Regal Properties (Pte) Ltd v. Choo Kim San and Others

HCMP000476/1982

Garnishee proceedings - Factors which have to be considered by Court - Discretionary nature of the relief - Priority accorded to claimants - Circumstances when it might be appropriate for an account to be taken - requirements which must be complied with if a Garnishee order is to be made absolute - Order Nisi discharged in this case.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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BETWEEN

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Coram: The Hon. Mr. Justice Mayo.

Date: 28 March 1983

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DECISION

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1. By virtue of an order dated the 14th day of October 1982 and made by Master McClelland, I am hearing an application on the part of the plaintiffs for a Garnishee Order Nisi dated the 23rd April 1982 and a Charging Order Nisi dated the 22nd April 1982 to be made absolute. . At the commencement of the hearing as a result of a concession made by Mr. Robert Wei acting for the plaintiffs, it was agreed that the Charging Order should be made absolute on certain terms and accordingly it is only necessary for me to deal with the Garnishee Order. Mr. Denis Chang who represents the first named garnishee informed me at the outset of this hearing that his main ground of opposition to the plaintiffs' application was that neither Messrs. Johnson Stokes & Master nor Peter Mark & Co. are indebted to the defendant Choo Kim San (Mr. San) and that if the plaintiff was to have any prospect of succeeding with his application the correct party to make a Garnishee order against would be Mr. David Ng Pak Shing, Melville Edward Ives and Ho Chap Man (the Syndicate). The result of issue being taken in this way to the Garnishee proceedings is that it is necessary to take cognizance of the background to these proceedings. Unfortunately there is a long and complicated history of litigation and if the issues are to be comprehended in a satisfactory manner it is necessary for me to give a short outline of the historical position of this litigation.

2. In June 1976 Mr. San was arrested in connection with various fraud charges. He was granted bail but did not answer to the terms of his bail and regrettably he must be regarded as a fugitive from justice. In November 1976 a Hong Kong businessman named James Coe was interested in acquiring a controlling interest in a company in which Mr. San had a controlling interest. The company is San Imperial Corporation Limited (San Imperial). Mr. Coe has a controlling interest in a number of companies. One of these is called Rocky Enterprises Limited and another is Siu King Cheung Hing Yip Company Limited. Mr. Coe used these companies as vehicles in his plans to acquire a controlling interest in San Imperial. In December 1976 the Syndicate decided to endeavour to acquire 24 million shares in San Imperial for the purpose of selling it to Mr. Coe at a profit to enable him to obtain the controlling interest he wanted. In order to achieve their objectives the Syndicate entered into an agreement dated 23rd March 1977 (the FermayAagreement) whereby it was agreed that Mr. San, through nominees, would sell to the Syndicate 15 million shares in San Imperial and the Syndicate would purchase the shares for 9 million Hong Kong dollars.  Two hundred thousand dollars was paid as a deposit and a balance of 8.8 million Hong Kong dollars was payable by the Syndicate to Mr. San. The arrangements surrounding the Fermay Agreement were exceedingly complex but in general terms the shares were vested in Fermay Limited and the members of the Syndicate were the only shareholders of Fermay Limited. The said shares were the only asset of the company. The 8.8 million I have just referred to was the balance of the purchase price payable under the Fermay Agreement and these monies are the monies which it will be seen are payable by the Syndicate to Mr. San.

3. There were then a series of negotiations and a number of documents were prepared with the overall intention of the Syndicate ' selling the 15 million shares to Mr. Coe and his companies. These arrangements were eventually reduced in the form of an agreement dated the 12th May 1977 which l will refer to as the Rocky Agreement. In outline an option was granted to Rocky Enterprises Limited to purchase the 15 million Sari Imperial shares.   There was an alternative procedure worked out whereby Rocky Enterprises Limited could acquire the share capital of Fermay Limited but for the purposes of this exercise it is immaterial which way the matter was proceeded with. The price for the option shares was 22.5 million Hong Kong dollars of which 18.5 million dollars remained outstanding at all material times for our purposes. The option I have referred to was exercised and accordingly the balance of 18.5 million dollars became payable to the Syndicate by Rocky Enter-prises Limited. Mr. San never had any interest in the Rocky Agreement unless it was held by the Court that the Syndicate were the nominees of Mr. San.

4. Three of San's creditors obtained judgment against him. These were Lee Ing Chee and Lee Kon Wah (the Lees) and Malaysia Borneo Finance Corporation (M) Berhad (MBF). On the 15th July 1977 the Lees obtained a Charging Order on various parcels of San Imperial shares. They also obtained a Garnishee Order Nisi on the 8.8 million dollars which was the balance of the monies payable under the Fermay Agreement. On the 11th August 1977 MBF obtained judgment against Mr. San. These judgments were registered in Hong Kong and on 7th September 1977 MBF obtained a Charging Order Nisi on the same parcels of shares the Lees and also obtained a Garnishee Order Nisi against the Syndicate in respect of the same sum of 8.8 million dollars.

5. All these issues and other issues were tried before Mr. Justice Yang in a lengthy trial.   It may perhaps be helpful to attempt in the most general terms to give some indications of the matters which were raised before Mr. Justice Yang. The creditors of Mr. San contested the validity and the bona fides of the Fermay Agreement and the Rocky Agreement. It was the creditors contention that the Agreements were shams and the Syndicate were in reality nothing more than nominees of Mr. San. This being the case they argued that the Fermay Agreement was of no effect and the 15 million shares in San Imperial remained the property of Mr. San.  They also argued that Rocky Enterprises Limited did not obtain any shares by virtue of the Rocky Agreement. To summarise the position at the conclusion of the trial Mr. Justice Yang held that the Fermay Agreement was indeed a sham. However he held that the Rocky Agreement was genuine. This though did not assist the Syndicate as Mr. Justice Yang also held that because the option to purchase the shares was not exercisable the beneficial interest in the shares had not passed. I refer to the 15 million San Imperial shares registered in the name of Fermay Company Limited. Consequential upon his findings Mr. Justice Yang made the Charging Orders I have referred to absolute. By the same token he discharged the said Garnishee Orders on the basis that the Lees and MBF could not have both the benefit of  the shares and the proceeds of sale at one on the same time.

6. The Syndicate lodged an appeal against the judgment of Mr. Justice Yang and their appeal was heard by the Court of Appeal in due course. Again to summarise the position the Court of Appeal upheld Mr. Justice Yang's determination of the issue that the Fermay Agreement was a sham.  However the Court of Appeal held that the Rocky Agreement was a genuine agreement and the beneficial interest of the Syndicate passed to Rocky Enterprises. By virtue of their finding on the Fermay Agreement the effect of their ruling on the Rocky Agreement was to hold that the beneficial interest of the Syndicate passed to Mr. San. The net result of all of this was that the Charging Orders on the shares would have to be discharged. That meant that the beneficial interest in the 15 million San Imperial shares passed to Rocky Enterprises Limited. One of the consequences of the finding that the Fermay Agreement was a sham was that it was necessary for the Garnishee Orders to be discharged. The 18.5 million dollars payable under the Rocky Agreement would in effect be payable not to the Syndicate but to Mr. San. The Rocky Agreement was a highly complicated agreement and the Court of Appeal was unable to make Garnishee orders absolute in respect of monies which may be payable or become payable.

7. At the conclusion of the hearing of the Court of Appeal proceedings and after judgment had been delivered a compromise arrange-ment was entered into between Mr. Coe and his various companies, MBF, the Lees, San Imperial and Mr. Marvin Cheung, the Receiver of San Imperial. Again this was a complicated document and the agreement provided for two separate Deeds to be entered into for the implementation of the arrangements which were made by the parties concerned. It is significant to observe that the Syndicate were also a party to the Deeds. In the most general terms one of the objectives of the scheme was to preserve the status quo of the interested parties pending the determination of the issues which would be ventilated in an appeal which was made to the Privy Council. It will be necessary for me in due course to make further observations concerning the terms and conditions contained in this scheme as Mr. Robert Wei placed considerable reliance upon this arrangement to support his contention that the garnishees in the 'present application, Messrs. Johnson Stokes & Master and Peter Mark & Co. held monies for the benefit of Mr. San thereby enabling him to argue that a Garnishee Order absolute should be made. I will deal with Mr. Robert Wei's contentions and the documentation of this compromise arrangement in due course.

8. Following the chronology of events I will next turn to the appeal which was heard by Privy Council. The judgment was delivered on the 20th April 1982. In outline the Privy Council held that the Fermay Agreement was not a sham. It was a valid and effectual agreement. The consequence of this was that the Syndicate should not be regarded as Mr. San's nominees. This meant that the Syndicate through other nominees owed Mr. San 8.8 million under the Fermay Agreement. This was the only money due and owing to Mr. San. The 18.5 million dollars relating to the option shares did not belong to Mr. San.  The Syndicate was entitled to receive the proceeds of the sale under the Rocky Agreement. The beneficial interest in the option shares had already passed to Rocky Enterprises Limited. Mr. San did not have any residual interest.

9. However Mr. San was entitled to receive the 8.8 million under the Fermay Agreement. As has been stated earlier, this was payable by the Syndicate to Mr. San. Since the Lees and MBF were judgment creditors they were entitled to have Garnishee Orders absolute in relation to the 8.8 million dollars. This of course was conditional upon their having an outstanding judgment due to them of this amount or more. The Privy 'Council were of course conversant with the background situation and the Garnishee Orders Nisi in favour of the Lees and MBF which had been made in 1977. As Can be seen from the final Order which was drawn up which embodied the terms of the Privy Council judgment Garnishee orders absolute were made in favour of the Lees and MBF.

10. In point of time this now brings us to the position where the plaintiffs first appeared in these proceedings. San Development Company (NB) obtained a judgment against Mr. San on the 4th February 1977. This judgment debt was assigned to the Plaintiffs and registered in Hong Kong. The plaintiffs then obtained the Charging Order Nisi and the Garnishee Order Nisi which are subject of this present application. It will be noted that the Orders were obtained immediately prior to the delivery of the Privy Council decision. As I have mentioned the plaintiffs have attempted to enforce the judgment in their favour by obtaining a Garnishee order upon the 8.8 million dollars which represent the balance of the purchase price payable under the Fermay Agreement. As can be seen from the manner in which these proceedings have been framed it is essential for the plaintiffs to establish that the said monies are either a debt owing or monies due and accruing to Mr. San if their claim is to succeed. Mr. Chang argued strenuously that on the basis of the findings of the Privy Council it was apparent that the said sum of 8.8 million dollars was a debt which was due to the Syndicate and not to Mr. San.  On the basis of the history of this litigation which I have recited in some detail Mr. Chang's submission in this respect would appear to be unanswerable. Mr. Chang analysised the whole situation in some detail and I find myself in complete agreement with the conclusions he reached and I am satisfied that the 8.8 million dollars is a debt which is due and owing to the Syndicate.

11. Mr. Chang then went on to explore the possibility whether Mr. San might be able to obtain any beneficial interest or entitlement to any monies held by the garnishees by virtue of the compromise arrangement. Before considering the detailed provisions of the three documents embodying all of the arrangements it is pertinent to observe that as one might expect Mr. San was not a party to any of these instruments. Nor were either of the named garnishees. Mr. Chang went on to argue that a fairly heavy burden is imposed upon the plaintiffs to establish their claim to the monies by reason of the requirements of Order 49 of the Rules of the Supreme Court which contains the rules relating to garnishee proceedings. A number of cases are referred to in the notes accompanying the rule in the white book. For a garnishor to succeed in obtaining a Garnishee Order absolute the commitment or obligation of the judgment debtor must be clear and unconditional. The Court of Appeal held in Bagley v. Winsome & National Provisional Bank Limited ⁽¹⁾ that where a customers deposit account had attached to it a condition that personal application must be made and a pass book produced at the time when the money was withdrawn was not complied with the payment of the monies by the bank was a conditional obligation and the sum held in the deposit account could not be garnisheed Mr. Chang also referred to various passages appearing in the case of Webb v. Strenton ⁽²⁾. On page 526 of the report Lindley L.J. said:

"The important point is that the affidavit must show that the third person, called the garnishee, is indebted to the judgment debtor, and that the subject matter to be attached is a debt 'owing or accruing' from the garnishee."

And then further on on the same page:

"I do not doubt that the power of attachment is extended to equitable debts. But is a trustee a debtor to his cestui que trust? You can not say he is unless he has got in his hands money which it is his duty to hand over to the cestui que trust; then of course he is a debtor and there is no difficulty in attaching such a debt under this Order.'

These cases illustrate the stringent nature of the requirements which must be met if a plaintiff is to succeed in attaching a debt. Mr. Chang submitted that on any fair perusal of the documentation comprising the so-called compromise agreement it was impossible for the plaintiff to come anywhere near meeting these requirements. This being the case the plaintiffs application for a Garnishee Order absolute must fail.

12. Mr. Faulkner who was representing the second named garnishee adopted all of the submissions of Mr. Chang. He also added a number of powerful agruments of his own why the plaintiffs application should fail. He suggested that whatever interpretation may be adopted, for the com-promise arrangements it was nonetheless true to state that Mr. San was not a party to these arrangements. He did not see how the plaintiffs or Mr. San could place reliance upon the documents. For one thing he had not given any consideration for any benefits which might flow from the documents. The transfer of shares under the Fermay Agreement had been made three years previously and obviously any consideration payable then would be past consideration so far as the compromise arrangements were concerned. He also cast doubts upon the ability of the garnishees to make payments either to Mr. San or the plaintiffs. He referred in particular to the condition which was imposed in the documents that the garnishees should not make any payments out of funds held by them without obtaining the prior directions from MBF and the Syndicate. At the very least such a requirement would constitute the sort of impediment which had resulted in the failure of the garnishor to obtain a Garnishee Order absolute in Bagley v. Winsome & National Provisional Bank Limited ⁽¹⁾.

13. Mr. Faulkner also referred me to the terms of the Garnishee Order Nisi which had been obtained by the plaintiff.  Specific reference is made in this Order to the 8.8 million dollars which I have earlier referred to and accordingly the plaintiffs must confine themselves to this particular fund when addressing arguments to the Court on the interpretation of the documents comprising the compromise arrangements. This places a considerable constraint upon any arguments or submissions which might be developed by Mr. Wei.

14. Mr. Faulkner also argued that the relief which was available under Order 49 was discretionary. He suggested that in the present case the Court ought to be reluctant to exercise this discretion in favour of the plaintiffs.. Were the Court to do so a number of anomalies and difficulties would inevitably arise. One effect of making the Garnishee Orders absolute would be to possibly provide the plaintiffs with a priority over and above the interests of the Lees and MBF who had already obtained Garnishee Orders absolute as a result of the Privy Council judgment. Problems may be encountered in determining the priority and interest of all interested parties if the plaintiffs were to obtain a Garnishee order absolute. If I understood Mr. Chang and Mr. Faulkner correctly they would not object in any way if the plaintiffs were to institute proceedings to obtain a Garnishee order absolute against the Syndicate. Were they to obtain such an Order it would of course be subject to the prior interests of the Lees and MBF.

15. At the beginning of his submission Mr. Wei conceded that even if he was to obtain the Garnishee Order absolute that he is seeking for the plaintiffs it would have to be subject to the Garnishee orders which had been obtained by the Lees and MBF. Notwithstanding the fact that Mr. Chang and Mr. Faulkner indicated that they would not oppose an application for a Garnishee order if it was made against the Syndicate Mr. Wei still did not feel disposed to withdraw his application and proceed against the Syndicate. He argued that the plaintiffs could establish an interest in the funds which were being held by the garnishees. He added that it was necessary for the plaintiffs to obtain a Garnishee Order so that the funds could be applied for the benefit of the creditors of Mr. San. Mr. Davidson a Malaysian advocate, had filed an affidavit which provided detailed information concerning transactions which had been effected by MBF and also indicated that MBF had received large sums of money. It might well be the case that Mr. San's indebtedness to MBF had been reduced to such an extent that they might not now be owed anything approaching the amount of their judgment debt and accordingly was quite possible that there might be sufficient funds available to discharge the debts of the Lees, MBF and the plaintiffs.   What was required was that the Court should order that an account should be taken so as to enable the true position to be ascertained. It was quite possible that the information which had been obtained by Mr. Davidson was not complete and the plaintiffs were not in a position to themselves obtain sufficient information concerning the overall financial situation unless the Court ordered that an account should be taken. A further reason for ordering an account to be taken was the necessity for including in the Garnishee Order absolute a specific amount. A perusal of model forms and orders contained in Atkins Court Forms 2nd edition volume 19 page 270 indicated the requirement for specifying a sum certain. Unless an account was taken it would be impossible to meet this requirement.   I regret that I do not see any merit in this submission.  I do not see why a judgment creditor should not make a claim in garnishee proceedings for the full amount which the garnishee holds which is a debt owing or accruing to the judgment debtor. Before any Garnishee Order is made absolute the Court will determine the amount of the judgment debt which remains due to the judgment creditor.' If any monies are still held by the garnishee after the first Garnishee Order has been satisfied there may be a balance remaining outstanding for other judgment creditors seeking to attach the monies held by the garnishee. In other words it is a simple matter of each garnishee application being dealt with in order of priority of time. I accept that there may be situations where it would be necessary and desirable for a Court to order that an account should be taken.   Such cases might arise where a solicitor or trustee is administering a fund and it may be impossible at the time when the garnishee proceedings are being heard to determine the amount which the garnishee is holding unless an account is taken. The present case is not such a case and I do not consider that it would be correct for me to order that an account should be taken.

16. I have already commented upon the Privy Council judgment and its effect upon the Fermay and Rocky Agreements. I am satisfied that there is nothing contained in that judgment which can lead me to a conclusion that the funds held by the garnishees can be said to be payable to Mr. San or accruing to him or in any way constitute either a beneficial interest for him or a debt due to him. This being so I now propose considering whether it can be argued that such an interest can arise by virtue of any of the documents comprised in the compromise arrangement or in the Silks agreement which' was concluded at the end of the appeal heard by the Court of Appeal.

17. Mr. Wei submitted that it could be so argued. He claimed that if a fair construction was given to the Deeds and agreement it could be seen that the garnishees were exercising powers analogous to the powers of trustees. In support of this proposition he referred to the limited role which was exercisable by the liquidator. He also asked rhetorically why the Receiver had been a party to the compromise. He suggested that it was reasonable to draw an inference from this that the reason he had been included was to ensure that the interests of all parties could be adequately protected. In the event that the claims of the Lees and MBF

"Attachment of debt due to judgment debtor

1. (1)  Where a person (in this order referred to as the judgment creditor') has obtained a judgment or order for the payment by some other person (in this order referred to as 'the judgment debtor') of money, not being a judgment or order for the payment of money into court, and any other person within the jurisdiction (in this Order referred to as 'the garnishee') is indebted to the judgment debtor, the Court may, subject to the provisions of this order and of any written law, order the garnishee to pay the judgment creditor the amount of any debt due or accruing due to the judgment debtor from the garnishee, or so much thereof as is sufficient to satisfy that judgment or order and the costs of the garnishee proceedings."

I do not consider that the plaintiffs have come anywhere near satisfying me that the garnishees are indebted to Mr. Sang the judgment debtor. For this reason this application must fail. As a consequence of this the Garnishee Order Nisi must be discharged.

18. I informed the parties of my decision at the conclusion of the hearing. I also advised them that I would in due course be giving them my written reasons for this decision which I now do. At the end of the hearing, after hearing submissions from Counsel, I made a slightly unusual order concerning costs.  Mr. Chang and Mr. Faulkner said that it was apparent from notes in their possession that they had informed the plaintiffs that in their opinion the plaintiffs were proceeding against the wrong parties and that they should make the Syndicate a party as garnishees rather than Messrs. Johnson Stokes & Master and Messrs. Peter Mark & Co. They went on to argue that the consequence of the plaintiffs disregarding this advice was that the two solicitors firms would incur a substantial loss if they were only entitled to recover costs on a party and party basis rather than a solicitor and own client basis. I felt some sympathy for the solicitors who through no fault of their own found themselves in this position. Having regard to all of the submissions which were made to me on this application I have no doubt that the plaintiffs should have heeded the advice which they received. I was not though prepared to go to the length of making an Order that could be satisfied there might be a residue left in the Receiver's hands which could be applied for the benefit of Mr. San. If this happened a situation could well arise where the garnishees may be holding monies which were due and payable to Mr. San. Only if an account was taken could this be ascertained. I do not think that this situation could arise. The Receiver held the 15 million shares registered in his name for the purposes set out in the document.  In the Deed the Receiver confirms that Rocky Enterprises Limited has become beneficially entitled to the Rocky shares. He also agrees in the Deed that the 18.5 million dollars which was paid to establish the fund represented payment for the option shares under the Rocky Agreement. There is nothing in this part of the Deed to indicate that under any circumstances could any beneficial interest become due and payable to Mr. San. Under the relevant provisions the Syndicate were entitled in entirety to the proceeds of sale under the Rocky Agreement.

19. Although Mr. Wei referred me to a number of different clauses in the documents there was nothing in any of them to indicate that Mr. San could derive any benefit under the arrangement. The same can be said for the Silks agreement. This is hardly surprising. I do not think that it would have been in the contemplation of any of the parties to these agreements and deeds that any benefits should flow to Mr. San who at the time of the arrangement was a fugitive debtor. Even if it was possible that he might be able to establish such an entitlement I do not think that it could in any way be argued that the garnishees could be regarded as trustees holding the monies for him It is my reading of the documents that the garnishees were simply acting as repositories for the funds entrusted to their care. It is equally clear that the interested parties in the funds at that point of time were MBF and the Syndicate. The distribution of the funds they were holding would be in accordance with the findings of the Privy Council when they determined the issues before them.

20. In my judgment the main issue that I have to determine is whether the plaintiffs have succeeded in bringing themselves within the requirements of order 49 rule 1 of the Rules of the Supreme Court. This rule reads as follows:- the costs should be paid on a solicitor and own client basis and I decided that the most appropriate Order was that the costs should be taxed on a common fund basis. I made an Order to this effect.

(1)    (1952) 2 Q.B. 236.

(2)    (1883) 11 Q.B.D. 518.

Representation:

Mr. R. Wei, Q.C. & Mr. Chan (Ince & Co.) for Plaintiff.

Mr. D. Chang, Q.C. & Mr. W. Poon (J.S. & M.) for first named Garnishee.

Mr. R. Faulkner (Peter Mark & Co.) for second named Garnishee.

Mr. P. Fung (Deacons) for Claimants (the Lees)

Mr. D. Chang, Q.C. & Mr. W. Poon (J.S. & M.) for Claimant (MBF)