American Express International Banking Corporation and Others v. Michael J. John and Another
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1. This matter arises out of the collapse of a company commonly called Axona, (its full name being Axona International Credit and commerce Ltd.) - the collapse of that company, and its associates in a group, one of which was known as Tetra, and the other known as Hong Kong Deposit Guarantee Company.
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HCA014594A/1983
Shortly before the commencement in Hong Kong of the liquidation of Axona International Credit and Commerce Ltd., the three plaintiff banks completed in New York attachments of Axona's assets. By U. S. Law attachments made within 90 days of the commencement of insolvency proceedings in the U. S. were defeasible at the suit of a trustee in bankruptcy if they operated as preferences in fact. With the leave of the Hong Kong Court, the joint liquidators of Axona commenced insolvency proceedings in New York for the purpose of challenging these attachments as preferences. Upon applications by the plaintiff banks for orders directing the liquidators to terminate the New York proceedings held:-
Plaintiffs' application dismissed. Observations upon the need for the court when granting a Mareva injunction:-
IN THE SUPREME COURT OF HONG KONG HIGH COURT _____ BETWEEN
______ Coram: The Hon. Mr. Justice Hunter Dates of Hearing: 21st to 25th May 1984. Date of Delivery of Judgment: 28th may 1984. __________ JUDGMENT __________ 1. This matter arises out of the collapse of a company commonly called Axona, (its full name being Axona International Credit and commerce Ltd.) - the collapse of that company, and its associates in a group, one of which was known as Tetra, and the other known as Hong Kong Deposit Guarantee Company. 2. I heard argument in Chambers last week over a period of five days. One of the points raised was a matter of some importance in Hong Kong, and this judgment may well be used in open Court in proceedings in New York. That is why I am giving this judgment in open Court. 3. The story starts in November 1982, when Axona first got into difficulty and was in fact, unable to pay its debts when they fell due. Axona alleged that the cause was liquidity problems, and not true insolvency. As so often happens, the first group of persons to become conscious of the seriousness of the position, was a group of bankers. They formed an informal committee. I have seen the names, as committee members, of 24 banks, all of them well known in Europe, Asia or the Unite States. I think there were some seven or eight U.S. bankers on that committee. They were faced with a regrettably familiar problem. They had two choices. They could each go their own way, make such use as they could of the knowledge in their position, and pursue a policy of grabbing such assets as were available for themselves, whilst the going was good. The second course was to subordinate their own personal interest in favour of the interest of the general body of creditors, including themselves and wider numbers who were probably much less familiar with what was going on, and decide for themselves what was best in the general interest; whether some scheme could be devised, or whether liquidation was inevitable. The vast majority of the members of this committee adopted the second course. 4. The affairs of Axona and the group were investigated in December and January. It was revealed that the answer was insolvency. On 2nd February, one of the U.S. bankers, and a committee member, Pittsburgh International Asia Ltd., presented a winding up petition. 5. The three banks, the three plaintiffs in the action before me, pursued what they would no doubt describe as a policy of enlightened self-interest. The first, American Express International Banking Corporation, was a committee member and took action both in Hong Kong and in New York. The second two plaintiffs, State Street Bank International, and Manufacturers Hanover Trust, were not committee members and took proceedings solely in New York. It is in my judgment, plain, that that action by them was inspired or triggered by the action taken by American Express. I am going to recite briefly the steps they each took. 6. First, American Express. Axona defaulted on a foreign exchange transaction on 16th November, which resulted in American Express obtaining on 19th November an ex parte order of attachment, which it served on served on seven New York bankers, including the second and third plaintiff. More significantly, on 22nd November, American Express, filed suit in New York, to recover HK$12 million, or rather its U. S. equivalent. The next day, 23rd November, it obtained an attachment order for over US$1.8 million, and again served that order in respect of $1.4 million on the seven banks. This plaintiff then turned its attention to Hong Kong, and on 30th November issued a writ for the selfsame HK$12 million here. By pure chance, late on the afternoon of 2nd December, it came before me in Chambers on an application for a Mareva injunction. For anyone who might be reading this judgment in the United States, I should simply explain that a Mareva injunction operates only by way of restraint; it does not operate in any way by way of charge or attachment. I was then told that the plaintiff was a member of this committee, and that it was under pressure, from that committee, to withdraw its New York attachments which I was likewise told about. There was a reference in the affidavit to some agreement between this plaintiff and that committee. 7. Now, its unfortunate that at this stage, something went wrong, and therefore I am going to be careful to use neutral language. What happened in this suit was this. On the first day of the hearing, I was invited in the interests of time, to do some homework, to take some files home, I did. One of the files was the file relating to this action. I was unhappy with what I read. I revealed my unhappiness to counsel first thing on Tuesday morning, and later on that day, at their request, I adjourned to enable the matter to be investigated. It appears that the remaining days of the hearing were not sufficient for that investigation to be completed, so I do not yet know what the answers are. 8. All I do know is that on 2nd December I thought I was being told that American Express had given an undertaking to this committee, in substance, to hold the proceeds of these attachments to their order. In other words, American Express were pursuing a policy of subordinating their own self-interest, in line with the rest of the committee. I therefore, granted them relief. If I had thought that they were, in fact, pursuing these attachments solely in their own interests, I do not see how I could possibly have granted this relief. But I made a mistake. I can now see that I should have insisted upon this undertaking, which I believed had been given, being recited in the order. I did not so insist. If I had, the matter would have been clarified then and there. 9. The matter came back before me on 15th December, when an application was made by Axona to correct an ambiguity, (I regret to say, a patent ambiguity), in my original order, and in particular that the scope of the order should be expressly limited. That was the proposal. The then facts, raised very serious doubts indeed about the viability of Axona. I acceded to the opposition temporarily, and adjourned the matter for five days, following a course advocated by Lord Denning in a case in the Court of Appeal, called Z Ltd. v. A-Z, (1982) Q. B. 558, the passage which is material being at p.576E. This was not to make the order limited, but to force the defendants to reveal what assets they in fact had. The result of that was, that when the matter came back before me on 20th December, an affidavit in circumstances of some confidence was produced, revealing what assets Axona then possessed. I did not have to go into the matter again, because I was invited to make, and made, a consent order. That was my second mistake. 10. Part of the agreement (but not of the order) was that Axona should consent to judgment under Order 14 at some future date, and in fact, it consented on 8th January. The next stage was on 14th and 15th January, American Express, obtained garnishee orders on the two assets revealed, of necessity, in the Axona affidavit. In due course, one of the major creditors got wind of this, and put in an affidavit in opposition, saying that those orders should not be made absolute because they would constitute a blatant preference. In fact, the matter never came to a crunch, because the application was not pursued. The probability is that those orders would never have been made absolute in light of that opposition. It was not pursued because of the intervening events in New York. What happened there was this. On 11th January, American Express took proceedings on the Hong Kong judgment, and on 28th January, obtained a default judgment on that judgment, which the same day was satisfied, out of the attachments. 11. Now, there are two lessons to be learned from that history. The first lessen is purely domestic and has no real relevance to the issues raised in the present proceedings. I refer to it only to confess my own errors, in the hope that others will not fall into the same pitfall. The first is that, if on an application, a Court thinks either that it is being given an undertaking to itself, or that it is granting relief upon the basis that some undertaking has been given to another, it is essential for the order, to recite this. Second, if a Court pursues the policy advocated by Lord Denning, as I did, it must insist upon the recipient of that information giving certain undertakings to the Court, as to the way it is going to be used. Otherwise, as here, the effect of my order was to give a positive advantage to American Express without any restriction at all, of which they promptly took advantage. 12. The other lesson to be learned, is the obvious practical differences between execution in Hong Kong and execution in New York. In Hong Kong, execution as a general rule, follows judgment, and in circumstances like this, may give rise to vigorous opposition. By contrast, in New York, attachment comes early and easily on an ex parte application. 13. Whilst this was going on, State Street likewise took proceedings in New York. It started with a claim before the New York Court, filed on 10th December, again for the U.S. Dollar equivalent of a Hong Kong debt. They likewise obtained, on the same day, an attachment order which was served on the same group of banks. Between 14th January and 1st February, that judgment was satisfied by a combination of funds attached and set off. 14. The third plaintiff, Manufacturers Hanover, started its proceedings in New York on 24th November, the day after, it received American Expresses' second attachment order. This was for a sum of US$1.5 million. On 10th January, it obtained a default judgment, and by 12th January, that judgment had been settled by attachment. 15. The net effect of this is, that a total sum of just over $3.8 million, then standing to the credit of Axona, in the Chemical Bank in New York, was successfully attached by these three plaintiffs. The whole issue before me is whether those three banks can retain that at the expense of the general body of creditors. It has given rise to a massive and hideously expensive inquiry, both here and in New York. 16. I must now turn to the conduct of the liquidation itself. As I have said, the petition was filed on 2nd February. Matters then moved quickly. On 4th February, this Court appointed the two defendants to the action, Mr. Johnson and Mr. McMillan, partners in a well known firm, as joint provisional liquidators, and made a regulatory order. The next day, 5th February, the liquidators were informed of these New York attachments, significantly, by another committee member, and another U. S. bank, Fleet National Bank. The events that followed have been put on oath before me by Mr. James, a partner in Wilkinson and Grist, the Hong Kong solicitors acting for the joint liquidators, and Mr. Greig, who is senior partner of the Hong Kong office of Cleary, Gottlieb, Stein & Hamilton. 17. In order to explain this, it is first necessary to say a little bit about U. S. Law. Under the relevant U.S. Code, a foreign liquidator comes under the description of a "foreign representative". If he wishes to take any insolvency proceedings in the United States, two routes are open to him. First he can proceed under Section 303 of the Code, and then if an order is made, a trustee is appointed, a separate estate is created in the United States under the control of that trustee and under the ultimate control of the United States Court. One might almost summarise that by saying, a typical Hong Kong or English type situation. The other route, was first introduced in 1978. That is to proceed under Section 304. This allows the foreign representative to take proceedings in the United States Court specifically described as "ancillary" to the foreign liquidation, and in this way, seek the assistance of the U. S. Court in respect of such liquidation. 18. When they were first consulted by the joint liquidators, Cleary Gottlieb's initial reaction was to proceed under Section 304, and make use of this new procedure. But on further reflection, particularly by the three partners in New York, it was revealed that there were significant disadvantages in that, and significant advantages in proceeding under Section 303. The matter was summarised in a memorandum dated the 7th February, signed by three New York attorneys. The four advantages which they identified, advantages of proceeding under S. 303 as opposed to S. 304,were:-
19. And at the same time, both in this memorandum, and in discussion, Cleary, Gottlieb's attorneys warned the joint liquidators of the disadvantages of proceeding under Section 303, the principal one of which was the loss of control over the U.S. estate, resulting from the appointment of a trustee in New York, coupled with additional administrative expenses. They also warned of the uncertainties as to precisely how the United States Court would deal with the situation. But they drew attention to two authorities in the United States. The first of which concerned proceedings in the United States arising out of, I think a Swiss liquidation. The full title is Banque de Financement S.A. v. First National Bank 568 F.2d.911. It has been referred to conveniently, and I shall follow, as the Finabank case. The second arose out of a liquidation in England, Israel British Bank (London) v. Federal Deposit Inc. Corp. 536 F.2d. 509. That has been referred to as the "IBB" case. These cases were referred to as illustrating how the United States Court was prepared to assist foreign liquidators, positively and sensitively, as shown in the way it acted in those two cases. 20. I can only express my admiration for the authors of that memorandum. I have had very very much more paper put before me. Having read that paper, and coming back to that memorandum, I am struck with the speed with which it was produced, the clarity of its presentation, and its accuracy. It seems to me that it is wholly correct, because for reasons with which I shall deal hereafter, I reject the one criticism directed to it. Mr. Greig is also fully entitled to say, with the wisdom of hindsight, that all four reasons have been fully justified. 21. Armed with that advice from Cleary, Gottlieb in New York, coupled with positive advice from the partner here to proceed under I Section 303, application was made to Mr. Justice Liu, on 8th February. Before him went Mr. Knos of the Official Receiver's Department, Mr. Johnson, one of the joint provisional liquidators and Mr. James. The matter was presented to the Judge. This memorandum was produced to him, together with another earlier memorandum prepared by the joint liquidators. He then made an order in these terms:-
22. The next day, the 9th February, the necessary petition was presented to the New York Court. On 4th March, a formal order was made in Hong Kong winding up the company, and confirming the appointment of the provisional liquidators as full liquidators. On l1th April, the matter came before Judge Galgay in the New York Court, who made the necessary orders despite vigorous opposition by the three banks. The terms of Mr. Justice Liu's order of 8th February, were not specifically referred to, but the transcript reveals that counsel for the joint liquidators, made it abundantly clear, that the step was being taken in New York, as it was, at the request of the Hong Kong Court. Thereafter, Mr. Togat was appointed trustee, and in October, he commenced what have been called "adversary proceedings", to set aside the three preferences obtained in the United States. There is one singular fact in this case. It is that in this respect, the United States law is very clear and very simple, and, if I am allowed to say so, infinitely preferable to U. K. and Hong Kong law. Unlike us, the New York Court, does not have to go into difficult questions of intention. They have to ask themselves a simple objection question, "did this payment, in fact, operate as a preference?" This case has been conducted by the three banks before me on the basis there is only one possible answer to that question. This explains what has happened. Having no apparent defence to this claim in New York, the banks have launched into a massive counter-attack, a massive filibuster to prevent the New York Court from giving judgment in the adversary proceedings. 23. There was, at least in relation to the principal point urged before me, a short and simple procedure open to them in Hong Kong. Sadly they chose not to take that proceeding until the last moment, and instead pursued a course which has placed maximum risk, and maximum expense, on the joint liquidators. This concerted attack involves the Courts of both countries. There are now four separate summonses. The first is the writ in the present action, which was issued on 1st December, and which is relied upon in New York as an overt submission to the jurisdiction of this Court. It claims declaratory relief to the effect that they are entitled under Hong Kong law to retain the benefit of these executions, upon the apparent hypothesis, as far as the pleading goes, that New York law is not relevant at any stage of the inquiry. 24. Secondly, on 20th December, motions to stay or dismiss the adversary proceeding were launched before the U.S. Court. Thirdly, on 12th January of this year, a motion to dismiss the bankruptcy proceeding was launched before the New York Court. The documentation of those proceedings has been put before me, and I will refer to it at the end of this judgment. Finally, on 27th April, a summons was taken out in the liquidation itself. The action of 1st December, has spawned three separate summonses. The first was a summons under Order 14 for summary judgment. That was abandoned halfway through the hearing. The second was a summons by the liquidator defendants, inviting the Court to stay those proceedings on a number of grounds. The principal one is that the liquidators should not be wasting creditors' money litigating in two Courts at the same time. Thirdly, there is a summons for leave to re-amend, the Statement of Claim, in that action, to introduce a claim for mandatory relief, an order directing the liquidators to take certain steps. Then finally, as I think I said, there is a summons in the liquidation, which again is asking in substance for the same mandatory relief; a direct order of the Court in the exercise of its supervisory jurisdiction in that liquidation. There were two claims in the original summons. They were both ways of asking the Court to direct the liquidators to withdraw (if they could) the U. S. proceedings. Paragraph (1)(1) was put upon the heading of "misfeasance". Paragraph (1)(2), was put upon the basis, of conduct inconsistent with their duties as officers of the Court. Paragraph (2), was put on a more neutral bas is and invited the Court to review the original order, and to say it was wrongly made. 25. I take the view that this summons in the liquidation, was the proper procedure to take in the first instance, and I am proposing to deal with it first. Now, as I have already said, the joint liquidators presented this matter to Mr. Justice Liu in Chambers, and he made the order that he did. They acted throughout, on the advice of the attorneys in New York, and solicitors in Hong Kong, and with the authority of the committee of inspection. I was therefore very puzzled, at an early stage, as how any case of misfeasance could be grounded. I fear I harried Mr. Ribeiro, upon this point on Day 4, and found myself getting not very satisfactory answers. On the morning of Day 5, Mr. Ribeiro, who was then conducting the case of the second and third plaintiff invited leave to amend the summons, to abandon the claim of misfeasance, and to substitute the claim of relief, originally claimed on the ground advanced in Paragraph (2). I readily gave leave for that amendment to be made. I thought it meant that the claim of misfeasance was acknowledged to be bad, and had gone forever. It was accordingly unnecessary to rule on the point made by Mr. Woolard as to the locus of these three banks. Mr. Muir Hunter, Q.C. who was then following his former junior, on behalf of the first plaintiff, concurred. But to my surprise, when he came to address me, he put his concurrence on the basis that the claim of misfeasance was not unfounded but premature. He said that my interlocutory observations to Mr. Ribeiro, were founded upon a wrong view of law, and contrary to the decision of Maugham J. Re Home and Colonial Insurance Co. Ltd. (1930) Ch. 102. He ended his submissions by inviting me to give directions as to the future trial of his misfeasance summons. I have therefore carefully considered this authority to which Mr. Muir Hunter referred. In my judgment, it constitutes no authority whatsoever for the proposition that he was founding upon it. Maugham J. in that case, found the liquidator guilty of negligence. He found a charge of negligence made out, which he himself formulated at page 119 of the judgment, in these terms:-
Later, in his judgment, when he reaches his conclusion that the liquidator was negligent, he observed in relation to a liquidator.
26. Where the liquidator in that case went wrong, was that on the point in issue, he never even consulted his own solicitors or put the matter before the Court. He only went before the Court on the subsidiary question of quantum. My understanding has always been that when the Court gives guidance to a liquidator, the Court is taking the decision; and the Court is accepting the responsibility; and that such an order completely protects the liquidator so long as he has put all relevant matters before the Court. In my judgment, that is what these joint liquidators did here. I do not think there is any substance whatever in this charge of misfeasance. If, as appears, the charge was launched upon the advice of Mr. Muir Hunter, that advice was, in my judgment, mistaken. I am not prepared to allow the matter to be held over these liquidators' heads any longer. I think they are entitled to a clear view from me that what they have done does not constitute misfeasance. Still less does it constitute a breach of their duty as officers of this court. 27. I am now going to return to the amended summons in the liquidation. It emerged in the course of argument, that the attack upon Liu J.'s order was being put on three grounds. First, it was said Section 269 of the Companies Ordinance governed the situation, and was a complete defence under Hong Kong Law, which was the point intended to be raised by the original writ. Secondly, it was said it was fundamentally wrong to create a second estate in the United States by proceeding under Section 303. What Mr. Muir Hunter at one stage said to me was this:-
28. Thirdly, it was said that the rules governing U.S. bankruptcy, and the restrictions they impose upon the U. S. Court are such, that a hopeless, destructive conflict would be created between the joint liquidators and their opposite number, and I suppose, between me arid my opposite number. The first point is one of law; the second and third go to discretion. 29. Those were the three attacks that were made, and on several occasions I was asked to stop irreparable damage being done to these three banks. At the same time, most curiously, the banks were seeking to deprive me of a vehicle upon which I could act. One of the vehicles on which I might have acted, was the Order 14 summons, and that was abandoned. The second vehicle on which I could act, was this summons of liquidation; but I was invited eventually by both counsel, only to give directions as to the future trial of the matters raised on those summonses. Eventually, it was put that I should give a provisional ruling upon the matter, subject to further argument. I reject both those suggestions. 30. The principal matter upon which directions were sought was for the attendance in Hong Kong for cross-examination, of the various persons who have deposed to U.S. law. Bearing in mind, that there are pending proceedings in the United States Court, which knows more about the United States Law, than I could ever begin to learn, a more barren exercise I find it impossible to imagine. As to the suggestion of a provisional ruling, I can see no merit in that. The matter has been fully argued before me. I am quite satisfied that I can deal with the matters on the evidence which has been put before me, for reasons which I shall endeavour to state. The ruling I am proposing to give is intended to be final (subject of course, to appeal) as far as the Hong Kong Court is concerned, so that the U.S. Court will know precisely what Hong Kong's views are upon this matter. 31. Now, as I said, the first point was that Section 269 governed. Section 269 of the Companies Ordinance, is, so far as is material in these terms: "(a) Where a creditor has issued execution against the goods or lands of a company, or has attached any debt due to the company, and the company is subsequently wound up, he shall not be entitled to retain the benefit of the execution, or attachment against the liquidator in the winding up of the company, unless he has completed the execution or attachment, before the commencement of the winding up." (i.e. before a petition is filed). "(2) For the purposes of this section, an execution against goods shall be taken to be completed by seizure and sale, and an attachment of a debt shall be deemed to be completed by receipt of the debt." That plainly means, (and there is authority for this proposition) receipt of actual payment is discharge of the debt. 32. Now the submission which is put before me by Mr. Eban Hamilton Q.C. for the joint liquidators, and by Mr. Woollard for the Official Receiver, is in substance, that this is a domestic code. It governs domestic executions against goods and lands within the jurisdiction of the Court, or attachments which have occurred in Hong Kong, and does not extend to matters taking place outside the jurisdiction of this Court. Such matters, they contend, are governed, and I emphasise that word, by the lex situs, which in this case, is the law of the United States, as administered in New York. In answer to that, the banks contend that this section governs activities anywhere. They deal with the lex situs in this way. Mr. Ribeiro submitted, that the lex situs governed only up to the date of the liquidation. As I understood it, it ceased to have an effect after that date. Mr. Muir Hunter put it slightly differently (it may be that it all comes down to the same thing) that the law of the insolvency, what he called the lex concursus overruled the lex situs. 33. Now, this is a significant and very important submission. The normal result, with which one is familiars, in this area of the law, accurately described as "Conflict of Laws", is for the domestic Court to decide in accordance with governing principles which of two conflicting laws is to prevail; which of two conflicting laws is to govern a transaction. The concept of having two governing laws, and the one overruling, or overriding the other, is to me a somewhat unusual and novel one. I was therefore interested to see how this exception had arisen, and what was said in the authorities about how this conflict was to be resolved. But to my surprise, no authority in favour of this proposition was advanced at all. The one relevant authority to which I was referred was the decision in Suidair. Mr. Ribeiro, eventually at my request, sought to deal with it, Mr. Muir Hunter ignored it. When I asked him whether there was any statement in any text book, his own, Williams on Bankruptcy, or any other book on bankruptcy, Dicey's Conflict of Laws or any other book, supporting this proposition, or shedding light upon it, I was told that there was none. What he said to me was that the point was "too plain for argument" and a "selfevident proposition". 34. I am minded to observe, that even in Hong Kong, this will not do. A proposition of such importance which is put before me in this sort of way, I am bound to regard as suspect in principle. What I am proposing to do, is to consider it, (1), in relation to lex situs (2) as a question of construction, and (3) on authority. In my judgment, it does not cross a single one of those hurdles. (1) Let us consider the lex situs. First, it is accepted that the lex situs governs the validity of the attachments. It is not necessary to go further than Rule 84 in Dicey and Morris, "Conflict of Laws", 10th edition, page 577. Secondly, it is common ground that the lex situs, i.e. the law of New York applied to the attachments. It shows first that they were sufficient to discharge the indebtedness of Chemical Bank; and secondly, that subject to the question of defeasance, it would likewise discharge the three banks. So much is common ground. But, equally in my judgment, it is self-evident that any question of defeasance, any question of preference in insolvency, can only be pronounced upon effectively, by the Courts of the lex situs. They, and they alone, and dominant. They and they alone, can either order repayment, or deny any obligation to repay, the latter being the point in Suidair. In this respect, the Hong Kong Court is totally impotent. The Hong Kong Court can make no effective order against any of these three banks. The Hong Kong Court can do no more than it has already done, authorise proceedings in the other jurisdiction. That seems to me the probable reason why the three banks have been so keen to submit themselves to the jurisdiction of this Court, knowing full well, that I am impotent to do anything against them. Those considerations are sufficient, in my judgment, to show that there cannot be any substance in Mr. Ribeiro's cut off argument. The whole matter must turn on Mr. Muir Hunter's overruling point. 35. Fortunately the point becomes more obvious when one looks at the Codes: the requirements of all relevant local enactments, which I have considered in this matter, namely Hong Kong, U.K. and U.S. They all show that for a matter to be avoided as a preference, three things are necessary: the first is appropriate words in the Code: The second is some adjudication, some insolvency, some winding up: And the third, some claim by the trustee. That is again, self-evident of the law of the United Kingdom and Hong Kong. Again, one need really go on further than that Rule 142 (1) and (2) in Dicey p.738. 36. Equally, it is plain, that it is the law in the United States, because Professor King says this, in his first affirmation.
37. So, he is stating U.S. law in this respect, in identical terms to U. K. law. This simply confirms the obvious dominance of the Court of the lex situs. 38. Fifth, and this is again self-evident, the lex situs varies in accordance with local ideas. There are, in fact, three variable and interconnecting factors. The first, is that you find variations in the Codes. I have already drawn attention to an important variation between Hong Kong and the United States. These Codes vary over the years in each country, depending upon the view taken as between the demands of particular creditors. Secondly, there are important variations in procedures, times for attachments, and the ease of attachment. Thirdly, those two variations themselves, condition local behaviour. I have already drawn attention to the fact that in Hong Kong, attachment normally only follows judgment, and in a large case like this, it may be very difficult for a local creditor to bring himself under Section 269 by completing his attachment. Conversely, in New York, attachments, as I say, come early and easy. Other creditors do not have to worry very much, because they know of the 90 days available. 39. These considerations are quite sufficient to defeat the suggestion that equality requires the Hong Kong Court to apply its code worldwide. Where you have got three variable factors, you do not produce equality by seeking artificially to Impose one on everybody. The only route to equality here, is to treat all people equally in their respective jurisdictions by affording dominance to the laws in those jurisdictions. Therefore, dominance of the lex situs, is essential, in my judgment, to produce equality. 40. Next, the dominance of the lex situs is essential to avoid futility. This can very readily be demonstrated here. Suppose the complainant to the joint liquidators, the Fleet National Bank, had been told by the liquidators: "I am sorry; I am bound by Hong Kong law, I cannot do anything in New York." The short and simple answer for Fleet, was themselves go to New York; to petition as creditors; and then as creditors in New York, to set aside these attachments. At the moment, I do not see the answer to that proposition. This reveals the absurdity of saying, that the trustee cannot get in through the front door, but any other creditor can go in through the back: the futility of trying to invite the Hong Kong Court to pretend it is dominant in the circumstances where it is plainly not. 41. Now, in attempt to meet this point, reliance is sought to be placed upon the rule in England, known as the rule in Ex Parte James (1874) 9 Ch. App. 609. In substance, this rule is this. The liquidator being an officer of the Court, is required by the Court, to behave impeccably and to conform to higher standards than others might. He is not allowed to do anything which may be regarded as shoddy. It is a principle which has been applied several times to the domestic conduct of liquidators in England, in respect of matters over which they have sole control. It has never been remotely applied to the sort of circumstances which are present before me. My first observation about this line of authority, is that it is quite useless at this stage of argument. It is quite obvious that unless this point of construction is right (the point in issue), there is nothing shoddy about the liquidators conduct, which starts to allow this principle to intrude. If the liquidators and this Court, when it made the order of 8th February, should happen to be right, then the liquidators conduct is beyond question. This point only comes in, if you assume what it is sought to achieve. It is a typical "own bootstraps" type of argument. 42. Secondly, it does not even work, at stage two. Its purpose is to try to show that the Hong Kong Court can, in fact, control matters beyond its jurisdiction. The Statement of Claim acknowledges that nothing can be done by Hong Kong under this alleged principle, unless money is returned by the U.S. liquidator to Hong Kong. So the first and obvious solution, in the hypothesis I have put of Fleet National petitioning in New York, is for that liquidator to make sure none of this money is ever returned to Hong Kong. Secondly, even if a return was made, it would be a net return (it could not be anything else) out of the total accounting in the U. S. liquidation. I do not know of any rules in equity or common law, which would enable the Hong Kong Court to identify this fund. 43. In my judgment, it is a hopeless attempt to try and extend the rule in ex parte James, a significant domestic rule, way outside its true limits. Having regard to everything that has happened in this case, it is somewhat bizarre that English law allows it to be raised. So that as far as the lex situs is concerned, considerations of principle seem to point emphatically against this proposition. (2) The same is true if one looks at the matter as one of construction. Chapter 8 of Maxwell, Interpretation of Statutes, 12th edition, deals with The Territorial extent of British Legislation. It starts by citing two passages. The first is Lord Asquith in The Attorney General for Alberta v. Huggard Assets Ltd. (1953) A. C. 420, 441:
The second is in Draper v. Turner (1964) 3 A.E.R. 148, 150 by Lord Denning:-
These were general statements said to be slight over-simplications by the editor. But he does not make the same comment in respect of another passage from an earlier edition of the same textbook which we find at page 172:
I take one authority at random out of many to this effect. It is the decision in Colquhoun v. Heddon (1890), 25 Q.B.D. 129 where at page 134, Lord Esher M.R. says this:
44. There is nothing whatever in the Companies Ordinance to suggest that the Legislature in Hong Kong, adopting in this respect (with modification) parliamentary legislation from the United Kingdom, was intending any of the words used to extend or operate beyond the jurisdiction of this Court. On the contrary, if you look at the words used, all the indications are against it. There are three concepts put together, execution against goods or lands of the companies, or attachments of debt. One thing which is plain as a pike staff is that there is no suggestion that the Hong Kong Court here can exercise jurisdiction over land, under any principle, outside the jurisdiction of this Court. The section could well have been derived initially from the Bankruptcy Act in England, which is, itself, largely re-enacted in our Bankruptcy Ordinance. Our ordinance, does expressly given an extended meaning, in the definition section, section 2, to the word "property", as extending to property anywhere. But that is the only extended meaning given to any term in the corresponding bankruptcy provisions. So, the direct application of normal principles of construction, lead one to the conclusion that this is a domestic code. (3) Finally, when one comes to authority, one finds the matter put very clearly by Wynn Parry J. in a Re Suidair International Airways Ltd. (1951) Ch. '165. The factual position there was this. There were two winding up petitions: The first was in South Africa, the second in the United Kingdom. A creditor has sought to execute on the company's property. The execution was nowhere near complete at the date of the South African liquidation. It was still incomplete but much closer to completion by the date of the English liquidation. Under South African law, that execution was void as against the liquidator. Under the relevant U.K. law, the Court had a discretion whether to allow the execution creditor to retain the proceeds which he only got after the date of liquidation. Wynn Parry J. was minded to exercise his discretion in favour of that creditor. That produced the second point in the case; whether it was right for him to do that, having regard to the fact that the execution was wholly void as against the South African liquidator. 45. Now, this is the precise converse of the proposition that these three banks are arguing before me. It was wholly rejected by Wynn Parry J. He referred first of all to dicta of Vaughan Williams J. in Re English Scottish and Australian Chartered bank (1893), 3 Ch. 385, 391. He said this, and (it was some bearing upon this and other matters in this case.)
Now that, in my judgment, precisely summarises the approach of the English Court, and of the Hong Kong Court, where you have parallel liquidation proceedings, particularly bearing in mind, that those liquidations of necessity, create separate estates in both Hong Kong and the U. K. (I am using that word, without overlooking the technical differences between bankruptcy and liquidation.) Vaughan Williams J. went or. to say that that "will not ever make the court give up the forensic rules which govern the conduct of its own liquidation." Now it was argued that that should be confirmed to matters of procedure. Wynn Parry J. did not agree. He went on to say:
46. What the Learned Judge seems to be there saying, loud and clear is each Court must stick to its own last. It should stick to assets within its jurisdiction, and apply its own rules, within its jurisdiction, otherwise there will be chaos. I respectfully and entirely agree. I also observe that the United States Court, appears to adopt exactly the same approach, because as far as I can judge from the reports I have read, of both the Finabank and the IBB case, they applied their rules for the avoidance of the preferences in these cases not the rules of the United Kingdom, or the rules of Switzerland. In other words, it seems to me, that all the nations adopt exactly the same premise. Indeed, I can see no other that is practical. 47. Therefore, I can see no substance at all, in this major point which has been taken, or in the so-called statutory defence, which is relied upon, or in the words of the amended summons no "entitlement to retain". 48. I then come on to the remaining points, which I can deal with, rather more shortly. The first is that, that it was wrong to create an estate and that the liquidator should have proceeded under Section 304. This is an almost breathtaking, self-serving submission, because, the only reason which is really being advanced to say that the liquidators should have proceeded under Section 304, is that admittedly, if they had done that, these banks could not be touched. It is really remarkable that this is being put forward, seriously by the three banks. As far as the risk of creating this estate is concerned, certainly it is there. The Court was warned and advised about it. But, I can not see any difference here between that, and the situation with which this Court and the U. K. Court has been familiar for years, and has given rise to the principle referred to by Vaughan Williams J. I can not see any problems arising out of this by reason of the decisions in Finabank and IBB. I cannot see any reason why the U. S. Courts are not going to behave with the same sensitivity in this case, as they showed in these cases. This is a risk that has to be taken by the Hong Kong Court if it is to permit anything to be done to remedy the situation which has arisen by reason of the policy adopted by these three banks, immediately before this liquidation. 49. Now the only criticism which has been really directed to the Cleary, Gottlieb view, comes from Professor King. He is a lawyer of the greatest distinction. He is editor of the leading textbook on this subject matter in New York. I am in the curious position in this case of finding myself rejecting submissions from the author of the leading textbook of the U.K., and not accepting submissions made by the editor of the leading textbook in the U.S. Because I regret to have to say that the Professor, in this case, seems to me to have lost his objectivity, and to have entered the arena. I am unable to accord to the views that he has put before me, the respect which I would have preferred to have given them, and which his distinguished past really entitles him to receive. For this there are three reasons. 50. The first is that he recognises that under s.304, the joint liquidators could have done nothing to have avoided these preferences. But he still asserts that it is wrong for the liquidators to proceed under S.303, and that they ought to have proceeded under S.304, resulting in a total exercise in futility, as I see it. He said initially that 303 was "inappropriate". Later he said, it was "improper". Although it appears that Congress has given an extra choice to foreign representatives, he has set out certain guidelines, which he said, in fact, governed; and that this is a case which is governed by S.304 in the application of these guidelines and should not have been brought under S.303. I do find the utmost difficulty in that. First, one would have expected, if that be right, to find something in the statute, or in the legislative history, because the effect of the legislation would not only be to open the new route, but also to close the old route. Secondly, one would have expected to find something in his own textbook; but no-one can point to anything. Thirdly, one would have expected to find something forthright said on the hearing of the 11th of April, because if this point is right, the petition should never have been allowed at all. One would have expected some of the experienced advocates for the bank to have raised the point. One would have expected Judge Galgay himself to say: "you cannot do this now; this is governed by Section 304." But nothing whatever was said like that at all. Equally, one would have expected something to have been found in the voluminous documentation put before the American Court, on the two other applications. Again, nothing is found. Therefore, I am quite unable to accept this proposition. 51. Secondly, the Professor says that the two cases that I have referred to IBB and Finabank, which were relied upon by the deponents for the joint liquidators, as illustrating the approach of the U.S. Court, are no longer applicable. The suggestion is that they have been displaced by this new code, which now governs. I find that proposition very difficult to accept. 52. The two principles which as I read the decisions governed, were (1) comity, and (2) equality. I can see nothing in the documentation to suggest that those two principles are no longer significant, and indeed, are no longer of prevailing significance. 53. In the decision of Judge Gurfein, in the Appellant Court in IBB P.2d. 509, 536 we find the Learned Judge said this.
54. That precisely mirrors the approach in the United Kingdom to which I have referred. I can see no conceivable reason for suggesting that the United States Courts will now follow a different approach. He goes on to say:
(then the classic sentence.)
Am I to assume that this theme has now been over ridden? He finally concludes.
A remark which is particularly appropriate to the facts in this case. 55. Exactly the same, seems to me, to emerge from the quotations which have been put before me, from the judgments in Finabank. This one I take from the judgment of the Court of Appeal. 568 F.2d. 911.
In other words, as I read these decisions, they are founded upon those two fundamental principles, and there is nothing which has been put before me, to suggest that Congress in any way, by introducing this new rule, was seeking to erode those principles. I do not understand, or follow, the Professor's reasons. I notice that he first, cited these cases himself. No one has been able to put before me any reference to anything in his book that suggests that these principles no longer govern, or that these authorities are no longer of any authority. The point, again did not seem to occurred to Judge Galgay, who refers to both of them in the course of his hearing. 56. The third point, which has constrained my treating the Professor's evidence in this way, is what he says about Section 501(C) of the Bankruptcy Code. This arose in this way. One of the points of conflict, he said in his first affirmation, was that a number of creditors would be out of time in filing in the United States, and therefore could have no claim in the bankruptcy. (The short practical answer to this (if it were right) of the Hong Kong liquidators balancing the distribution I put to one side). Therefore, this was going to be a great cause of conflict. This was met, by I think Mr. Weisz who said, in that case there was nothing to stop the trustee filing a global proof under Section 501(C) of the Code. To this Professor replied: "the trustee may only file these claims (under 501(C) within the time (90 days) specified in Rule 3002(c)". This I am quite unable to accept. S.501 says this:
57. If you look at the Rule, one finds that it names only two categories of persons in sub-paragraph (a), namely an unsecured creditor, or equity security holder. The Rule does not expressly encompass, or appear to encompass, either the debtor or the trustee. Secondly, if you give this construction to this sub-section, it seems to me plainly, that it deprives it of any meaning at all. The trustee's power to file, only arises in the absence of a timely filing by the creditor. The trustee has to allow the 90 days to expire, before he has any right to file. If you then put him under the same time limit as the creditor, his right expires at the self same time, as it is to arise. The result is plain nonsense. 58. So, principally for those reasons, I have been driven to the conclusion I have already expressed in relation to Professor King. It necessarily follows, there is nothing in this second point at all. Equally, it necessarily follows, there is nothing in the third point, which was founded exclusively on him. 59. I would only be justified in giving the direction requested, to the joint liquidators, if I thought the risk of conflict between this Court and the U. S. court, and between our liquidators, and their trustee, was so overwhelming, that it would positively harm the general body of creditors to allow the other proceeding to continue. I reject that proposition utterly. I am really very embarrassed by what the Professor has put before me. The effect of what he has said, seems to me, to constitute an insult to the United States Court and U.S. jurisprudence. I am being asked to assume that they either must, or will, behave in this matter like rogue elephants, and do more harm than good. As I say, I reject the proposition completely. I think it is very unfortunate that he has lent his name to it at all. 60. The matter lies, at the moment, in the hands of the U.S. Court. That is the dominant Court, I am totally confident it will deal with the matter in accordance with its law, and in a way which will give this Court no possible cause for complaint at all. I therefore dismiss this summons in the liquidation, and I can deal very shortly and briefly with the remaining matters. 61. In the action, I refuse leave to amend, because the amendment was simply designed to raise the same point as I have rejected in the liquidation summons. 62. Thirdly, I grant the application for a stay. I cannot go further than that in this action, because I am not asked to do so. At least I can make sure no further money is wasted by the liquidators on that piece of litigation. 63. I would have liked to have said here, that that closes the Hong Kong story (subject, of course, to appeal) and leave the matter in the hands of the New York Judge. But I have seen documents that have been filed before him. They have also been put in evidence before me. They contain a number of allegations, which I read with disbelief and dismay, because they constitute a direct attack on the motivation and the bona fides of this Court, and its liquidators. No attempt has been made to repeat, or justify, these allegations before me, but at the same time they were not withdrawn, and as things now stand, they are open to be advanced by these banks to the New York Court. I cannot, therefore, just leave the matter there. I think I must make some comment upon them, in an attempt to leave the New York Judge in no doubt at all, as to the feelings of this Court about it. By way of example, I need only refer to the Motion to Dismiss the Bankruptcy I Proceedings filed on behalf of all three banks. Amongst other things, one finds these statements. I start at paragraph 21.
Paragraph 22
Paragraph 23
64. I desire to make three points in respect of those allegations. The first is, that these three banks were in no way singled out; they selected themselves. They were the only creditors in any relevant jurisdiction, to resort to self-helps; to prefer themselves in this way. Secondly, the suggestion that this Court has put in hand any deliberate discrimination against United States citizens is positively grotesque. The intention of this Court, and its liquidators is to seek the aid of the NewYork Court, on behalf of the whole body of creditors, which include a considerable number of United States creditors. I have already drawn attention to the fact that the petitioning creditor is one United States Bank; the complaining creditor, another; and there were I think four or five other U.S. Banks on the original informal committee. Thirdly, there has been no forum shopping by this Court. The only persons who ever had a choice of forum were these banks. The obligations, in each case, were Hong Kong obligations, incurred by Hong Kong companies. They could choose whether they sued here, or anywhere else where they able to find assets. They apparently were aware of the existence of assets in New York, and chose to sue there; in addition, in one case, to suing here. That conduct by them, made the New York Court, the dominant Court under Hong Kong law, and the trustee had to follow the creditors to the New York Court. 65. I therefore wish to make it clear, that sitting here I can see no substance whatever, in those submissions. I also, sitting here, totally regret that they have been advanced at all. It seems to me, that they demonstrate a lack of understanding, perhaps, on the part of these three banks, as to what I would describe as certain Hong Kong norms. This Court exists to supervise and control its liquidators, and its other officers. The rule in Ex Parte James shows that the Court demands very high standards of them. It does not ask that level of principle from any of its litigants. But it does expect certain norms, particularly from bankers who come to it with an international reputation. To these banks I would say this. If you ever have a complaint about the conduct of this Court, or its officers, will you please make it to this Court, because this is what we expect. We do not expect you to make it exclusively (and I emphasise that word) to your domestic tribunal, or in such terms as these, without seeking to explain, or justify, yourself in any way to this Court.
Representation: Muir Hunter, Q. C., Ronny Wong (M/s Deacons) for 1st Plaintiff. Robert Ribeiro (M/s Deacons) for 2nd and 3rd Plaintiffs. Eben Hamilton, Q. C., Anthony Dicks (M/s Wilkinson & Grist) for Defendants. |