XCHRX CCIC FINANCE LTD. v. GUANGDONG INTERNATIONAL TRUST & INVESTMENT CORPORATION

HCA 15651/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 15651 OF 1999

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J U D G M E N T

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Introduction

1. There are two applications before me. The plaintiff, now judgment creditor, CCIC Finance Limited (CCIC) having obtained in the Hong Kong High Court judgment by default against the defendant, now judgment debtor, Guangdong International Trust & Investment Corporation (GITIC) and a garnishee order nisi against Guangdong International Trust & Investment Corporation Hong Kong (Holdings) Limited (GITIC HK) applies to make that garnishee order absolute. That is the first application. GITIC applies for a stay of all proceedings including the garnishee application. That is the second. Both are opposed.

The history

2. GITIC was incorporated in Guangdong in the PRC as a State Owned Enterprise (SOE) in March 1984. In August 1988 it was registered in Hong Kong under part XI of the Companies Ordinance as an overseas company. In June 1986 GITIC HK was incorporated in Hong Kong as a wholly owned subsidiary of GITIC. CCIC is a bank incorporated and carrying on business in Hong Kong.

3. On 27 March 1997 CCIC for itself and on behalf of a consortium of banks as agent entered into a loan agreement with GITIC HK on the strength of which it lent to GITIC HK US$35 million on terms of repayment set out in the loan agreement. On 3 April 1997 GITIC executed the document called by the parties a Letter of Support which I reproduce below: -

"Guangdong International Trust & Investment Corp.

Date: 3 Apr 1997

To:	CCIC Finance Limited (as Agent on behalf of the Lenders)
	38/F., BOC Tower, 1 Garden Road,
	Central, Hong Kong

Dear Sirs,

Letter of Support

We confirm that we are aware of the US$35 million syndicated term loan facility (the "Facility") arranged by CCIC Finance Limited ("CCIC") for Guangdong International Trust & Investment Corp. H.K. (Holdings) Ltd. ("GITIC HK"), our wholly owned subsidiary in Hong Kong, to finance its acquisition of 50% interest in the HCD Toll Roads Company Limited (which owns the right to operate and receive tolls from 82 km of completed toll roads in Huadu City, Guangdong Province, the PRC) and its working capital requirement. In consideration of the Lenders providing the Facility to GITIC HK, we hereby undertake:

(a) not to alter our shareholding in GITIC HK during the life of the Facility without first having received the Lenders' written consent or having ensured that all GITIC HK's liabilities and obligations to the Lenders under the Loan Agreement are discharged in full;

(b) in accordance with our policies, to procure that GITIC HK will conduct its affairs and business in a prudent manner and in such a way that it is able at all times to meet all of its obligations; and

(c) to provide all necessary support and assistance to GITIC HK to ensure that it will be able to promptly pay all sums due under the Facility as and when such payments are due.

Yours faithfully,

________________________
Authorised Signatory (with chop)
Guangdong International Trust &
Investment Corporation"

4. GITIC was not a party to the loan agreement.

5. GITIC HK defaulted in complying with the terms of repayment of the loan agreement; that default continues.

6. On 12 October 1998 GITIC HK went into voluntary liquidation in Hong Kong upon the grounds it could not, by reason of its liabilities, continue to do business. As at the date of adjudication it was in debt to its parent GITIC.

7. But the parent was also in strife. On 16 January 1999, on application by GITIC, the People's Higher Court of Guangdong Province (PHC) found the operation and management of GITIC were 'in a state of disarray with liabilities grossly exceeding assets and with huge sums of domestic and foreign debts due and unpaid.' It declared GITIC bankrupt and appointed a committee called the Liquidation Committee to take complete control. In doing so, the PHC was invoking the Enterprise Bankruptcy Law of the Peoples Republic of China (for Trial Implementation) (EBL). This Law is exclusive to the liquidation, or bankruptcy as it is known in the PRC, of SOE's. It came into force in 1986. The PHC made a public announcement of the adjudication which stated: 'From the date of bankruptcy [GITIC] has lost its powers and rights to deal with and to dispose of its assets and the Liquidation Committee designated by this court is to take control of the bankrupt enterprise.'

8. In its directions appointing the Liquidation Committee, the PHC spelt out its duties. The English translation is as follows: -

"THE PEOPLE'S HIGHER COURT OF GUANGDONG PROVINCE

Directions for the Appointment of the Liquidation Committee

(1999) Yue Fa Jing - Po Zi No. 1-9

This Court accepted the application of Guangdong International Trust & Investment Corporation ("GITIC") for its bankruptcy on 15th January 1999 and declared the bankruptcy of GITIC on 16th January 1999. Wu Jiexi, Li Chunhong, Dong Hong, Wu Qingquan, Hu Keshun, Zhang Guanghua, Zhang Xiaoshan, Zhang Qunsheng, Yang Qingshan, Lin Xuwen are hereby appointed to constitute the Liquidation Committee of GITIC which shall be responsible for the liquidation work carried out in this case. Wu Jiexi is to act as the Chairman of the Liquidation Committee. The Liquidation Committee may appoint necessary working personnel. The responsibilities of the Liquidation Committee are as follows:

1. to take complete control of the bankrupt enterprise and to receive the assets, accounting books, documents, materials and official seal of the bankrupt enterprise;

2. to make and to be responsible for the receipt and use of the official seal of the Liquidation Committee of Guangdong International Trust & Investment Corporation;

3. to be responsible for the liquidation, valuation, realization and distribution of the bankruptcy property, and to submit to this Court a proposal for distribution of assets;

4. to accept the repayments made by debtors and the return of assets by holders of assets of the bankrupt enterprise;

5. to convene meetings of creditors (the first meeting of Creditors will be convened by this Court);

6. to perform other duties and responsibilities conferred by law on the Liquidation Committee;

7. to attend to the de-registration at the registration department with which the bankrupt enterprise was originally registered after the conclusion of the bankruptcy procedure;

8. to promptly report to this Court important issues arising out of the liquidation process.

Chop of the People's Higher Court of Guangdong Province

16th January 1999"

9. In the course of the conduct of its duties, the Liquidation Committee filed a proof of debt with the liquidators of GITIC HK for the amount claimed to be due to GITIC. According to a statement of affairs of GITIC HK prepared by its liquidators as at 12 October 1998, the date of the adjudication, it owed to its parent a little more than HK$819 million, with the prospect of a dividend of 54% of proved claims. If GITIC's claim is accepted in full, its dividend on these figures may be a bit more than HK$442 million, which converts to US$56.9 million. To date GITIC's claim has not been accepted by GITIC HK's liquidators; to date there has been no declared interim dividend.

10. Meanwhile, on 17 December 1998, CCIC filed a proof of debt with the Liquidation Committee claiming a debt due under the Letter of Support, being the advance of US$35 million and accrued interest due but not paid by GITIC HK. (This was filed some days before GITIC was adjudicated bankrupt by PHC, but nothing turns on this.)

11. By letter dated 11 August 1999, the Liquidation Committee turned down the claim. The translation of that letter follows: -

"Liquidation Committee of
Guangdong International Trust & Investment Corporation

___________________________________________________

NOTICE OF REJECTION

CCIC Finance Limited

38th Floor, Bank of China Tower
1 Garden Road, Central
Hong Kong

___________________________________________________

Dear Sirs,

Upon processing the claim against Guangdong International Trust & Investment Corporation ("GITIC") as contained in your Declaration Form for Claims Registration (Registration No. 31948) and the evidence submitted, we consider that your following claim(s) is/are not established and accordingly the same is/are rejected:

Rejected Claims

All claims in respect of the aforesaid Registration No. 31948 submitted.

Reason(s) for Rejection

Your claims are based on a Letter of Comfort. However, due to the fact that:-

(a) the Letter of Comfort fails to state with certainty the acts required to be performed by GITIC and thus amounts merely to an expression of comfort and does not constitute a legally binding contract; and

(b) the Letter of Comfort also fails to specify in any detail the rights and obligations and thus does not amount to a civil juristic act or a guarantee within the meaning of PRC law.

Accordingly, the claims of the creditor based on a Letter of Comfort are not a provable debt protected by PRC law and are thus, as a matter of law, rejected.

TAKE NOTICE that the reasons for rejection set out above are not exhaustive and our right to put forward any other reasons for rejection is hereby reserved.

If you object to the above decision, please submit to us your written objection within 15 days from the date of this Notice, failing which, you will be solely responsible for all consequences arising therefrom.

Upon receiving and considering your written objection referred to above, we shall respond in writing to your objection. Should you then still take objection to the decision contained in our written response, you should refer your objections to the People's Higher Court of Guangdong Province for adjudication as soon as possible.

Yours faithfully,

 

[The chop of Liquidation Committee of
Guangdong International Trust & Investment Corporation]

Date: 11th August 1999"

12. Invited thus to respond if it objected to that decision, CCIC did so, by letter of 26 August 1999, as follows :-

"CCIC FINANCE LIMITED
A RESTRICTED LICENCE BANK

Notice of Objection to Non-Recognition of Claim

Date:	August 26, 1999	By Registered Post and Fax
		Objection
To:	Liquidation Committee
	Guangdong International Trust & Investment Corporation
From:	CCIC Finance Limited
	38/F, Bank of China Tower
	1 Garden Road
	Central
	Hong Kong

We refer to our claim in the liquidation of Guangdong International Trust & Investment Corporation ("GITIC"), with registration number 31948 (the "Claim"), made by CCIC Finance Limited ("CCIC") on its own behalf and as agent for Bank of China, Hanarem Banking Corporation, ING Bank NV, Bayerische Hypo-und Vereinsbank AG, IBJ Leasing (Hong Kong) Limited, Industrial Bank of Korea and Shinhan Finance Limited (together referred to as the "Syndicate"). We also refer to the Notice of Non-Recognition of Claim dated 11 August 1999, sent by you by registered mail on 13 August 1999 and received by CCIC on 16 August 1999. We hereby give notice to the GITIC Liquidation Committee on behalf of the Syndicate that we object to the non-recognition of the Claim for the reasons set out below.

Reasons for Objection

The Claim is based on a letter from GITIC to CCIC as agent for the Syndicate dated 3 April 1997 and described as a "Letter of Support" (the "Support Letter").

The Support Letter expressly relates to the US$35 million syndicated term loan facility (the "Facility") arranged by CCIC for Guangdong International Trust & Investment Corp. HK (Holdings) Limited ("GITIC HK"), a wholly owned subsidiary of GITIC. The terms of the Facility are set out in a loan agreement dated 27 March 1997 (the "Loan Agreement"). Clause 3.01 of the Loan Agreement provides that any advances under the Facility are conditional on receipt of the Support Letter.

The Loan Agreement is expressly governed by the laws of Hong Kong (clause 23.01). The Support Letter does not refer to a governing law but it is a well established principle of private international law that, in the absence of express agreement, a document will be governed by and construed in accordance with the laws of the jurisdiction with which the document is most closely connected. The Support Letter is clearly most closely connected with Hong Kong because:

· the Loan Agreement to which it relates is expressly governed by Hong Kong law;

· it relates exclusively to a loan arranged by a Hong Kong company (CCIC) to a Hong Kong company (GITIC HK) and made in Hong Kong.

The Support Letter is therefore clearly governed by and must be construed in accordance with the laws of Hong Kong.

The relevant terms of the Support Letter on which the Syndicate relies are:

"In consideration of the Lenders providing the Facility to GITIC HK, we hereby undertake:

...

(b) in accordance with our policies, to procure that GITIC HK will conduct its affairs and business ..... in such a way that it is able at all times to meet all of its obligations; and

(c) to provide all necessary support and assistance to GITIC HK to ensure that it will be able to promptly pay all sums due under the Facility as and when such payments are due."

These terms of the Support Letter clearly indicate GITIC's intention to create a contractual obligation which is binding and enforceable by the Syndicate because:

· the Support Letter is clearly addressed to and in favour of the Syndicate.

· the Support Letter refers expressly to the consideration flowing to GITIC from the Syndicate. Reference to consideration is only relevant or necessary if the parties intend to create an obligation which can be enforced.

· GITIC's obligations are expressed as undertakings, further indicating an intention of commitment upon which the Syndicate are entitled to rely. These undertakings are unequivocal and are not in any way conditional.

· this document is not a "letter of comfort", as it has mistakenly been described by the Liquidation Committee. This indicates that the parties did not intend that its contents should only give comfort. The description of the document as a letter of support indicates that GITIC's undertakings were intended by the parties to strengthen the obligations of GITIC HK under the Loan Agreement by providing security for their performance.

· GITIC's intention to act as surety is further confirmed by the use of the word "ensure".

· it is clear from the terms of both the Support Letter and the Loan Agreement that the Syndicate members were intended to rely on the security provided by the Support Letter. In fact, the Syndicate did rely on the Support Letter, the provision of which was required before any advance was made under the Facility.

CCIC requests that the Liquidation Committee now reconsider its earlier decision and recognise the Claim.

Meanwhile CCIC, on its own behalf and on behalf of the Syndicate, reserves the right to take such steps, by Court proceedings or otherwise, as are necessary to protect its or their position and to raise such other arguments in support of the Claim, such as misrepresentation, as may be available to it or them.

For and on behalf of
CCIC Finance Limited

Paul S. Muther
Managing Director"

13. Then without waiting for a response, CCIC chose another route.

14. On 2 October 1999, it filed a writ in the Hong Kong High Court suing GITIC for 'moneys due from [GITIC] pursuant to a written obligation made on 3 April 1997 and signed by [GITIC]' in the sum of US$39,268,424.28. It was suing on the Letter of Support. GITIC took no steps; on 27 October 1999 judgment in favour of CCIC was entered for the sum claimed, interest and fixed costs. The judgment debt remains wholly unsatisfied. On 29 November 1999 on CCIC's application, the Hong Kong High Court granted a garnishee order nisi attaching 'all debts due or accruing due from [GITIC HK] to [GITIC]' to answer the judgment debt.

15. The application to make that order absolute is the first of the two applications before me.

16. During the course of what is clearly a complex winding up of the affairs of GITIC, the Liquidation Committee has periodically called creditors' meetings and issued progress reports on what its goals are and what so far has been achieved. At one, held on 22 October 1999, it tabled a detailed report which included inter alia a statement of affairs as at the date of adjudication. It also reported on progress made in the processing of proofs of debt submitted by those claiming as creditors. Having stated that by then 543 proofs, being 95% of all submitted, had been processed, it concluded: -

"As provided by the relevant law, creditors will only be entitled to receive distribution in the liquidation after the amounts of the proofs admitted have been endorsed at the Meeting of Creditors."

17. By relevant law it was no doubt referring to article 15(1) of the EBL, which states: -

"The functions and powers of the creditors' meeting are: -

(1) to examine materials of proof relating to the claims, and to confirm the amount of such claims ........,"

and article 30 of the Supreme People's Court, Questions on the Peoples Republic of China Enterprise Insolvency Law (Trial Implementation) Opinion, which states: -

"The quantity of creditors' rights represented by a creditor that exercises its right to vote shall be calculated on the basis of the quantity of its creditors' rights determined by the creditors' meeting."

18. The proofs by then approved were categorised into foreign and domestic creditors, as follows: -

Foreign creditors	RMB$19.11 billion
Domestic creditors	RMB$ 5.22 billion
In all	RMB$24.33 billion
	=============

19. With total assets anticipated to realise RMB$7.68 billion, this represented a shortfall of RMB$16.65 billion.

20. The proof filed by CCIC was identified as having already been rejected. On this issue the Liquidation Committee stated: -

"Processing of Objections Raised by Creditors

Although the Liquidation Committee has formulated principles applicable to the processing of proofs and is of the view that these principles are lawful and reasonable, it is not possible to keep all creditors satisfied with the application of these principles. As the circumstances relating to each creditor are somewhat unique and the application of these principles may affect different creditors to varying degrees, different creditors may hold different views.

Accordingly, proving creditors are entitled to raise objections in writing with the Liquidation Committee within 15 days from the despatch of notices by the Liquidation Committee concerning the amount admitted, the basis of admitting the proofs, the reasons for rejecting the proofs etc. The Liquidation Committee will respond to these objections in writing as quickly as possible after receipt of the written objections raised by the proving creditors. If the proving creditors are not satisfied with the written response of the Liquidation Committee, such proving creditors may, within 15 days from the despatch of such response, make an application to the Guangdong Higher Court for adjudication.

Along with the process made on the processing of proofs, some proving creditors raised objections to the Notices of Admission or Rejection which they received. At this stage, out of the proofs so far rejected in full or in part, some creditors, representing 31 proofs with an aggregate amount of RMB2.896 billion rejected in full and 9 proofs with an aggregate amount of RMB842 million rejected in part, have raised objections. The Liquidation Committee is now processing these objections."

21. On the following day, 23 October 1999, the PHC held a press conference and the above figures were announced. The press release revealed objectives of the Liquidation Committee, of which one is relevant:-

"(4) To strive at completing the work relating to the first distribution of bankruptcy property in accordance with the law. Distribution can be made upon achieving certain progress in the process of the recovery of bankruptcy property. The principle underlying distribution is that all domestic and foreign creditors will rank pari passu with each other but the secured creditors will be preferred. (emphasis added)

22. In a subsequent report from the Liquidation Committee, dated 3 March 2000, it reported to the body of creditors that CCIC had applied for a garnishee order, and its intention to resist the same. Having stated the grounds for doing so, the Liquidation Committee disclosed that it had been advised: -

"......... the Hong Kong Court may in exercise of its discretion refuse to make absolute the Garnishee Order Nisi. To hold otherwise will indirectly prefer this proving creditor thereby defeating the principle of pari passu ranking applicable to the bankruptcy law of the PRC and Hong Kong. In other words, Senior Counsel is cautiously optimistic in successfully resisting the application to make absolute the Garnishee Order Nisi so that the dividends declared by the Liquidators of [GITIC HK] in favour of the Liquidation Committee could be paid to the Liquidation Committee directly." (emphasis added)

23. Then CCIC chose to return to the fray in the PRC.

24. By letter of 9 June 2000 it wrote to the Liquidation Committee and supplemented its objection made in its letter of 26 August 1999, already reproduced, giving further detailed reasons why its claims should be admitted to proof by the Liquidation Committee. It cited the Hong Kong proceedings in which its claim and judgment were unchallenged. The Liquidation Committee responded by letter of 29 September 2000 maintaining its original position that the claim was rejected, on the primary ground that the Letter of Support fell short of rendering GITIC liable as if a guarantor. It placed no value on the judgment in Hong Kong, as having been obtained in a foreign jurisdiction when the debtor had already been adjudicated bankrupt in the PRC. It concluded: -

"By reason of the above, this Liquidation Committee hereby formally rejects your objections and maintains the views referred to in the Notice of Rejection.

Should your company still take objection to the above decision, your company should refer any objections to the Guangdong Court as soon as possible. The Letters of Objections and any relevant evidential materials should be sent to "The Penal (sic) of Judges of the Bankruptcy Case of GITIC (Jing Yi Court), People's Higher Court of Guangdong Province, No. 9 Yuan Cun Yi Heng Lu, Guangzhou". If your company does not refer any objections to the Guangdong Court in time, this Liquidation Committee will take it that your company has accepted the above decision."

25. I interpose here that the Liquidation Committee requested assistance from the PHC as to its functions and duties. The PHC responded by issuing a document, part of which, as translated, is as follows:-

"THE PEOPLE'S HIGHER COURT OF GUANGDONG PROVINCE

Clarification Note on the Functions and Duties of
the Liquidation Committee of
Guangdong International Trust & Investment Corporation

(1999) Yue Fa Jing - Po Han Zi No. 18

The Liquidation Committee of GITIC:

............. After Guangdong International Trust & Investment Corporation was declared bankrupt in accordance with the law, all its assets located within or outside the territory (including Hong Kong) should be recovered by and in the name of your Committee and what has been recovered should be included as falling within the ambit of bankruptcy property.

It is hereby replied.

Chop of the People's Higher Court of Guangdong Province

29 August 2000" (emphasis added)

26. On 31 October 2000, the Liquidation Committee presided over a meeting of creditors, when it was proposed, subject to PHC's approval, that an interim dividend of 3.38% (RMB$713 million) should be struck and paid out to the creditors whose claims had been processed and admitted. The proposal was adopted unanimously. It provided for no priority or other distinction between domestic and overseas creditors. Under article 37 of the EBL, the Liquidation Committee sought approval from the PHC; that was forthcoming by order of 10 November 2000. Notice of that was sent to the creditors on 11 December 2000.

27. On 23 April 2001, the Liquidation Committee sent a notice of particular relevance to those claiming to be creditors whose claims had been rejected. The following is its English translation: -

"Liquidation Committee of
Guangdong International Trust & Investment Corporation

Notice Regarding the Deadline
for A Creditor to Raise Objections Against the Decisions
of the Liquidation Committee

To all creditors concerned:

Pursuant to the opinion expressed by the People's Higher Court of Guangdong Province on the deadline for a creditor to raise objections, this Liquidation Committee hereby notifies you as follows:

The deadline for a creditor of Guangdong International Trust & Investment Corporation to raise objections with the People's Higher Court of Guangdong Province against the decisions of this Liquidation Committee is 10 days from the date of receipt of this notice. Objections raised after the above deadline will not be accepted.

Liquidation Committee of
Guangdong International Trust & Investment Corporation

23 April 2001"

28. By letter of 27 April 2001 from its solicitors, CMS Cameron McKenna, CCIC responded. It stated that it maintained that it had a binding claim against GITIC that should be accepted, but it was not intending to pursue its opposition to the rejection in the PHC, whilst reserving its rights.

29. The final event in the history to date was the filing on behalf of the Liquidation Committee in the Hong Kong proceedings of a summons seeking a stay including, but not limited to, the execution of the judgment.

30. This is the second of the two applications now before me.

The Issues

31. (1) Is there a debt due by GITIC HK (in liquidation) to GITIC giving the court jurisdiction to make a garnishee order under Order 49 Rule 1 Rules of High Court?

(2) If so, the exercise of the power being a discretionary one, how should the Court exercise its discretion having regard to: -

(a) the liquidation of GITIC HK;

(b) the bankruptcy of GITIC in the PRC;

(c) the conduct of CCIC;

(d) any other matter?

(3) Notwithstanding the outcome of the garnishee application, should the proceedings be stayed?

32. I propose to deal with these in turn.

(1) Is there a debt due?

33. Order 49, rules 1 and 2 RHC state as follows: -

"Attachment of debt due to judgment debtor (O.49, r.1)

1. - (1) Where a person (in this Order referred to as "the judgment creditor") has obtained a judgment or order for the payment by some other person (in this Order referred to as "the judgment debtor") of a sum of money amounting in value to at least $1,000, not being a judgment or order for the payment of money into court, and any other person within the jurisdiction (in this Order referred to as "the garnishee") is indebted to the judgment debtor, the Court may, subject to the provisions of this Order and of any written law, order the garnishee to pay the judgment creditor the amount of any debt due or accruing due to the judgment debtor from the garnishee, or so much thereof as is sufficient to satisfy that judgment or order and the costs of the garnishee proceedings.

(2) An order under this rule shall in the first instance be an order to show cause, specifying the time and place for further consideration of the matter, and in the meantime attaching such debt as is mentioned in paragraph (1), or so much thereof as may be specified in the order, to answer the judgment or order mentioned in that paragraph and the costs of the garnishee proceedings."

34. Order 49 rule 4 RHC states: -

"No appearance or dispute of liability by garnishee (O.49, r.4)

4 - (1) Where on the further consideration of the matter the garnishee does not attend or does not dispute the debt due or claimed to be due from him to the judgment debtor, the Court may make an order absolute under rule 1 against the garnishee.

(2) An order absolute under rule 1 against the garnishee may be enforced in the same manner as any other order for the payment of money."

35. GITIC HK's liquidators with notice of this application attended the hearing on the first day when they sought and were granted leave not to participate in the hearing and agreed to abide by any order of the court.

36. Although they have not yet admitted GITIC's debt to proof, they have publicly acknowledged a debt of a little more than HK$819 million.

37. Mr Tong SC, representing GITIC, raised three grounds to support the proposition that this was not a 'debt' capable of being garnisheed, by reason of GITIC HK being now in liquidation.

38. First, that no pre-liquidation debt following liquidation is payable by the company by reason of the statutory restriction imposed by Section 182 of the Companies Ordinance Cap. 32 (CO). What is left is a creditor's right to prove a debt, which is not a debt capable of being attached.

39. Secondly, that a legal consequence of a liquidation is that the assets of the company are administered as if a trust fund. The company is no longer independently able to satisfy its creditors' debts.

40. Thirdly, the right for the creditors to recover the debt, in whole or in part, depends first on the liquidator admitting the debt. Only when that happens does the obligation arise.

41. There is a fourth ground which presupposes that GITIC HK had admitted GITIC's debt and had declared a payout. That is that GITIC being in liquidation itself would not be able to dispose of it. Since CCIC as judgment creditor cannot obtain a better right than GITIC as judgment debtor, CCIC would not be entitled to receive the dividend to discharge the judgment debt.

42. It seems to me these objections rely on the premise that the liquidation of a company in debt to another alters the status of the debt so that it can no longer be attached.

43. In my view that is not so. A debt remains, until satisfied or otherwise provided for, a debt. It does not disappear, to re-emerge in another form. It does not transform into a future right to a dividend. Liquidation brings into existence an appointed liquidator. It is control of the company that vests in him, not the assets and debts. His role, statutorily imposed, is to undertake an orderly winding up. That all creditors are required to prove their debts on liability and quantum and then await payment in whole or part pari passu with other creditors of similar rank, is part of that process.

44. The company's assets remain in its ownership and the debts once proved remain a charge on those assets. The creditors' claim for repayment remains against the debt not against any future dividend that in due course is to be struck and paid out by the liquidator.

45. That a debt has not at a particular point in time yet been proved does not mean that it is no longer there. Obviously a necessary function of a liquidator is to satisfy himself that a claimed debt is properly due, and inevitably there will be delay, and the more complex the affairs, the longer that will be. A judgement creditor of the creditor seeking to attach may not be penalised if by accident of timing proof is awaited, as in this case. In any event GITIC HK's liquidators have so conducted themselves as to acknowledge substantial indebtedness to GITIC and have agreed to abide by any order this court makes.

46. The fact that the creditor is itself in liquidation, the fourth ground raised by Mr Tong, does not change the status of the debt, it already having been established to be due or accruing due.

47. The answer to the first issue is accordingly in the affirmative.

(2) How should the discretion be exercised?

48. Before dealing with the specific factors raised, it is appropriate to spell out the principle that a garnishee order will probably not be granted if the effect will be to prefer one creditor of the judgment debtor over others. I paraphrase Mr Tong (para. 27 of his closing submissions): -

"It is a fundamental principle of Hong Kong bankruptcy and liquidation law that a creditor should never be allowed to exploit the judicial process so as to achieve an unfair advantage over the general body of creditors since the principle of pari passu distribution is the most jealously guarded principle in this area of the law."

49. Support for this proposition is found in Prichard v Westminster Bank Limited [1969] 1 WLR 547, where the English Court of Appeal was asked to overturn a garnishee order absolute made in favour of one of the creditors of a bankrupt estate. Lord Denning MR said at p. 549: -

"The general principle, when there is no insolvency, is that the person who gets in first gets the fruits of his diligence; see per Lord Goddard L.J. in James Bibby Ltd. v. Woods & Howard [1949] 2 K.B. 449, 455. But it is different when the estate is insolvent. Under the Administration of Estates Act, 1925, s. 34, and Schedule 1 thereto it is quite plain that, when an estate is insolvent, the bankruptcy rules apply. This brings in section 33 of the Bankruptcy Act, 1914. Subsection (5) shows that the date of death is equivalent to a receiving order; and subsection (7) shows that all debts proved are to be paid pari passu.

The result is that at the date of death, a curtain comes down. All debts existing at that date are to be paid pari passu. The executors must pay all the creditors equally and rateably. The court will not allow one creditor, however diligent he may be, to get an advantage over the others by getting first in with a garnishee order. There is an authority which seems to me to be conclusive on the point. It is Kennett v. Westminster Improvement Commissioners (1855) 11 Exch. 349. In that case there were bondholders who were, by agreement, to be paid pari passu by Westminster Improvement Commissioners. The court held that one creditor could not get an advantage by coming in with a garnishee order before the others. Platt B. said at p. 354.

'the court are of opinion that this is not such a debt as ought to have been attached, because the attaching it and compelling immediate payment would give a preference to the debt due to this particular bondholder over all the others, which is in direct violation of the agreement.'

So here the attaching of this debt and compelling immediate payment to Mr. Prichard would give a preference to him over all other creditors, which is in direct violation of the statute. The overriding rule is that all creditors should be treated equally. This garnishee order ought not to be made absolute. I would allow the appeal, accordingly."

50. And that was the finding of the court.

51. Although this was a bankruptcy and not a liquidation, with different rules applying, the principle of fairness amongst creditors of equal rank is the same.

52. In the case of Rooke & Another v HV Construction Services Limited [1998] 1 HKC 686, where the debtor was an incorporated company not in liquidation although in financial difficulties, Godfrey JA said at p. 689: -

": It is a matter within the discretion of the court whether or not to make absolute a garnishee order nisi. There are no general principles laid down upon which the discretion falls to be exercised. Cotton LJ in Roberts v Death (1881) 8 QBD 319 says, at 324:

'I am of opinion that whenever the judge is informed on any reasonable ground that such an order ought not to be made, he should withhold making the garnishee order absolute for taking the money of one person to pay the debt due from another.'

So the question is whether there is any 'reasonable ground' why the order should not be made. Certainly, 'in considering whether or not to exercise its discretion to make absolute a garnishee order, the court must bear in mind not only the position of the judgment creditor, the judgment debtor and the garnishee, but also the position of the other creditors of the judgment debtor; and have regard to the fact that proceedings are on foot for enforcing the distribution of the available assets of the judgment debtor among the creditors pari passu': see Wilson (D) (Birmingham) Ltd v Metropolitan Property Developments Ltd [1975] 2 All ER 814, per Buckley LJ at 819. (Emphasis added)

So, as Hunter J pointed out in the local case of Wardley Ltd & Ors v Aik San Realty Ltd & Anor [1985] 2 HKC 695B-D:

'.....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 make 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.'"

53. It is with a view to establishing whether an order absolute will have the effect of giving CCIC an unfair preference in the recovery of its debt that I now turn to consider the effect of the liquidation of GITIC HK, the winding up of GITIC, the steps so far taken by CCIC and any other matter.

(a) The liquidation of GITIC HK

54. This, I believe, can shortly be dealt with.

55. That GITIC HK is now in the hands of liquidators has the effect that CCIC would have to wait until GITIC's debt were proved and a dividend struck and paid. And that would amount to no more than what GITIC would have received. I do not see how any other creditor of GITIC HK or GITIC HK itself would in any way be affected by whether or not a garnishee order is made absolute.

(b) The bankruptcy of GITIC in the PRC

56. It is a rule of international law that where there is already pending a process of universal distribution of a bankrupt's effects in a foreign jurisdiction, the local court should not allow steps to be taken within its jurisdiction which would interfere with that process; see, for example, Galbraith v Grimshaw [1910] AC 508. Lord Dunedin said at p. 513: -

"[So] far as the general principle is concerned it is quite consistent with the comity of nations that it should be a rule of international law that if the Court finds that there is already pending a process of universal distribution of a bankrupt's effects it should not allow steps to be taken in its territory which would interfere with the process of universal distribution......"

57. Although that was a case in which the debtor was an individual who went bankrupt, for the same reasons as given before, I do not believe the principle differs where the debtor is a company being wound up.

58. The principle was considered in Hong Kong in Modern Terminals (Berth 5) Limited v States Steamship Company [1979] HKLR 512, where a local creditor was given judgment against the defendant which was incorporated under the Laws of the State of Nevada, USA. But the defendant had sought and obtained protection under the Federal Bankruptcy Act of the United States with the result that the Court of the Northern District of California had obtained exclusive jurisdiction of itself and its property wherever situated. A stay of execution of the Hong Kong judgment was thus asked for, and granted. Headnote 3 stated: -

"3. Applying the principle enunciated in Galbraith v. Grimshaw (1910) A.C. 508 that where a court finds there is already pending a process of universal distribution of a bankrupt's effects it should not allow steps to be taken in its territory which would interfere with that process, a stay of execution should be ordered."

59. In Chen Li Hung v Ting Lei Miao [1998] 3 HKC 119, Godfrey JA said at p. 135: -

"It has been settled for centuries, in England and Wales, that the court may recognise, and give effect to, foreign bankruptcy proceedings where no question has arisen as to the jurisdiciton of the foreign court over the bankrupt ..... notwithstanding that the foreign insolvency proceedings may be of a very different nature form ours and that a decree in such proceedings pronounced by a foreign court cannot be equated with a foreign judgment ...... Not surprisingly, therefore, it is not a condition precedent to the recognition by our courts of a foreign insolvency proceeding that it, too should operate to vest the bankrupt's property in his trustees by way of assignment: .........." (emphasis added)

60. It is, I believe, thus necessary to examine the nature of the winding up of GITIC in PRC and in particular whether that liquidation has extra-territorial effect or not; that is whether the EBL, the PRC bankruptcy law, is intended or purports to apply to extra-territorial assets of GITIC, so as to subject them to the liquidation regime in the PRC.

61. Much of the trial was taken up in the adducing of evidence by four scholars in PRC bankruptcy law on this topic.

62. In support of CCIC's case, Dr Shi Jing Xia of the International Economic Law Department at the Law Faculty of China University of Business and Economics, Beijing, and Associate Professor Wang Xing Xin of the same faculty wrote opinions and were examined and cross-examined on them. For GITIC, Professor Wang Wei Go, the Dean of the Department of Economic Law of the China University for Political Science and Law and Dr Zou Hai Lia, Associate Research Fellow at the Institute of Law of the China Academy of Social Sciences were likewise involved. The academics, all recognised as experts in their field, had divergent opinions on whether the EBL, the PRC bankruptcy law, invokes the territorial or the extra-territorial approach.

63. The difficulty stems from what it seems was a deliberate intention by those who drafted the EBL not to bind the courts. I borrow Dr Shi's words extracted from a leading article she wrote entitled "A Study of the Legal Issues Arising Out of Cross Border Insolvency": -

"I. The Legislative Blank and the Issues Arising therefrom

The question of the extraterritorial effects of bankruptcy under the prevailing bankruptcy law in the PRC is a legislative blank. No stipulation has been enacted on the important issue of the extraterritorial effects of bankruptcy under the 1986 Enterprises Bankruptcy Law of PRC (Trial Implementation) applicable to state-owned enterprises or 'The Procedure for Repayment of Debts by the Bankruptcy of Enterprise Legal Persons', Chapter 19 of 1991 Civil Procedure Law applicable to enterprise legal persons other than state-owned enterprises including sino-foreign equity joint venture, sino-foreign co-operative joint venture or wholly owned foreign enterprises. There are various reasons which lead to the legislative blank but presumably the most important one is the lack of a systematic study of the theories. According to the briefing given by the experts who participated in the legislative process, the absence of enactment of bankruptcy law on this issue is not due to the inadvertence on the part of the legislators but when they deliberated over this issue, the legislators could not make up their mind as to whether to adopt the principle of universal application or the principle of territorial application and so they considered the best solution was not to make any enactments. At that time, the prevailing approach was to adopt the principle of territorial application for a foreign bankruptcy and to adopt the principle of universal application for a PRC bankruptcy."

64. Article 28 of the EBL defines property that falls to be administered by the duly appointed Liquidation Committee of an SOE adjudicated bankrupt as follows: -

"Article 28 Bankruptcy property comprises the following property:

(1) all property that the bankrupt enterprise operated and managed at the time bankruptcy was declared;

(2) property obtained by the bankrupt enterprise during the period from the declaration of bankruptcy until the conclusion of the bankruptcy proceedings; and

(3) other property rights that the bankrupt enterprise should exercise.

Property that already constitutes security collateral is not bankruptcy property; the portion of the value of the security collateral exceeding the amount of the debt that it secures is bankruptcy property."

65. It is not, I believe, productive for me to consider in depth the philosophical differences in the academic approach of the experts to the legislative lacuna on this topic. Suffice I think to spell out what those differences are and then form my own view based on their opinions and the present conduct of the winding up of GITIC by its Liquidation Committee.

66. Dr. Shi said that having regard to the legislative silence on the issue, it was necessary to examine cases tried in the PRC to see what in practice was the approach of the PRC courts. She reported on two cases, called for short the Liwan case and BCCI (Shenzhen Branch). I quote from her opinion: -

"20. In the Liwan case, a PRC plaintiff commenced proceedings in the Guangzhou Intermediate Court against a Hong Kong incorporated defendant which had entered into several contracts with the PRC plaintiff. The Hong Kong defendant was wound up by the Hong Kong Court during the course of the PRC proceedings. The bankruptcy issues in the case were ignored by the PRC Court for the purpose of deciding the outcome of the PRC proceedings. The contracts entered into concern the construction of a residential development in the PRC. Whilst the parties had numerous issues yet to negotiate, the Hong Kong party completed a temporary office for the construction project, in the PRC. Ultimately, a dispute between the PRC party and the Hong Kong company erupted concerning the balance of the contractual terms. The People's Court accepted the case commenced by the PRC party against the Hong Kong party for breach of contract. However, by that time the Hong Kong party had been winding up by a creditor in Hong Kong.

21. The PRC Court found that the Hong Kong liquidator lacked authority to represent a Hong Kong party in legal proceedings outside Hong Kong. It further held that the contract be set aside and that the value of the temporary office be determined by PRC planning authority. Furthermore, the Hong Kong party was to compensate the PRC party for breach of the agreement and, after accounts had been set-off with each other, the balance attributable to the Hong Kong party was to be remitted to and held in an account of the People's Court.

22. The Guangzhou Court applied the territoriality approach and acted to protect the PRC party. Implicitly, the PRC Court decided that the Hong Kong liquidator's authority did not extend beyond the borders of Hong Kong. Further, the Hong Kong party's assets in the PRC were to be dealt with under the laws of the PRC and any claims by the Hong Kong liquidator to those assets would not be recognised by the PRC Courts. The balance of the proceeds of realisation of the temporary construction office was only to be remitted to the bankrupt Hong Kong party, once its obligations to the PRC party had been satisfied.

23. The well-publicised collapse of BCCI all over the world serves as another example of the PRC Court's application of the territorial approach to transnational insolvencies. A branch office of BCCI was trading in Shenzhen, PRC. The Bank of China (Shenzhen Branch) was one of the largest creditors of BCCI (Shenzhen Branch) and applied to the Shenzhen Intermediate Court for the bankruptcy of BCCI in Shenzhen and the commencement of debt repayments.

24. The Shenzhen Court accepted the case that was begun to hear in 1992. Upon application by PRC creditors, the Shenzhen Court froze the assets of BCCI within the PRC and pursuant to article 5 of the Shenzhen Rules and article 243 of the CPL (according to this article, Chinese courts may exercise jurisdiction over defendant where the defendant has assets in PRC which can be attached and realised by the people's court or the defendant has representative office in PRC), the Shenzhen Court appointed a liquidation committee to take charge of the liquidation of BCCI in the PRC. PRC creditors of BCCI (Shenzhen Branch) did not participate in the global liquidation of BCCI. Those creditors only participated in the proceedings commenced by the Shenzhen Court.

25. The liquidation committee's report on BCCI (Shenzhen Brnach), disclosed BCCI's assets in China amounted to US$20 million and its liabilities totalled nearly US$80 million. PRC creditors only received their respective claims in the PRC proceedings, by way of dividend from the Shenzhen bankruptcy of BCCI. There were no reported world-wide/foreign creditors participating in the liquidation of the Shenzhen branch of BCCI in the PRC. Again, this is a classic example of the PRC's practice of applying the territorial principle when dealing with cross-border insolvency matters."

67. Dr Shi formed the view that by analysis judicial practice supported a territorial approach. However, in an article entitled "Chinese Cross-Border Insolvencies: Current Issues and Future Developments", she wrote: -

"It is difficult to draw a comprehensive conclusion about Chinese cross-border insolvencies from very few cases. Nonetheless, it has been observed that there is an absence of clear legislative guide for Chinese courts to cope with these problems."

68. Associate Professor Wang opined at paragraph 7 of his report:-

"7. The [EBL], upon formulation, did not purport to have extraterritorial effect outside the sovereign or legal boundaries of the PRC. It purported mainly to satisfy the necessity for reform of the economic system in the PRC at that time in order to urge reform of state-owned enterprises. Therefore, the extraterritorial effect of the declaration of bankruptcy was not considered and not provided for in the [EBL]. There is no sufficient legal basis to support the statement that it is applicable to property outside of PRC."

69. In summary he gave his reasons as follows: -

(a) he knows of no case where it has been claimed that a liquidation in the PRC has extra-territorial effect, with respect to property situated outside the PRC;

(b) the PRC Courts do not, in practice, recognise a foreign liquidator's rights to exert control over assets in the PRC;

(c) there are no bi- or multi-lateral treaties the PRC is a party to;

(d) since there is no provision in the legislation for extra-territoriality, the inference is that it does not apply.

70. He went on to say that whilst the declaration of GITIC's bankruptcy imposed a stay of civil enforcement proceedings under article 11 of the EBL, it was his view, at para. 45 of his opinion: -

"45. ..... the legal effect of the stay is limited to the jurisdiction in which the bankruptcy is declared, namely the PRC. This does not presently include the Hong Kong region of the PRC. The question as to whether the stay of proceedings has effect in non-PRC jurisdictions depends upon whether the legal effect of such declaration of bankruptcy is recognised in that jurisdiction. In my view, the [EBL] does not have, nor purports to have extraterritorial effect."

71. Then at para. 46: -

"46. According to the rules of private international law, it is my view that civil enforcement proceedings will not be stayed in Hong Kong, unless Hong Kong law itself provides otherwise. Whether a Hong Kong court recognises the bankruptcy of GITIC as having the effect of a stay on civil proceedings against GITIC in Hong Kong is a question to be decided by a Hong Kong court, not a PRC court."

72. And at para. 49: -

"49. Property of GITIC in foreign jurisdictions is not part of GITIC's bankruptcy property unless and until it is remitted to GITIC in the PRC. In my view, a PRC court would be unlikely to rule that property owned by GITIC situated in foreign jurisdictions formed part of GITIC's 'bankruptcy property', unless and until it was remitted to the PRC."

73. Dr. Zou said at para. 5 of his report: -

"5. ........... It must be specially noted that: - Firstly, to declare the bankruptcy of a state-owned enterprise in the PRC, the applicable law must be PRC law. The only law which can be relied upon to resolve issues relating to the assets of GITIC after its bankruptcy is the [EBL] and the relevant provisions of other PRC laws. Secondly, the ownership of all the assets of GITIC (including all the assets of GITIC at the time it was declared bankrupt, all the assets of GITIC obtained after it was declared bankrupt and prior to the completion of the bankruptcy procedure as well as other rights in respect of assets which should be exercised by GITIC), irrespective of their geographical location, must first be verified in accordance with PRC laws. So long as the assets belong to GITIC, they must be dealt with and distributed in accordance with the [EBL] and other relevant legal stipulations. All the assets belonging to GITIC cannot, by reason of the bankruptcy of GITIC, be severed and separately dealt with (............). Thirdly, all the creditors of GITIC (including the creditors outside China) must, upon the bankruptcy of GITIC, exercise their rights in accordance with the [EBL] and other relevant legal stipulations. No creditor is permitted to evade PRC law so as to obtain special benefits which are better than those obtained by other creditors in respect of the assets belonging to GITIC."

74. His view as to the meaning and the effect of Article 28 and what constituted property of the bankrupted SOE was at para. 14 as follows:-

"14. I take the view that bankruptcy property, pursuant to the provisions of the [EBL], means collectively or the aggregate of all the assets of the bankrupt enterprise available for distribution in the bankruptcy which assets come into possession and become subject to the control of the liquidation committee during the period from the declaration of bankruptcy until the conclusion of the bankruptcy proceedings and possess the following characteristics: (1) Bankruptcy property is to be possessed, managed and disposed of by the liquidation committee. (2) Unless PRC law stipulates otherwise, all the assets belonging to the bankrupt enterprise are regarded as bankruptcy property. (3) Bankruptcy property is not limited to the assets situated in Mainland China belonging to the bankrupt enterprise; all assets situated outside Mainland China which can be verified as belonging to the bankrupt enterprise also constitute bankruptcy property."

75. And at paras. 25 and 26: -

"25. Pari passu ranking (also known as pari passu distribution) among the creditors of the bankrupt enterprise is the objective of bankruptcy liquidation and the main purpose of the [EBL]. Creditors of the same bankrupt enterprise can only receive pari passu distribution from the assets of the bankrupt enterprise. If individual creditors were permitted to levy execution against the assets of the bankrupt enterprise which are outside Mainland China through a foreign court or to receive satisfaction of the debt through other means, then the rights of the creditors of the bankrupt enterprise to receive pari passu distribution would have been seriously infringed thereby causing injustice as between the creditors of the bankrupt enterprise. In order to safeguard the rights to receive pari passu distribution of the general body of creditors (irrespective of whether the creditors are located in the PRC or not), the maintenance of a full and complete set of bankruptcy property should be the foundation. In order to ensure that the bankruptcy property is fully and completely maintained, it is the fundamental spirit of the [EBL] that no person may possess, use or dispose of the assets belonging to the bankrupt enterprise without going through the liquidation committee. A full and complete set of bankruptcy property should consist of all assets of the bankruptcy enterprise within or outside Mainland China.

26. I take the view that the assets of the GITIC which are outside the PRC forms an essential part of its total assets. Given that GITIC has already lost its ability to control and to dispose of its assets, by reason of the bankruptcy declaration, the liquidation committee is entitled to receive, control and dispose of such assets. Only under these circumstances can the set of bankruptcy property be fully and completely maintained and the objective of the [EBL] to protect the rights of the whole body of creditors of the bankruptcy enterprise to receive pari passu distributions be best achieved."

76. Professor Wang took the view that the legislative silence on the issue of extra-territoriality did not permit an inference to be drawn that the EBL has already adopted the territorial principle. (see para. 1.5.5 of his report)

77. At para. 3.6 he defined the functions and duties of the Liquidation Committee as including a duty '(i) to take over the bankruptcy property', and went on to conclude: -

"3.6 ............ It follows that under the PRC bankruptcy law, extraterritorial actions taken by the liquidation committee to recover debts and assets are a fulfillment of its statutory functions and duties. The fact that the liquidation committee of a bankrupt enterprise seeks to collect dividends from a liquidator of a company in liquidation in the HKSAR falls within the ambit of item (i) above."

78. All of the experts were searchingly cross-examined yet could not significantly be swayed from the opinions I have sparingly summarized.

79. What is of benefit to me in this case is that GITIC's winding up having begun in January 1999 there is thus a history from which I can deduce the approach that is being taken by the Liquidation Committee as directed by the PHC.

80. Returning to the factual summary at the outset of this judgement, I note: -

(a) the primary direction of the PHC of 16 January 1999 was that the Liquidation Committee was: -

"1. To take complete control of [GITIC] and to receive the assets, accounting books, documents, materials and official seal of the bankrupt enterprise"; with no reference to this control being limited to within the borders of the PRC;

(b) GITIC filed a proof of debt with the Liquidators of GITIC HK. Whilst this proof has yet to be admitted, there is no indication that it will be rejected by virtue of being an off-shore claim; more pertinent is that the Liquidation Committee is looking to realize on property outside the PRC's territorial boundaries;

(c) the rejection by the Liquidation Committee of CCIC's proof of debt is on the merits of the claim, not because it comes from outside the territorial boundaries of the PRC;

(d) in the course of the winding up, the Liquidation Committee has periodically reported on progress. At the meeting held on 22 October 1999 it reported on those proofs already approved, four-fifths in value of which were labelled as coming from foreign creditors;

(e) the press conference that followed highlighted that the principle of a pari passu distribution amongst all creditors both foreign and domestic would be followed;

(f) CCIC has been informed by the Liquidation Committee that its claim having been rejected on liability gives it the right to have that rejection tested in the PHC;

(g) the PHC gave a direction to the Liquidation Committee dated 29 August 2000: "After [GITIC] was declared bankrupt in accordance with the law, its assets located within or outside the territory (including Hong Kong) should be recovered by and in the name of your Committee and what has been recovered should be included as falling within the ambit of the bankruptcy property";

(h) on 31 October 2000 the dividend was struck the intended payees being local and foreign creditors there being no priority or other distinction.

81. Taken singularly and together these lead to the inevitable conclusion that GITIC's Liquidation Committee as directed by the PHC is conducting the winding up under the EBL by adopting the extra-territorial approach.

82. Dr Shi formed the view that the courts of the PRC would adopt the territorial approach upon the basis that that is how they proceeded in the two cases cited. But the PRC does not for various reasons embrace the Common Law principle of binding precedent. Furthermore, the Liwan case was dealt with by a lower court not tested on appeal, was not about a PRC bankruptcy, and was not fully, and thus reliably, reported. The BCCI insolvency was a world-wide phenomenon which presented its own unique set of challenges and circumstances. Moreover, in the PRC it was dealt with under the now repealed Shenzhen Regulations and not the EBL.

83. Associate Professor Wang's firm view that the EBL is not extra-territorial by virtue of its silence on the topic seems to me to ignore the possibility that the converse might be true because the word 'property' in article 28 EBL is not limited to domestically owned property; that in reality the legislators elected to leave the board clean, and by doing so permit the courts the freedom of pursuing their own course.

84. It seems clear to me that whatever has been decided before and whatever may happen in the future, the GITIC liquidation is being pursued, without challenge, on the basis of a universal collection and distribution of assets and that the paramount principle of pari passu of distribution is strictly being adhered to.

85. The making absolute of the garnishee order would interfere with that process.

(c) The conduct of CCIC

86. Mr Tong submits that this is a material matter for consideration given that what is sought by CCIC is an equitable remedy. CCIC did choose to accede to the authority of the Liquidation Committee to consider the validity of its claim under the Letter of Support by lodging its proof of debt in December 1998. Its election to issue a writ in October 1999 in Hong Kong when by August 1999 its proof had been rejected (subject to 'appeal' to the PHC) was because it had tried and failed to have its claim accepted on the merits, not because it believed under the concept of territoriality its debt due could not be considered in the PRC. It was, he contended, forum shopping. The writ was not defended not because the demand was meritorious but because, on advice, GITIC elected to reserve its opposition to enforcement proceedings.

87. Mr Fok SC arguing for CCIC submits that it was not and is not forum shopping; that it was entitled to proceed against the assets of GITIC outside the PRC because it believes the liquidation in the PRC, on advice, is territorial. Furthermore, it perceives by the preliminary rejection of its claim by the Liquidation Committee that it is being denied the right to substantive justice because, in the PRC: -

"the Court/Liquidation Committee have simply set their faces against claims based on letters of comfort for the Hong Kong subsidiary GITIC HK."

88. My view is that CCIC knew the correct procedure was to make its claim by submitting its proof of debt in the bankruptcy of GITIC in the PRC and that is why it did so. It has not, faced with the rejection, come up against a brick wall; rather, it has, or at least had if not by now time-barred, the opportunity of proving the validity of the claim before the PHC, but has chosen not to pursue this.

89. Whilst I do not believe - nor I think is it contended by Mr Tong - that the doctrine of estoppel may be invoked to prevent CCIC from pursuing this remedy in this court, nevertheless I believe CCIC's conduct is a factor that I can take into account in considering the exercise of my discretion as to whether or not to enforce the judgment it obtained here.

(d) Other matters

(i) The financial effect

90. Mr Fok invites me to grant CCIC the relief it seeks because it has a legally enforceable judgment deriving from failure by GITIC to honour its legal obligation under the legally binding Letter of Support. He submits it ill-behoves GITIC to down-grade its worth because on advice it chose not to defend it. Furthermore, for two reasons, it is not going to benefit by way of a 'windfall' if I grant the application it seeks to make the garnishee order absolute. His research based on estimates now to hand indicates that the amount available from GITIC HK on a garnishee order may not, in percentage terms, exceed significantly, if at all, what the other creditors who have been admitted to proof in the PRC liquidation are likely to get. And it may end up getting less. The second is that permitting CCIC to enforce the judgment debt will have the effect of diminishing the available pool for the other creditors of GITIC by no more than 0.6%.

91. It is not, I believe, the function of this court to explore the merits of CCIC's judgment against GITIC. All I believe I should be concerned with is that it has judgment; the fact that it is by default does not diminish its value or its worth.

92. On the other hand I do not believe it is relevant or appropriate to consider by how much, in percentage terms, the pool will be reduced if I make the garnishee order absolute; nor whether, by accident of accounting, CCIC's recovery will more or less match the rate achieved for the creditors whose claims have or are likely to be accepted in the PRC liquidation.

(ii) International comity

93. I have not tried to cover any issue associated with cross-border insolvency beyond those actually raised because this is not a legal discourse on a weighty and difficult topic; rather it is an attempt at first instance to discern how a judicial discretion should be exercised.

94. I have had referred to me by Mr Tong an article by Sir Peter Millett, now the Right Honourable the Lord Millett, entitled Cross-Border Insolvency: The Judicial Approach [1997] 611 R 99. He wrote that where an English court has jurisdiction with extra-territorial effect, such jurisdiction should be exercised with restraint. He cited an example where that was observed and then said at p. 107: -

"The leading example of the failure to exercise judicial restraint is the well-known case of Felixstowe Dock and Railway Co. v US Lines Inc [1989] QB 360. The company was incorporated in the United States and carried on a worldwide shipping business. It operated in England and was registered under the Companies Acts. It filed under Chapter 11 in the United States. The New York Bankruptcy Court granted a worldwide restraining order staying all claims against the company within and outside the United States. The reorganisation scheme submitted to the New York court provided for the company to close down its English and European operations and concentrate its activities in the United States. The plaintiffs, who were English and European trade creditors of the company, brought proceedings to recover payment for services supplied to the company, and obtained Mareva injunctions restraining the company from removing its assets from the jurisdiction. The company applied for the injunctions to be discharged, arguing that the English court should recognise the restraining order of the New York Bankruptcy Court and allow it to govern the disposition of the company's English assets. Hirst J refused the application; he was concerned that if the Mareva injunctions were discharged, the English assets would be removed from the jurisdiction and used to keep the company as a going concern in the United States without any corresponding benefit to the English creditors.

The decision did great harm to the relations between the courts of the two countries, and seriously damaged the esteem in which UK courts had previously been held by insolvency practitioners and judges abroad. There was clearly a very difficult issue to resolve - the relative weight to be given to the competing claims of the creditors outside the United States and the survival of the company and its business in the United States - but, with great respect to Hirst J, it was not for him to resolve. The English and European creditors had dealt with a US corporation (i.e. a corporation which was amenable to Chapter 11) and had to take the consequences. The creditors had a case because they were entirely excluded from the scope of the proposed reconstruction; but, in my view, it was a case which should have been presented to the New York court."

95. Of course, CCIC claims to have been excluded from the liquidation by the Liquidation Committee's outright rejection of its claim. I do not find that to be so as I shall come to; thus under this head if Lord Mllett's approach is adopted, there is an even stronger case for leaving the issue of CCIC's claim to be presented to and decided by the PHC.

The exercise of discretion

96. I propose to exercise my discretion by refusing the application for garnishee order absolute. My primary reason for doing so is because, as I have found, the GITIC liquidation is being pursued on the basis of a universal collection and distribution of assets and the creditors world-wide are to be paid pari passu with each other subject only to ranking. To have granted the application would have offended the principle of equality in that one of the creditors, CCIC, would have achieved an unfair preference ahead of those others ranking at the same level.

97. There is no evidence that the liquidators are experiencing or may have difficulty in the recovery of property based outside the PRC; in fact the converse would seem to be established.

98. That CCIC's proof has been rejected is no counter to the proposition that CCIC has been treated fairly. The reasons for the rejection have been fully made known and are on the merits, not for reasons of territoriality.

99. That CCIC, were its application to succeed, might not benefit from a windfall for reasons given is not material; that is no more than a coincidence in the accounting.

100. That GITIC HK is itself in liquidation is neither here nor there.

101. The concept of comity of nations is not of itself a reason to turn away a litigant with a bona fide claim that should otherwise be granted on the merits. But where a foreign jurisdiction is actively and openly pursuing a liquidation in which it says it intends to treat all creditors, domestic and foreign, alike, and then patently does so, it is not, I believe, for the courts of Hong Kong to interfere with that process.

The application to stay

102. Because my reasons for turning down CCIC's application for a garnishee order absolute are that to have granted it would have offended the principle of a pari passu distribution, it follows that all enforcement action should properly not be allowed to proceed; GITIC's application for a stay of all proceedings shall be granted.

A tribute

103. Before reciting the orders, I want to record my gratitude to Mr Fok SC leading Mr G Lam and Mr Tong SC leading Miss Y Cheung for the thoroughness and clarity of their submissions and the assistance they afforded me in the trial.

The orders

104. The judgment creditor's application that the garnishee pay to the judgment creditor the debt due from the garnishee to the judgment debtor or so much thereof as may be sufficient to satisfy the judgment recovered by the judgment creditor against the judgment debtor on 27 October 1999 is dismissed.

105. The judgment debtor's application that all further proceedings in this action including execution of any judgment therein be stayed is granted.

106. Costs (nisi at first instance) in respect of both applications are to the judgment debtor taxed if not agreed, with certificate for two counsel.