XCHRX RICHMAN RESOURCES LTD. v. ZHANG SABINE SOI FAN

HCSD 40/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

STATUTORY DEMAND NO. 40 OF 2000

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DECISION

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1. This is an application by Sabine Zhang Soi Fan, also known as Wan Soi Fan ("Zhang") to strike out a statutory demand served against her by Richman Resources Limited ("Richman").

2. The statutory demand was served on Zhang on 25 October 2000 claiming a total sum of $21,861,937.02 made up of 18 debts allegedly incurred in the previous year from 29 January 1999 to 6 October 1999. On 11 November 2000, within the time prescribed by the rules, she applied to set aside the statutory demand.

3. Before I consider the evidence adduced on this application, I should note that there was a technical defect in the statutory demand in that it was made in a form appropriate for a demand based on a judgment debt, when in fact no judgment has been entered against Zhang. At the hearing however, counsel for Zhang accepted that she had not been misled by the technical defect and indicated that no reliance would be placed upon it as a ground for the application to set aside the statutory demand.

The Law

4. Rule 48 of the Bankruptcy Rules provides that the court may grant an application to set aside a statutory demand if:-

(a) the debtor appears to have a set-off which equals or exceeds the amount of the debts specified in the statutory demand,

(b) the debt is disputed on grounds which appear to the court to be substantial, or

(c) if the court is satisfied on other grounds that the demand ought to be set aside.

Other provisions in rule 48 are not applicable in the present case.

5. In respect of the ground at (a) above, counsel for Richman has submitted that it would only be if Zhang has a set-off against the company itself (and not the person controlling it) that this ground can be invoked. However, Zhang's case is that Richman is only an agent for Chun Kam Chiu ("Chun") who controls it, and that Chun himself had disclosed that he was Richman's principal authorizing it to pay Zhang to whom he had to pay money.

6. As a matter of mutual set-off in bankruptcy law, it is well-established that a debtor can set off a debt owing by the creditor's disclosed principal. The same principle must apply for the purposes of set-off as a ground to set aside a statutory demand. Hence, if Zhang can satisfy the Court that she appears to have a set-off against Chun which equals or exceeds the amount of the debts specified in the statutory demand, ground (a) would be satisfied.

7. In respect of the ground at (b) above, it is common ground that the same principles should be applied as those which apply to the setting aside of a petition to wind-up a company. I have in a recent decision involving Richman and a company controlled by Zhang discussed the relevant legal principles and I need not repeat them here (see the Decision in CWU 822/00 dated 25 April 2001).

8. The Court's approach (based on Re a Company No. 006685 of 1996 [1997] BCC 830) should be to examine the evidence adduced, and to see from the evidence whether the applicant (Zhang) has discharged the onus of showing that there are substantive grounds which support a bona fide belief that she is not indebted to Richman. However, once the Court sees that there is some substance in the applicant's stand, it would not (unless the dispute is capable of being determined simply) undertake a trial during this summary procedure. An action should be started by the party claiming to be the creditor to establish its claim to the alleged debt.

9. As for the ground at (c), which is also invoked by Zhang, the established approach is that this should be of the same degree of substance as the other grounds.

Zhang's case

10. Zhang's case is that in August 1998, Chun invited her and her husband to invest in his company called Keen Lloyd which was in difficulties at the time. Zhang did not have ready cash but had a large quantity of rough diamonds worth more than US$93m.

11. Zhang says that she agreed with Chun that he would sell the diamonds for her in the PRC and would, with her prior consent, invest the proceeds for her. If any part of the proceeds were not so invested, he would return the unused part to her in 1 year's time.

12. Zhang says that in accordance with that agreement, she gave him the diamonds in October 1998. This was evidenced by a written document signed by Chun, the authenticity of which he has denied.

13. Zhang says that in December 1998 however, she needed cash and asked Chun about the progress of sale of the diamonds. Chun then provided two payments of HK$2m each to her, these payments being made by his company Richman to her company Shui Yick Precious Metals Co Ltd.

14. Zhang says that in February 1999, she heard that Chun had sold a large quantity of diamonds. Upon her inquiry, Chun caused a further sum of nearly HK$12.48m to be paid by Richman to Shui Yick.

15. In her affirmation in the present application, Zhang says that Chun told her that since the proceeds of sale of the diamonds would be deposited into Richman's account with the Sin Hua Bank, she could draw money from that account whenever she needed it. In February/March 1999, she was made an authorized signatory of the account. She could sign singly and there was no limit on the amount for which she could sign cheques.

16. Zhang says that she and her husband did not approve any investment proposals from Chun. In about August 1999, her relationship with Chun deteriorated. In 2000, a flurry of proceedings commenced between Zhang and her companies of the one part and Chun and his companies of the other part.

17. In HCA 9007/00, Zhang is the Plaintiff and Chun is the Defendant. Zhang is suing for US$93m. but has purportedly given credit for some (but not all) of the funds received by her from Richman. Chun has denied that he had ever taken any diamonds from her, and has denied the alleged agreement for their realization and the payment of their proceeds in the event no investment is approved. Pleadings are closed. The further progress of the action depends on the outcome of Chun's application for security for costs.

18. In HCA 1922/01, the Plaintiffs are Richman and Keen Lloyd and the Defendants are Zhang, Rui Lloyd Holdings Hong Kong which is said to be her management company, and another company controlled by her called Generation International. There are 4 claims in that action which overlap with the 18 sums claimed in the statutory demand.

Debts alleged in statutory demand

19. Of the 18 sums alleged in the statutory demand, Zhang has admitted that 15 were received by her for her personal use. These are:-

(a) the 12 sums No. 7 (10 June 1999) to No. 18 (6 October 1999) inclusive which add up to a total of HK$1,712,577.02;

(b) sum No.1 for HK$1,560,000 (29 January 1999) which she has now admitted (in the affirmation made by her solicitors on her instructions) was paid into the account of her company Generation International;

(c) sum No.2 for HK$12,479,360 (4 February 1999) which was paid by way of a cheque signed by Chun and endorsed by Zhang in favour of her company Shui Yick; and

(d) sum No.4 for HK$2,772,720 (19 March 1999).

I shall deal with these 15 admitted receipts below.

20. As for sum No.3 for HK$156,000 (18 March 1999), she says this was US$20,000 paid on behalf of Richman's subsidiary Victory Link to Victory Link's subsidiary Rui Lloyd Abidjan. This allegation is supported by Richman's own journal voucher. On the face of it, therefore, this has nothing to do with Zhang.

21. Chun in his affirmation made on behalf of Richman has denied his interest in Rui Lloyd Abidjan, notwithstanding corporate records. He also says that journal vouchers were prepared by a Miss Chin, a member of Richman's staff and although he checked the accounts, he seldom checked the journal vouchers. However, there is no explanation proffered from Miss Chin (although she has been in contact with Chun) as to why she made that entry in the journal voucher if it was not correct. In the light of this, Zhang has discharged her onus of showing that this debt is disputed on substantial grounds.

22. As for sum No.5 for HK$1,240,000 (3 June 1999), Zhang says that this sum was paid by Richman to Shui Yick so that Shui Yick could remit it through its bankers Standard Chartered Bank to Rui Lloyd Abidjan. The remittance had to be done this way because Richman's bankers Sin Hua Bank had no banking arrangements with banks in Africa. This is supported by Richman's journal voucher which records the sum as a payment made on behalf of Johari (another company controlled by Chun) to Rui Lloyd Abidjan.

23. Chun in his affirmation made on behalf of Richman says that this was lent to Zhang for payment of import tax for jeeps to be imported by a Laye Fadika, which import was financed by Richman. However even on Chun's affirmation, Zhang had no interest in the transaction, apart from signing the financial agreement on behalf of Richman. That being so, one cannot see why Zhang should have to borrow money for the import tax. In the premises, Zhang has discharged her onus of showing that this debt is disputed on substantial grounds.

24. As for sum No.6 for HK$1,941,280 (10 June 1999), Zhang admits that a cash cheque for this sum equivalent to US$250,000 had been signed by her but she says that this was withdrawn for Chun's use to pay a third party whose identity she is restricted by law from disclosing. It was not disputed by counsel for Chun that Chun has recently been arrested by the Independent Commission Against Corruption for suspected bribery offences.

25. Chun in his affirmation made on behalf of Richman says that if he had the need for US currency in cash, he could have asked any one of Richman's staff to get it for him. However, even though he must be presumed to be innocent until proven guilty, the fact that he has been arrested lends some support for Zhang's allegation which was made in an affirmation filed well before Chun's arrest.

26. I find therefore that in respect of sums No.3, 5 and 6, Zhang has discharged the onus of showing that these debts are disputed on substantial grounds.

27. As for the 15 sums Zhang has admitted were received by her, she says they should be set-off against Chun's indebtedness to her in the sum of US$93m., there having been no payment by him in October 1999.

28. Zhang's allegation of Chun's receipt of the diamonds is supported by the affirmations of Zhang's husband and her sister. Zhang's allegation of Chun's execution of a written letter of guarantee for the payment of US$93m is supported by an affirmation of the interpreter who had interpreted the document to him in Beijing. Although Chun has said that the signature was forged, the Court obviously cannot, at this stage and in proceedings of the present type, determine whether the affirmation of a third party such as the interpreter can be disbelieved.

29. In the circumstances set out above, I take the view that Zhang has thrown sufficient doubt upon this case to persuade me that the alleged debts are bona fide disputed on substantial grounds and in any event, such that the full rigours of a witness action with discovery and cross-examination at trial should be applied to the determination of the disputes of fact between Zhang and Richman.

30. In coming to this decision, I have taken into account the fact that some of the sums received by Zhang were in odd figures (sum No.2 for HK$12,479,360 and sum No.4 for HK$2,772,720) which may lend support for Richman's allegation that these were meant for diamond purchases.

31. However, Richman's evidence also raises a number of questions. Its case In respect of sum No.2 is inconsistent in that in HCA 9007/2000, Chun had said that this sum had been misappropriated by Zhang signing a cheque for this sum in favour of Shui Yick, when its case in the present application is that the cheque had been signed by Chun himself in the mistaken belief that the sum was to be used to buy diamonds under an invoice that has been allegedly forged.

32. As for sum No.4, Richman's case is that this was paid on the basis of an invoice from a diamond dealer which invoice had been cancelled. However there is no explanation why Richman's journal voucher stated that this sum was paid on behalf of China Africa Mining, when it was Richman and not China Africa Mining which, according to Chun's affirmation, was in the business of the purchase of diamonds and to whom the invoice was addressed. Although an explanation for the reference to China Africa Mining is offered for other invoices, that explanation (using China Africa Mining's software) is unusual to say the least. In any event, even if Zhang had indeed practised a deception upon Richman in obtaining payment of this sum, the set-off alleged against Chun on the basis of the US$93m transaction would still be a sufficient ground for setting aside the statutory demand.

Order

33. In all the circumstances, this is a case where on all the grounds referred to in paragraph 4 above, bankruptcy proceedings are not appropriate for the resolution of the issues between the parties. I would therefore set aside the statutory demand and would make an order nisi that the costs follow the event, i.e. that costs be borne by Richman.