E.G.O. POLSKA S.P. Z.O.O. (a company incorporated in Poland) v. PROFIT POWER INTERNATIONAL CAPITAL LTD

HCA 562/2022

[2022] HKCFI 3299

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 562 OF 2022

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DECISION

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A.   INTRODUCTION

1.  This case concerns circumstances in which there are competing creditors scrambling to obtain priority when the Defendant company in question is potentially on the brink of insolvency.

2.  The application in HCA 562/2022 seeking inter alia a garnishee order absolute came before me on 19 September 2022.  At that hearing, I was informed that another application in relation to another garnishee order had been made in relation to the same garnishee and Defendant company in HCA 582/2022.  The plaintiff in HCA 582/2022 is Sodrugestvo Paraguay S.A., (“Sodrugestvo”) represented by Messrs. Fangda Partners (“Fangda”). At the hearing on 19 September 2022, Sodrugestvo appeared by its solicitors and made submissions in its capacity as an interested creditor.

3.  Directions were given subsequent to the 19 September 2022 hearing (“the 19 September Hearing”) for the application in HCA 582/2022 to be listed before me as well, such hearing taking place on 12 October 2022. For reasons that will appear below, this decision addresses primarily the points discussed by parties in HCA 562/2022, but also taking into account certain arguments that were placed before the Court in the subsequent hearing for HCA 582/2022.

4.  In HCA 562/2022 the Plaintiff, E.G.O. Polska S.P. Z.O.O. (“the Plaintiff” / “EGO Polska”), applied for (i) variation of an injunction order granted by the Honourable Mr Justice Wilson Chan on 13 May 2022 (“the Ex Parte Order”), as continued by order of the Honourable Mr Justice Anthony Chan on 20 May 2022 (“the Interlocutory Injunction”) and (ii) a Garnishee Order Absolute to be made against the Garnishee, Standard Chartered Bank (Hong Kong) Limited (“SCB”).

5.  At the hearings, I heard from solicitors representing EGO Polska and Sodrugestvo.

6.  For the reasons set out below, I decline to make the orders sought by EGO Polska.

B.  BACKGROUND

7.  These proceedings were commenced on 13 May 2022 by the Plaintiff.

8.  On the same date, an ex parte application was made leading to the Ex Parte Order.  As can be seen from the evidence filed in support of such application, it was the Plaintiff’s case that it had been a victim of fraud, having transferred US$966,000 into a bank account maintained with SCB (“the Defendant’s SCB Account”) on 6 April 2022, on the back of fake emails and fake telephone calls between fraudsters and the Plaintiff’s staff.

9.  In addition to the Ex Parte Order, a disclosure order against SCB was made on 13 May 2022 requiring them to disclose the balance of the Defendant’s SCB Account, and the bank statements for the period from 6 April 2022 to 13 May 2022.  By such disclosure, it could be seen that:

(1)  Prior to the date of the transfer by the Plaintiff (6 April 2022), there was a balance of US$1,739.20;

(2)  The funds from the Plaintiff arrived in the Defendant’s SCB Account on 6 April 2022, the total balance thereafter being US$967,739.20;

(3)  Thereafter, there were only minimal transactions (in the form of a withdrawal of US$105 on 6 April 2022, a deposit of US$105 on 19 April 2022, and credit interest of US$0.67 on 30 April); and

(4)  The balance of the Defendant’s SCB Account as at 16 May 2022 was US$967,739.87.

10.  The Writ of Summons as filed sought, by way of the first prayer for relief, damages in the sum of US$966,000 (or its equivalent in Hong Kong dollars).  There were alternative reliefs sought including declaratory relief that the Defendant holds the US$966,000 (defined as “the Stolen Monies”) as trustee for the Plaintiff; alternatively yet, an order that the Defendant accounts as constructive trustee and that there be an order for payment of sums found to be due upon the taking of such account; and yet further and alternatively, an order for payment of equitable compensation and declaratory relief that the Defendant holds any sums of money or assets which it retains or has derived from the Stolen Monies on trust for the Plaintiff.

11.  On 6 July 2022, the Plaintiff obtained final judgment in default of filing of the Acknowledgment of Service.  In so doing, the Plaintiff elected not to pursue any of the alternative reliefs.  The upshot is that based upon the writ (which had no statement of claim attached), the Plaintiff chose to and obtained a default judgment solely for damages in the sum of US$966,000 (or the Hong Kong dollar equivalent at the time of payment) together with interest thereon at the rate of 8% per annum from 13 May 2022 to the date of judgment, and thereafter at judgment rate until payment.  The judgment does not make any declarations as to any alleged trusts.

12.  On 14 July 2022, the Plaintiff was granted a Garnishee Order to Show Cause against the Judgment Debtor.

13.  On 22 July 2022, the Plaintiff filed the summons to vary the Injunction Order to permit SCB to release and pay over to the Plaintiff the Judgment Sum from the Defendant’s SCB Account maintained with SCB.

14.  On 1 August 2022, SCB informed the solicitors for EGO Polska that the Defendant was also named as a defendant in HCA 582/2022, and Fangda, the solicitors for the plaintiff therein, Sodrugestvo, would be informed of these proceedings.  SCB indicated that it would take a neutral stance in all the actions and sought to be excused thereafter.

15.  On 3 August 2022, Messrs. Tanner De Witt (“TDW”), the solicitors for the Plaintiff, wrote to Fangda informing them that the Plaintiff asserts a proprietary claim against the funds in the Defendant’s SCB Account and asking them to confirm their stance towards the present application.

16.  On 9 September 2022, Fangda wrote back informing TDW that their client as judgment creditor in HCA 582/2022 had presented a winding-up petition in HCCW 298/2022 on 26 August 2022 (“Petition”, i.e. after they had been informed of the present application).  They then indicated that their client would oppose the present application.

17.  As can be seen from the Petition:

(1)  Sodrugestvo had obtained final judgment on 13 July 2022 against the Defendant for the sum of US$1,547,834.82.

(2)  As to how this sum came about, it is Sodrugestvo’s case that on or around 24 March 2022, it had transferred a sum of US$1,512,739 to the Defendant’s bank account in Hong Kong, “a large part which was subsequently dissipated by the [Defendant] to the bank accounts of various second layer recipients.”

(3)  Sodrugestvo commenced HCA 582/2022, and obtained judgment in default of Acknowledgment of Service on 13 July 2022.

(4)  A statutory demand was served on 4 August 2022, and the Petition was filed shortly after the 21-day period had passed.

18.  It was in such circumstances that the present application came before the Court.  At the 19 September Hearing, I heard from TDW and Fangda.  I was informed at the hearing that:

(1)  Sodrugestvo’s application in respect of its own garnishee order (also against SCB) was due to be heard on 12 October 2022; and

(2)  The first hearing of the Petition would be on 2 November 2022 (before the Master).

19.  Sodrugestvo invited the Court to dismiss EGO Polska’s application for garnishee order absolute and leave matters to be determined and considered by the liquidators to be appointed.

20.  On 12 October 2022, Sodrugestvo’s application for garnishee order absolute in respect of SCB came before me.  At that hearing, Sodrugestvo indicated that it would withdraw its own application (consistent with its position in HCA 562/2022 that no garnishee order absolute should be granted to anyone insofar as this Defendant and the funds in the Defendant’s SCB Account were concerned).

C.  DISCUSSION

C1.  The Issue

21.  Taking stock of the factual position as it presently stands:

(1)  There can be no dispute that the judgment in these proceedings was a money judgment, simply for the sum of US$966,000 (or its HK dollar equivalent) with interest. There was no declaratory relief made as to any kind of trusteeship or the specific sum that had been paid into the Defendant’s SCB Account. The default judgment in and of itself, therefore, does not give rise to a proprietary right on the part of the Plaintiff to the monies presently in the Defendant’s SCB Account.

(2)  The Court has before it a select amount of materials (primarily the disclosure from SCB) which seems to show that insofar as the Defendant’s SCB Account is concerned, there had been minimal movements after the transfer of the sum of US$966,000 into the Defendant’s SCB Account up until 16 May 2022.

(3)  There does not appear to be any further information from SCB as to the position of the account after 16 May 2022. However, they were and are plainly aware of the Injunction Order, and one can readily presume that the amount remains undisturbed so long as the Injunction Order is in place.

(4)  It is Sodrugestvo’s own case that its funds that had been transferred into the Defendant’s SCB Account had already been dissipated to second layer recipients. It does not, therefore, present any alternative factual picture to the Court as to the sum presently in credit in the Defendant’s SCB Account in SCB. What it does point to, however, is its Petition for winding up, and asks the Court to decline to make the Garnishee Order Absolute on the basis that the interests of all judgment creditors and their entitlement to pari passu distribution should be taken into account.

22.  The question for the Court is whether it is right and appropriate in such circumstances to make the Garnishee Order Absolute and vary the injunction, such that effectively the entire amount in the Defendant’s SCB Account would be paid out to the Plaintiff in these proceedings, notwithstanding the extant Petition and the opposition by Sodrugestvo.

C2.  Relevant Legal Principles

23.  There are a few lines of authority which impact upon the analysis of the above question.

24.  First, as to the principles surrounding the discretion to be exercised in making a garnishee order absolute:

(1)  O 49, r 1 of the Rules of the High Court (“RHC”) provides for the discretion to make a garnishee order where a person has obtained a judgment or order for the payment by some other person of a sum of money amounting in value to at least HK$1,000, and another person within the jurisdiction is indebted to the judgment debtor.

(2)  See further HKCP 2022, §49/1/5:

(a)  A garnishee order is essentially a statutory remedy and will not generally be granted if the effect will be to prefer one creditor over another, e.g. where an estate is insolvent (Prichard v Westminster Bank Ltd [1969] 1 WLR 547), and therefore if there is doubt whether the estate is insolvent, the money in the hands of the garnishee should be ordered to be paid into court, pending an enquiry whether or not the estate is insolvent (George Lee & Sons (Builders) Ltd & Olink [1972] 1 WLR 214).

(b)  In considering whether or not to exercise its discretion to make absolute a garnishee order, the court must bear in mind not only the position of the judgment creditor, the judgment debtor and the garnishee, but also the position of the other creditors of the judgment debtor (Rooke v HV Construction Services Ltd [1998] 1 HKC 686 at 689 per Godfrey JA; also Credit Lyonnais v SK Global Hong Kong Ltd [2004] 4 HKC 104 at §8).

(3)  Reference was also made to the principles set out in relation to charging orders in the White Book (HKCP 2022, §50/9A/23), which are for all intents and purposes applicable insofar as garnishee proceedings are concerned. Relevantly: (i) the court has the right and duty to take into account all circumstances of the case; (ii) the court should exercise its discretion as to do equity, so far as possible, to all the parties involved, (iii) liquidation of a company brings into operation a statutory scheme for dealing with the company’s assets, and accordingly if such liquidation occurs after the making of the charging order nisi and before the order is made absolute, the court in its discretion will decline to make the charging order absolute.

25.  Second, insofar as there may be any complaint as to the procedures adopted by parties in the scramble for priority, it is trite that a judgment creditor is entitled to pursue concurrent remedies (HKCP 2022, §49/1/17).  A judgment creditor who has obtained a garnishee order (or one who is simply pursuing one) is not precluded from pursuing bankruptcy or insolvency proceedings, as the pursuit or obtaining of a garnishee order does not amount to a stay of execution (Re Renison, ex p. Greaves [1913] 2 KB 300; Re H.B. [1904] 1 KB 94 at 97).

26.  Third, trust property held by a company in liquidation does not form part of the liquidation estate and thus proceeds of those assets will not be available for pari passsu distribution amongst unsecured creditors. Instead, the liquidators will deal with those separately and their costs and expenses in dealing with the same will be claimed separately by way of a Berkeley Applegate order (e.g. TS Wong (Investment & Finance) Co Ltd [2008] 5 HKLRD 469).

C3.  Analysis

27.  The parties’ positions are essentially as follows.

28.  EGO Polska:

(1)  Invites the Court to make absolute the garnishee order on the basis that the evidence is overwhelming that it has a proprietary interest in the specific funds in the Defendant’s SCB Account (citing Milestone Electric, Inc v Meihoukang Trading Co Limited [2020] HKCFI 2542 at §§13-14);

(2)  Says that the granting of the order absolute would not prejudice other creditors (since these are, it now says, trust assets);

(3)  Says that the Court’s exercise of discretion is not fettered by the nature of the default judgment previously obtained (and that they are not estopped from asserting this case as to proprietary interest in the funds), since the Court is entitled to look at all circumstances of the case and do equity accordingly;

(4)  Complains that the Petition by Sodrugestvo is intended to obstruct or delay the Plaintiff’s recovery of the trust assets rightly belonging to EGO Polska.  It also draws the Court’s attention to the cost and expense that would need to be incurred in the event of liquidation in determining its proprietary claim to the funds (primarily being the liquidators’ funds in administering the same).

29.  Sodrugestvo:

(1)  Invites the Court to discharge the garnishee order nisi on the basis that there are competing interests amongst the unsecured creditors;

(2)  Points to the fact that the default judgment obtained by EGO Polska was simply for a money judgment, and it cannot now be permitted to have another bite at the cherry and argue that its rights are better than that judgment; and

(3)  Says that in any event, it is for the liquidators (yet to be appointed) to determine whether there is any merit in the said proprietary claim and it would be premature to resolve the same in the context of garnishee proceedings when there is a Petition on foot.

30.  Following the 19 September Hearing, I had further directed the parties to specifically address whether the approach in the case of George Lee & Sons (above) was appropriate in the present case (i.e. for the money in the hands of the garnishee to be paid into court pending an enquiry whether or not the estate is insolvent).  In short, the parties took the following positions:

(1)  EGO Polska maintained its points above, but as a fallback indicated that it would be appropriate where there was dispute over the ownership of the sum in question, and also to minimize the costs to be expended by the liquidators to be appointed (if the Petition were successful) in administering what they say are trust assets.

(2)  Sodrugestvo opposed the procedure, essentially on the basis that the Petition was already extant and that the approach of discharging EGO Polska’s garnishee order nisi would be more appropriate in the present circumstances, leaving everything to be dealt with by the liquidators to be appointed.

31.  Having considered the parties’ submissions and the circumstances of the case in the round, I have declined to make the orders sought by EGO Polska.  In so doing, I take into account the following points:

(1)  First, in this case, the judgment in question is a money judgment, and no more than that. Putting aside the question of whether there is res judicata, or indeed any wider abuse of process, and even assuming the Court is entitled to take into account all relevant circumstances as a matter of equity, the stark fact is that what EGO Polska obtained by way of its default judgment is a debt, and not a declaration for any kind of trust or proprietary interest.

(2)  There is thus an incongruence in the position adopted by EGO Polska.  Garnishee proceedings are by their nature a statutory procedure for the enforcement of judgments. The very basis of the jurisdiction lies in the understanding that the money held by the garnishee is a debt owed to the judgment debtor (O 49, r 1, RHC).  The order operates such that the money owed to the judgment debtor is instead paid directly to the judgment creditor.  What EGO Polska asserts in the present application, however, is that the money is beneficially owned by it (this assertion being somewhat contrary to the default judgment as obtained), and not a debt owed by SCB to the Defendant. There is thus an incongruence in the positions taken to date.

(3)  In fact, what might have been more appropriate if EGO Polska were indeed convinced of its proprietary rights in the present case was for EGO Polska to obtain the declaratory relief to the effect that the monies were held on trust, and then to endeavour to enforce that particular declaratory relief. Such was the route taken in United Kesvick Limited v Tsang Wing Fai [2020] HKCFI 2922. On the foundation of the declaratory relief, the Court considered it had jurisdiction to make the garnishee order absolute sought (see in particular the discussion at §§17 to 23 of the decision).

(4)  I acknowledge, however, that there is some degree of confusion as to the appropriate approach, as previous attempts by various parties have met with varying degrees of success. For a more recent discussion of the difficulties with the various approaches wherein there has been proprietary relief sought, see United Kesvick Limited (above), Wismettac Asian Foods, Inc. v United Top Properties Ltd & Ors [2020] 3 HKLRD 732; also Kuo Benjamin Yung Hsiang v Xu Meiyi [2022] HKCFI 3007.

(5)  The upshot, however, is that EGO Polska has not taken any of the routes which find their foundation in proprietary relief in the first place. This distinguishes its position from of any of the cases discussed above.

(6)  Second, I bear in mind the competing interests of the creditors of the Defendant, not just those of EGO Polska and Sodrugestvo (Rooke (above)). With the hearing of the Petition being imminent, it is the better course to take into account all creditors’ interests, and leave the liquidators to consider all such competing interests, including any claim which EGO Polska may wish to make in relation to the sums in the Defendant’s SCB Account.  The liquidators’ task will be to inter alia investigate the affairs of the company.  In so doing, they would be better placed to consider all relevant matters including any competing claims to the funds in question.

(7)  Third, whilst I had considered whether this would be an appropriate case in which to order that the funds in question be paid into Court (per the George Lee case (above)), on balance, I did not consider it necessary in the present circumstances, given the above observations on the nature of the respective debts and the likely better position of the liquidators to assess the various claims, proprietary or otherwise.

32.  The application is thus dismissed and the garnishee order nisi discharged.

33.  As to costs, I make an order nisi that there shall be no order as to costs.  In so doing, I have taken into account the fact that at least insofar as the Petition and competing interests of creditors are concerned, matters developed over the past few months and it would not have been possible for EGO Polska to foresee when it took out the application that events would take a turn down this particular route.  Whilst Sodrugestvo took steps that it was rightly entitled to take, this is simply a scenario where creditors have put forward their respective stances and the Court has had to make a determination taking into account all of their competing interests.