shilin District Court granted an order for Paloma to enforce against Capxon’s assets despite the liquidation and rejected Capxon’s objections (in respect of which Capxon has filed further submissions in opposition) …

13. There being no winding up proceedings in Hong Kong, Capxon can only pray in aid the Hong Kong court’s common law power to give assistance to the Taiwanese liquidation.

14. However, Capxon’s attempt to show cause against the Charging Order Nisi is bound to fail given three fundamental limits[2] to the power of assistance:

(1) First, a member’s voluntary winding up of a solvent foreign company is not a collective insolvency proceeding which the Hong Kong court will recognise by refusing creditors’ enforcement.

(2) Second, the Hong Kong court’s power of assistance is subject to local law and policy under which a member’s voluntary winding up of a solvent company has not been regarded as sufficient cause against making a charging order absolute.

(3)     Third, the Hong Kong’s court’s power of assistance to refuse creditors’ enforcement should not be exercised where the foreign court has found insufficient cause to refuse execution or where it has ordered execution notwithstanding the objection by the liquidator.”

23.  The main legal principle that is engaged is how this Court, when considering whether the Charging Order Nisi should be made absolute, should approach the cross‑border, voluntary and balance‑sheet solvent Taiwan Winding‑up.

G. The law relevant to the Three Limitations

G.1.   Singularis

24.  The case Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675 features heavily in Mr Joffe’s submissions.  It is relevant to all Three Limitations.  I will first endeavor to give an overview of that case before concentrating upon the Three Limitations.

25.  In Singularis:

 (a) a Cayman Islands company was wound up in Cayman Islands.  Liquidators were appointed there;

 (b) In order to trace the company’s assets, the liquidators wished to obtain information relating to the company’s affairs from the company’s auditors.  The company’s auditors were a Bermuda registered partnership;

 (c) The liquidators applied to the Cayman Islands courts.  But under Cayman Islands law, the auditors could only be ordered to deliver up material belonging to the company;

 (d) In order to obtain materials belonging to the auditors themselves, the liquidators made an application in Bermuda for an order requiring the auditors to produce all documents in their possession relating to the affairs of the company.  Under s 195 of the Bermudan Companies Act 1981 (the “Bermudan Companies Act”), the Supreme Court of Bermuda had power to make such an order.  That statutory power however could only be exercised in relation to a company which the court had ordered to be wound up;

 (e) The Supreme Court acceded to the liquidators’ application, exercising what was termed a common law power to order the auditors to produce information which they could have been ordered to produce under s 195 of the Bermudan Companies Act if the company had been wound up in Bermuda;

 (f) The auditors appealed.  The Court of Appeal of Bermuda doubted whether there was any jurisdiction on the part of the Supreme Court to make the order in circumstances where s 195 did not apply (because the company was wound up in Cayman Islands), but set aside the order on the basis that, in any event, it was not an appropriate exercise of discretion because it was an order made in support of a Cayman Islands liquidation which could not have been made by the Cayman Islands court itself;

 (g) The liquidators appealed to the Privy Council;

 (h) Before the Privy Council were three main issues:

 (1) whether there was any common power on the part of the Bermudan courts to “assist a foreign court of insolvency jurisdiction by ordering the production of information in oral or documentary form which is necessary for the administration of a foreign winding up”[3] (the “Common Law Power”);

 (2) whether the Common Law Power existed in Bermuda given the fact that the statutory power to order production under s 195 of the Bermudan Companies Act 1981 was limited to cases where the company had been wound up in Bermuda; and

 (3) whether in any event, the Supreme Court was correct in exercising that power given that the Cayman Islands court could not itself have made the order;

 (i) Ultimately, the Privy Council dismissed the appeal:

 (1) The Board was unified in dismissing the appeal.  The reasons given by the 5 members of the Board however differed;

 (2) Lord Sumption held that the Common Law Power existed (§§10, 19 and 25), that it was not excluded by the Bermudan Companies Act (§28), but the power should not be exercised given the lack of equivalent power on the part of the Cayman Islands court over persons within their jurisdiction (§29);

 (3) Lord Collins held that “there is a principle of the common law that the court has the power to recognize and grant assistance to foreign insolvency proceedings” (§§38 and 51 to 58), but that given the Bermudan Companies Act, “to apply insolvency legislation by analogy ‘as if’ it applied, even though it does not actually apply, would go so far beyond the traditional judicial development of the common law as to be a plain usurpation of the legislative function” (§§64 and 108);

 (4) Lord Clarke dismissed the appeal for the reasons given by Lord Sumption, and agreed specifically that despite the Bermudan Companies Act, the Bermudan court did have the Common Law Power (§110);

 (5) Lord Mance held that the common law power to assist a foreign liquidation did not enable the Bermudan courts to order any person (whether or not an officer or agent of the company) to attend and be interrogated and produce documentation and information on pain of contempt (§§117, 130, 135 and 147), but that in any event, even if that power had existed, it should not have been exercised when the Cayman Island courts had no equivalent power over persons within their jurisdiction (§117 and 148);

 (6) Lord Neuberger agreed that the appeal should be dismissed on the grounds that (1) there was no common law power to apply legislation which applied to domestic insolvencies by analogy to foreign insolvencies and that (2) the Bermudan courts in any event should not have exercised the power given the lack of equivalent powers on the part of Cayman Islands courts.  He expressed the further view that he would, if necessary, have agreed with Lord Mance that the Common Law Power did not exist (§§149, 156 and 162).  In any event, he disagreed with Lord Sumption that the Common Law Power was limited in its application to “court‑ordered liquidation” and had no application to voluntary liquidations (§158, and see also the observations of Lord Mance at §131).   

G.2.   Limitation #1 — The Common Law Power to recognize and assist foreign insolvency not applicable to solvent winding up

26.  Capxon is seeking to rely upon the Taiwan Winding‑up to show cause. 

27.  The Taiwan Winding‑up is a cross‑border one.  Whether it existence may be considered by this Court as sufficient cause for the present purpose depends on whether this Court may recognize and assist the same.

28.  Singularis shows that the courts have a common law power to recognise and assist foreign winding‑up proceedings.  Mr Joffe submits that the exercise of that common law power is however subject to one fundamental limitation — if the foreign winding‑up is a solvent one, solvent winding-up being not a collective insolvency proceeding, the common law power has no application. 

29.  In Singularis, Lord Sumption:

 (a) observed at §10 that:

“ The English courts have for at least a century and a half exercised a power to assist a foreign liquidation by taking control of the English assets of the insolvent company …” (Emphasis added)

 (b) referred to Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508 for the principle of “modified universalism”, namely that the court has a common law power to assist foreign winding up proceedings so far as it properly can (§15);

 (c) observed at §19 that whilst certain other propositions for which Cambridge Gas was authority could no longer be supported, the principle of modified universalism had not been discredited, and had been accepted in principle in Rubin v Eurofinance SA [2013] 1 AC 236.  Lord Sumption then referred to Lord Mance’s summary of the law in Rubin, that:

“ 29. Fourth, at common law the court has power to recognise and grant assistance to foreign insolvency proceedings. The common law principle is that assistance may be given to foreign office‑holders in insolvencies with an international element ...

…

31. The common law assistance cases have been concerned with such matters as the vesting of English assets in a foreign office‑holder, or the staying of local proceedings, or orders for examination in support of the foreign proceedings, or orders for the remittal of assets to a foreign liquidation, and have involved cases in which the foreign court was a court of competent jurisdiction in the sense that the bankrupt was domiciled in the foreign country or, if a company, was incorporated there …

…

33. One group of cases involved local proceedings which were stayed or orders which were discharged because of foreign insolvency proceedings ...”

 (d) set out at §25 the scope and limits of that common law power.  In so far as relevant to the present application, he observed that

“25. In the Board’s opinion, there is a power at common law to assist a foreign court of insolvency jurisdiction by ordering the production of information in oral or documentary form which is necessary for the administration of a foreign winding up. In recognising the existence of such a power, the Board would not wish to encourage the promiscuous creation of other common law powers to compel the production of information. The limits of this power are implicit in the reasons for recognising its existence. In the first place, it is available only to assist the officers of a foreign court of insolvency jurisdiction or equivalent public officers. It would not, for example, be available to assist a voluntary winding up, which is essentially a private arrangement and although subject to the directions of the court is not conducted by or on behalf of an officer of the court. Secondly, it is a power of assistance. It exists for the purpose of enabling those courts to surmount the problems posed for a worldwide winding up of the company’s affairs by the territorial limits of each court’s powers. It is not therefore available to enable them to do something which they could not do even under the law by which they were appointed. Thirdly, it is available only when it is necessary for the performance of the office‑holder’s functions. Fourth, the power is subject to the limitation in In re African Farms Ltd [1906] TS 373 and in HIH [2008] 1 WLR 852 and Rubin [2013] 1 AC 236, that such an order must be consistent with the substantive law and public policy of the assisting court, in this case that of Bermuda …” (emphasis added)

30.  The view that the exercise of that common law power is limited to foreign “insolvent” proceedings is shared by Lord Collins (§§38 and 51) and Lord Clark (who agreed with Lord Sumption, and see §113).  Lord Mance (who Lord Neuberger was in agreement with) also agreed, based upon the principle of modified universalism, that the common law power of assistance exists (§§132 to 133), just that that power should not be extended to assist any foreign liquidation by ordering any person (whether or not an officer or agent of the company) to attend and be interrogated and produce documentation and information on pain of contempt.

31.  One point the Board did not agree upon was whether that power to recognize and assist foreign insolvency proceedings is available to cases of foreign voluntary liquidations.  Lord Sumption observed that it is not. Lord Neuberger disagreed, observing at §158 that:

“ 158. The limitation of the Power to insolvency cases may be seen by many to be questionable. More specifically, the limitation to liquidations which are being conducted by officers of a foreign court seems to me to be potentially arbitrary. Companies may be in court‑imposed liquidation in many jurisdictions when it is ‘just and equitable’ to wind them up, even if they are solvent: I do not see why liquidators in such a case should be able to invoke the Power when other people running solvent companies could not do so. Further, there is no reason why a statutory regime should not provide that voluntary liquidations are to be conducted under the aegis of the court, and, if so, the Power would seem to apply in such cases. And the status of administrators in administrations may be unclear in this connection.”

32.  In Hong Kong, the issue as to whether a foreign insolvent liquidation commenced by a shareholders’ resolution is eligible for common law recognition and assistance in Hong Kong was considered for the first time by Harris J in Re Supreme Tycoon Ltd [2018] 1 HKLRD 1120[4]:

 (a) In that case, though the company concerned was put into liquidation by a shareholders resolution, it was an insolvent and fully court‑supervised liquidation[5];

 (b) One main issue before Harris J was, the liquidation being a voluntary one, whether the common law power of recognition and assistance applied;

 (c) On that main issue, Harris J accepted the dissenting view expressed by Lord Neuberger in Singularis that it did;

 (d) However, and importantly for the purpose of the present discussion, Harris J observed, though obiter, that that common law power has no application to solvent foreign liquidations.  The learned judge observed that:

“ 15. In my view, what matters for cross‑border insolvency assistance is not whether the foreign insolvency officeholder is or is not an officer of the foreign court. What matters is whether the foreign proceeding is collective in nature, in the sense that it is ‘a process of collective enforcement of debts for the benefit of the general body of creditors’. It is with collective insolvency proceedings that the principle of modified universalism is concerned.

^…

17. Therefore the mere fact of a foreign liquidation being a voluntary liquidation is no bar to the Hong Kong court recognising and assisting that liquidation under the principle of modified universalism. However, if the foreign liquidation is a solvent liquidation (for instance, a members’ voluntary liquidation), it would not fall within the principle of modified universalism. A foreign solvent liquidation is not a collective insolvency proceeding, and is more akin to the ‘private arrangement’ the Privy Council was referring to. In this connection, with respect, I agree with Lord Neuberger’s dissenting observations in Singularis...” (Emphasis added)

33.  Mr Yeung has not been able to refer this Court to any decision where a Court has applied the common power of assistance and recognition to stay or refuse execution of judgment in the context of a foreign debtor’s solvent members’ voluntary winding up.

34.  Whilst Mr Yeung has referred to 3 cases which appear to support the recognition of members’ voluntary liquidations abroad[6], those cases were concerned with the interpretation of statutory provisions incorporating the UNCITRAL Model Law on Cross‑Border Insolvency, which has no application in Hong Kong[7].

35.  Mr Yeung then sought to distinguish Singularis on the basis that it related to a specific power, namely the power to assist a foreign liquidation by ordering the auditors to attend and be interrogated and produce documentation and information on pain of contempt.

36.  I am not able to accept Mr Yeung’s submissions in this regard.  As has been explained by Lord Sumption in Singularis at §19 (citing Rubin), whilst the common law assistance cases have been raised in connection with different matters, the underlying principle is the same.  To similar effects are the observations of Lord Collins’ observations at §§54‑58 in Singularis.

37.  I note that the relevant observations made by the Board in Singularis and Harris J in Supreme Tycoon are obiter.  However, they being from the Judicial Committee of the Privy Council, and Harris J, himself an experienced specialist judge, carry a lot of weight and persuasiveness.  The rationale is also, in my respectful view, sound.  As Harris J observed[8], which I respectfully repeat, “if the foreign liquidation is a solvent liquidation…, it would not fall within the principle of modified universalism”.

38.  On the strength and state of authorities cited before me, I accept Mr Joffe’s submissions that the power of recognition and assistance does not apply to cross‑border or foreign solvent liquidation.

G.3. Limitation #2 — Local law and policy not to act on solvent liquidations

39.  In gist, Mr Joffe submits that:

 (a) the common law power of recognizing and assisting cross-border liquidations is in any even subject to local law and policy (“Limb (a) of Limitation #2”); and

 (b) according to the law and policy in Hong Kong, a members’ solvent winding up does not prevent a creditor from making a charging order nisi absolute (“Limb (b) of Limitation #2”).

G.3.i. Limb (a) of Limitation #2 — the law

40.  Limb (a) of Limitation #2 is supported by Singulais.

41.  In Singulais, at §19, Lord Sumption, having referred to Lord Mance’s summary of the law in Rubin, continued to observe that:

“ In the Board’s opinion, the principle of modified universalism is part of the common law, but it is necessary to bear in mind, first, that it is subject to local law and local public policy and, secondly, that the court can only ever act within the limits of its own statutory and common law powers. What are those limits? In the absence of a relevant statutory power, they must depend on the common law, including any proper development of the common law. The question how far it is appropriate to develop the common law so as to recognise an equivalent power does not admit of a single, universal answer. It depends on the nature of the power that the court is being asked to exercise …”

42.  Lord Clarke expressed the same view at §113, that:

“ [The common law power] is subject to the limitation that such an order must be consistent with the substantive law and public policy of the assisting court, in this case that of Bermuda.”

43.  Support can also be found in the local case of Joint Administrators of African Minerals [2015] 4 HKC 215.  In that case:

 (a) an urgent ex parte application on notice was made to the Harris J for an order that would restrain the enforcement of security over certain shares pursuant to a letter of request issued by a judge in the English High Court;

 (b) at §11 of his judgment, Harris J observed that

“ ...although in my opinion the Hong Kong Court can take a generous view of its power to assist a foreign liquidation process this is limited by the extent to which the type of order sought is available to a liquidator in Hong Kong under our insolvency regime and common law and equitable principles. This is explained more fully in para 19 of Lord Sumption’s recent judgment in Singularis … [which paragraph Harris J then proceeded to quote in full]”

 (c) in the end, the learned judge refused the application.  The main reason, as summarized by him at §12, was that:

“ Hong Kong does not currently have any equivalent to administration and no statutory provision which provides for a moratorium on the enforcement of secured debt.”

G.3.ii. Limb (b) of Limitation #2 — local law and policy

44.  In support of Limb (b) of Limitation #2, Mr Joffe cites the following passages from McPherson’s Law of Company Liquidation (4^th ed 2017), that:

“ As the name suggests, with a members’ voluntary winding up the members are the persons who are primarily interested in the results of the winding-up process. As the company must be solvent, the creditors have no real interest in the company as they will be paid in full. With a members’ voluntary the members are in control. Where there is a creditors’ voluntary winding up, the creditors have the primary interest in the winding-up process as they will not be paid in full, the company being insolvent. The creditors have ultimate control in such a process. (§2-004)

In members’ voluntary winding up there is no statutory provision, rule or practice, or consideration of policy to prevent a creditor from garnisheeing the company’s debts at any stage of the liquidation.” (§7-098)

45.  While §7-098 of McPherson’s talks about “garnisheeing the company’s debts”, one notes the summary of the relevant principles set out in the Hong Kong Civil Procedure 2020 (§50/9A/23 at 1065), that:

“ 1. The question whether a charging order nisi should be made absolute is one for the discretion of the court.

…

3. For the purpose of the exercise of the court’s discretion there is, in general, no material difference between the making absolute of a charging order nision the one hand and a garnishee order nisi on the other.”

46.  In Gerard v Worth of Paris Ltd [1936] 2 All E.R. 905[9], a company went into liquidation under a resolution for a member’s voluntary winding up.  To do that, the majority of the directors of the company would have to carry and pass a declaration to the effect that the company was solvent.  As observed by Slesser LJ[10], there was indeed no reason to suppose that the company was not solvent. Despite the practice of staying execution when a company was in liquidation, Slesser LJ observed as follows[11] and made absolute a garnishee order against the company on the basis that the company was solvent so that the distribution of the assets of the company pari passu would not necessarily be interfered with:

“ I have come to the conclusion that this is one of the cases contemplated in Anglo‑Baltic & Mediterranean Bank v Barber & Co where the court in its discretion may properly refuse to grant a stay. I think so for the following reason. It appears from the judgments in that case, which are only stating what I understand to have been laid down in the earlier authorities, that, as Scrutton LJ says, at pp 417–8:

‘ It is now the almost invariable practice when a company is in voluntary liquidation to stay proceedings in an action against it, because the result of allowing a judgment creditor proceed to execution might be that, instead of the assets being divided among the creditors pari passu, the judgment creditor, by enforcing his judgment, would obtain an advantage over the other creditors. … But it is only in very special circumstances such as those that the court will depart from its general practice of staying execution when the company is in voluntary liquidation, for the reason that the execution, if allowed, would necessarily interfere with the distribution of the assets pari passu.’

And Atkin LJ, at p 420, says:

‘ The only ground on which leave to issue execution in this case could be justified would be on the supposition that the judgment creditor had some right in equity over the debt which he seeks to take in execution under the garnishee proceedings.’

In my view this case is not one of those which might produce that mischief which Scrutton LJ intimates might arise were the stay not to be granted; because this is not a case, this company being solvent—and there is no suggestion of other creditors claiming these moneys—where the execution if allowed (to quote Scrutton LJ) ‘would necessarily interfere with the distribution of the assets pari passu.’ It does not seem to be a case where there is any danger that, instead of the assets being divided among the creditors, the judgment creditor may obtain an advantage over the other creditors …” (emphasis added)

47.  In this regard, the importance of the imminent prospect of a true pari passu distribution taking place was emphasized by Hunter J in Wardley Ltd v Aik San Reality Ltd [1985] 2 HKC 695 (at 698B-E), that:

“ This line of authority [culminating in Roberts Petroleum Ltd v Bernard Kenny Ltd [1983] 2 AC 192] shows that if the court has a choice between allowing a particular creditor to obtain a preference or ensuring a pari passu distribution of a debtor’s total assets amongst his creditors, it will opt for the latter and equality. But in the case of a corporate debtor no choice arises unless a pari passu distribution will follow from a refusal to take a Charging Order absolute ie because winding‑up proceedings have already been commenced or perhaps because their equivalent in the form of some scheme of arrangement is imminent. Unless these circumstances exist the above choice is not available to the court.

That is the position here.  No one, including the directors of the defendants, has chosen to put either of these companies in liquidation.  What has happened over the past two years cannot be described as an equal distribution.  There have simply been individual settlements on terms unknown with individual creditors.  There is at present no prospect of a true pari passu distribution taking place. So in my judgment these authorities have no application and the master was right.”

48.  Wardley Ltd was approved by the Court of Appeal in Credit Lyonnais v Sakhrani Global (unrep, CACV 167/2003, 30 July 2003) (see §§8(4) and 9.  There, the Court of Appeal held that the possibility or even reasonable prospect of a compromise being reached between the judgment debtor and its creditors in general, or of a restructuring of the judgment debtor’s debts did not provide any reason to order a stay of execution.  A statutory scheme for the pari passu distribution of the judgment debtors’ assets amongst its creditors (whether by winding‑up or scheme of arrangement) has to be either in place or imminent.  As observed by Ma CJHC (as the learned CJ then was):

“ 8. …

(4) The only situation in which the courts have appeared to take into account broader interests when considering question of execution, have been where the judgment debtor was in the process of being wound up or where liquidation or some form of scheme of arrangement was imminent …

9. In applying for a stay, the defendant has in the present case effectively sought a moratorium on its debts to enable restructuring negotiations to take place with its creditors. Neither a winding‑up (there is no petition presented) nor a scheme of arrangement is imminent. For the reasons that Rogers VP articulates in his judgment, this is simply not sufficient. As Hunter J said in Wardley Ltd at 698 :

‘ Unless these circumstances [i.e. winding‑up proceedings or their equivalent in the form of some scheme of arrangement being imminent] exist the above choice is not available to the court.’

10. It is not up to the court to use its inherent jurisdiction to create a regime in which a judgment debtor or insolvent company is able to obtain a moratorium on its debts (or to put it more crudely, to give it some ‘breathing space’ to allow it to negotiate with creditors).  This is a matter for the legislature to contemplate and if seen fit, to legislate on.  The inherent jurisdiction of the court is only to be exercised in the circumstances set out above; it is not there to fill in perceived lacunae in the insolvency legislation.”

49.  When there is no insolvency, or at least when a pari passu distribution is not imminent, there is no undue prejudice to other creditors by the court making absolute a charging order in favour of a particular creditor.  The general rule is that the person who gets in first gets the fruits — see British Arab Commercial Bank v Algosaibi and Bros Co [2011] 2 CLC 736, per Flaux J (as he then was) at §§17, 53-55.

50.  In his submissions, Mr Yeung refers to United Asia Finance Ltd v Yiu Tsz Ngar [2015] 2 HKLRD 189 and Snee Enterprise v HK Shaoji Trade Co Ltd (unrep, HCA 1609 & 1744/2016, 7 October 2016) in support of his submission that “it is well‑established that an order nisi should not be made absolute if, in the interim, (a) the judgment debtor enters into voluntary winding up, or (b) a statutory scheme of assets distribution applies to the creditors of the judgment debtor”[12]. In this regard, I accept Mr Joffe’s submissions[13] that those authorities do not support a wider principle than the one discussed above, as none of them concerned a solvent or members’ voluntary liquidation. 

51.  On the state of the authorities as submitted before me, I am of the view that Limb (b) of Limitation #2 is also made out.

G.3.iii. Limitation #3 — the power of the foreign court and its exercise

52.  In Singularis (at §25, which I have reproduced above), Lord Sumption explained that as the common law power to recognize and assist cross‑border liquidations is a power of assistance, it exists for the purpose of enabling those courts to surmount the problems posed for a worldwide winding up of the company’s affairs by the territorial limits of each court's powers. “It is not therefore available to enable them to do something which they could not do even under the law by which they were appointed ”.

53.  As I have covered in the overview of Singularis above, while the Board did not agree on the scope of the common law power, the Board was clear that given the lack of the equivalent power under Cayman Islands law, the Bermudan Supreme Court erred in making the order concerned. 

54.  Mr Joffe intends to take the matter one step further.  He submits that the Limitation #3 is not restricted to cases where the foreign court has no jurisdiction to grant the order sought.  As a matter of principle, it extends to cases where the foreign court, though with the requisite jurisdiction and power, has found insufficient cause to exercise that jurisdiction and power.  He relies analogically on Deiulemar Shipping v Transfield [2011] 1 HKLR 75 and Beyonics Technology v Goh [2016] 1 HKC 17 where the courts have held that the Hong Kong Court should not grant injunctions in aid of foreign proceedings where it would interfere with the foreign proceedings.

55.  In my view, in the context of the present application where the Court’s discretion to decide whether to make absolute a charging order nisi is engaged, how a foreign court has exercised its power in relation to the execution and enforcement of the debt concerned is clearly a relevant consideration when deciding how the discretion should be exercised.  At least to that extent, I agree with Mr Joffe’s submission.

H. Application of the law

56.  Capxon was solvent as at 31 December 2017.

57.  On 10 April 2018, during the 10/4/18 EGM, a resolution was passed for its liquidation.  Admittedly, the process is akin to a members’ voluntary winding‑up in Hong Kong.

58.  According to the updated information provided by Lin in Lin 2^nd, on 4 April 2018 when the resolution was passed, Capxon remained solvent.

59.  No further update has been provided to this court.  In particular, in Lin 3^rd filed on 5 November 2018, there was still no suggestion that Capxon had become insolvent.

60.  Lin in Lin 3^rd referred to certain deferred tax liabilities which might become payable when the Lancom Shares are sold.  But those deferred liabilities have been included as one of the liabilities in the Updated Financial Statements[14]. Further, whilst Lin at §26 of Lin 3^rd said that “[when] the [Lancom Shares] are subject to a sale or disposal, the [deferred tax liabilities] will be realised”, he immediately afterwards said that “the actual value of which will ultimately depend on the sale price of the shares and I am unable to give an estimate of the actual value of [deferred tax liabilities]at this junction”.

61.  I highlight the fact that the Award, when converted into NT$, and according to the financial information provided by Lin, was NT$886,036,000, and that the value of the Lancom Shares was estimated at NT$1,234,998,432.  The estimated value of the Lancom Shares exceeds the amount of the Award.

62.  What Lin is saying is simply this, that without the Lancom Shares, it would not have been able to pay off all creditors.

63.  But that assumes that upon sale of the Lancom Shares, there would be no surplus left for distribution despite the fact that their estimated value in fact far exceeds that of the Award.

64.  I agree with Mr Joffe’s submission[15]that “Capxon’s case effectively boils down to a speculation that Paloma will sell the Lancom Shares at an undervalue”.  The speculativeness of its case becomes quite clear when one notes:

 (a) what Lin said at §9 of Lin 2^nd, that

“ Once the Charging Order Nisi is made absolute, then [Capxon’s] pool of assets available for distribution to its creditors will be depleted considerably by the value of the Lancom Shares and [Capxon] will not have sufficient assets to satisfy its outstanding liabilities owed to its other creditors as at 10 April 2018. As such, if the Charging Order Nisi is made absolute, Paloma will in effect be able to assert a priority over Lancom Shares. Such a creation of priority in favour Paloma will unfairly prejudice the interests of [Capxon’s] other creditors and/or shareholders and this is contrary to the spirit of pari passu distribution of assets under the dissolution/liquidation laws of Taiwan”;

 (b) Mr Yeung’s submissions[16], that:

“ …if the Lancom Shares are taken away by [Paloma], the remaining pool of assets of [Capxon] will not be sufficient to satisfy the liabilities owed to the statutory and unsecured creditors excluding [Paloma] as at 10 April 2018, leaving a deficit of approximately NT$105,531,341. For this reason, given the uncertainty over when, how and at what price the Lancom Shares would be sold, granting the Charging Order Application (as opposed to refusing it upon which the liquidator would seize the matter and deal with it in accordance with its duties of loyalty and care to treat all creditors fairly and unbiasedly on a pari passu basis), the balance clearly swings towards refusing the Charging Order.” (emphasis added)

65.  The solvent nature of the Taiwan Winding‑up, I respectfully borrow the words of Harris J at §17 of Supreme Tycoon, “would not fall within the principle of modified universalism” (Limitation #1).

66.  The speculative nature of Capxon’s case also falls far short of the requirement of imminence explained in Wardley Ltd and Credit Lyonnais (Limitation #2). 

67.  Capxon’s case does not improve even when the evidence of the its Taiwan law expert is taken into consideration:

 (a) In his Legal Opinion dated 13 April 2018, Kao was asked to give his opinion on the following question:

“ 6. How would the creditors be ranked under the winding up (bearing in mind in particular that one of the creditors is a judgment creditor)? And if the winding up would change the ranking, then when would this amended ranking start to take place. More particularly, will a charging order nisi (i.e. a temporary charging order) in Hong Kong affect the ranking, assuming that the creditors should be ranked pari passu. And if so, when would that take place?”

 (b) The second paragraph of Kao’s answer to that question was:

“ Generally speaking, there is no such thing as ranking if the assets of a company are enough to cover all its indebtedness.”

 (c) In that same Legal Opinion, Kao was further asked to give his opinion on the following question:

“ 7. In the case where the assets (comprising of cash, shares, receivables and other kind) exceeds the liabilities, how (steps and procedures, and consideration, to be taken) would the assets be distributed among the creditors?”

 (d) His answer was:

“ The liquidator has certain discretion right to decide how to dispose the company’s assets. In other words, the liquidator may decide whether or not to satisfy the company’s creditor by directly allocating its existing assets or by selling and distributing the proceeds for the sales of the assets. However, the liquidator may not perform in favour of any of the creditors or satisfy any indebtedness during the 3‑month period for calling upon all creditors to declare their claims. While performing the duty as liquidator after the 3‑month period, the liquidator shall aim for quick completing of the liquidation procedure, follow relevant laws and regulations and take the interest of the creditors and shareholders of the company into consideration. And the liquidator shall fulfill his/her duty faithfully with the care of a good administrator.”

 (e) Then in 4^th Kao, he tried to qualify what he had said. At §8.2, he said:

“ There are still certain limitations as to how the liquidator must perform his duty after the lapse of the 3‑mohth period. For instance, Article 324 of the Company Act stipulates that a liquidator must have the same rights and obligations as a director in handing liquidating matters (his original emphasis), which include settling all pending business, collecting all outstanding debts, paying off all claims, allocating surplus or loss, and allocating the residual assets of the Company… As such, the liquidator must fulfill his/her duty faithfully with the care of a good administrator while handling liquidating matters.”

 (f) I note however that what is “a good administrator”, and how “a good administrator” “must fulfill his/her duty faithfully” remain unclear;

 (g) Then at §8.3 of 4^th Kao, Kao referred to Taipei District Court Civil Ruling No 106年度司字第120號, that:

「 清算人依照同法第334條準用同法第84條規定，有了結現務、收取債權、清償債務、分派盈餘或虧損、分判賸餘財產之職務，是清算人之職務行使，特重於追求公司債權人公平受償與股東受賸餘財產分配利益。」

 (h) Despite Kao’s assertion based on that decision[17] that “when discharging his/her duty, the liquidator shall emphasize treating the creditors on a pari passu basis and shall also take the shareholders’ rights to the residual interest into consideration”, there is neither discussion nor explanation as to whether “公平受償” is the same as the concept of “pari passu”.  In the course of the hearing, Mr Yeung accepted that there is before the court no evidence showing that they are the same;

 (i) Further, whatever “公平受償” or the duty to act “faithfully” mean, the evidence does not suggest that the Taiwan Winding-up is a collective proceeding or regime, but is more akin to a private arrangement.  In the course of the hearing, Mr Yeung further informed the court that he was not going to press the point that “公平受償” or the duty to act “faithfully” is the same as a collective proceeding.

68.  I add two matters:

 (a) Lin claimed that making the Charging Order Nisi would give Paloma priority over the Lancom Shares.  I repeat in this regard the general principle that, in the absence of insolvency and “undue prejudice”, the person who gets in first gets the fruits; and

 (b) Even if I am to make absolute the Charging Order Nisi, that is not going to be the end of the matter.  As Mr Joffe has submitted[18], further down the road, Paloma will still require to obtain an order for sale. Suitable directions can be given at that stage to enable the best price to be obtained for the Lancom Shares and for a sizeable surplus to be returned to Capxon for the payment of its other creditors.

69.  There is further the aspect relating to the powers of the Taiwanese court and certain related proceedings that have been before it.  As revealed in Yamaura 4^th, Paloma has taken steps in Taiwan to enforce the Award.  Both Lin and Kao agree that there are no express laws and or regulations in Taiwan in relation to the suspension of enforcement or execution proceedings or the refusal to grant compulsory execution orders upon the commencement of an ordinary liquidation proceeding.  Kao has pointed to certain provisions suggesting that “parties or other interested parties may oppose a compulsory execution proceeding if the proceeding is either illegal, inappropriate, or may harm the interest of the parties or other interested third parties.  The court will decide whether or not an objection is reasonable on a case‑by‑case basis…”.  Whilst that may be so, the matters are now before the Taiwanese Court, and as things stood at the time of the hearing, though under objections from Capxon, the Taiwanese court had ordered certain enforcement actions.  These are matters that I can take into account when deciding how my discretion should be exercised (Limitation #3).

70.  Having considered the above matters, I form the view that Capxon has failed to discharge the burden on it to show cause why the Charging Order Nisi should not be made absolute.

I. Disposition

71.  In all the circumstances, and having considered the totality of the evidence, I form the view that Capxon has failed to show cause why the Charging Order Nisi should not be made absolute.  I make the Charging Order Nisi absolute.

J. Costs

72.  I make a costs order nisi that all costs of and occasioned by the application be to Paloma, with certificate for 2 counsel, to be taxed if not agreed.  Any party who seeks any variation or summary assessment should file its submissions within 14 days from the date hereof, submissions in response within 14 days of receipt, and reply within 7 days.