RE SHANG LILI

HCB 5329/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 5329 OF 2014

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J U D G M E N T

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Introduction

1.  This is the hearing of a bankruptcy petition (“Petition”) presented on 14 July 2014 by Mr Ang Chien Kiat (“Petitioner”) against Madam Shang Lili (“Madam Shang”). There is also before this court an application dated 22 December 2014 by Madam Shang to dismiss the Petition. As the issues raised by that application are the same as those raised in her opposition to the Petition, on 3 June 2015, this court ordered the two to be heard together.

2.  The Petition is based on Madam Shang’s non‑compliance with a statutory demand dated 22 November 2013 (“Statutory Demand”) for the sum of HK$80,250 (“Debt”). The Statutory Demand is in turn founded on a judgment in default dated 6 September 2013 (“Judgment”) in the Lands Tribunal no. LDPD1775 of 2013[1] between the Petitioner as Applicant and Madam Shang as Respondent. The Lands Tribunal ordered inter alia:

“2. The Respondent do pay the Applicant the arrears of rent/mesne profits at the rate of HK$15,500.00 per month from 15/06/2013 until delivery up of vacant possession of the suit premises;

3. The Respondent do pay the Applicant the costs of this Application which is summarily assessed at HK$2000.00…”

3.  The suit premises (“Premises”) is situated at Flat B, 9/F, Bonham Mansion, No. 63 Bonham Road, Hong Kong, and was the subject of a tenancy agreement dated 9 March 2012 between the Petitioner as landlord and Madam Shang as tenant. What happened was that Madam Shang failed to pay rent at the rate of HK$15,500 from 15 June 2013 onwards which led to the proceedings in the Lands Tribunal and which ended up in the Judgment.

4.  In October 2013, the Petitioner obtained leave to issue a writ of possession from the Lands Tribunal. On 14 November 2013, a representative of the Petitioner’s solicitors, a bailiff and a locksmith broke the lock and entered the Premises to recover possession for the Petitioner. An inventory giving particulars of the goods and chattels inside the Premises was prepared by the bailiff.

5.  As set out in Annexure 1 to the Petition, the Debt of HK$80,250 is calculated as follows:

(1) HK$77,500 – arrears of rent/mesne profits from 15 June to 14 November 2013;

(2) HK$2,000 – costs summarily assessed by the Lands Tribunal;

(3) HK$750 – costs awarded for leave to issue writ of possession.

6.  Apart from the rental deposit of HK$31,000, the Petitioner does not hold any security.

7.  Despite her denial of any knowledge of the Statutory Demand, this court is satisfied on the evidence that both the Statutory Demand and the Petition have been personally served on Madam Shang in Hong Kong on 24 February and 21 July 2014 respectively. As far as the Petition is concerned, it was served on Madam Shang at Flat D, 16/F, Bonham Mansion, No. 63 Bonham Road, Hong Kong (“Flat 16D”).

8.  Madam Shang claims she has moved out of the Premises and into Flat 16D sometime in June/ in early July 2013. The Petitioner challenges that and says Madam Shang has never returned the keys or otherwise re-delivered possession of the Premises to him – hence the need to engage the assistance of the bailiff. I shall return to this issue later in this judgment.

Deliberation

9.  This court shall first remind itself of the applicable legal principles.

10.  In order to successfully oppose a petition, a debtor has to show a bona fide dispute on substantial grounds, by sufficiently precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: ICS Computer Distribution Ltd [1996] 1 HKLR 181; Re Tam Mei Kam unrep.; HCB 3777 of 2011; 25 April 2012; Barma J (as he then was); Re Yuen Mun Wa (a debtor)[2012] 5 HKLRD 108.

11.  Where the underlying debt is based on a judgment, the court hearing the bankruptcy petition will treat the judgment as prima facie evidence that the debtor is indebted to the petitioner. In appropriate circumstances, the court may “go behind” the judgment - what is normally required is some “fraud”, “collusion” or “miscarriage of justice” which impinges on the validity of the judgment, the latter phrase being clearly capable of wide application according to the particular circumstances of the case: Dawodu v American Express Bank [2001] BPIR 983; Re Tam Mei Kam unrep.; CACV87 of 2012; 8 May 2013; Cheung, Yuen & Lam JJA.

12.  In Re Tam Mei Kam supra, Yuen JA set out the principles to be applied where a petition is based on a judgment debt or court order at [22.1] – [26.2] as follows:

“22.1 The bankruptcy court will treat a judgment for a sum of money as prima facie evidence that the debtor is indebted to the Petitioner for that sum.

22.2 As prima facie evidence of indebtedness, it may be rebutted and that is what is meant by “going behind” the judgment. It is important to understand the rationale for this approach. First, bankruptcy affects an individual’s legal status. Secondly and importantly in this context, the bankruptcy court’s exercise of the power and/or duty to inquire into a judgment is necessary to protect a debtor’s real creditors from collusive judgments entered into by the debtor in order to initiate a bankruptcy and thereby reduce the funds available for his real creditors.

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23. In other words, the reason why a bankruptcy court is not conclusively bound by a judgment debt is so that (in appropriate circumstances) it can inquire whether there was actually bona fide consideration for it. Of course apart from opposing creditors at the petition seeking to impugn the judgment debt, the debtor himself can also seek to do so, especially if the judgment had been obtained by default. See Fletcher, The Law of Insolvency, 4^th ed. p.163 para.6-116…

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However that is not to say that in every case the bankruptcy court should exercise its powers of inquiry simply for a The debtor to get a second bite of the cherry and conduct parallel proceedings to review a judgment which he has lost or to avoid its execution.

24. The rationale discussed above should guide the approach to be taken by the bankruptcy court when a debtor opposes a petition on the ground that he challenges the judgment debt.

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26.1 Where the debtor has not lodged an application to set aside or an appeal by the time of the petition hearing but intends to do so (probably out of time), he must, in addition to satisfying the bankruptcy court of the reasonable prospects of success in his application or appeal, also provide a reasonable explanation why he has failed to act in time. If he can do so, the bankruptcy court may adjourn the hearing of the petition to enable him to commence an application to set aside or appeal, giving appropriate directions to ensure that it is conducted expeditiously, with liberty to apply so that either party may apply to restore or dismiss the petition as appropriate.

26.2 Where the debtor is unlikely to be able to pursue an application to set aside or an appeal for procedural reasons eg where there has been gross and inexcusable delay, the bankruptcy court may consider his case to see if he can rebut the prima facie evidence of indebtedness. Before arriving at a decision, the bankruptcy court will consider the circumstances in which the judgment was obtained. At one end of the spectrum, the court may decide to dismiss the petition even if a regular judgment had been obtained in default, e.g. if service of a writ had been effected on the debtor’s previous address and he can clearly establish a substantial defence. At the other side of the spectrum is a petition based on a judgment obtained after a full trial on the merits. In the latter situation, the general principle is that the bankruptcy court would inquire into such a judgment only if the debtor can show fraud, collusion or miscarriage of justice, the latter term having been described as “something from which [the court] can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the claimant” (Dawodu v American Express [2001] BPIR 983 quoted in Watts at [48]).”

13.  It is indisputable that at least 3 weeks have elapsed since the Statutory Demand was served and it has been neither complied with nor set aside. Nor was the Judgment set aside.

14.  Madam Shang has filed no less than 5 affidavits in these proceedings. This court has carefully considered them all. At the end of the day, this court is not satisfied that she has shown a bona fide dispute to the Debt on substantial grounds by believable evidence. The reasons are these.

15.  Madam Shang’s primary case is that she has moved out of the Premises either in June 2013 or on 4 July 2013, depending on whether one takes her 16 July 2015 affidavit or her 24 July 2014 affidavit as definitive. In this connection, Madam Shang also says it was unreasonable for the Petitioner to send the legal documents for the Lands Tribunal proceedings to the Premises. 

16.  This court does not accept Madam Shang’s primary case.

17.  There is no credible evidence to support Madam Shang’s case that she had moved out of the Premises in June 2013 or on 4 July 2013.  The Petitioner has deposed in his 3^rd affirmation the circumstances giving rise to the need to recover possession of the Premises by the bailiff and with the assistance of a locksmith. His 3^rd affirmation was substantially unanswered by Madam Shang whose only reply was that her departure was said to have been witnessed by a security guard at the building. The security guard has since denied on oath Madam Shang’s said allegation.

18.  What seriously undermines Madam Shang’s primary case is that, on 29 July 2013, she sent a SMS and WeChat message to the Petitioner claiming she was moving out of the Premises and, if no one came to collect the keys, she would just leave them at the management office of the building. This directly contradicts her case that she had moved out in June or on 4 July 2013.

19.  The Petitioner says in his 3^rd affirmation that upon receiving the message, he prepared a blank notice acknowledging redelivery of the Premises and left it with the management office. He also requested the management office to let him know immediately when Madam Shang was actually moving out. This is corroborated by the management office’s written record. On the evidence available, Madam Shang never left the keys with the management office. Nor did she sign the notice of acknowledgment.

20.  What is equally perplexing is that Madam Shang has exhibited two letters in her July 2014 affidavit: one dated 19 July 2013 issued by the Buildings Department to the owner of the Premises c/o the occupant and the other dated 10 September 2013 issued by the Lands Tribunal to the Petitioner’s solicitors (cc Madam Shang by post to the Premises). This rather suggests that Madam Shang has not left the Premises at least as at 10 September 2013; otherwise, she would not have received the two letters and would not have been able to use them as exhibits.

21.  Last but not least, the Petitioner stated in his 3^rd affirmation that, upon inquiry, Madam Shang only terminated her electricity account with Hongkong Electric on 28 October 2013. Madam Shang did not challenge that in her affirmation in reply. What that means speaks for itself.

22.  In any event, moving out of the Premises while the same was locked, without handing over the keys back to the Petitioner, does not amount to redelivery of possession and would not stop the rent/mesne profits from accruing. If Madam Shang seriously thinks the Judgment obtained by the Petitioner in the Lands Tribunal proceedings is irregular, she should have applied to set it aside – but there is no evidence that she has done so.

23.  Madam Shang’s secondary case is that she has a cross claim against the Petitioner for breach of the tenancy agreement by reason of the poor conditions of the Premises. In this connection, the amount of her counterclaim is either HK$67,600, HK$86,700 or HK$65,670, again depending on whether one takes her Form of Claim dated 24 July 2014 filed with the Small Claims Tribunal[2], her 16 July 2015 affidavit or her hand‑written statement in court (exhibit R1) as definitive.

24.  The Court’s approach in dealing with an alleged cross‑claim, in a corporate insolvency context, is neatly summarised by Barma J, as he then was, in Jade Union Investment Limited unrep.; HCCW 400/2003; 5 March 2004 at [11]:

“In the context of set-offs or cross-claims, the court will look at the evidence adduced by the company and reach a conclusion as to whether the set-offs or cross-claims relied upon by the company have substance. If it is satisfied that such set-offs or cross-claims have substance, and exceed the amount of the debt on which the petition is based, the court will ordinarily dismiss or stay the petition. It is arguable that there may be a further requirement in relation to cross-claims that the company should have been unable previously to litigate them, but even if that is a requirement, it was not suggested that it arises for consideration in this case.” (emphasis added)

25.  The same approach can and should be adopted in bankruptcy.

26.  Adopting the said approach, this court is not satisfied that Madam Shang’s alleged cross claim has any substance or that its amount will even arguably exceed the Debt. Although there is some evidence that Madam Shang was upset about the malfunction of an air‑conditioner in the bedroom and had complained to the Petitioner about it, she had not been able to explain why the malfunction of an air‑conditioner or the reluctance of the Petitioner to replace it amounted to a breach of the tenancy agreement. Nor can she explain the quantification of her loss, if any, arising from such an alleged breach. Instead, she simply claims two months’ rent ie HK$31,000 as her loss together with repair costs of the windows of HK$1,670 and/or removal costs of HK$20,000. 

Disposition

27.  For the above reasons, Madam Shang’s opposition to the Petition fails and her application dated 22 December 2014 is hereby dismissed.

28.  There shall be a usual bankruptcy order against Madam Shang and an order nisi that costs be to the Petitioner, to be taxed if not agreed, with certificate for counsel.