BLOOMSBURY INTERNATIONAL LTD v. NOUVELLE FOODS (HONG KONG) LTD

HCCT 109/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.109 OF 2002

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J U D G M E N T

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I.       Introduction

1.  Nouvelle owes Bloomsbury some £162,216 under an arbitration award dated 5 December 2002.  Nouvelle having failed to pay, Bloomsbury applied for Mr. Ng Joo Siang (NJS) and Mr. Ng Joo Puay (NJP), former directors of Nouvelle, to be examined before the master pursuant to Order 48 Rule 1. 

2.  During the hearing by the master, a dispute arose over the scope of the examination.  That dispute has been referred to me for determination under Order 48, Rule 1(3).

3.  The debate between the parties concerns the following general issues:-

(1)     Whether Bloomsbury can only ask questions about debts, property or means which are currently owing or available to Nouvelle.

(2)     Whether Bloomsbury can ask questions about Nouvelle's rights of action against third parties.

(3)     Whether Bloomsbury can ask questions with a view to assessing whether it can personally bring proceedings against NJS, NJP or any other directors of Nouvelle.

(4)     Whether NJS or NJP can be compelled to disclose information which they acquired in their capacity as directors or officers of companies other than Nouvelle.

II.      Background

4.  Nouvelle originally formed part of the Pacific Andes group.  The Group's parent company is Pacific Andes International Holdings Ltd. (PAIHL), a Bermuda company. 

5.  Nouvelle was described in PAIHL's Annual Report for the financial year ended 31 March 2001 as a principal subsidiary of the Group.  When it belonged to the Group, Nouvelle's shares were held by Nouvelle Foods International Ltd. (NFIL) and Pacific Andes International Holdings (BVI) Ltd. (PAIBV).  Both NFIL and PAIBV are BVI companies.

6.  On 27 March 2001 NFIL and PAIBV sold their shareholdings in Nouvelle to Westerham Trading Ltd. and Best Target Development Ltd. respectively.  Both Westerham and Best Target are BVI companies.  The consideration for the share sales to Westerham and Best Target was $1 each.

7.  Nouvelle's balance sheet as at 27 March 2001 disclosed $276,419 of current assets: tax recoverable $26,103; bank balance and cash $250,316.

8.  Nouvelle's income statement for the period from 1 April 2000 to 27 March 2001 showed that the company had incurred certain expenses ("the expenses"): agency fee $1,231,028.65; administration fee $1,651,516.

9.  NJS and NJP resigned as Nouvelle's directors on 27 March 2001.  They continue to be directors of PAIHL.

10.  Nouvelle's new directors are Westerham and Cheng Po Ming.  Nouvelle's address and that of Cheng, as supplied to the Companies Registry, is 3rd Floor, 63 Shek Pan Wan Road, Aberdeen.  That address does not seem to exist.

11.  Westerham has been struck off the BVI register of international business companies.  Attempts to contact Best Target have met with no success.

12.  Nouvelle initially participated in the arbitration brought by Bloomsbury.  By letter dated 27 August 2001 Nouvelle's solicitors at the time when the arbitration commenced told Bloomsbury that the shareholders from whom instructions had previously been received no longer owned the company.  From then on, Nouvelle ceased to play any part in the arbitration.

13.  Bloomsbury has been granted leave to enforce the arbitration award as a judgment of the Court.

III.     Discussion

14.  Order 48, Rule 1 provides:-

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

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

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

         and the Court may also order the judgment debtor or officer to produce any books or documents in the possession of the judgment debtor relevant to the questions aforesaid at the time and place appointed for the examination.

....

(3)     Any difficulty arising in the course of an examination under this rule before the Registrar or officer, including any dispute with respect to the obligation of the person being examined to answer any question put to him, may be referred to a judge and he may determine it or give such directions for determining it as he thinks fit."

15.  The starting point to understanding what Bloomsbury can or cannot do in the course of examination must be the proper construction of Order 48. 

16.  Both counsel before me (Mr. Duncan SC for Bloomsbury and Mr. Burns for Nouvelle) agree that Order 48 must be construed against the touchstone of its purpose.  That purpose (both counsel accept) is "to enable a judgment creditor to come to an informed decision as to how best to enforce the judgment which he has obtained".

17.  I shall initially deal with the general issues which have been identified in Section I of this Judgment.

18.  The parties further wish me to comment specifically on whether Bloomsbury can ask questions on the following topics:-

(1)     Were the agreements of 27 March 2001 to transfer Nouvelle's shares bona fide arms-length transactions?

(2)     What were the circumstances surrounding the sale of the shares to Westerham and Best Target?  In particular:-

         (a)    What was the purpose of the share transfer?

         (b)   What relationships (if any) did Nouvelle's former directors have with Westerham and Best Target?

         (c)   What do Nouvelle's former directors know of the ownership and control of Westerham and Best Target?

(3)     Were PAIHL and its principal subsidiaries directed and managed by the same person(s) as at 26 March 2001?

(4)     What happened to Nouvelle's current assets (in particular, tax recoverable and bank balance) shown on the 27 March 2001 balance sheet?

(5)     What happened to Nouvelle's other assets (in particular, goodwill and customer/supplier lists) as around 27 March 2001?

(6)     Whether payment of the expenses were bona fide payments and (if so) to whom and for what consideration were the expenses paid?

19.  Having determined broad principles in my discussion of the general issues, I shall accordingly conclude by commenting on the specific topics put forward.

A.      Issue 1: Whether Bloomsbury can only examine on Nouvelle's current debts, property or means narrowly defined

A.1   The proper construction of Rule 1(1)(b)

20.  Mr. Burns submits that, on its plain construction, Order 48 only allows a creditor to ask about debts, property or means currently available for enforcement of a judgment debt.  This means (Mr. Burns says) that one cannot examine on claims which a debtor might be able to bring in the future against others for the recovery of property or unliquidated amounts. 

21.  Mr. Burns accepts that under Rule 1(1)(a) Bloomsbury might ask about debts which have fallen due to Nouvelle and for which Nouvelle can (if those debts remain unpaid) sue.  But, where a claim by Nouvelle would not involve payment of a debt, Mr. Burns is adamant that Rule 1(1)(b) does not permit examination on such claim.

22.  I disagree with Mr. Burns.

23.  Rule 1(1)(a) allows a debtor to be examined on "what debts are owing".  That plainly means claims for liquidated sums which are presently due and owing from others.

24.  Rule 1(1)(b), on the other hand, refers to "any and, if so, what other property or means of satisfying the judgment or order".  This second limb is broadly worded.  I do not see why the expression "property" should be read narrowly as excluding claims for unliquidated damages or for restitution of property of whatever nature.  Such claims would be choses in action and, although intangible, would still constitute "property" in law.

25.  My reading of Rule 1(1)(b) is reinforced by the word "means" in the provision.  That word obviously has a broad scope.  It must refer to something more than just property rights.  Otherwise its inclusion in Rule 1(1)(b) would be otiose.  A creditor must thereby be entitled to explore in examination whether a debtor has "any means" whatsoever of satisfying the judgment debt. 

26.  If "property" did not include rights of action as Mr. Burns contends, the pursuit of a claim for unliquidated damages or for money's worth would still be a "means" by which the debtor could raise cash to satisfy a debt.

A.2    Whether Bloomsbury's construction of Rule 1(1)(b) is practical

27.  Mr. Burns argues that Bloomsbury's wide reading of "property" to include rights of action other than for debts, does not make practical sense.

28.  First, a debtor (Mr. Burns argues) may decide not to commence any necessary proceedings and cannot be forced to do so. 

29.  Second, even where proceedings are started, they may not (Mr. Burns submits) bear fruit.

30.  Third, if a creditor decides to petition for a debtor's winding-up on the basis of testimony received, Mr. Burns suggests that would still not help.  It is true tha a liquidator may commence requisite proceedings to enforce the debtor's rights.  But that (Mr. Burns contends) cannot help the creditor because "on the liquidation of the Judgment Debtor, execution on the judgment will be stayed".

31.  I am not persuaded by Mr. Burn's reasoning.

A.2.1 Practical objection 1: No action commenced

32.  Whether or not a debtor decides to commence proceedings is beside the point. 

33.  Assume, for example, that a debtor is unwilling to sue another on an unliquidated claim.  It would nonetheless be open to a creditor to apply to the Court under Order 51 for the appointment of a receiver to pursue the claim by way of equitable execution. 

34.  Thus, Hong Kong Civil Procedure 2004 comments (at 51/1/2 (p.744)):-

"There are various interests in property to which a judgment debtor may be entitled, yet which cannot be taken in execution under any of the processes specified in these rules.  Such interests may generally be reached by the appointment of a receiver; supplemented, if necessary, by an injunction restraining the judgment debtor from dealing with the property."

35.  A creditor should accordingly be allowed in examination to explore the possibility of the debtor's rights of action being used to satisfy the outstanding debt.  This would conform with the objective of Order 48, namely, to provide the creditor with the information needed to assess:-

(1)     the nature of the debtor's claim against a third party; and,

(2)     whether the claim can viably be used to satisfy judgment through some enforcement procedure open to the creditor, including (say) appointment of an equitable receiver or liquidator.

36.  Mr. Burns stresses the use of the present tense "has" in Rule 1(1)(b).  There is the suggestion that "has" implies that Bloomsbury cannot ask about actions which might be brought in the future. 

37.  But I do not think this is correct.  To see why, consider 3 situations.

38.  In situation 1, a debtor D has a right of action against a third party T for the return of some property P. 

39.  D's right is an existing right or present chose in action.  The fact that D has not commenced proceedings against T for the restitution of P does not make D's right any less an existing right. 

40.  D's right of suit constitutes a present asset which would have an economic value.  In appropriate circumstances, the asset could be sold or assigned for valuable consideration. 

41.  Plainly, a creditor should be allowed to examine to determine whether it is possible to cause the right of action either to be enforced by (say) an equitable receiver or assigned for some amount.

42.  In situation 2, assume that, in exchange for valuable consideration, T has agreed to pay D a sum X on the happening of an event E.  E has not yet transpired and may or may not occur. 

43.  Here the agreement between D and T is no less an existing chose in action, even though D cannot now sue (and has not sued) T for X.  By its contract with T, D holds an asset.  It may be possible to assign or trade the contract for money's worth. 

44.  Where E is likely to occur and the price of assignment is low relative to X, many may be prepared to buy the right and risk E not happening. 

45.  If D should go into liquidation, a liquidator could raise cash for distribution among creditors by assigning the contingent right pursuant to Companies Ordinance (Cap.32) (CO) s.199(2)(a). 

46.  All of the foregoing would be the case in situation 2, regardless of whether D has commenced proceedings against T or can even sue T because E has not yet occurred.

47.  In situation 3, D is negotiating a potentially lucrative deal with T.  No agreement has yet been received.

48.  Here D has no concluded contract.  D may eventually, if the negotiations are successful, have the means to earn money with which to discharge the judgment debt.  But, for the moment, D has no such means.  D cannot sue T for anything and has not done so.

49.  In situation 3, I think that a creditor would not be entitled to examine D about negotiations with T.  The creditor cannot do so, for the simple reason that D has no "property" (chose in action) or "means" arising out of pure negotiations.  The fact that D has not commenced proceedings against T would be irrelevant.

50.  Therefore, I do not accept that the fact that Nouvelle has not commenced proceedings constitutes any obstacle to questions on rights of action available to Nouvelle.  On analysis, the commencement of proceedings is not a relevant factor.  The pertinent question is whether there is or is not a currently existing chose in action.

A.2.2 Practical objection 2: No fruits

51.  The possibility of failure on an action against a third party cannot be a valid ground for refusing Bloomsbury's questions. 

52.  Order 48 allows Bloomsbury to assess whether it is worthwhile to take steps to initiate proceedings against relevant third parties.  Bloomsbury may make a wrong assessment.  If so, it will probably have to bear the penalty in the form of the costs of the abortive proceedings.  Consequently, it is important that Bloomsbury be given latitude to explore the nature of Nouvelle's rights of action against third parties in order that Nouvelle can come to a truly informed decision of the prospects of any proceedings.

A.2.3 Practical objection 3: No solution in liquidation

53.  Applying for the liquidation of a debtor may be a means of obtaining satisfaction for a judgment debt. 

54.  If the answers to an Order 48 examination suggest that the debtor has a number of potentially fruitful claims, the creditor may decide to apply for the debtor's liquidation.  It may so act in the hope of persuading the liquidator to commence actions, or to authorise actions to be commenced, against third parties for unliquidated damages or restoration of property in which the debtor has an interest.

55.  Obviously, the more that a liquidator can raise from any proceedings started, the greater the prospect of the creditor's debt being satisfied.  This would be the case regardless of the fact that on liquidation litigation by third parties against the debtor are stayed. 

56.  Actions against the debtor are stayed to prevent a free for all where only the swiftest creditors at obtaining judgment against an insolvent debtor obtain payment.  A stay merely ensures that the proceeds of liquidation are distributed pari passu among all creditors.  Depending on what becomes available for distribution from pursuit of viable rights of action, liquidation could be a "means" available in respect of a debtor by which a creditor obtains full or partial satisfaction.

57.  Consequently, questions to determine the nature of available rights of action with a view to assessing (among others) the benefits in winding up the debtor should fall within the identified purpose of Order 48.

A.3    Case law

58.  Mr. Burns cites Watkins v. Ross (1893) 68 LT 423, McCormack v. National Australia Bank Ltd. (1992) 106 ALR 647 and Hua Chiao Commercial Bank Ltd. v. Alpha Plus International Development Ltd. [2001] 2 HKC 54 in aid of his submissions. 

59.  I do not think that the cases support his contentions.  I shall briefly consider each case.  I shall also comment below on National Australia Bank Ltd. v. Ilana Elenka Stern and another [2000] FCA 588, a case relied on by Mr. Duncan in rebuttal of Mr. Burns.

A.3.1 Watkins

60.  In Watkins the creditor obtained judgment against the debtor for £600.  The debtor had deposited company X's bearer bond (having face value £1,000) with X as security for a loan of £300.  The creditor had commenced an action against X on the bond.  In that action X had been given unconditional leave to defend on the basis that the bond had not been validly issued.

61.  The creditor later sought to examine the debtor under the version of Order 48 at the time (then known as Rule 32).  The creditor wished to ask questions on the validity of the bond.  The debtor refused because the questions were designed for use in the creditor's action against X.  The Divisional Court agreed.  The creditor appealed.

62.  Lord Esher MR thought that the creditor was fully entitled to ask the debtor about the bond.  He said (at 424):-

"The defendant [debtor] had, in my opinion, an interest remaining in him under that document [the bond] which brings the case within rule 32, and I think that the rule requires a defendant to state, not merely the name of his debtor and his property, but to give also a description of his assets sufficiently to enable the plaintiff to know what they are."

63.  But in Lord Esher's view it was not open to the creditor to ask about the validity of the bond.  He stated (at 424):-

"I think, however, that the plaintiff [creditor] cannot require from the defendant more knowledge of the nature of this debenture bond.  He requires more information as to its effect, and says that he is entitled to know all that the defendant knows about it to enable him to determine whether or not he will go on to enforce the bond, that is to say that, in the words of the judgment of Jessel, MR, in Republic of Costa Rica v. Strousbourg [16 Ch Div 8], the defendant must 'give all necessary particulars to enable the plaintiff to recover' the amount due upon the bond.  I think that what the plaintiff seeks to know in this case goes rather beyond the limit of the rule."

64.  Nonetheless, Lord Esher believed that whether or not the creditor's questions should be allowed was a matter for the discretion of the tribunal overseeing the examination.  He said (at 424):-

"In this case I think that the Divisional Court might, if they had thought fit to do so, have made an order upon the defendant to give a further description of this document....  I am satisfied that it is a matter of discretion whether an order to answer further will be made.  The Divisional Court has exercised a discretion in this matter, and we cannot disagree with them.  The appeal must therefore be dismissed."

65.  Lindley LJ explained the purpose of the version of Rule 32 as follows (at 424):-

"The object of this rule is plain enough; it is to make a judgment debtor tell what assets he has got to satisfy the judgment.  Without drawing any hard-and-fast line, we can see what is meant by the rule from its object."

66.  Lindley LJ noted that the debtor retained a reversionary interest in the bond.  The bond was the debtor's asset and he "was rightly asked about it".  What the creditor could not do under the rule was to ask the debtor questions on the validity of the bond, so as to strengthen the creditor's case against X.

67.  But, echoing Lord Esher MR, Lindley LJ believed that, whatever his opinion on the matter, the admissibility of the creditor's question was essentially a matter for the discretion of the tribunal hearing the examination.  There could be no "hard-and-fast" rule. 

68.  Lindley LJ stated (at 424):-

"Now, the plaintiff wants to examine the defendant upon that point.  I think that would be pushing the rule too far.  If, indeed, the Divisional Curt had ordered the defendant to answer further, we should not have said that they were wrong in so doing; but the Divisional Court thought that the plaintiff was going too far in the questions he desired to have answered, and I agree with them."

69.  Kay LJ agreed with Lord Esher and Lindley LJ (at 425):-

"I think that it was an attempt to push the rule too far.  The object of the rule is to enable a judgment creditor to get discovery from a judgment debtor as to what assets he has got to satisfy the judgment.  These questions go beyond that, and as the court, in the exercise of its discretion, has refused to order the defendant to answer them, I cannot see how we can interfere."

70.  The Court of Appeal's reasoning is puzzling.  It acknowledged that Order 48 allows a creditor to have discovery relating to a debtor's property and means.  Nonetheless, it felt that the creditor could not examine with a view to assessing the merits of its action against X on the bond.  But why not?

71.  If a debtor is allowed to withhold important information, a creditor may get a false picture regarding the prospects of enforcing against a particular asset.  Acting on that wrong impression, the creditor might embark on proceedings which ultimately fail.  All the time and money wasted on enforcement could have been saved if the debtor had been compelled to state what he knew.  In those circumstances, since the debtor's wrongful non-payment is the original cause of the creditor's difficulties, it is hard to see why examination of the debtor should be confined in the way the Court of Appeal thought.

72.  Nor can the fact of the creditor having already started an action against X affect the analysis, contrary to what Lindley LJ seems to have suggested.  The creditor should still be entitled to information which will enable him to decide whether to proceed with the action or to cut losses.

73.  Still, whatever the ratio of Watkins, the Court of Appeal explicitly recognised that the issue before it was one where judges might reasonably hold differing views.  All 3 judges acknowledged that, if the lower court had held the creditor's questions permissible, they would not have interfered with the court's decision.

74.  This suggests that at the end of the day Watkins is of limited value as an authority. 

75.  There must be some line beyond which a creditor examining under Order 48 may not tread.  That line cannot be drawn with precision.  It is undesirable fully to articulate its boundaries.  That would needlessly constrain the flexibility inherent in Order 48.

76.  At one extreme, questions will clearly be directed at discovering information about a debtor's property and means.  Those should be within the bounds of Order 48.  At the other end of the spectrum, questions will be so obviously unconnected with a debtor's assets, as to be outside the purpose of Order 48.  In between will inevitably fall a large grey area of topics.  Whether a particular course of inquiry in the grey area falls within or without Order 48 should be left to the discretion and good sense of the tribunal hearing the examination to decide.

77.  That is the most that I derive from Watkins.  As far as I can see, it says nothing about whether current rights of actions are or are not a proper subject of Order 48 inquiries.

A.3.2. McCormack

78.  This case was brought under Order 43, an equivalent in the Australian Capital Territory of Hong Kong's Order 48.  The creditor proposed to examine the debtor about a deed of maintenance between the latter and his wife.  The creditor wished to determine whether the agreement was a transaction to defeat creditors. 

79.  The creditor's reasoning as summarised by the master hearing the examination was: "If [the deed] were set aside, ... property would then be available to satisfy the judgment debt".  In other words, "the judgment debtor would then have the means".  The master thought that this begged the question whether the debtor "now has means of satisfying the judgment".  The master concluded that the "nascent possibility" of setting aside the deed was not "some method presently available ... to satisfy the judgment debt".  The questions were disallowed.

80.  The creditor applied to Higgins J.  The appeal was allowed.  The debtor then appealed to the Full Court.

81.  The Full Court read the word "means" as having a wide scope (at 649):-

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

82.  For the Full Court, the difficulty with the creditor's case was that Order 43 only allowed an examination of the debtor's means and property.  It did not permit inquiry about means available to other parties for the satisfaction of the judgment debt. 

83.  The Full Court said (at 645):-

"Order 43, r,31 does not ... allow for a general, wide ranging inquiry into the financial transactions of the debtor.  The purpose of the examination is to ascertain from what sources the debtor may satisfy the judgment debt.  The term 'means' does not denote other possible methods by which the judgment creditor may obtain satisfaction of the debt.  It is the means of the debtor which are the subject of the examination.  Therefore, we would not agree with Higgins J.

The process of the Supreme Court ought not to be used as a form of pre-trial discovery to aid a judgment creditor to institute proceedings under the Family Law Act or under the Bankruptcy Act."

84.  The references to the Family Law Act and Bankruptcy Act appear to be to potential proceedings brought by the creditor personally under those statutes to set aside the deed.  But this is not clear from the report.

85.  Apparently, before the master, the creditor's counsel alluded to an application under s.83 of the Family Law Act "to vary the maintenance agreement, with the intent that the Family Court of Australia might order the retransfer of one or both of the properties or perhaps other assets" from the wife to the debtor.

86.  If s.83 only relates to an action by a party to the maintenance agreement (such as the debtor), then proceedings to re-distribute the assets assigned under the deed would provide a "means" (as defined by the Full Court) for the debtor satisfying the judgment debt.  The possibility of such re-distribution proceedings would squarely relate to the debtor's property and means.  The Full Court's decision would not make sense.

87.  It is only if the Full Court:-

(1)     regarded s.83 as enabling the creditor itself to mount an action directly against the wife; and,

(2)     assumed that was the creditor's sole motive for its proposed line of questioning,

that the reasoning in MacCormack would be internally consistent. 

88.  In such event, the examination contemplated would have concerned the creditor's right of action or means against the wife.  The questions would not have involved the debtor's means or rights to property as against the wife.

89.  As for the Bankruptcy Act, the report does not state what provision the Full Court had in mind or what exactly the creditor intended to do in connection with that statute.

90.  Interestingly, the Full Court also referred to the Property Law Act s.89(1).  This seems to allow "any person prejudiced" to avoid an assignment of property intended to defraud creditors.  The Full Court observed, however, that the creditor had neither suggested that the debtor was a person prejudiced by the deed nor that the wife was a trustee of property for the debtor.

91.  This indicates that the Full Court was of the view that, insofar as the debtor had a potential action against the wife as a "person prejudiced" under s.89(1), there may be scope for the creditor to ask its questions.  The possibility of an action by the debtor to avoid the deed would then involve a consideration of his "means".

92.  Given the foregoing analysis, the Full Court's remark about Order 43 not being used to obtain "pre-trial discovery" makes good sense.  Order 48 is a process of discovery about the debtor's means and property rights against third parties.  Order 48 is not a means of obtaining discovery for use in personal actions by the creditor or anyone else against third parties.

93.  I note that I am not persuaded by Mr. Burns' suggested analogy with examinations under CO s.221.  I do not think that it is correct to treat CO ss.221 and Order 48 as analogous.  The practice governing the former cannot be regarded as setting bounds for the latter.

94.  It should be noted that the Full Court referred to the discretion of the master hearing the examination.  Citing Watkins v. Ross, the Full Court remarked: "The master has a discretion to control the proceedings before him to ensure that the questions asked are directed to a relevant and useful end."  The Full Court commented that had the creditor proposed a "more limited series of questions" the master might in his discretion have permitted them.

95.  As was the situation in Watkins, there is nothing in MacCormack that forbids examination about a debtor's rights of action against third parties.  On the contrary, the broad definition of "means" given by the Full Court, suggests that examination on a debtor's rights of claim would be within the purposes of Order 48, whether or not the claims have been litigated.

A.3.3 Hua Chiao

96.  This is a decision of Master Kwan.  As such it cannot be binding on a first instance judge.

97.  The creditor wished to examine the debtor about accounts receivable.  The accounts receivable allegedly arose from loans made by the debtor or related companies to a third party. 

98.  The master thought that the questions were not permissible.  She believed (at 61) that "[t]he means to pay must relate to existing assets that are instantly or currently available to the judgment debtor".

99.  Although the master cited Watkins and MacCormack in coming to her decision, those cases (as has been discussed above) do not support her conclusion.  If the creditor was right about loans having been made, the accounts receivable would constitute current assets.  As such they would be fair game as the subject of an Order 48 examination.

100.  It is true that the accounts receivable would not be in the form of liquid cash at the debtor's immediate disposal.  But there is nothing in the wording of Order 48 that requires the debtor's property and means to be immediately to hand as the master appears to have thought.

101.  I do not think that I can regard Hua Chiao as compelling authority for Mr. Burn's propositions about choses in action.

A.3.4 National Australia Bank

102.  The creditor applied to examine the debtors.  The creditors obtained certain documents under sub-poena from parties connected with the debtors.  The debtors sought to see the documents in order to ascertain what they contained prior to the debtors' examination by the creditor.  The debtors' said they would be prejudiced otherwise.  Enfield J refused the debtors' application.

103.  Mr. Duncan cites the case, not so much for its facts, as for dicta indicative of the Court's approach in Order 48 proceedings.

104.  Enfield J said (at §12):-

"[The debtors] are persons bound to pay money under a judgment or order of the Court.  The examinations are to ascertain what assets and means they have to pay the debt.  If the judgment were paid, there would be no need for any examination which only arises when a judgment is not paid.  The purpose of the examination is this to ascertain whether the persons bound to pay the judgment are withholding assets or means to pay the debt or, as was suggested may be applicable in this case, have disposed of assets they had so as to put them in a position where they cannot pay the debt."

105.  He added in similar vein (at §17):-

"In this case all that will happen is that the respondents will be questioned about their means and assets and their answers will make manifest that they cannot pay because they simply do not have the capacity to pay.  If on the other hand the examinees do have assets which they have not been willing to realise to pay the judgment, or if they had assets which they have disposed of so that they cannot now be used for the payment of the debt, then the applicant is entitled to discover these facts by the examinations and thereafter take whatever steps it feels appropriate to recover its judgment or enforce it in some other way."

106.  I agree with Mr. Duncan that the tenor of the foregoing passages militates against Mr. Burns' narrow construction of Order 48.

107.  The dicta stress that Order 48 is a way of obtaining discovery against the debtor as to his assets for discharging a judgment debt.  Because the debtor has committed a wrong in failing to pay, the Court must not be overly solicitous in his favour.  The Court can be robust  Without good reason, it should refrain from drawing too refined distinctions as to what can or cannot be encompassed within an Order 48 examination.

A.4    Conclusion on Issue 1

108.  Nouvelle's existing contractual rights against third parties constitute property (in legal terms) or assets (in economic terms) belonging to Nouvelle.  Those rights are within the ambit of "property" or "means" in Order 48.

109.  There may be procedures, such as appointment of a liquidator or equitable receiver, which Nouvelle could pursue to convert those rights of action into money or money's worth applicable in satisfaction of the extant judgment. 

110.  The point is that Bloomsbury cannot come to any informed decision on whether and (if so) how to enforce against Nouvelle's rights of action unless Bloomsbury is allowed to explore the nature of such "property" or "means" under Order 48.

B.      Issue 2: Whether Bloomsbury can examine on Nouvelle's rights of action against others

111.  It follows from the foregoing discussion that Order 48 allows Bloomsbury to investigate Nouvelle's rights of action against others.

C.      Issue 3: Whether Bloomsbury can examine Nouvelle to obtain material for future litigation by Bloomsbury personally against others

112.  As pointed out in MacCormack, Bloomsbury cannot examine NJS or NJP to obtain information for the sole purpose of fuelling claims by Bloomsbury against NJS, NJP or other directors. Order 48 concerns discovery by a debtor of his means and property.  Order 48 does not authorise pre-trial discovery to enable a creditor to assess the prospects of personal actions brought by him against others.

113.  At the hearing before me, Mr. Burns suggested that, on the basis of MacCormack, Bloomsbury could not examine NJS or NJP about potential claims under Conveyancing and Property Ordinance (Cap.219) (CPO) s.60.

114.  CPO s.60 provides:-

"(1)   Subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

(2)     This section does not affect the law of bankruptcy for the time being in force.

(3)     This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors."

115.  I am uncertain how Bloomsbury can mount an action against NJS or NJP under CPO s.60. 

116.  Assume that Bloomsbury wishes to avoid some transfer of property by Nouvelle.  In that case Bloomsbury would claim as a plaintiff creditor to be a person prejudiced by the transfer.  The defendants to the action would presumably be Nouvelle and the transferee of the disputed property.  I am not certain that NJS or NJP would be appropriate parties to proceedings under CPO s.60, as opposed to (say) CO ss. 275 (claims against directors for fraudulent trading) or 276 (claims against directors for damages).

117.  If what Bloomsbury is contemplating are proceedings against Nouvelle and its transferee, then I do not see why Nouvelle should be prevented from asking questions of NJS or NJP to determine whether such a course is viable.  The end result of a claim under CPO s.60 would be the avoidance of any fraudulent transfer.  The transfer being undone, the transferor's pool of assets would be increased.  The transferor's property and means of satisfying a judgment debt would be commensurately enlarged.

118.  MacCormack suggests that, in order to examine under Order 48 in connection with CPO s.60, the creditor must allege that the judgment debtor has been prejudiced by a transfer.  But I cannot see why it makes a difference whether the creditor says he has been personally prejudiced by the transfer or that the debtor has somehow been disadvantaged.  In both cases, the end result of a successful claim under CPO s.60 would be to augment the debtor's pool of assets.  Questions put to NJS or NJP with CPO s.60 claims at the back of the examiner's mind would in such case definitely relate to a debtor's means and property.

119.  On the other hand, where Bloomsbury is only thinking of suing NJS and NJP under CO ss.275 or 276, the situation is different.  In such case, the questioning of NJS and NJP would merely be a means of obtaining pre-trial discovery for the intended action against them.  That would fall outside the wording of Order 48.  The examination does not relate to the debtor's means, but to the liability of NJS and NJP and to their means of satisfying the judgment debt.

120.  But a degree of caution is needed.  The situation which I have just canvassed is that where the creditor candidly admits that his sole purpose in examining is to sue the directors later.

121.  It is rarely the case that a creditor will have a clear idea what sort of action he wishes to take against a debtor.  The Order 48 examination is after all a way of obtaining information to enable a creditor to decide what to do.

122.  Suppose a creditor examines a debtor's director D about certain transactions because the creditor is considering applying for an equitable receiver to liquidate such claims on the debtor's behalf.  Pressed by the master, the creditor says that he cannot rule out the possibility of later suing D under CO s.275.  Should the master then rule that the questions are impermissible because of the latter possibility?

123.  I do not think that there is any single answer to the question.  As Lindley LJ stated, there can be no hard-and-fast rule. 

124.  One is thrown back to the master's discretion.  It may be that the correct course is to allow the examination to proceed insofar as, at least in part, it has the goal of ascertaining information about the debtor's property and means for the purposes of enforcing against the same.  If specific questions may cause D to incriminate himself, D may claim privilege and object to being compelled to reply to those questions.  At that stage, just as with any other examination process, the master must decide whether the claim of privilege is well-founded and deal with the specific questions accordingly.

D.      Issue 4: Whether Bloomsbury can only examine NJS and NJP about information acquired by them as Nouvelle's directors

125.  Nouvelle says that NJS and NJP acquired certain information as directors of Nouvelle and other information as directors of other companies in the Group including PAIHL.  The argument is that NJS or NJP cannot be compelled to answer questions on matters which they learned as directors of PAIHL.

126.  The distinction which Nouvelle seeks to draw is artificial and impractical.  Given that NJS and NJP hold many directorships in the Group, how can they draw any rigorous idea in their mind what they learned in their capacity as director of Nouvelle and what they learned in some other capacity?  I do not think it is possible.

127.  I do not think therefore that Order 48 examinations should be confined to what directors learned or know in their capacity as officers of one company as opposed to another in a group.  To confine questions as Nouvelle suggests would only lead to much time-wasting as the parties engaged in metaphysical wrangling as to what was acquired in some capacity but not other.

128.  Consider, for example, the following exchange at the start of NJS' examination before the master:-

"MR. DUNCAN SC:

First paragraph, '[PAIHL], supplying frozen food products since 1986.  The company now sources, processes and distributes a diverse range of frozen food products....' etc., etc.  Does that accurately represent the business of the Pacific Andes group of companies?

NJS:  I am coming here today -- I do not know your name, Sir, counsel, I do not know your name so excuse me -- I am coming here today in the capacity as ex-director of Nouvelle Foods (Hong Kong) Limited, not [PAIHL] or any of its subsidiaries.  I am representing, I am coming here to answer your questions only in relation to Nouvelle Foods (Hong Kong) Limited, relating to its accounts, maybe, but not for Pacific Andes International Holdings Limited.  I hope I am correct on that.

Q:     Yes, you are correct on that.

MR. WHITE [NJS' solicitor]:

Master, can I just, sorry can I just add something?  I do not see why Mr. Ng should have to answer a number of potentially confidential business questions in relation to companies which are not the judgment debtor.

COURT:

Mr. White, are you objecting to this line of examination?

MR. WHITE:

I am, Master.  The questions clearly have to relate to the assets and the means of paying the judgment of [Nouvelle].  The other companies within the group, their business objectives, or whatever, whatever this line of questioning is leading to, is wholly irrelevant to that question.

COURT:

Is it Pacific Andes was the shareholder of [Nouvelle]?  So Pacific Andes was the shareholder?

MR. WHITE:

But, master, the shareholding in [Novelle] is not an asset of the company.  It is wholly irrelevant to this exercise today.

COURT:

Mr. Duncan?

MR. DUNCAN:

First of all, this is not, contrary to what my learned friend said, confidential information.  It is a matter of public record, the annual report of the company.  The other matter, I understand the point that Mr. ng is concerned about.  I would like to reply to that in Mr. Ng's absence if I could."

129.  NJS was asked to leave the Court.  Mr. Duncan then explained as follows:-

"I am leading up to asking the witness questions, what happened to the assets, and in particular the cash in the company [Nouvelle] prior to the sale of the company.  There is also in the accounts a very large administrative fee charged to the company, and as we will see in a few moments, the role apparently of he parent company, about which I am asking questions at the moment, was to provide management services to the group.  And presumably that would be a fee.  We are concerned about the quantum of that fee paid in the time leading up to the sale of this company for a dollar, and that is why I have some interest..."

130.  As far as I can see, in asking about PAIHL, Mr. Duncan was simply setting the scene for a series of questions about Nouvelle's assets.  That seems unobjectionable.

131.  I do not understand NJS' objection to the extent that it distinguishes between what he knows as a director of Nouvelle on the one part and of PAIHL on the other.  One would expect a director of Nouvelle to know something about the business of the Group, its holding company and its subsidiaries, regardless of whether the director was also an officer of other companies within the Group.  It would be surprising otherwise. 

132.  Thus, I do not see why the mere fact that Mr. Duncan's question involved PAIHL means that NJS was not obliged to answer.

133.  That does not mean that Bloomsbury has license to ask about any information whatsoever in regard to the Group.  For example, Mr. Duncan was clearly alive to Mr. White's concerns about Group confidentiality.

134.  An appropriate practical test for allowing or disallowing a question is not the capacity in which the director acquired the information sought, but that of relevance.  If a question does not pertain to a debtor's means and property as discussed above, then it is not relevant to the Order 48 proceedings and should be disallowed.

135.  There will always be grey areas.  When such arise, the master must decide whether as a matter of discretion to permit the particular line of inquiry.

136.  There will be times when a director claims privilege on the ground of confidentiality.  Once again, the master has a discretion to exercise.  Is the relevance of the question such that fairness points towards allowing it?  Or does the question have only a tenuous relevance, such that the claim of confidentiality should be upheld?

137.  The approach is precisely the same as that which the Court takes when privilege is asserted in any other type of examination before it.

138.  I note that in support of his submissions on Issue 4, Mr. Burns relied on In re Hampshire Land Company [1896] 2 Ch 743, In re Fenwick Stobart & Co. Ltd. [1902] 1 Ch 507 and In re David Payne & Co. Ltd. [1904] 2 Ch 608. 

139.  Those authorities concern the doctrine of ultra vires.  Typically in those cases, the same individual X was fortuitously an officer or person interested in both lender and borrower companies.

140.  The question arises whether X's knowledge that loan monies are to be used by the borrower for an ultra vires purpose, means that the lender cannot recover the loan from the borrower.  In the cases, the Courts have held that knowledge gained by X as officer or person interested in the borrower cannot be imputed to X as officer or person interested in the lender.  There is thus no impediment against the lender enforcing against the borrower.

141.  The doctrine of ultra vires has generated a body of specific rules with the aim of ensuring that the doctrine produces just and commonsense results.  I do not believe that the special rules developed in the ultra vires context apply, whether by analogy or otherwise, to the distinct situation of Order 48 examinations.

E.      Footnote to Issues 1-4: The master's discretion

142.  I have referred extensively to the master's discretion.

143.  For completeness, before considering the specific topics raised by the parties, I should deal with a concern voiced by the master. 

144.  In the course of submissions on the scope of the examination, she said:-

"Mr. Duncan, over the break I read Order 48 again and my attention has been drawn to Order 48, rule 1 and sub-paragraph 3, where it states 'any difficulty arising in the course of any examination under this rule before the registrar or officer including any dispute with respect to the obligation of a person being examined to answer any question put to him, may be referred to a judge and he may determine on or give certain directions for determining as he thinks fit.'  That is the rule, and if one were to read the commentary at page 706, paragraph 48/3/7, I do not wish to read the entire commentary but I think it is quite clear that, if, during the examination before a master, if there is a difficulty or dispute as to whether a person being examined is obliged to answer a particular question, or a dispute arises like the present case,it seems to me, I start to wonder whether in fact a master would have any jurisdiction to resolve such kind of dispute, because the rules seem to specifically refer to a judge.  So perhaps the parties can assist me on this?"

145.  Order 48, Rule 1(3) is permissive.  It does not require that every dispute on the scope of the examination be referred to the judge.  The rule only says that a dispute "may be" referred.

146.  The Master needs to adopt a practical approach.  It would be impractical and disruptive, not to say inefficient in terms of time and cost, if every dispute in the course of examination had to go to a judge for resolution. 

147.  The case law emphasises that, as in any examination before the Court, the person hearing the proceedings (here the master) has a wide discretion whether to allow a question. 

148.  The master may of course think that, for whatever reason, it is convenient or appropriate to refer certain matters to a judge.  My only object is to reaffirm the master's concurrent jurisdiction to resolve the issues of scope raised by the parties.

F.      Topic 1: Questions about the sale of Nouvelle' shares

149.  It seems to me that questions on this topic do not relate to an asset of Nouvelle.  The topic therefore falls outside the ambit of Order 48.

150.  Assume that the share transfer to Westerham and Best Target by NFIL and PAIBV was not bona fide as Bloomsbury contends.  Even then the Nouvelle shares transferred would not have been assets of Nouvelle.  The shares would have been the property of NFIL and PAIBV. 

151.  If the share sale were set aside, Nouvelle's pool of assets would not be enlarged.  Bloomsbury could not execute against the shares. 

152.  Nor would Nouvelle have any claim against NFIL, PAIBV, Westerham or Best Target for the fraudulent transfer of the shares.  There would thus be no chose of action belonging to Nouvelle against which Bloomsbury could mount enforcement proceedings.

G.      Topic 2: Questions about the circumstances behind the sale to Westerham and Best Target

153.  This set of questions is effectively the same as those under Topic 1.  It is equally not permissible.

H.      Topic 3: Questions about the management of PAIHL and its subsidiaries

154.  Mr. Duncan suggested that these questions related to any treasury system operated by PAIHL.  He said that he wished to ascertain how the inter-company accounts were managed.  Thus, for example, if company X within the Group needed to pay a company R not within the Group, were funds provided from some Group treasurer company?

155.  But for Mr. Duncan's explanation in Court, it would not have been apparent to me that Topic 3 related to inter-company accounts.  On the face of it, Topic 3 has only peripheral (if any) relevance to ascertaining Nouvelle's assets.

156.  It is possible that the management of specific companies within the Group becomes relevant as a result of other topics raised by Bloomsbury in examination.  For example, if Bloomsbury finds that a payment was wrongly made by Nouvelle to some company within the Group, it may be necessary to trace what happened to the monies paid within the Group.

157.  I therefore do not think that I can rule out Topic 3 in its entirety.  Of itself, the topic does not seem to me to relate directly to the Order 48 proceedings.  But particular questions of group management (including questions about any Treasury system maintained for payments by group companies) may be or become incidentally relevant to other topics.

158.  This seems to me a topic then where the admissibility of particular questions should be left to the master's discretion.

I.       Topic 4: Questions about Nouvelle's current assets as at 27 March 2001

159.  These would be within the scope of Order 48.  Bloomsbury wishes to satisfy itself that monies or assets were not wrongly paid out or given away.  If they had been, Nouvelle may well have some claim for repayment or restitution.

160.  Mr. Burns say that the question cannot involve property or mean which Nouvelle now has to satisfy the debt.  But, if Mr. Duncan is right about assets shown in the March 2001 balance sheet having been wrongly dissipated, Nouvelle may have an existing right in action against the persons receiving the monies or assets.  That right would constitute property.

J.       Topic 5: Questions about Nouvelle's other assets as at 27 March 2001

161.  The same reasoning would apply here as with Topic 4.  The questions are permissible.

K.      Topic 6: Questions about Nouvelle's expenses as at 27 March 2001

162.  These would be within the scope of Order 48. 

163.  Bloomsbury alleges that the expenses were either inflated or not genuine.  Their payment at some point in time may accordingly have given rise to claims in Nouvelle's favour for restitution.  Such claims could constitute existing assets which might potentially be used to satisfy the debt.

164.  It follows that Bloomsbury should be entitled to explore the possibility of Nouvelle claiming back any overpayments in the Order 48 examination.

IV.     Conclusion

165.  I would answer Issues 1 to 4 broadly as follows:-

         (1)   Yes.

         (2)   Yes.

         (3)   No.

         (4)   Yes.

166.  As to the possibility of raising questions on Topics 1 to 6, my general answers would be as follows:-

         (1)   No.

         (2)   No.

         (3)   It depends.  There is no simple answer.

         (4)   Yes.

         (5)   Yes.

         (6)   Yes.

167.  Neither party has wholly prevailed in its contentions. 

168.  Although it would appear that more Issues and Topics have gone in Bloomsbury's favour, in reality the bulk of the argument focused on the admissibility of questions concerned with:-

         (1)   Nouvelle's rights of action; and,

         (2)   Bloomsbury's personal rights against third parties.

Bloomsbury's arguments succeeded on the former, Nouvelle's on the latter.

169.  Given that circumstance and the fact that this reference should (I hope) be helpful to both parties in their future conduct of the Order 48 examination, it seems that the appropriate costs order should be no order as to costs.  I make an order nisi accordingly.