Karaha Bodas Co Llc v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara

HCCT 28/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 28 OF 2002

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BETWEEN

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Before: Hon Reyes J in Chambers

Date of Hearing: 27 May 2004

Date of Judgment: 3 June 2004

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J U D G M E N T

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Background

1.By an Amended Summons dated 26 January 2004 (originally issued 25 November 2003) the Judgment Creditor ("KBC") applies for the appointment of receivers by way of equitable execution over the shares of the Judgment Debtor ("Pertamina") in Pertamina Engineering Trading Limited ("Petral"), Tugu Insurance Company Limited ("Tugu") and Korea Indonesia Petroleum Company Limited ("KIPCO") (collectively, "the 3 Companies").  The application is made under High Court Ordinance s.21L(1) and RHC Order 51. 

2.Pertamina is the registered shareholder of 89,850 out of 90,000 US$1 Petral shares (99.83%); 9,500,000 out of 20,000,000 US$1 Tugu shares (47.5%); and 225 out of 500 HK$5 KIPCO shares (45%).  The 3 Companies are Hong Kong private companies.  I shall refer below to the shares of the 3 Companies registered in Pertamina's name as "the Shares".

3.By an arbitration award ("the Award") dated 18 December 2000 Pertamina was found liable to KBC for the sums of US$111,100,000, US$150,000,000 and US$66,654.92.  By Order dated 15 March 2002 Burrell J granted leave for the Award to be enforced as a judgment of the Hong Kong Court pursuant to Arbitration Ordinance (Cap.341) s.2GG. 

4.By a Charging Order Nisi dated 23 May 2002 the Shares stood charged with the payment of the sums due from Pertamina to KBC under the Award.  The latter was made absolute by Order dated 18 July 2003.

5.By Garnishee Orders Nisi dated 23 May 2002 the Court attached in KBC's favour the debts due from the 3 Companies to Pertamina.  The orders nisi in respect of Petral and KIPCO became absolute by Order dated 11 September 2003.  The order nisi against Tugu was discharged on 11 September 2003 by Master Rimsky Yuen SC.  By Order dated 20 November 2003 the Court directed the Mr. Kim Young Sup ("Mr. Kim"), KIPCO's officer, attend for examination under RHC Order 48 in respect of the debts due from KIPCO to Pertamina.  

6.In the course of his examination before Master Jeffries on 6 April 2004 Mr. Kim stated that, pursuant to KIPCO's instruction, substantial funds in the order of US$5 million had been transferred from KIPCO's account with BNP Paribas to Pertamina notwithstanding service of the Garnishee Order Nisi on KIPCO.  Mr. Kim says that at the time of the transfer he did not appreciate (not having had the opportunity to take legal advice) the effect of the Garnishee Order Nisi. 

7.There is also evidence that on 19 June 2004 KIPCO ordered that a payment received by it from Itochu Petroleum be transferred to the Jakarta office of Korea Development Company Limited ("Korea Development").  KBC say that, but for the receipt of the Garnishee Order, such money would have been transferred by KIPCO in the ordinary course of business to Pertamina.  KBC’s suggestion is that the money was transferred to Korea Development as a way of getting around the Garnishee Order.

Discussion

8.The principles applicable to the exercise of the Court's discretion in the appointment of receivers by way of equitable execution have been analysed in Maclaine Watson & Co Ltd. v. International Tin Council [1988] 1 Ch 1 (Millet J) and Soinco SACI and Eural KFT v. Novokuznetsk Aluminium Plant Base Metal Trading Ltd. [1997] 2 Lloyds Rep 330 (Colman J).  Relevant principles may be summarised as follows:-

(1) A receiver may be appointed when recovery of the judgment debt by normal means of legal execution is "not practicable".  In such case the Courts grant equitable relief as a means of "taking out of the way a hindrance which prevents execution at common law".  An applicant must normally show that circumstances are such as to render it practically difficult, if not impossible, to obtain the fruits of his judgment.  See also Goldschmidt v. Oberrheinische Metallwerke [1906] 1 KB 373 and Bourne v. Colodense Ltd. [1985] ICR 291.

(2) It is not necessary that a judgment debtor have a legal interest in the asset over which a receiver is sought to be appointed.  Thus, it is possible to appoint a receiver to recover future debts from a third party, even though at the time of the garnishee order or appointment of a receiver such debts cannot be attached at common law.

(3) Nonetheless, there must be some difficulty, arising from the nature of the property, which precludes execution at law but which can be overcome by the appointment of a receiver.

9.Mr. Shieh SC (appearing for KBC) submits that a receiver should be appointed here on the basis of the following reasoning:-

(1) The Shares are Pertamina's only asset in Hong Kong.  Although subject to a charging order in KBC's favour, the Shares are difficult to value properly without the receipt of financial information from the 3 Companies.

(2) KBC has no means of finding out whether (and (if so) what amount of) dividends have been or will be declared or paid.

(3) Accordingly, without the appointment of receivers who can obtain financial information from the 3 Companies (including information as to dividends and the state of account between the individual companies and Pertamina), enforcement by way of charging and garnishee orders would be inadequate in practical terms.

10.Mr. Shieh draws my attention to RHC Order 88, Rule 5A(1).  He submits that, to realise its charging orders and sell the Shares, KBC would have to provide the Court with "estimates of the gross price which would be obtained on a sale" (see Order 88, Rule 5A(1)(e)).  Without the extra financial information sought by KBC through the appointment of receivers, it would be impossible (Mr. Shieh suggests) to comply with that requirement.

11.Mr. Shieh argues that, to be effective, the equitable receivers appointed by the Court should have particular powers.  Thus, Mr. Shieh seeks not just a power enabling the receivers to sell (and receive dividends declared on) the Shares, but also authority permitting the receivers to exercise all such powers which Pertamina as registered shareholder could have exercised in respect of the Shares.  Mr. Shieh says that, certainly in the case of Petral (where Pertamina has a controlling interest) and possibly as far as Tugu and KIPCO are concerned, such authority would allow the receivers to apply for meetings to be requisitioned with a view to appointing or replacing directors on the boards of the 3 Companies.  Directors whom the receivers successfully managed to have appointed to the 3 Companies' boards, would then enable KBC to have access to relevant books and records beyond those which a shareholder would normally be allowed to see.

12.Mr. Manzoni (appearing for Pertamina) challenges Mr. Shieh's reasoning as follows:-

(1) There is no practical impediment to KBC executing its charging order and sell the Shares.  KBC has more than adequate financial information.  For example, in October 2002 KBC commissioned Messrs. Baker Tilly ("Baker Tilly") to value the shares for the purposes of a security for costs application against Pertamina.  Using information in the public domain, Baker Tilly valued the Tugu shares at between US$27.2 and US$58.9 million; the Petral shares at between US$9 million and an upper range of US$12.5 to US$37.5 million; and the KIPCO shares at US$200,000.  There is no reason why those valuations suitably updated could not be used to estimate an appropriate price for the Shares for the purposes of a public tender.

(2) In any event, even if the receivers were ordered to stand in the shoes of Pertamina as registered shareholder, they would be unable to obtain any more information than was contained in the 3 Companies' respective audited financial statements.  As a general rule, shareholders are not entitled to see any more financial information from their companies than that.  KBC, however, already has the financial statements of Tugu and KIPCO.  KIPCO's financial statements were obtained in the process of Mr. Kim's examination.  KBC has initiated a similar process for the examination of Petral's Mr. George Chan ("Mr. Chan") and should presumably be able to obtain Petral's financial statements in the same way.  Empowering the receivers to stand in the shoes of shareholders in the 3 Companies, would not help KBC to obtain more information than those financial statements to which it already has access.

(3) Mr. Shieh's suggestion that the receivers seek to have their representatives appointed as directors of the 3 Companies, would be unworkable in practice.  The receivers, if successful in such endeavour, would be placed in an impossible position.  They would become involved in the management of one or more of the 3 Companies.  On the one hand they or their representatives, as directors of one or more of the 3 Companies, would owe fiduciary duties to the relevant companies, including the duty to preserve the assets of such companies.  On the other hand, the receivers’ representatives would be seeking to advance KBC's interest in collecting debts due from the 3 Companies to Pertamina.

13.Mr. Manzoni accepts that the valuation range suggested by Baker Tilly for the 3 Companies was a wide one.  Baker Tilly note in their report that this was "a consequence of the limited information available, and is subject to numerous material assumptions made by us in respect of the information provided".  But, at least in the case of Tugu, much of the uncertainty (Mr. Manzoni submitted) hinged on the valuation of a London property belonging to the company.  The value of the London property could vary significantly depending on the date of its acquisition by Tugu.  Baker Tilly simply appear not to have had time to research that date from the Land Registry in England.  The uncertainty in Tugu's valuation to a large part did not stem from any want of financial information in the public domain.  In the case of KIPCO and Petral, KBC had obtained the audited financial statements of the former and was in the process of seeking the same for Petral through the examination of Mr. Chan.  There would likely be more information (Mr. Manzoni concluded) on which Baker Tilly could refine their valuations independently of the empowerment of receivers.

14.As far as the receipt of dividends are concerned, Mr. Manzoni acknowledges that in light of Soinco he was in some difficulty in arguing receivers should not be appointed for that limited purpose.  A garnishee order typically relates to present or existing debts.  It does not affect future debts or monies which will only accrue due at a future time.  In Soinco at 333 (col.2) Colman J thought that to overcome this legal impediment in the operation of a garnishee order it was "both just and convenient" for the Court:-

"to appoint a receiver for the purpose of ascertaining what deliveries are to be made under the supply contract [between a Guernsey company and the judgment debtor] and what payments are to become due and for the further purpose of receiving payments of such amounts by the Guernsey company."

Insofar as I was minded to make an analogous order appointing receivers here, Mr. Manzoni stressed that such should not preclude the 3 Companies (none of which are parties to the present application) from applying (if they saw fit) to set aside such order for whatever good reason.

15.KBC's application for the appointment of receivers then essentially has 2 objectives: one ("Objective A") to obtain further information to facilitate an envisaged sale of the Shares and the other ("Objective B") to obtain information on and receive payment of dividends.  Mr. Shieh hopes to achieve Objective A by 2 stratagems, both arising from a vesting of the powers of a shareholder on any receivers appointed.  Such powers would initially enable the receivers to ask the 3 Companies to provide them with such financial information as an ordinary shareholder may be entitled to receive.  Mr. Shieh says that the information he has in mind insofar as this first stratagem is concerned are the 3 Companies' audited financial statements.  The second stratagem is more ambitious.  It involves the receivers taking advantage of an ordinary shareholder's ability to requisition a meeting in certain circumstances and, in the event that a general meeting is convened, using Pertamina's substantial voting power as shareholder in the 3 Companies to appoint friendly representatives onto the boards of the 3 Companies.

16.On the appointment of receivers for the purpose of obtaining financial information is concerned, I am against Mr. Shieh. 

17.I agree with Mr. Manzoni that, as far as obtaining audited financial statements is concerned, KBC already has access to those of KIPCO and Tugu and is likely to obtain those of Petral in the course of Mr. Chan's examination.  Accordingly, there is no legal or practical impediment towards the enforcement of KBC's rights as judgment creditor in that respect. 

18.Mr. Shieh suggests that the process of obtaining audited financial statements through the mechanism of examining officers of garnishee companies has been long and tedious and the appointment of a receiver with the powers sought by him would cut through the Gordian knot of inveterate delay.  But I am not satisfied that this would be the case.  For example, Petral is not a party to the present application.  If Petral, for example, truly wished to be uncooperative (as Mr. Shieh hints), it would be open for it to challenge an order vesting particular powers in receivers and, until that question was resolved, KBC's goal of obtaining Petral's financial statements would be in abeyance.  I do not think that the method advocated by Mr. Shieh will necessarily hurry things along.

19.I also agree with Mr. Manzoni on the impracticality of Mr. Shieh's proposal of the receivers using Pertamina's voting power as shareholder in the 3 Companies to bring about the appointment of representatives on the 3 Companies's boards.  The receivers' representatives would (if successful) be placed in an unenviable position of actual or potential conflict of interest. 

20.Consider, for example, the question of the declaration of dividends.  A board decides whether or not a dividend should be declared in a given year and (if so) how much.  The board then puts forward an ordinary resolution to the company in general meeting which decides whether or not to approve the proposed dividend.  The dividend does not become payable until approved in general meeting.  What does the receiver's representative on a company's board do when the question of a dividend for the year comes up?  His duties towards the company require him to consider whether the financial interests of the company justify payment of a particular dividend.  But it may be said (or suspected) that, as representative of receivers with a duty to collect as much as possible of the judgment debt owing to KBC, the representative should (or might) recommend payment of a large dividend contrary to the company's interest.  How will the representative reconcile these 2 apparently conflicting duties?  I do not think that there is a way. 

21.In Soinco Colman J carefully considered whether the appointment of receivers with the powers suggested by the judgment creditor would effectively involve the receivers in the management of the garnishee company.  Colman J decided it would not.  This indicates to me that, if Colman J had thought that his order would mean that the receivers would be managing the garnishee, he would not have made the order.  I acknowledge (as Mr. Shieh points out) that there is no explicit dictum in Soinco to the latter effect.  Nonetheless, it seems to me that the Court should be concerned if effectively receivers (who are officers of the Court) end up becoming involved in the management of a garnishee company.  If (at it seems to me in the present case) there is a significant risk that they might so end up, the Court should either proceed with extreme caution or even refuse to make the Order sought.

22.I am finally concerned that Mr. Shieh's argument essentially amounts to the proposition that, whenever a judgment creditor who is not a member of a private company wishes to enforce a charging order against the shares of a private company held by a judgment debtor, the judgment creditor should be entitled in practice to have receivers appointed by way of equitable execution with the powers of shareholders so as to obtain as much financial information as possible about the private company.  That appears to me to be too wide a proposition, one not justified by the extant case law.  I accept that the fact that a garnishee is a private company (and information about its financial abilities consequently hard to come by) is a factor that may be taken into account by the Court in considering whether to exercise a discretion to appoint receivers.  But I have doubt that this factor alone (or coupled with the fact that the outstanding debt is considerable) is sufficient to weigh the balance in favour of appointment of a receiver along the lines which Mr. Shieh argues.

23.For the above reasons, I refuse to appoint receivers with shareholder powers along the lines put forward by Mr. Shieh in connection with Objective A.

24.That leaves Mr. Shieh's Objective B.  Here I accept Mr. Shieh's reasoning.  There appears to me to be a legal impediment.  Garnishee orders do not attach future debts.  Nonetheless, as demonstrated by the KIPCO incident wherein monies were paid to Pertamina despite service of the Garnishee Order Nisi, there is some risk that advertently or inadvertently monies may be paid to Pertamina if KBC is not informed of the receipt or impending receipt of the same.  It makes sense in the circumstances to appoint receivers by way of equitable execution with powers:-

(1) to ascertain from the 3 Companies respectively what monies or amounts have (or will) become due or payable to KBC since service of the Garnishee Orders Nisi; and,

(2) to receive such monies or amounts insofar as the same have not already been paid or if and when the same accrue due or otherwise come into the 3 Companies' hands.

25.As discussed in the course of counsel’s submissions, I shall leave it to the legal advisers of KBC and Pertamina in the first instance to draft appropriate wording to reflect my decision.  That wording would specify when and how the 3 Companies are to inform the receivers of the receipt or impending receipt of any monies due to Pertamina.  If no agreement can be reached, there will be liberty to apply before me to work out a suitable text.  Any Order would be without prejudice to an application by one or more of the 3 Companies to set aside or vary the terms of appointment of the receivers, made within 14 days from the date of service of my Order on the 3 Companies.

26.In Soinco Colman J referred to evidence that the Guernsey company entered into "collusive pre-payments" with the judgment debtor in order to "create equitable set-offs such as to preclude a receiver requiring payment of the due debt".  Colman J thought (at 333 (col.2)) that the appointment of receivers by way of equitable execution "would appear to have the effect of preventing the creation of set-offs by means of prepayments".  In any case, if he were wrong on that:-

"I do not exclude the possibility that injunctive relief ancillary to the Mareva jurisdiction might be devised which would have the effect of curbing what is in substance if not in form an arrangement for the disposal by [the judgment debtor] of assets which would otherwise be available for execution.  This, however, is not a point which has been in issue or argued before me and I express no concluded view on the availability of such relief."

27.In the course of submission, I raised the question of how set-offs or alleged set-offs between Pertamina and the 3 Companies affected the amounts payable either to KBC under the Garnishee Orders or to any receivers appointed by way of equitable execution.  There may or may not be set-offs claimed by the 3 Companies.  The 3 Companies may or may not be entitled to set off amounts due to Pertamina against sums due to them from Pertamina.  Further, KBC may or may not allege that certain set-offs lack bona fides even if as a matter of general principle the 3 Companies have a right of set-off.  Not having heard full argument on the point, I should not be taken by ordering the appointment of receivers to have finally decided the rights of any party to claim or reject a set-off.  As Mr. Shieh notes, problems may come up in the course of the exercise by the receivers of their functions and it is not possible at this time to cater for all scenarios.  There will therefore be a general liberty to apply.

Conclusion

28.I make an Order to the effect that:-

(1) Mr. Nicholas Timothy Cornforth Hill and Mr. Stephen Briscoe ("the Receivers"), both of RSM Nelson Wheeler Corporate Advisory Services Limited of 7th Floor, Allied Kajima Building, 138 Gloucester Road, Wanchai on first giving satisfactory security be appointed as joint and several receivers:-

(a) to ascertain from the 3 Companies respectively what monies or amounts (including dividends and interest) have (or will) become due or payable to KBC since service of the Garnishee Orders Nisi; and,

(b) to receive such monies or amounts (including dividends and interest) insofar as the same have not already been paid or if and when the same accrue due or otherwise come into the 3 Companies' hands;

(2) The Receivers within 14 days give security to the extent of $300,000 by bank guarantee or insurance bond in a form to the satisfaction of the Registrar of the High Court or by payment into Court and any such guarantee or bond be lodged in Court but, in case the Receivers shall not have provided security within the time aforesaid or within such further time as the Court shall allow, the Receivers' appointment shall forthwith be suspended at the expiration of such time;

(3) The remuneration of the Receivers shall be charged on a time cost basis at the standard scale of fees agreed from time to time between the Official Receiver and the Hong Kong Society of Accountants under the administrative scheme of contracting out of non-summary court winding-up cases to accountants;

(4) The following amounts, namely:-

(a) the costs and disbursements incurred by the Receivers including their costs and disbursements in preparing accounts and obtaining their discharge; and,

(b) the Receivers' remunerations referred to above,

shall be taxed and assessed by the master and shall be primarily payable out of the monies received by the Receivers.

(5) After deduction of their remuneration, costs and disbursement, the Receivers shall pay to KBC such sums in full or partial satisfaction of such amount (including any interest thereon) remaining due to KBC in respect of:-

(a) the Award; and,

(b) costs directed to be paid by Pertamina to KBC in relation to any proceedings to enforce the Award (including any costs ordered in KBC's favour in respect of its application for the appointment of receivers by way of equitable execution).

(6) If the sums received by the Receivers are insufficient to discharge their remuneration, costs and disbursements, a master shall so certify, stating the amount of deficiency, and the amount certified shall be recoverable by KBC from Pertamina.

(7) There will be an Order Nisi that Pertamina is to pay KBC's costs of its application for the appointment of the Receivers, such costs to be taxed if not agreed.

(8) There shall be liberty to apply.

(9) The foregoing paragraphs are made without prejudice to any application to set the same aside made by one or more of the 3 Companies within 14 days of service of a copy of my Order.

29.I heard argument as to the payment of the Receivers' remuneration, costs and disbursements.  In my view, the direction sketched out above in respect of such amounts is the appropriate one.  I think that the Receivers should in the first instance be entitled to deduct their remuneration from monies received by them from the 3 Companies.  If funds received are deficient, KBC (whom the Receivers would presumably approach to make up the deficiency in monies due to the Receivers) should be able to recover such deficiency from Pertamina as part of KBC's costs of execution.

30.The Costs Order Nisi is intended to reflect the fact that KBC has been largely successful in its applications.

31.KBC’s Amended Summons includes provisions for the sale of the Shares.  It is unclear from the course of submissions before me whether KBC now wishes to enforce its Charging Order over the Shares.  If it does, I am prepared to give suitable directions (insofar as necessary) for the sale of the Shares as parts of the Order herein.  The general liberty to apply will also cover that contingency.

Mr. Paul Shieh, SC, instructed by Messrs. Clyde & Co., for the Plaintiff.

Mr. Charles Manzoni, instructed by Messrs. Haldanes, for the Defendant.