TRADING CONSULTANTS LTD. v. JOHN STEWART SLOAN

DCCJ 2548/00 & 13438/00

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTIONS NOS. 2548 & 13438 OF 2000

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(CONSOLIDATED BY ORDER OF MASTER C K CHAN DATED 1-9-2000)

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REASONS FOR DECISION

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Background

1. By a Consent Order dated 12 February 2001, Judgment was entered in favour of the Plaintiff against the Defendant for the sum of HK$75,000 inclusive of damages, interest and costs. Under the same order, the parties agreed to a stay of execution of the Judgment provided that the Defendant shall pay the Plaintiff $5,000 on the 12th day of each month commencing from 12 March 2001 which stay would be lifted if the Defendant failed to make 2 consecutive instalment payments.

2. In April this year, as the Defendant Judgment Debtor failed to make 2 consecutive instalment payments rendering the whole Judgment debt unsatisfied, the Plaintiff Judgment Creditor obtained an oral examination order dated 27 April 2001 against the Judgment Debtor under Order 49B of the Rules of District Court. It was provided under the said Order that the Defendant "attend and be orally examined under Order 49B of the Rules of District Court as to whether any and what debts are owing to the Judgment Debtor and whether the said Judgment Debtor has any and what other property or means of satisfying the Judgment dated 12 February 2001,..." At the call over hearing on 23 May 2001, the Judgment Debtor appeared in person and Ms. Registrar Au-Yeung granted usual directions for the Judgment Debtor to produce various documents for the last 2 years.

3. The oral examination was heard before me on 30 July 2001. At the conclusion of the oral examination, Mr. Clarke, appearing for the Judgment Creditor, applied for an order for the imprisonment of the Judgment Debtor for a period of 14 days pursuant to Order 49B 1B(1)(b) and (1)(c) that the Judgment Debtor:

(a) has disposed of assets with a view to avoiding satisfaction of the Judgment; and

(b) has wilfully failed to make full disclosure.

4. As the proposed order asked by the Judgment Creditor carried serious consequence and would affect the liberty of the Judgment Debtor, I informed the Judgment Debtor who appeared in person to seek legal advice and to make submission on the Judgment Creditor's application. The Judgment Debtor indicated that he would seek legal advice after reviewing the transcript of the proceedings. The hearing was adjourned to a date to be fixed to allow the Judgment Debtor to seek legal advice and to make submission and directions were made for the Judgment Creditor to file and serve the transcript of proceedings within 21 days and written submission within 7 days thereafter. The transcript and the written submission of the Judgment Creditor were later filed on 7 and 11 August 2001 respectively.

5. On 26 September 2001, the Judgment Debtor, while acting in person without legal representation, made oral submission in opposing the Judgment Creditor's application for his imprisonment. After hearing Mr. Clarke's reply, I reserved my Judgment pending the filing of the further transcript of the proceedings by the Judgment Creditor. The transcript was later filed on 8 October 2001.

Order 49B Rules of District Court

6. It may be convenient to set out the provisions of the Rules of District Court which are relevant to the application of the Judgment Creditor.

" Order 49B

(HK) Execution and Enforcement of Judgment for Money by Imprisonment

1. Securing attendance at examination

(1) Where a judgment for the payment of a specified sum of money is, wholly or partly, unsatisfied, the Court, on an ex parte application of the judgment creditor, may order that the judgment debtor be examined under rule IA and shall, for the purpose of securing the attendance of the judgment debtor at an examination under rule 1A either-

(a) order the judgment debtor, by an order which shall be served personally upon him, to appear before the Court at a time appointed by the Court, with such documents or records as the Court may specify;

1A. Examination of debtor

(1) Upon appearance of the judgment debtor for examination, he shall give evidence and he may be examined on oath by the judgment creditor and the Court; and the Court may receive such other evidence as it thinks fit.

(2) The judgment debtor shall, at his examination, make a full disclosure of all his assets, liabilities, income and expenditure and of the disposal of any assets or income and shall, subject to the directions of the Court, answer all questions put to him.

1B. Power of the Court following examination

(1) Where the Court is satisfied, following the examination conducted under rule 1A that the judgment debtor -

(a) is able to satisfy the judgment, wholly or partly; or

(b) has disposed of assets with a view to avoiding satisfaction of the judgment or the liability which is the subject of the judgment, wholly or partly; or

(c) has wilfully failed to make a full disclosure as required under rule 1A(2) or at the examination under Order 48 or to answer any question as provided under that rule or Order

it may, in its discretion, order the imprisonment of the judgment debtor for a period of not exceeding 3 months. "

7. The law as it now stands only empowers the court to imprison a judgment debtor on confined grounds as those specified under Order 49B Rule1B(1). The Court should exercise its discretion with care and circumspection so that a judgment debtor would not be imprisoned merely because he has no means to satisfy the judgment debt no matter whether the Judgment was entered by consent or otherwise.

8. Mr. Clarke for the Judgment Creditor accepted that as the relief sought is of a criminal nature, he must prove the grounds on a criminal standard of proof, i.e. the court must be satisfied beyond reasonable doubt before an order of imprisonment will be made (see Bank of India v. Murjani & others [1991] HKLY 819 and Hua Chiao Commercial Bank Ltd. v. Alpha Plus International Development Ltd. HCA 14714 of 1999).

9. The present application for imprisonment of the Judgment Debtor was proceeded under grounds (b) and (c) of Rule 1B(1). Under ground (b), the Judgment Creditor has to show that the Judgment Debtor has disposed of assets. Although the rules do not specify whose assets, it must follow that it should refer to the assets of the Judgment Debtor but not the others. As decided in the case of Luen Hing Fat Textile Ltd. v. Lam Shing-chin t/a New Cotton Trading Company [1990] 1 HKLR 737, in order to invoke the rule to imprison a judgment debtor, the wordings of the provision must be construed strictly. Furthermore, the Judgment Creditor has to prove that the disposal was made with a view to avoiding satisfaction of the Judgment Debt.

10. For ground (c), the failure to make a full disclosure must be deliberate and intentional as opposed to accidental and negligent. The failure to make disclosure should be judged as a whole following the examination rather than for disobedience of a specific order (Luen Hing Fat Textile Ltd. v. Lam Shing-chin t/a New Cotton Trading Company, op cite followed).

The Evidence of the Judgment Debtor

11. Before going into the evidence of the Judgment Debtor, I must mention that throughout the examination of the Judgment Debtor, Mr. Clarke apparently focused more on laying foundation for his application for imprisonment of the Judgment Debtor than obtaining evidence to show means of the Judgment Debtor to satisfy the Judgment Debt (which should be the whole object of the oral examination as provided under my Order dated 27 April 2001). Therefore, there is little evidence which touched on the assets of the Judgment Debtor. Rather, the Judgment Debtor had tried to explain out the allegations made by Mr. Clarke against him for disposal of assets and failure to make full disclosure.

12. The Judgment Debtor was and is a 25% shareholder and a director of a company called Asia International Investigations Ltd ("Asia International") from where he derived his major income. However, at the time of the examination, according to the Judgment Debtor, the business of Asia International had ceased and he was unemployed and earned no income. From the documents disclosed by the Judgment Debtor, he maintained 2 bank accounts with the Hong Kong & Shanghai Banking Corporation ("HSBC"): one in joint names with his wife with only a few cents in credit and another one in his sole name with about $3,600 in credit as at 15 April 1999. Mr. Clarke accused the Judgment Debtor for failure to provide bank statements of his account in his sole name or joint name and other documents like bank accounts and accounting records of Asia International for a period from June 1999 to April 2001.

13. The Judgment Debtor explained that he did not have the practice to keep bank statements and has to obtain copies of the previous bank statements. He was told by the Bank that it would charge $50 to $60 per month per statement. He said that at that time, he had financial difficulty to even paying electricity bill so not to say to afford payment of the copying charges to the Bank. Mr. Clarke challenged the evidence of the Judgment Debtor by producing a fee tariff purportedly issued by the Bank which showed that to provide account history report for 2 years, the fees would be $500.

14. The Judgment Debtor could not produce copies of all the required company accounts and bank statements of Asia International who explained that parts of the company documents were stored in boxes and were placed in the balcony of his premises. The company documents were damaged during a heavy rainfall when the balcony was flooded in late May this year. According to the Judgment Debtor, the company documents were "turned to pulp and could not be separated".

15. There were no audited company accounts of Asia International as it could not afford to pay the auditor's fees and the accounting records were destroyed by the flooding. The Judgment Debtor stated that the income of Asia International was unsteady and very seldom there was any surplus. As written in one of the bank statements of Asia International disclosed to the Judgment Creditor, the estimated average income for the past 12 months prior to June 2000 was $17,500 while the company needed an absolute minimum of about $25,000 to $30,000 to sustain.

16. While the Judgment Debtor is a member of the Kowloon Cricket Club, it was his wife who used the facilities and spent a couple of thousands dollars there a month. The bills were paid by the Judgment Debtor's wife who earned $5,000 to $7,000 per month from working with the English Schools' Foundation. On this, I accept the submission of the Judgment Debtor that his wife was not subject to examination under this action and so the source of her income is irrelevant.

17. Despite the extensive cross-examination by Mr. Clarke, the Judgment Debtor flatly denied that he had conducted business under the umbrella of Cheverton Ltd. which is a dental laboratory conducted by a Mr. Barlow. The Judgment Debtor stated that when he was under the injunction order in this action, he received an inquiry from a Switzerland company to conduct investigation. The Judgment Debtor then referred the inquiry to Mr. Barlow since the latter has friends and acquaintance with intelligence experience who could carry out the work. No remuneration was received from Mr. Barlow for such referral. The Judgment Debtor further explained that he used the address of Cheverton Ltd as the registered address of Asia International only to avoid letting his clients know that he was working from home.

18. The Judgment Debtor was also examined extensively on another company called Avila & Associates ("Avila") which was described as subsidiary or sister company of Asia International. Avila was, according to the Judgment Debtor, a company set up by his wife and some of her relatives and the Judgment Debtor had tried to pass on any possible work from Asia International to Avila as Asia International was going to close down and he would seek other full time employment. To described Avila as subsidiary or sister company of Asia International was just to persuade the clients to pass their work to Avila. The Judgment Debtor set up the office system of Avila and trained its staff but he received no remuneration.

19. When questioned about the ownership of half a million dollars shares of Hong Kong Bank, the Judgment Debtor confirmed that he used to have shares in Hong Kong Bank prior to December 1997 but they never worth half a million dollars and such shares were initially purchased by using funds of his wife and the shares were registered in the joint names with his wife. The shares were transferred back to the Judgment Debtor's wife when they decided to separate in late 1997.

20. The Judgment Debtor has an account with Halifax Plc. in the United Kingdom but he could not produce any passbook as it was allegedly lost in mail when it was sent to update. Such assertion was supported by a letter from Halifax Plc. to the Judgment Debtor dated 20 June 2001. The Judgment Debtor recalled that the account might have 1,400 to 1,500 Pounds Sterling.

21. Mr. Clarke asked the Judgment Debtor about a house in Cebu, Philippines which according to his instructions, the Judgment Debtor owned such house. The Judgment Debtor stated that the house was purchased by his wife using her own funds and was registered in his wife's name.

22. Unless the Judgment Creditor is able to prove that the Judgment Debtor was concealing his assets or disposing them with a view to avoiding settlement of the Judgment debt, it is hard to see from the available evidence of the Judgment Debtor that he could have means at the present moment to satisfy the Judgment Debt.

Credibility of the Judgment Debtor

23. It was submitted by Mr. Clarke for the Judgment Creditor that the Judgment Debtor was evasive and argumentative during the examination and urged me to disbelieve the evidence of the Judgment Debtor.

24. In a purported attempt to demonstrate that the evidence of the Judgment Debtor was incredible and unbelievable, Mr. Clarke referred to a list of unfortunate incidents put forward by the Judgment Debtor such as the damage of the company records by the flooding, lost of the passbook for an account he holds in the UK, the cessation of business of his previous solicitors so that he could not retrieve documents, his car being destroyed by vandals, separation from his wife, difficulties with the Inland Revenue Department and his computer crashing. However, for most of the incidents listed above, the Judgment Debtor has documents to prove while the others, I am afraid that Mr. Clarke did not produce any evidence to contradict what the Judgment Debtor said.

25. Mr. Clarke, in his written submission, tried to list out the inconsistencies of the evidence of the Judgment Debtor in relation to the payment of the Kowloon Cricket Club expenses. The Judgment Debtor said these expenses were paid by his wife while his wife only earned $5,000 to $7,000 per month for 10 months of the year and he had no control over his wife. Further, from the company accounts of Asia International disclosed, they showed that for some months, the Kowloon Cricket Club bills were paid out of the company accounts instead. The Judgment Debtor said that this was to compensate his wife for having paid expenses such as rent which apparently was paid out of the company account also.

26. While the Judgment Debtor might have given inconsistent evidence during his examination, I must judge his credibility from the totality of his evidence and through my observation of the gesture and demeanour of the Judgment Debtor when he gave evidence in court under oath.

27. I do not agree with Mr. Clarke that the Judgment Debtor was evasive and argumentative. If the Judgment Debtor was argumentative, it was because of the forms of questions put forward by Mr. Clarke himself. The Judgment Debtor was neither evasive. He was frank enough in admitting his debt owed to the Judgment Creditor and the reasons for his inability to provide documents as requested in his letter to the Judgment Creditor's solicitors dated 1 July 2001, such reasons were repeated by the Judgment Debtor in his examination. The Judgment Debtor disclosed voluntarily the income and work of his wife while he has no obligation to do so. He responded to the questions posed by Mr. Clarke appropriately without exaggeration. Overall, despite a few inconsistencies, I find that the evidence of the Judgment Debtor was coherent and I accept that he is a credible and honest witness.

Wilful Failure to Make Full Disclosure

28. The Judgment Creditor alleged that the Judgment Debtor failed to comply fully with the Order of Ms. Registrar Au-Yeung dated 23 May 2001 to disclose:-

(a) bank statements of the Judgment Debtor's personal account with the HSBC for the entire subject period;

(b) bank statements of the joint bank account of the Judgment Debtor with his wife for the entire subject period;

(c) statements and passbook of 2 bank accounts of Asia International with HSBC for part of the subject period;

(d) monthly accounts of Asia International;

(e) documents showing outgoings.

Mr. Clarke urged me not to accept the explanation of the Judgment Debtor.

29. As stated in the above paragraphs, I find that the evidence of the Judgment Debtor credible. I am prepared to accept the explanation of the Judgment Debtor that he did not have a practice to keep records of bank statements and was so informed by a staff of HSBC that he had to pay $50 per month per statement and could not afford to pay so in light of his then financial position. The fee tariff produced by Mr. Clarke seems not applicable to current account but to savings account only. During the oral submission of the Judgment Debtor, he handed up a letter from HSBC confirming the same. The Judgment Debtor after the examination hearing on 30 July 2001 obtained further statements of his bank accounts and released the same to the Judgment Creditor. Mr. Clarke confirmed that the Judgment Creditor did not wish to re-open the examination.

30. The bank statements and passbook of account of Asia International are, according to my interpretation of the Order dated 23 May 2001, never part of the documents the Judgment Debtor has to disclose to the Judgment Creditor. Clause (a) of the Order only covers statements of banks accounts "in his (Judgment Debtor's) sole name or jointly with any other person, or of any firm or business of which he is sole proprietor or a partner".

31. The Judgment Debtor was unable to produce all the accounts of Asia International as part of the records were damaged in a flood in late May 2001. The Judgment Debtor could not produce any documents to show his outgoings. He explained that most of such expenses such as rent and utility charges were paid by Asia International and the same were shown on the accounting records of Asia International produced by the Judgment Debtor. As such, the records were also destroyed at the flooding. Although it sounds a little bit co-incidence when the Judgment Debtor was under an Order dated 23 May 2001 to disclose, I do not find such explanation totally incredible especially in light of my above findings on the credibility of the Judgment Debtor.

32. For the passbook of Halifax Plc, the Judgment Debtor produced a letter which showed that the passbook might have lost in mail. The Judgment Creditor has nothing to contradict such assertion.

33. The Judgment Creditor submitted that the Judgment Debtor failed to disclose his interest in a house in Philippines and asked the Court to disbelieve that the wife of the Judgment Debtor owned such a house. I agree with the submission of the Judgment Debtor that it is not for him to prove something which he did not own. He gave evidence that the house was owned by his wife. It is up to the Judgment Creditor to prove the otherwise if the Judgment Creditor intends to prove that the Judgment Debtor is telling lies. The Judgment Creditor adduced no evidence to challenge the assertion of the Judgment Debtor and clearly fails to discharge its burden of proof especially the standard of proof is the criminal standard. Such reasoning applies equally to the Judgment Creditor's allegation that the Judgment Debtor owns shares of HSBC worth half a million dollars.

Wilful Failure to Disclose Interest in/Disposal of Assets to Cheverton Ltd

34. At the examination, Mr. Clarke challenged the Judgment Debtor why he failed to disclose any records of business allegedly done through a company called Cheverton Ltd. Again, Mr. Clarke asked me not to accept the explanation of the Judgment Debtor. Furthermore, it was the submission of the Judgment Creditor that the Judgment Debtor disposed of his assets to Cheverton Ltd.

35. The Judgment Creditor has nothing concrete to prove that the Judgment Debtor had done business under the name of Cheverton Ltd. save that the Judgment Debtor adopted the address of Cheverton as the registered address of Asia International.

36. The Judgment Debtor explained that he referred a Swiss client to Cheverton Ltd. as he was under an injunction order which restrained him from taking up such business and knowing the intelligence experience of Mr. Barlow of Cheverton Ltd. The Judgment Debtor stated that he did not receive any remuneration from and denied carrying out his work under the umbrella of Cheverton Ltd. The Judgment Debtor further explained that he used Cheverton's address so as to avoid letting his clients who are lawyers know that he was working from home. I do not find such explanation unbelievable. Referral of business is quite common nowadays and using another office address such as an accountant's office or a business centre as registered office is not unheard of.

37. The contention of the Judgment Creditor here to the highest may tend to show that the business or one of the clients of Asia International was diverted by the Judgment Debtor to Cheverton Ltd. It is doubtful whether business or client equals to assets unless there is evidence to show that it eventually generates income or profit. The Judgment Creditor has no evidence to prove so. Even if so, it is the asset of Asia International but not of the Judgment Debtor under the strict separate legal entity principle. As stated in Paragraph 9 above, to succeed in the Judgment Creditor's application, it has to prove that the assets of the Judgment Debtor were disposed of. The Judgment Debtor may be in breach of his fiduciary duty as a director/shareholder to refer clients to another company but it will be a cause for Asia International to pursue. The Judgment Creditor fails to establish its case here.

Wilful Failure to Disclose Interest in/Disposal of Assets to Avila

38. The Judgment Creditor also contends that the Judgment Debtor wilfully failed to disclose his interest in or business done through Avila and the Judgment Debtor has transferred assets to Avila with a view to avoiding satisfaction of the Judgment Debt.

39. According to the Judgment Debtor, Avila is a company owned by his wife. As he decided to cease the business of Asia International and to seek full time employment, the Judgment Debtor assisted to set up the office system and to train its staff. Although the Judgment Debtor referred clients of Asia International to Avila, he derived no income from there. In fact, the Judgment Creditor has no evidence to contradict such assertion. Furthermore, the Judgment Debtor argued that since he is still living together with his wife at the same home, he saw no reason why he could refuse his wife to use the home as the base of her company. I see the logic of his arguments.

40. Mr. Clarke submitted that if the Judgment Debtor has no interest in Avila, why he would transfer business to it, assist it to train its staff, allow it to use the fax and telephone lines of Asia International, adopt the email address of Avila and allow Avila to be run from his own home in competition with his own business. To certain extent, Mr. Clarke asked me to draw inference from the said factors to conclude that the Judgment Debtor has interest in Avila. As the Judgment Creditor has a criminal standard of proof to fulfil, unless such inference is an irresistible inference, I doubt if the Judgment Creditor has discharged the high burden of proof.

41. While I accept the credibility of the evidence of the Judgment Debtor and I am prepared to accept his explanation, I find that the Judgment Creditor fails to prove that the Judgment Debtor has interest in Avila. On the other hand, for those reasons as stated in Paragraph 37 above, the Judgment Creditor fails to prove that there was disposal of assets of the Judgment Debtor by referring clients of Asia International to Avila.

Conclusion

42. For the reasons stated above, I conclude that the Judgment Creditor fails to prove that the Judgment Debtor has wilfully failed to make full disclosure as a whole and has disposed of assets with a view to avoiding satisfaction of Judgment. The application for the imprisonment of the Judgment Debtor under Order 49B 1B(1)(b) and 1(c) must fail,

43. Before I turn to deal with the issue of costs, I would like to mention one other matter. Near the end of the hearing on 26 September 2001, Mr. Clarke asked me to consider making an order for imprisonment but suspending it and ordering the Judgment Debtor to pay the Judgment Debt by instalments. He relied upon Order 49B Rule 1B (2)(b) which provides that the Court may, on application, discharge, vary or suspend an order made under sub-paragraph (a), either absolutely or subject to such conditions as it thinks fit. Sub-paragraph (a) relates to ordering a Judgment Debtor to satisfy the Judgment Debt by instalments if following examination, the Court is satisfied that the Judgment Debtor is able to satisfy the Judgment Debt wholly or partly. Clearly, the power of the Court to suspend only relates to an order for instalment payment of Judgment Debt instead of imprisonment which is made under Order 49B Rule 1B(1). Therefore, I doubt if I have jurisdiction to suspend a term of imprisonment on condition the Judgment Debtor makes instalment payments. Further, I indicated to Mr. Clarke that throughout the examination of the Judgment Debtor, I could not find any evidence to show that the Judgment Debtor has any means to repay the Judgment Debt wholly or in part by instalments. Therefore, I have no basis to make an instalment payment order at all. In light my observations, Mr. Clarke had sensibly withdrawn his application. Even if he insisted to pursue, I doubt if I would have power to order a suspended term of imprisonment.

Costs

44. At the end of the hearing on 26 September 2001, I invited the parties to make submission on costs. Mr. Clarke for the Judgment Creditor submitted that his clients should have costs of the oral examination since the Judgment Creditor is entitled to enforce the Judgment which was entered by consent of the Judgment Debtor who failed to comply. The Judgment Debtor, on the other hand, urged me to grant no costs order against him as he had informed the Judgment Creditor that he was in financial difficulty before the Judgment Creditor took out the summons for oral examination.

45. Costs are always in the discretion of the Court and the Court should exercise such discretion judicially after considering all the circumstances of the case.

46. The Consent Order was entered in February this year and the Judgment Debtor failed to pay any instalment that he promised to pay under the Order. The Judgment Creditor is fully entitled to enforce the Judgment by taking out a summons for oral examination of the Judgment Debtor in order to ascertain the financial means of the Judgment Debtor.

47. Paragraph 48/3/10 of the Hong Kong Civil Procedure 2001 states that the costs will be added to the Judgment if the examination produced some fruitful information or the disclosure of some income, property or assets on which enforcement process could usefully be issued. If the examination proves abortive or does not yield any useful information or material, the general practice, by analogy with an abortive execution, no costs will be awarded.

48. I see the justification of the Judgment Creditor to apply for an oral examination of the Judgment Debtor as a result of his default of payment of the Judgment Debt. Consequent upon the Order dated 27 April 2001, the Judgment Debtor appeared at the call over hearing on 23 May 2001 and supplied copy documents to the Judgment Creditor on or about early July 2001 in compliance of the directions given. I would give an order that the costs of and incidental to the application for oral examination against the Judgment Debtor including the costs of the hearing on 23 May 2001 be to the Judgment Creditor to be taxed if not agreed.

49. I observed in the early part of this judgment, the main object of the hearing 30 July 2001 was for the Judgment Creditor to obtain evidence in order to lay foundation for its application for imprisonment of the Judgment Debtor which I now refuse. No fruitful evidence was elicited to show any means of the Judgment Debtor to pay the Judgment Debt following the examination. The hearing on 26 September 2001 was necessary in order to allow the Judgment Debtor to seek legal advice and to reply on the Judgment Creditor's application. For those 2 hearings, after due consideration, I make no order as to costs.