VALLAT MAURICE HENRI ROLAND v. PHOENIX TELECOMMUNICATION LTD

DCMP 3403/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO.3403 OF 2003

--------------------

--------------------

-------------------------

R U L I N G

-----------------------

1. The plaintiff and judgment creditor, ("Mr Vallat"), who was formerly an employee and a director of the defendant and judgment debtor ("Phoenix") instituted proceedings in the Labour Tribunal against the latter for arrears of salary. On 17 August 2003 he obtained judgment against Phoenix for $592,131.65 with interest and costs.

2. Phoenix was owed money by the Garnishee, ("Dragon"). In February 2002, Phoenix commenced High Court proceedings, HCMP No. 514 of 2002 to prevent Dragon which was in fact a minority shareholder from presenting a winding up petition against it. Phoenix won, and got its costs. Madam Justice Yuen on 2 September 2002 ordered Dragon to pay Phoenix the costs of the action. By an Allocatur dated 1 September 2003 those costs were allowed at a total of $646,243.67. I will refer to those costs as the "Debt". Mr Vallat accordingly applied for a garnishee order nisi and obtained such order in this court on 11 October 2003.

3. On 8 December 2003 the Intervening Party ("Antares") applied to be joined as a party to these proceedings and for the discharge of the garnishee order nisi on the ground that the debt due by Dragon to Phoenix had been assigned to Antares. There are therefore before me two competing applications, that by Mr Vallat to have the garnishee order made absolute, and that by Antares to have it discharged. Antares also seeks a declaration that the assignment is valid. Phoenix is not represented in these proceedings; but Dragon also seeks to have the garnishee order discharged on the grounds that it has substantial counterclaims against Phoenix for amounts in excess of the Debt. It also says that the assignment is not bona fide or valid because its intention is to defraud creditors of Phoenix; and even if it is valid, Dragon has substantial counterclaims in excess of the Debt against Antares.

4. The main issue is whether the Debt owed by Dragon to Phoenix was validly assigned to Antares before the date of the garnishee order nisi, i.e. 11 October 2003.

5. One of the directors of Phoenix, Ms Fox, is a minority shareholder of Antares. Her husband, Mr Shanahan, is the majority shareholder. Antares is the majority shareholder in Phoenix. By late 2002, Phoenix owed a lot of money to its solicitors, Messrs. Barlow, Lyde & Gilbert ("BLG"). In order to ensure that payment was made to BLG, it was agreed that Antares would pay US$125,000.00 to that firm in consideration of the assignment to it of the Debt, the amount of which was then not known because the costs had not been taxed. On 26 November 2002, the Board of Directors of Phoenix, which then consisted of Mr Vallat, Ms Fox, a Mr Elser and a Mr Hassounah held a meeting by conference telephone call at which this agreement was made. The Board agreed that a resolution, approving the agreement was to be signed by all the directors.

6. A draft of the written agreement and a draft of the resolution had been circulated to the directors prior to the Board meeting. Subsequently all the directors except Mr Vallat signed the resolution. It appears that Mr Vallat was in negotiations with Phoenix at that stage about the termination of his appointment. His position is that he, as well as Antares, had to be paid out; but once the agreement had been reached that Antares would be paid out, Ms Fox terminated the negotiations between Phoenix and himself.

7. According to Ms Fox, who has produced the minutes, another Board meeting was held on 18 December 2002, in Dubai. The other directors voted Mr Vallat off the Board with immediate effect and he withdrew. The meeting carried on and the Board resolved to terminate Mr Vallat's employment, instruct BLG to make certain terminal payments to him, and to enter into the agreement with Antares. Other resolutions were made which are not relevant here. According to Ms Fox and Mr Elser, Mr Elser executed the agreement and gave it to Ms Fox.

8. The taxation of the Debt was completed and the Allocatur issued on 1 September 2003. Ms Fox then looked for the executed agreement but could not find it. Another copy was prepared and this was executed on 25 September 2003. Notice of it was given to Dragon by a letter dated 2 October 2003. Dragon says that it received the notice on 8 October but in any event that was before the date of the garnishee order nisi.

9. The argument advanced by Antares is that the bona fide assignment of a debt before the issue of a garnishee order nisi will be sufficient to extinguish a debt in favour of the judgment debtor; Hong Kong Civil Procedure paragraph 49/1/28; Hirsch & Ors. v Coates, Fountain & Ors. (1856) 24 LJCP (NS) 315. By section 9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) an assignment passes the right to the debt to the assignee on express written notice being given to the debtor. Notice was given before the date of the garnishee order nisi and that is the end of the matter.

10. That is of course the position if the assignment is made in good faith. Both Mr Vallat and Dragon say that it is not. Mr Vallat's argument is, obviously, that the assignment was only made after the Labour Tribunal had given judgment. Antares through Ms Fox says that this is coincidental; she only looked for and failed to find the original assignment executed in December 2002, after the taxation. I do not understand what the taxation had to do with it; from the terms of the agreement it is clear that what was assigned was a proportion of the costs equivalent to US$125,000.00; so there was no need to wait for taxation. I have to say that in all the circumstances, where there are such close connections between the Antares and Phoenix, and where indeed the payment to BLG was made, not by Antares directly but by Mr Shanahan, and where the original assignment was lost, one cannot avoid thinking that getting that assignment (assuming that it really was executed) made effectual by notice cannot ever have been a priority for Antares or Phoenix or Ms Fox (who is the common factor between the two of them) until after the Labour Tribunal had issued its judgment; so the inference is that the action to get a fresh assignment executed and give notice of it to Dragon was taken precisely with a view to blocking any enforcement proceedings which Mr Vallat might take.

11. There is also evidence from Mr Vallat that the Board of Phoenix resolved on 23 September 2003 to allow Phoenix's only valuable asset, namely shares in one Remoco Ltd to be acquired by one Duck Ltd. which is owned by the same persons as own Antares. Ms Fox does not deny this though she seeks to explain the reasons for it. Nevertheless as has been pointed out, in particular by Dragon's solicitor, Mr Cook, there is an obvious inference that Phoenix was seeking to divest itself of all its assets in favour or Antares or those who control it.

12. There is no dispute that the Board meeting of 26 November 2002 did take place and Mr Vallat did agree to the resolution that the agreement be entered into. In failing to sign the written resolution he did not do what he had agreed to do. I do not think that means that he cannot now object to the validity of the assignment. It was open to Phoenix any time after December 2002 to give notice to Dragon and so make the assignment effectual, but it did not.

13. Dragon of course says that the assignment is invalid or of no effect but for different reasons. It relies first of all on a claim which it says it has against Phoenix. In High Court Action No. 1180 of 2003, a firm, Lees and Chiong is suing Dragon for over $9 million for fees and disbursements incurred in the provisional liquidation of one SinoAmerican Telecom Inc. ("SinoAmerican") and Dragon in third party proceedings is seeking an indemnity or contribution from inter alia Phoenix. Mr Hudson, for Antares, says that the affidavits of Mr Collins-Taylor, Dragon's director should be given little weight. It is true that the assertions in them are not well supported by documentary evidence; for instance we do not see the indemnities referred to; but nevertheless it appears that the third party proceedings are on foot and the Third Party Notice in those proceedings was served on Phoenix on 24 September 2003.

14. Dragon argues that a garnishee can avail himself of a set-off or counterclaim which existed before the garnishee order nisi was made; Hale v Victoria Plumbing Co. and En Tout Cas Co., [1966] 2 QB 746. In that case, the matter at issue was whether, at the date of the garnishee order nisi, the garnishee was indebted to the judgment debtor. The garnishee's deponent deponed that it was not and further that the garnishee by reason of the judgment debtor's various breaches of contracts between them had claims against the judgment debtor in excess of the amount claimed by the judgment creditor; and details of those claims had been supplied to the judgment debtor before the date of the garnishee order nisi. Danckwerts LJ said that if that were true it meant that on balance there was nothing due whatever from the garnishee to the judgment debtor on which a garnishee order could operate. Later in the judgment His Lordship said:

It seems to me to be contrary to justice and sense to order that a garnishee should pay out money which it appears probably will not be due from him at all -- because no proceedings have been taken by the judgment debtor against the garnishee, any more than any proceedings have been taken by the garnishee against the judgment debtor. It seems contrary to justice that an order should be made for payment of moneys which on the face of it appear not likely to be due and which might perhaps be paid away irretrievably to a man or company who is in trouble.

15. Dragon further argues that a garnishee order is an equitable remedy and discretionary and should not be granted if the effect would be to prefer one creditor over another. See the Hong Kong Civil Procedure para. 49/1/5. The effect of making the order absolute would be to prefer Mr Vallat to Dragon's own claim (i.e. in the third party proceedings) against Phoenix.

16. So far as Antares is concerned, Mr Collins-Taylor depones to a long and complex history between the parties, in particular in relation to SinoAmerican. I do not think there is any need to go deeply into that history. He also gives evidence relating to proceedings brought by Antares in New York, U.S.A., again without exhibits, in which counterclaims are to be filed by Dragon, to dispute the validity of allocations to Antares of shares in Phoenix. Dragon will therefore dispute the constitution of the Board of Phoenix, and the validity of the Board's resolutions. I do not see that this evidence is of much assistance because it does not appear that, at this stage, there is any counterclaim by Dragon against Antares in those proceedings. However, as I have indicated, Dragon argues that the assignment of the Debt had the effect of depriving Phoenix of its only other known asset. So, in effect, Antares is trying to "clean out" Phoenix in order to defeat the claims of others; and therefore the Debt should not be paid out to Antares any more than it should be paid out to Mr Vallat.

17. I have considerable sympathy for Mr Vallat's plight. He has a judgment from the Labour Tribunal and it is certainly arguable that he should be paid out, and leave the various other parties to dispute among themselves. Unfortunately, however, I do not think that that can properly be done.

18. It seems to me that before any garnishee order can be made the court must be satisfied that there is a debt which can be attached. If there is a counterclaim which is greater than the debt then ultimately there is nothing due from the garnishee to the judgment debtor on which a garnishee order can operate. If the garnishee has to pay out money which ultimately it is found not to owe, it might not get that money back. It seems to me that the effect of the decision in Hale v Victoria Plumbing Co. and En Tout Cas Co. is that until such counterclaim is resolved, the debt should remain unattached and no garnishee order should be made.

19. If the Debt is not to be paid out to Mr Vallat because the question of counterclaim, and therefore indebtedness between Dragon and Phoenix is not yet resolved, it seems to me equally that it should not be paid out to Antares. If there is nothing to attach then there should be nothing to assign. But if that is wrong, the remedy of payment out to a third party in garnishee proceedings is equally an equitable remedy and discretionary. It seems to me that the sale of the Phoenix assets to Duck Ltd. at the same time as Phoenix made the assignment effectual certainly suggests an intention on the part of the directors of Phoenix, most of whom are connected to Antares, to "clean out" Phoenix so as to defeat the claims of others and it would not be proper to make an order which would aid that.

20. I therefore dismiss both the Judgment Debtor's and the Intervening Party's claims, with costs (nisi) in favour of the Garnishee, to be taxed if not agreed. That will include, in the case of the Intervening Party, the reserved costs of the summonses for leave to file the 2nd and 3rd affidavits of Mr. Collins-Taylor.