INTERNATIONAL ASSOCIATED ATTORNEYS LTD v. EUROSTOCK ENERGY LTD

HCA 180/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 180 OF 2012

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BETWEEN

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D E C I S I O N

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1.  The plaintiff (“IAA”) applies, as a judgment creditor, for a garnishee order to be made absolute. The Secretary for Justice (“SJ”), as an intervener, opposes it on the ground that the funds are subject to a restraint order.

The background

2.  Pursuant to requests for legal assistance from the German government, the SJ obtained, under the Mutual Legal Assistance in Criminal Matters Ordinance, Cap 525 (“the MLAO”), a restraint order on 21 July 2010 under HCMP 1346 of 2010 (“the Restraint Order”), restraining the defendant (“Eurostock”) from dealing with all monies held with 2 bank accounts of its with the Standard Chartered Bank (Hong Kong) Ltd (“the SCB Accounts”).  As of that date, the credit balance in the SCB Accounts was around HK$14,800,000.  The Restraint Order was continued by Tong J on 7 September 2010. 

3.  The matter originated from a conspiracy to commit fraudulent tax evasion and money laundering connected with trading of carbon remission credits investigated in Germany.  The tax evasion scheme was allegedly traced to Eurostock.  There were transfers in and out of the SCB Accounts and other bank accounts of the suspects that were suspected to be of criminal origin and linked with the tax fraud.  The 3 affirmations of ISY in the hearing bundle A filed on behalf of the SJ contained details of the scheme.  The proceeds of crime laundered through the accounts of the Eurostock were well over €6,595,000 during the period from December 2009 to 11 March 2010.

4.  The criminal investigation and proceedings in Germany are ongoing.  It is anticipated that a confiscation order will be made upon completion of those proceedings against, amongst others, Eurostock, including its SCB Accounts.

5.  Meanwhile, one Mr Pelfania was a client (“the client”) of IAA.  In March 2010, Mr Pelfania allegedly asked IAA to act on his behalf in transferring €380,000 to Eurostock to effect purchase of energy stock options.  Eurostock was allegedly the official agent for the 2 energy trading European companies issuing the stock which the client wanted to invest in.

6.  IAA made 2 transfers totalling €380,000 from its bank account to one of the SCB accounts no. XXX-XXX-XXX-74:

(i) €170,000 on 23 March 2010;

(ii) €210,000 on 7 April 2010.

7.  In the summer of 2010, the purchase of the stock options allegedly fell through.  The client instructed IAA to seek the return of the €380,000 from Eurostock and to manage the recovery process.

8.  Eurostock did not know why the transaction had fallen through but agreed to return €380,000 to IAA.  SCB, however, declined to release the money in view of the Restraint Order.

9.  IAA failed to convince Tong J to vary the Restraint Order: see the decision dated 28 October 2011 in HCMP 1346 of 2010 (“the Decision”).

10.  IAA subsequently took out the present action on 3 February 2012 against Eurostock, seeking payment of the liquidated sum of €380,000.  Eurostock failed to acknowledge service of the writ. IAA obtained default judgment on 8 March 2012.

11.  Eurostock failed to pay the judgment debt.  On 25 April 2012, IAA obtained a garnishee order to show cause in relation to the SCB Accounts for payment of the judgment debt plus interest and costs.  On 25 May 2012, SJ was joined as an intervener in these proceedings.

The parties’ respective stance

12.  IAA seeks to have the garnishee order made absolute.  Its counsel Mr Ng SC, leading Ms Queenie Lau, draws to my attention that there is no allegation that IAA or the client was involved in the alleged criminal activities in Germany.  Nor is there any allegation that the €380,000 transferred by IAA into Eurostock’s SCB Account was directly or indirectly connected with the alleged criminal offences complained of.  SJ is not in a position to challenge that Eurostock had failed to return the money to IAA. Specifically, the client’s deposit of the €380,000 into the account of Eurostock took place beyond the period of money laundering identified by the German authorities, i.e. after 11 March 2010.

13.  SJ opposes the application on the following grounds:

(A) A garnishee order absolute will conflict with the Restraint Order and is contrary to Order 49, rule 1 of the Rules of the High Court (“RHC”).

(B) It is an abuse of the process of the court to use the present proceedings to recover the sum of €380,000 after an application for variation has been refused by Tong J in HCMP 1346 of 2010.

(C) Under the law on garnishee order, the plaintiff’s default judgment is subject to the earlier Restraint Order.

(D) In terms of the law under the MLAO, unsecured creditors have no priority claim over assets which are subject to a Restraint Order.

14.  It may be useful to examine the scheme under Order 49, RHC and that under the MLAO.

The scheme under Order 49 of the Rules of the High Court

15.  Under Order 49, rule 1 of the RHC, 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” (emphasis added)

16.  The court has the discretion to make or refuse to make a garnishee order absolute.  The question is whether there is any “reasonable ground” why the garnishee order should not be made absolute: Rooke & Another v HV Construction Services Ltd. v MK Lam & Co (a firm) [1998] 2 HKLRD 319 at 323B.

17.  The starting point is that a judgment creditor is entitled to enforce the judgment he has secured against the judgment debtor.  It is usually not necessary to consider the interests of non-parties except in circumstances like where the judgment debtor was in the process of being wound up or where liquidation or some form of scheme of arrangement was imminent.  In Credit Lyonnaisv SK Global Hong Kong Ltd [2003] 4 HKC 104,Ma CJHC (as he then was) held as follows:

“8(1) The starting point is that a judgment creditor is entitled to enforce the judgment he has secured against the judgment debtor.

(2) In any event, as a matter of principle, it is somewhat difficult to see why the interests of non-parties (such as the defendant’s other creditors or even its Korean parent’s creditors) should be taken into account by the court in the first place. A civil action between two or more parties is normally one in personam, where the court is required to adjudicate on the rights and liabilities as between those parties alone. Were it otherwise, non-parties would then be able to have locus standi to intervene in that action. This is of course possible under RHC O 15 r6 but the circumstances in which intervention is permitted under that rule are somewhat circumscribed. They certainly would not cover intervention by creditors of a defendant unless those creditors had some interest directly related or connected to the subject matter of the action. (at page 108 D-G).

…

(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…  Here, the court is not so much taking into account the wishes of non-parties as recognizing that it must not allow a situation to occur that would be contrary to statute (viz the statutory scheme for the orderly and fair distribution of an insolvent company’s assets to its creditors) or would usurp the jurisdiction of other courts (such as the Companies Court).”

18.  Or there may be situations where other proceedings for enforcement are on foot, in which event, the court may take into account the interests of other parties: Rooke & Another v HV Construction Services Ltd v MK Lam & Co. (a firm) [1998] 2 HKLRD 319, 323B-C.

“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 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 creditor among creditors pari passu.” (per Godfrey JA)

19.  Closely related to these principles is the rule of chronological priority from which any departure must be justified.  In the absence of a stay, a successful plaintiff may enforce his judgment against the defendant as it is given: Cox v Bankside Members Agency Limited [1995] 2 Lloyd’s Rep 437. 

20.  The situation is no different where the funds to be garnisheed are subject to a Mareva injunction obtained by someone other than the successful plaintiff.  The purpose of a Mareva injunction is not to prevent creditors from exercising their rights.  In Re Ling Ex parte Enrobook Pty Ltd (1996) 142 ALR 87, 92-3, the Federal Court of Australia described the character of Mareva relief:

“It deprives the party subject to its restraint neither of title to nor of possession of the property to which it extends. It does not create a security interest, confer priority or in any sense rewrite insolvency law …; it is an order in personam restraining the party to whom it is directed from disposing of assets or removing them from the reach of creditors. The administration of the property is not place in the hands of a receiver, trustee or other officer of the court, nor is it assumed by the court itself. For these reasons, to speak of a Mareva injunction as ‘freezing’ assets may, with respect, be somewhat misleading: it operates as a personal restraint against the party to whom it is directed.

…

More importantly, however, the purpose of a Mareva injunction is to prevent a defendant from dissipating assets, or putting them beyond the reach of creditors, in circumstances where there is a real fear that, unless restrained, the defendant will do so.  Its purpose is not to prevent creditors from exercising their rights.  And the way in which such an injunction is commonly framed – the way in which Lockhart J’s order is framed – reflects the limited purpose: all it does in terms is restrain, in this case, Mr Ling from dealing with assets.   There appears to be no good reason why the exercise or enforcement of a creditor’s rights, including by execution, where no dealing by Mr Ling is required to effect it, should be regarded as contrary to the order.”

The decision was upheld on appeal: (1997) 74 FCR 19.

The written law: MLAO

21.  The unwritten law which Order 49 is subject to, in this case, is MLAO.  Section 6 of Schedule 2 to MLAO sets out the bases for granting a restraint order:

“(1) The powers conferred on the Court of First Instance by sections 7(1) and 8(1) are exercisable where-

(a) proceedings have been instituted in a place outside Hong Kong;

(b) the proceedings have not been concluded; and

(c) either an external confiscation order has been made in the proceedings or it appears to the Court of First Instance that there are reasonable grounds for believing that an external confiscation order may be made in them.

(2) Those powers are also exercisable where the Court of First Instance is satisfied that proceedings are to be instituted in a place outside Hong Kong and it appears to the court that an external confiscation order may be made in them.

...”

22.  Under section 7 to Schedule 2 of MLAO, the court has a discretion to make, vary or discharge a restraint order:

“(1) The Court of First Instance may by order (in this Schedule referred to as a ‘restraint order’) prohibit any person from dealing with any realisable property, subject to such conditions and exceptions as may be specified in the order.

(2) A restraint order may apply to any realisable property, including property transferred to a person after the making of the order.

…

(5) A restraint order –

(a) may be discharged or varied in relation to any property;

…

(6) An application for the discharge or variation of a restraint order may be made by any person affected by it.”

23.  The procedure governing the variation of a restraint order is set out in Order 115A, rule 15.

24.  Section 5 of Schedule 2 to MLAO defines “realisable property” as follows:

“(1) In this Schedule, “realisable property” means, subject to subsection (2) –

(a) In relation to an external confiscation order –

(i) made in respect of specified property, the property which is specified in the order;

(ii) which may be made as a result of proceedings which have been, or are to be, instituted in a place outside Hong Kong, the property which may be specified in the order; and

(b) in any other case –

(i) any property held by the defendant;

(ii) any property held by a person to whom the defendant has directly or indirectly made a gift caught by this Schedule; and

(iii) any property that is subject to the effective control of the defendant.

…

(3) Subject to the following subsections, for the purposes of this Schedule the value of property (other than cash) in relation to any person holding the property –

(a) where any other person holds an interest in the property, is –

(i) the market value of the first-mentioned person’s beneficial  interest in the property, less

(ii) the amount required to discharge any incumbrance (other than a charging order) on that interest; and

(b) in any other case, is its market value.”

25.  “Realisable property” includes both legitimately and illegitimately acquired properties: R v Chrastny (No. 2) (1991) 1 WLR 1385 at 1395E.

26.  The purpose of a restraint order is to preserve assets liable to be recovered under an external confiscation order: section 11(2) of MLAO; DOJ v Yeung Chun Pong & ors, HCMP 5021/2003, Deputy High Court Judge M. Poon (as she then was), 15 March 2004, at para 38.

27.  A restraint order is often compared to a Mareva injunction except that for the former, there is a public interest involved in making and continuing it.  In  Secretary for Justice v CKS & anor (No.2) (2001) 1 HKC 611 at 616B,Lugar-Mawson J held as follows:

“The nature of restraint and charging orders is akin to that of Mareva orders, but with a very significant difference: in respect of a restraint order made under s 15 of the [Organized and Serious Crimes Ordinance Cap 455] the public has an interest in its efficacy, with a Mareva order only a private litigant has such an interest.”

28.  This principle was elaborated by Deputy Judge McMahon (as he then was) in Choi Kong and Wong Lai Hung,HCMP 2801/2002, 4 December 2002.

“19. … it is worthwhile remembering the purpose and structure of the legislation under which these applications are brought. The present legislation is draconic and is meant to be so. That is because it prevents an accused person, who is presumed innocent until any future conviction, from dealing with property which is undisputably and legally his. …

20. But the draconic nature of the legislation reflects very real public concern that persons involved in serious organized crime should not have the use of the profits of those activities once they are convicted.

…

31. It has been said that the principles underlying sections 15 and 16 of the [Organized and Serious Crimes Ordinance] and restraint and charging orders made thereto, and variations to such orders, are similar in many ways to the principles governing Mareva injunctions.  That is so.  But there is one fundamental difference.  Mareva injunctions relate to actions in the commercial arena between companies and businessmen.  Restraint and charging orders apply to persons charged with serious criminal offences. …”

29.  To mitigate the draconic effect of a restraint order, the defendant or any person affected by it may apply for a discharge or variation: section 7(6) of Schedule 2 to MLAO.

30.  In considering whether variation should be made to a restraint order, the court should strike a balance between the rights of an accused person, who until conviction is presumed innocent, to the use of assets owned by him, and the interests of the community in recovering from persons eventually convicted of serious criminal offences the proceeds of their crime: Choi Kong and Wong Lai Hung,at para 20.

31.  The court should be reluctant to release any property from restraint until the proceedings are concluded, except for funds necessary for maintenance and legal expenses: Re Lau Koon Chiu [1990] 1 HKC 377, at 380 B-C. Such an application to release restrained assets to meet those expenses has been subject to close scrutiny of the court: eg Secretary for Justice v CKS; Choi Kong and Wong Wai Hung.

Position of unsecured judgment creditors

32.  Two issues arise in relation to unsecured judgment creditors:

(1) Whether an unsecured judgment creditor has priority over the funds subject to a restraint order; and

(2) Whether the court has power to examine the circumstances leading to the judgment obtained.

Issue (1): Whether an unsecured judgment creditor has priority over the restrained funds

33.  Effectively this is a question of whether the court has power to vary a restraint order to meet a judgment debt.  The written submission of Ms Lam purported to rely on German law but, during oral submission, counsel on both sides agree that it is Hong Kong law that is applicable to the question of priority.

34.  Section 11of Schedule 2 to MLAO is relevant:

“(1) The following subsections apply to the power conferred on the Court of First Instance by sections 7 to 10, or on a receiver appointed under section 7 or 9 or pursuant to a charging order.

(2) Subject to subsections (3), (4), (5) and (6), the powers shall be exercised with a view to recovering property which is liable to be recovered under an external confiscation order registered under section 28 of this Ordinance or, as the case may be, with a view to making available for recovery property which may become liable to be recovered under an external confiscation order which may be made.

...

(6) In exercising those powers [under sections 7 to 10], no account shall be taken of any obligations of the defendant or of the recipient of any such gift which conflict with the obligation to satisfy the external confiscation order.”[1] (emphasis added)

35.  Two lines of authorities from the UK flow from this section.  One forbids applying the restrained assets to satisfy a judgment debt:  Re W, (1990) Times, 15 November; the other permits it: Re Peters [1988] 3 All ER 46; Re X [2004] 3 All ER 1077.

36.  In Re W, (1990) Times, 15 November, Buckley J refused to vary a restraint order so as to permit payment even of a bona fide judgment debt and where the restrained assets remained available in excess of the statutory minimum for a confiscation order to be made and sufficient to repay the applicant and another victim.  In interpreting the parallel of section 11(6), he held:

“... Assuming that ‘obligation’ includes debts, the satisfaction of the confiscation order takes priority. As ‘obligations’ is given no special meaning in the definition sections of the Act, the assumption is justified. Support for this view of the legislative purpose is also to be found in the provision concerning receivers, realization of property and priorities on bankruptcy in, for example, sections 78, 79, 80, 81 and 84.

Mr Stephens, for ‘Mrs W’, drew my attention to In re Peters [1988] 1 QB 871, [1988] 3 All ER 46, and the analogy there drawn with Mareva injunctions. He submitted that under that jurisdiction the court would permit bona fide debts to third parties to be paid as they fell due. There is one fundamental difference between the two jurisdictions which did not concern the court In re Peters but which is vital here. The object of Mareva injunctions is not to give any priority or advantage to the plaintiff over other creditors of the defendant. The provisions to which I have referred in the 1988 Act do give priority to the satisfaction of the confiscation order at least over general creditors. If that is the ultimate purpose of the Act, it must be wrong to make any order at an intermediate stage which might thwart such purpose, quite apart from section 82(6).” (Page 3)

37.  On the other hand, in Re X [2004] 3 All ER 1077, Davis J (following Re Peters [1988] 3 All ER 46) declined to follow Re W,and came to a contrary view.  In Re X, one Z Ltd applied for variation of a restraint order to seek payment for goods sold and delivered.  The receivers had sufficient funds to meet the payment.  However, counsel for the Customs and Excise (“the claimant”) who obtained the restraint order contended that (i) the court was not empowered to pay general creditors in priority over the interests of the Crown which has obtained the restraint order as it would defeat the statutory purpose of making available the realisable property with a view to satisfying a confiscation order; (ii) that the debt claimed by Z Ltd was not legitimate or bona fide commercial trading.  Davis J declined to follow Re W and held that the court did have jurisdiction to vary the restraint order in favour of unsecured creditors who were plainly entitled to apply as a “person affected”, even if that would mean reducing the restrained assets below what was likely to be required to meet a future confiscation order.  The bar from taking into account any obligations of the defendant under the equivalent of section 11(6) of Schedule 2 to the MLAO only applies where a confiscation order has actually been made:

“20. … First, as I have said, s 77(1) is phrased in wide terms and the generality of that subsection is preserved by sub‑s (2) and by the unfettered discretion to vary conferred by sub‑s (6). Second, while it is the case that the powers conferred by s 77 are subjected to the terms of s 82, it is to be noted that s 82(2) requires that the powers under s 77 shall be exercised ‘with a view to’ making available for satisfaction of any confiscation order the value of the realisable property. I agree with Mr Davies' submission that the words ‘with a view to making available’ are not to be read as though they said ‘to make available’. The phrase ‘with a view to’ in this particular statutory context, in my judgment, introduces a degree of elasticity. Third, s 82(6) provides that no account shall be taken of any obligations of the defendant which conflict with the obligation to satisfy the confiscation order. But it is to be noted that sub‑s (6) does not, unlike s sub‑s  (2), include the words ‘or as the case may be, any confiscation Order that may be made’. Thus sub‑s  (6) only applies, and is only designed to apply, where a Confiscation Order has actually been made; not at an earlier stage. Indeed, that has been authoritatively decided by the Court of Appeal in the case of re Peters [1988] 1 QB 871: see in particular the judgment of Lord Donaldson of Lymington MR at page 879 B to C.

21. … In my view, however, what is important to bear in mind is that there is a clear distinction between the position after a confiscation order has been made and the position before one has been made. A confiscation order is made after conviction. Before conviction there is a presumption of innocence. The person who is the subject of the restraint order may be acquitted. It is difficult to think that Parliament could have intended to restrict the court's powers as a matter of jurisdiction in the way now contended for when the consequence might be the bankruptcy or ruin of the individual concerned before he has even been tried. That, indeed, to my mind is one explanation for the distinction between the wording of s 82(2) and s 82(6).

22. Moreover, I would draw attention to s 82(4). The wording of that section is apt to extend to debts, given the wide definition of the word ‘property’ in s 102.  It seems to me that, on its natural reading, sub‑s (4) in itself indicates that the court is required to have regard to the position of creditors who may be trying to recover the debts owed to them by the person the subject of any restraint order.

23. … The court certainly is required, I accept, to take into account what in re Peters was called a ‘legislative steer’ to the effect that the value of the realisable property should be maintained with a view to making it available to satisfy any confiscation order that may be made. That will always, indeed, be a highly material and important consideration. But it is not, in my view, and contrary to Mr Barnard's submissions, a conclusive consideration in all cases.”

38.  In that case, having regard to all the circumstances and taking due account of the legislative steer given by section 82 and the underlying purpose of the 1988 Act, and also taking due account of the fact that there had been no convictions and no confiscation order made, (at para 34), Davis J declined to vary the restraint order to permit payment to Z Ltd.  The full analyses of the facts were not set out but from the arguments of counsel for the claimant, that was probably due to the fact that the claimed debt was not the result of legitimate or bona fide trading (at para 6).

39.  Re W and Re X were considered in Serious Fraud Office v Lexi Holdings plc and another [2009] 1 All ER 586 but the English Court of Appeal did not state which of the two was more preferable.[2] 

40.  Re W was followed in Hong Kong in Secretary for Justice v 3 Respondents, HCMP 2562/2011, 18 April 2012 where Deputy Judge P Li (as he then was) refused to vary a restraint order to enable satisfaction of a judgment debt and the resultant garnishee order absolute, despite the existence of documentary proof that the applicant had transferred the loan amount from its own account to that of the 3^rd respondent. Deputy Judge P Li held that the applicant was an affected person.  There was no need to rely on Re W to establish the power to vary a restraint order. However, he found the reasoning of Buckley J in Re W to be relevant and he agreed with it.

“20. In refusing the application to vary the restraint order. Buckley J stressed that the law gave priority to the satisfaction of the confiscation order over general creditors. It would be wrong to make any order at an intermediate stage which thwarts such purpose. It is only when the value of the remaining realizable property was clearly enough to satisfy any reasonable confiscation order that a variation would be considered. As the Crown Court would have to consider more carefully the likely amount of any confiscation order in due course, the judge did not feel right to allow any variation which could have the effect of substantially undermining a potential confiscation order.

21. I entirely agree with the above reasoning.

…

24. At this stage, there is no way this court could estimate the likely amount of the prospective confiscation order in this case. There is a reasonable chance that the ‘benefit’ could be larger than the total balance in the accounts of R2 and R3.

25. As the garnishee order absolute in favour of GI has no priority over the prospective confiscation order, variation of the existing restraint order to release “the Account” may pre-empt the prospective confiscation order. ”

Apparently, Re Peters and Re X were not drawn to the attention of Deputy Judge P Li. I have been informed by Ms Lam that SJ v 3 Respondents is under appeal.

41.  Likewise, the court in HKSAR v Ho Shue, HCMP 1493/1997, Deputy High Court Judge Lugar-Mawson (as he then was), 17 July 1997 also refused to vary a restraint order to settle an unsecured debt for the same reason that the restrained funds should be preserved to satisfy a confiscation order.

42.  In the face of these 2 lines of authorities, Ms Lam seeks to persuade me in ground A of her objections that where there is already a restraint order in force before the obtaining of a judgment debt, the court should not make an order which is in conflict with an existing prior order.  She relies on Re Peters [1988] 3 All ER 46, at 51J:

“In so far as there is a conflict between the court order made in the divorce proceedings and the restraint order made under the 1986 Act, it should have been resolved in favour of maintaining the restraint, leaving the son’s education to be continued within the limits provided for by the order of Nolan J.”

43.  With respect, that is a misreading of Re Peters.  If the court cannot make an order which is in conflict with a prior restraint order, there will be no need at all for the legislative provisions on variation or discharge.  Re Peters recognized that.  Hence, variation of the restraint order to permit payment out for the school fees of the defendant’s son was not disturbed. However, payment of a sum (under a consent order in divorce proceedings of the defendant) representing capitalization of the son’s school fees was disallowed, as it was anticipatory discharge of liability.

44.  I prefer the reasoning of Re Peters and Re X, which is in line with the wording in section 11(6).  Apparently, Tong J also relied on those 2 cases in his Decision and took the same view:

“16. I agree that in terms of variation of restraint order, considerations would be different before and after a confiscation order has been made, and that the court has a clear discretion in the former situation.”

45.  Sections 12 and 13 to Schedule 2 of the MLAO also supports the view that the intention of the legislation is not to give priority to unsecured creditors:

“12(1) Where a person who holds realisable property is adjudged bankrupt –

(a) property for the time being subject to a restraint order made before the order adjudging him bankrupt; and

(b) any proceeds of property realised by virtue of section 7(7) or 9(5) or (6) for the time being in the hands of a receiver appointed under section 7 or 9,

are excluded from the property of the bankrupt for the purposes of the Bankruptcy Ordinance (Cap.6).”

“13(1) Where realisable property is held by a company and an order for the winding up of the company has been made or a resolution has been passed by the company for the voluntary winding up, the functions of the liquidator (or any provisional liquidator) shall not be exercisable in relation to-

(a) property for the time being subject to a restraint order made before the relevant time; and

(b) any proceeds of property realised by virtue of section 7(7) or 9(5) or (6) for the time being in the hands of a receiver appointed under section 7 or 9.”

46.  It is clear from these 2 sections that where a person is made bankrupt or a company is in the course of winding up, assets already subject to a restraint order are not treated as falling within the bankrupt or company’s estate insofar as unsecured creditors are concerned.

47.  In summary, the answer to Issue 1 is in the negative.  An unsecured judgment creditor has no priority over the restrained funds.  This is despite his having obtained an order by consent: Re Peters [1988] All ER 46; or even a garnishee order absolute: Secretary for Justice v 3 Respondents, HCMP 2562/2011, Deputy Judge P Li (as he then was), 18 April 2012.  The court has power to vary the restraint order to meet a judgment debt.

Issue (2): Whether the court has power to examine the circumstances leading to the judgment obtained

48.  The court should be satisfied as to the bona fides of the judgment debt.  In exercising its discretion, the court should not be precluded from examining the circumstances leading to the judgment.  Otherwise, by collusion between an applicant and a defendant to the criminal proceedings, the restrained assets might be irretrievably lost. Collusion may take various forms, eg with a defendant actively consenting to judgment for a bogus claim:Kanematsu-Gosho (H.K.) Ltd & Another v Lee Boon-chean & Others [1986] HKLR 59 or deliberately refraining from taking part in the proceedings leading to a default judgment against him.

49.  In Kanematsu-Gosho, the plaintiffs sued the defendant company for return of money upon a consideration that had wholly failed; alternatively for damages for fraud against another defendant Mr Kao.  The plaintiffs obtained a Mareva injunction against the defendants.  On the following day, one Mr Lee sued Mr Kao for payment of a loan under an IOU.  Within 3 days there was a writ by Mr Lee, service of the writ and Mr Kao’s signing of a consent summons.  Mr Lee then sought to garnishee Mr Kao’s account.  The plaintiffs sought leave to intervene in the garnishee proceedings on the ground that the judgment was obtained in collusion and there was no real indebtedness by Mr Kao at all.  It was said that Mr Lee and Mr Kao were closely connected with the 1^st defendant company. The judgment was obtained with indecent haste by consent.  Mr Lee was out of jurisdiction and if the money were released it would be taken irretrievably out of the jurisdiction.  No explanation had been offered by Mr Lee or Mr Kao as to the loan.  All that the plaintiffs could do was to point to a number of matters which they said gave rise to suspicion and a case for enquiry.  In considering what was “necessary for the purpose of justice”, Hunter J held (at page 65 H-I):

“35. … the significance of the judgment must, I think, depend upon the nature of that judgment, and the nature of the enquiry which led to that judgment. Having regard to this history and the nature of this judgment, it seems to me that it would be absurd for the court to treat the judgment here as anything like decisive, because the simple fact remains that judgment debts can be contrived as readily as any other debts….”

The court took the view that the circumstances of the consent judgment were so dubious that the application for a garnishee order absolute should be adjourned to investigate the bona fides of the purpose of the debt to avoid collusion of the defendant and the judgment creditor.

50.  If the court has such power in civil proceedings between private litigants, it should all the more have such power in the case where a restraint order has been imposed. This will ensure that the purpose of a restraint order is not frustrated and that Hong Kong can properly discharge its obligations in providing legal assistance to foreign governments in the recovery of proceeds of crime.

51.  It makes no difference that the defendant in Kanematsu-Gosho consented to judgment whereas Eurostock let judgment go by default.  A default judgment is well-known to be entered by administrative action rather than after a full judicial enquiry.  An applicant should not be permitted to get round the stringent conditions for variation under MLAO by inaction.

52.  The answer to issue 2 is in the affirmative.

Application of the principles to the facts of this case

53.  The SJ has, by letters dated 16 and 31 August 2011, very properly invited IAA to support its case on the intended stock purchase and its connection with the €380,000 by documentary evidence. Nothing beyond what had been stated in IAA’s affirmation in HCMP 1346/2010 was provided.

54.  In the Decision, Tong J has examined the bona fides of the underlying transaction.  He held that:

(i) The plaintiff has failed to adduce evidence which satisfied the court of the nature and purpose of the transfer of the sum of €380,000;

(ii) Mr Pelfania was not shown to be an affected party and therefore had no locus regarding the money in the account; but he might claim against Eurostock for damages; and

(iii) Mr Pelfania had no priority over the money and if there was satisfactory evidence to prove the nature and purpose of the fund transfer, Tong J would refuse to exercise discretion in his favour.

55.  The “change of circumstances” since the Decision can be summarized as follows:

(i) The legal labels for IAA’s applications to the court have changed.  Before Tong J, IAA was an affected party who relied on trust and unjust enrichment.  In the writ action, IAA as plaintiff sought to recover a liquidated sum.

(ii) IAA has now got a default judgment.

(iii) IAA produced 2 payment debit advices showing the stated purpose of the transfer of €380,000 was related to an “Escrow Contract SCI/DCI” and “Final Part Escrow Contract Purchase SCI/DCI” respectively. 

(iv) SJ confirmed that there was no indication that the €380,000 directly or indirectly originated from the alleged criminal offences.

(v) The period for which funds were transferred into and out of the SCB Accounts was said to be from December 2009 to 11 March 2010; whereas in HCMP1346/2010 it was December 2009 to April 2010.  The deposits by IAA into Eurostock’s account occurred beyond the alleged money laundering period.

56.  Item (i) does not assist IAA.  The court looks at the substance and not form.  An applicant cannot, by changing the legal label, circumvent the hurdles under MLAO and remain evasive as ever.

57.  Item (ii) does not assist IAA.  An unsecured judgment creditor has no priority for the reasons given above.

58.  Item (iii) is not new.  It remains the position that the Escrow Contract was never produced in evidence.  There was never any explanation as to why the transaction fell through.

59.  Item (iv) is not new. The point has been advanced before Tong J (para 3 of the Decision).  In any case, Tong J has not proceeded on the basis that IAA/Mr Pelfanian were suspects in the fraud.  It was the lack of supporting documents for the actual purpose behind the transfer of the €380,000 that Tong J was concerned with. (para 12 of the Decision)

60.  Item (v) is not conclusive.  The investigation of the German authorities is still ongoing.  Tong J’s Decision was not premised on the period of money laundering either.

61.  Whilst it was not an abuse of process for IAA to issue the writ and obtain judgment, there has been no substantial change of circumstances to justify a different order from Tong J’s.  The position remains that Eurostock only has a nominal presence in Hong Kong.  Its sole director and shareholder is a holder of a Romanian passport and has a residential address in Romania.  The defendant’s registered office is that of a secretarial company which served as a corporate secretary for the defendant.  Upon resignation of the corporate secretary in July 2010, the defendant has not filed any return for the year ending May 2011.  The writ would have been served on the registered office where one cannot be sure that would have come to the actual notice of Eurostock.

62.  Having examined the background leading to the default judgment, one finds great doubt as to the bona fides of the debt.  Notwithstanding that there are no other proceedings on foot for enforcement or distribution of Eurostock’s assets, or no dealing by Eurostock was needed to effect enforcement (Re Ling Ex P Enrobook Pty Ltd, above), I find there to be no good reason for releasing the restrained funds to IAA.  Enabling IAA to enforce a default judgment by way of garnishee proceedings on the restrained funds will open the way for abuse and frustrate the Restraint Order before the foreign criminal proceedings come to a conclusion.

63.  In ground B of SJ’s objections, Ms Lam submits that apart from refusing to exercise its statutory discretion under Order 49, the court may invoke its inherent jurisdiction to stay the proceedings for enforcement of the default judgment in suitable cases, meaning those situations in which the inherent jurisdiction of the court is required to be exercised so as to avoid injustice, prevent abuse, preserve the dignity of the court or to facilitate the administration of justice: Credit Lyonnais v SK Global Hong Kong Ltd [2003] 4 HKC 104, at para 2.

64.  Whilst the court has such inherent jurisdiction, it is not necessary to rely on it in this case.  The court already has sufficient power under MLAO to consider whether to rfelease the restrained assets to satisfy IAA’s judgment. It is not necessary to impose a general stay that will bar IAA from enforcement of the judgment where (though unlikely) it can locate other assets belonging to Eurostock.

65.  The above is sufficient to dispose of this application but in deference to counsel, I proceed to deal with other specific ground posed by counsel.

That a judgment creditor will step into the shoes of the defendant as a judgment debtor and be equally subject to the restraint

66.  Ms Lam’s arguments under Ground C run thus: a judgment creditor will step into the shoes of the defendant as judgment debtor and be equally subject to the restraint.  Hence, where a debt had been assigned before the applicant instituted garnishee proceedings, the court refused to make the garnishee order: Glegg v Bromley (1912) 3 K.B. 474, at 484; Re General Horticultural Co, ex p Whitehouse (1886) 32 Ch D 512, at 515.

67.  Those 2 authorities have no application here because SJ is not in the position of an assignee.

Other Matters

68.  Mr Ng SC comments that the Restraint Order has been issued for 2 years and there may be (but not definitely) an application for a confiscation order and it is likely to take 1 or 2 years for such an order to be obtained.  He queries whether public policy requires freezing the funds for another estimated 2 years.

69.  In my view, while this time frame may seem long, it must not be forgotten that the crimes involved were complex and spanned over several jurisdictions including Germany, Hong Kong, New Zealand and Cyprus.  The investigation is ongoing.  As in all cases, whether a confiscation order will be applied for depends on the outcome of criminal prosecution and hence one can hardly say that definitely a confiscation order will be made.  In any case, the fact that it may take 4 years since the Restraint Order was first made to see if a confiscation order would be made was not sufficient in itself to persuade me to make an order in favour of IAA.

70.  Further, just the damage caused by one of the suspect companies alone is in the region of €27 million.  The funds currently in the SCB accounts are far below the damages (estimated at €300 million) suffered by the victim, the State of Hessen.  The release of €380,000 will further deplete a major portion of the restrained funds.

Conclusion

71.  Order 49 is made subject to MLAO.  Under the MLAO, unsecured creditors have no priority over the restrained funds.  However, the court does have discretion to vary a restraint order to meet an unsecured judgment debt: Re Peters and Re X.  In exercising its discretion, the court may examine the circumstances leading to the judgment debt.  A judgment creditor (whether the judgment was obtained by consent, by default or otherwise) has to satisfy the court of the bona fides of the debt.

72.  The bona fides of the underlying purchase of stock option are in doubt. The obtaining of a default judgment does not carry IAA’s case further.  There has not been substantial change of circumstances since the Decision of Tong J. I decline to permit release of funds under the Restraint Order to meet the judgment debt.  The garnishee order nisi is discharged.

73.  Costs should, on a nisi basis, follow the event and be to the SJ to be summarily assessed on 29 October 2012 on the papers.  No attendance is required. SJ shall file and serve his statement of costs by 19 October 2012. The plaintiff shall file and serve its grounds in opposition by 26 October 2012.

74.  I thank counsel for their able arguments.