RE: CHAN HUNG TUEN and EX-PARTE: CHUN KEEN PROPERTY CONSULTANTS LTD.

HCB 2340/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 2340 OF 2000

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J U D G M E N T

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1. This is a petition for bankruptcy based on a judgment debt being the amount of interim payment for the use and occupation of the premises known as Ground Floor of the building erected on Lot No. 3250B8A in D.D. No. 104, Fairview Park Boulevard, Yuen Long ("the Premises") for the period from 1 January 2000 to 30 April 2000 pursuant to an order dated 22 November 1999 in HCA No. 13969 of 1999 ("the High Court action").

2. The amount of the judgment debt as stated in the petition filed on 4 July 2000 was HK$240,000.00. On 14 September 2000, the debtor, Mr Chan Hung Tuen, paid HK$140,000.00 to the Petitioner, Chun Keen Property Consultants Ltd, leaving the balance of HK$100,000.00 outstanding. The debtor has opposed the petition for bankruptcy on two grounds. Firstly, it was alleged that the statutory demand on which the petition was based was not served on him properly. Secondly, he claimed that he would have a complete set-off in respect of the outstanding balance of HK$100,000.00 out of the rental deposit for the Premises in the sum of HK$180,000.00 held by the Petitioner.

3. Before I deal with the two grounds of opposition, I set out the background matters in the dispute between the debtor and the Petitioner which led to the High Court action and the bankruptcy proceedings.

4. By a tenancy agreement dated 1 February 1999 made between the Petitioner as the landlord and the debtor and Mr Ngan Ming Hoi as the tenant, the Premises were let to the tenant for a term of two years commencing from 1 March 1999 at the rent of HK$60,000.00 a month. The Petitioner was paid a deposit equivalent to three months' rent in the sum of HK$180,000.00. The Premises were occupied by Good Fortune Agency Ltd ("Good Fortune"), of which the debtor, Mr Ngan and another were the directors and shareholders at the material time.

5. The debtor and Mr Ngan failed to pay the rent which was due on 1 August 1999. As a result, the Petitioner commenced the High Court action against the debtor and Mr Ngan on 30 August 1999 for recovery of vacant possession of the Premises, payment of arrears of rent for August 1999 and payment of mesne profits at HK$60,000.00 a month thereafter until the delivery up of vacant possession, and for loss and damage for breach of the tenancy agreement. In the Defence and Counterclaim filed on behalf of the debtor and Mr Ngan, it was pleaded that the tenant was entitled to suspend payment of rent for August 1999 because the Petitioner was in breach of its obligation to carry out maintenance and repair of the Premises. It was alleged that the tenant had suffered loss and damage due to the leakage and flooding of the Premises.

6. The Petitioner took out a summons for summary judgment against the tenant and applied for interim payment for the use and occupation of the Premises. On 22 November 1999, a Master made the order for interim payment referred to earlier requiring the debtor and Mr Ngan to pay HK$60,000.00 a month on the first day of each month commencing from 1 December 1999 for the use and occupation of the Premises. As for the question of interim payments from 1 September 1999 to 30 November 1999, this was adjourned to be heard with the O.14 application. Interim payment for the month of December 1999 was paid by the debtor and Mr Ngan pursuant to the order. However, no payment was made thereafter until May 2000 when the solicitors for the debtor sent a cheque of HK$60,000.00 in part payment of the outstanding interim payments. This sum was applied towards the interim payment for May 2000, leaving the interim payments for January to April 2000 outstanding. The total outstanding sum of HK$240,000.00 formed the subject matter of the statutory demand against the debtor referred to below.

7. The Petitioner's application for summary judgment was heard on 24 December 1999 and the debtor and Mr Ngan were granted leave to defend on condition that they were to pay into court HK$100,000.00 within 14 days. The payment into court was made on 11 January 2000. By an order made by consent in that action on 18 September 2000, the sum of HK$100,000.00 that had been paid into court was paid out to the Petitioner's solicitors. This amount was not applied towards satisfaction of the outstanding interim payments that formed the subject of the statutory demand but was apparently applied towards payment in part of the mesne profits between September and November 1999.

8. The High Court action is ongoing. The latest step in that action was a notice to act in person filed by Mr Ngan in March 2001 with an affirmation of Mr Ngan stating why he has chosen to act in person.

9. The Petitioner issued a statutory demand against the debtor for the outstanding interim payments from January to April 2000 in the sum of HK$240,000.00. I shall deal with the question of how service of the statutory demand was effected in the subsequent part of this judgment.

10. On 19 May 2000, the Petitioner recovered possession of the Premises pursuant to an agreement between Mr Ngai Man of the Petitioner and Mr Ngan. However, vacant possession was not delivered in that a large number of chattels and equipment were left behind. There was dispute between the debtor and the Petitioner whether the recovery of possession by the Petitioner on 19 May 2000 was wrongful and whether the Petitioner was entitled to claim storage charges, transportation charges and surveyor's fees being the costs and expenses incurred as a result of the chattels and equipment left in the Premises or whether the occupant of the Premises, Good Fortune, was entitled to unconditional return of the chattels held by the Petitioner and damages for conversion. These disputes were the subject of an action brought by Good Fortune against the Petitioner in August 2000. All proceedings in that action have been stayed as a result of an order for winding up made against Good Fortune on 15 January 2001.

11. The petition herein was filed on 4 July 2000 and was served on the debtor's solicitors who notified the Petitioner's solicitors that they had instructions to accept service of the petition for the debtor. On 12 September 2000, the debtor's solicitors wrote to the Petitioner's solicitors referring to a telephone conversation between the solicitors that day and stating that an agreement was reached to compromise the bankruptcy proceedings on these terms. The debtor's solicitors was to deliver a cashier order or solicitors' cheque for HK$140,000.00 payable to the Petitioner on 14 September 2000. At the same time, the debtor's solicitors were to deliver to the Petitioner's solicitors a cheque for HK$100,000.00 post dated to 5 October 2000 issued by the debtor in favour of the Petitioner. The debtor's solicitors were to endorse the consent summons as per the draft of the Petitioner's solicitors and they would ask the court to approve the consent summons. Lastly, it was recorded that the Petitioner would be at liberty to pursue the petition if the debtor should fail to comply with the above terms. On 14 September 2000, HK$140,000.00 was paid to the Petitioner through the debtor's solicitors. The solicitors for both parties signed a consent summons dated 12 September 2000 seeking an order that all the proceedings in the bankruptcy proceedings be stayed except for the purpose of carrying the order and the terms set out in the schedule thereto into effect. The terms set out in the schedule to the consent summons were in substance the terms recorded in the letter of the debtor's solicitors dated 12 September 2000. That consent summons was not made an order of the court because the debtor's cheque for HK$100,000.00 post dated to 5 October 2000 was dishonoured when it was presented for payment. On 12 October 2000, the debtor filed a notice setting out its two grounds of opposition to the petition mentioned in the beginning of this judgment.

Was the statutory demand properly served

12. The statutory demand was not served on the debtor personally. It was served by advertisement in a newspaper on 3 May 2000 after the process server of the Petitioner's solicitors had attempted to effect personal service at the two usual and last known addresses of the debtor on 24 March 2000 and 18 April 2000. In between these two dates, the Petitioner's solicitors had written several letters to the solicitors who acted for the debtor in the High Court action for the purpose of making an appointment with the debtor to effect personal service of the statutory demand. In particular, by a letter dated 11 April 2000 from the Petitioner's solicitors to the debtor's solicitors, the debtor's solicitors were requested to inform the Petitioner's solicitors the time and place convenient to the debtor to enable the process server to effect personal service of the statutory demand, a copy of which was enclosed for the reference of the debtor's solicitors. It was stated that if the debtor's solicitors should fail to reply within seven days, the Petitioner's solicitors would proceed to serve the statutory demand by "substituted service". No response was received from the debtor or his solicitors within seven days. After the process server had attempted to effect service at the usual and last known addresses of the debtor on 18 April 2000 and had on that day left a copy of the statutory demand at the Premises, the debtor's solicitors wrote to the Petitioner's solicitors on the same day stating that the debtor was at that time outside the jurisdiction. Before the Petitioner's solicitors proceeded to advertise notice of the statutory demand in a newspaper, they wrote to the debtor's solicitors once more on 28 April 2000 putting on record that despite enquiry made with the debtor's solicitors, the debtor's solicitors had failed to inform the Petitioner's solicitors of the time and place convenient to the debtor for personal service to be effected. There was also no response from the debtor or his solicitors to that letter.

13. The debtor has filed an affirmation in these proceedings stating that he had been ordinarily resident in Macau. He stated that for the month of April 2000, he had returned to Hong Kong on three occasions and that he spent just a few hours in Hong Kong on each occasion handling "urgent commercial matters". He also stated that on each occasion, he returned to Hong Kong on "very short notice". However, it would appear from the letter of the solicitors who acted for the debtor and Mr Ngan in the High Court action that they could get in touch with the debtor with no difficulty. When the Petitioner's solicitors first wrote to the solicitors for the debtor and Mr Ngan on 7 April 2000 seeking an appointment to effect service of the statutory demand, the solicitors replied the next day stating that they could not contact Mr Ngan for the time being. They did not state that they were unable to contact the debtor. Instead, it was stated in that letter that the debtor was "at present out of the jurisdiction", that he had "no intention to evade service" and that the debtor's solicitors would inform the Petitioner's solicitors when the debtor was to return to Hong Kong.

14. I am satisfied that the debtor had notice of the statutory demand and the unsuccessful attempts of the process server to serve him with the statutory demand in April 2000. I am also satisfied that the debtor could have made arrangements quite easily through his solicitors with the Petitioner's solicitors for the latter to serve the statutory demand on him personally in April 2000 if he had so wished. Alternatively, he could easily have authorised his solicitors to accept service for him of the statutory demand. In fact, he did subsequently authorise his solicitors to accept service of the petition. In my view, the Petitioner has fulfilled the requirement in Rule 46(3)(a) of the Bankruptcy Rules that "the creditor knows or believes with reasonable cause - (a) that the debtor has absconded or is keeping out of the way with a view to avoiding service."

15. The point taken by Mr Benjamin Chain on behalf of the debtor regarding irregularity of service of the statutory demand was that under Rule 46(3)(b), it must be shown that the creditor knows or believes with reasonable cause that there is no real prospect of the sum due being recovered by execution or other process before he is allowed to advertise the statutory demand in a newspaper. Under Rule 49(8), it is provided that where the creditor has taken advantage of Rule 46(3), the affidavit proving service of the demand must be made either by the creditor himself or by a person having direct personal knowledge of the circumstances. Here, the affirmation proving service of the statutory demand was made by the process server and he deposed that both the Petitioner and he verily believed that there was no real prospect of the sum due being recovered by execution or other process. He has not explained in his affirmation the means or basis of this belief. Mr Chain also criticised the affirmation in that the process server, not being the handling solicitor, was unlikely to have "direct personal knowledge of the circumstances" as required under Rule 49(8).

16. In my view, the deficiency in the affirmation of the process server was cured by the testimony given by Mr Ngai Man, a director of the Petitioner, who was called to testify at the hearing. Mr Ngai was cross-examined as to whether he had any reason to think that he could not recover the judgment debt by enforcing the charging order which he had obtained against a property in Sai Kung owned by the debtor. Mr Ngai was aware that there was already a legal charge in favour of a bank registered against that property. He was and is in the business of real estate and he had estimated that property prices had dropped 50 to 60%. He was of the view that with a prior legal charge to a bank, and given the substantial fall in property prices, it was probable that even if that property was sold, the price realised might not even be sufficient to discharge the indebtedness under the legal charge. He had a discussion with the Petitioner's solicitors about enquiries with the mortgagee bank to find out the outstanding balance owed by the debtor and no reply was received from the bank to their enquiries.

17. I accept Mr Ngai's evidence on this. I find that the Petitioner, through Mr Ngai, had reasonable cause to believe that there was no real prospect of the sum due being recovered by enforcing the charging order registered against the debtor's property and that the requirement under Rule 46(3)(b) was satisfied. I find against the debtor on the ground of opposition regarding irregularity of service of the statutory demand.

Would the debtor be entitled to a complete set-off of the outstanding balance of the judgment debt

18. As mentioned earlier, after the petition was filed and in September 2000, the debtor had paid the Petitioner a sum of HK$140,000.00, leaving outstanding the balance of HK$100,000.00. It was claimed that the debtor would have a complete set-off in that there was a rental deposit in the sum of HK$180,000.00, which the Petitioner was and is liable to refund to the debtor as the Petitioner had recovered possession of the Premises on 19 May 2000. I was referred by Mr Chain to the decision of Sakhrani J in Profitex Development Ltd v. Tarxen Promotion Co. Ltd [1999] 3 HKC 257 for the proposition that once a landlord has elected to forfeit the tenancy by the issue and service of the writ on the tenant, he has made an irrevocable election to bring the tenancy to an end. The effect of this is that the landlord cannot claim consequential damages for the unexpired term of the tenancy and the tenant is only liable to pay rent up to the service of the proceedings and mesne profits thereafter until the delivery of vacant possession of the Premises. In reliance of this authority, Mr Chain submitted that the Petitioner had made an irrevocable election to forfeit the tenancy and bring it to an end by the issue and service of the writ in the High Court action in August 1999. Hence, the tenant was liable to pay mesne profits only up to the delivery of possession of the Premises (there was an issue whether vacant possession was delivered up) on 19 May 2000. The Premises had been let by the Petitioner to a new tenant in June 2000 at a reduced rent. However, the Petitioner was not entitled to claim the difference between the contractual rent and the reduced rent for the unexpired term of the tenancy granted to the debtor and Mr Ngan in the sum of HK$270,000.00, being a loss of HK$30,000.00 over a nine-month period from June 2000 to February 2001.

19. I was also referred by Mr Chain to a subsequent decision of the Court of Appeal in Bonny Ace Ltd v. Elanby Nominees Ltd CACV No. 285 of 2000, 9 January 2001. It was held by the Court of Appeal that it is at least arguable that a landlord may pursue a claim for forfeiture and, in the alternative, a claim for damages occasioned by the premature termination of the tenancy by acceptance of repudiation, having considered the decision of the High Court of Australia in Progressive Mailing House Pty Ltd v. Tabali Pty Ltd (1984-5) 157 CLR 17. Assuming that the Petitioner might be allowed to pursue a claim for damages for the loss of future rental in respect of the unexpired term of the tenancy by alleging acceptance of repudiation, and notwithstanding that the Petitioner had only pursued a claim for forfeiture in the Statement of Claim, Mr Chain submitted that on the facts of the present case, there could be no basis for alleging repudiation on the part of the tenant in that the tenant had only failed or refused to pay rent for the month of August 1999. It was very different from the situation in Bonny Ace in that the tenant in that case was alleged to be guilty of a repudiatory breach in refusing to pay rent and other outgoings for five months and that it had unilaterally purported to give up possession. It is not every breach by a tenant that will amount to a repudiation of the lease.

20. It is a matter in issue in the High Court action whether the Petitioner would be entitled to claim damages against the debtor and Mr Ngan for the loss suffered due to the early termination of the tenancy in May 2000. Apart from this, there are other items of claim by the Petitioner against the debtor and Mr Ngan. As mentioned earlier, there were chattels and equipment left behind in the Premises when possession was delivered up by Mr Ngan to the Petitioner on 19 May 2000. As a result, the Petitioner had incurred surveyor's fees, transportation and packing fees and the storage charges at the rate of HK$4,500.00 a month as from 19 May 2000. The Petitioner has not disposed of the chattels and equipment due to the objection of the debtor and Good Fortune and storage charges are still being incurred. The debtor and Good Fortune had refused to accede to the Petitioner's demand to pay the costs and expenses incurred towards the surveyor, transportation and storage as a pre-condition for the chattels and equipment to be released to them. The Petitioner's claim in this respect, with the storage charges of the chattels and equipment calculated up to April 2001, would be in the region of HK$55,750.00. In addition, the Petitioner would have a claim against the debtor and Mr Ngan for water and electricity charges which had remained unsettled when possession was delivered up in May 2000. These charges had been paid by the Petitioner and it would claim reimbursement in the sum of approximately HK$20,000.00.

21. Under clause 5 of the tenancy agreement made between the Petitioner and the debtor and Mr Ngan in February 1999, it was provided that when the tenant was to move out of the Premises at the expiry of the lease, the landlord was to return the rental deposit of HK$180,000.00 to the tenant without interest. In case the tenant had not settled the rent or any other charges, the landlord was entitled to deduct the same from the deposit.

22. The claim in respect of the costs and expenses incurred due to the chattels left behind in the Premises and the claim for reimbursement of utility charges would amount to a figure less than HK$80,000.00. If it could be shown that the Petitioner was not entitled to apply any part of the rental deposit towards its claim for the difference in rental during the unexpired term of the tenancy, there would be a balance of HK$100,000.00 which could or should have been utilised by the Petitioner towards payment of the balance of the judgment debt being the subject of this petition in the sum of HK$100,000.00. In that event, this petition should be dismissed as the debtor would be entitled to a complete set-off against the rental deposit.

23. I am satisfied that the debtor is not entitled to ask for a set-off on the evidence of Mr Ngai Man, who had reached a verbal agreement with Mr Ngan in May 2000 when the Petitioner accepted the delivery of possession of the Premises from the tenant. Mr Ngai was concerned that if the Petitioner should be able to find a substitute tenant after it had accepted the delivery up of possession from Mr Ngan and the debtor, the Petitioner would suffer a loss in rental for the unexpired term of the tenancy in that the Petitioner would probably only be able to let the Premises to a substitute tenant at a reduced rent. It was agreed between Mr Ngai and Mr Ngan that in accepting early termination of the tenancy, the rental deposit of HK$180,000.00 would be treated as "forfeited" and applied towards the loss and damages that would be suffered by the Petitioner in respect of the reduction in future rent for the unexpired term and towards the Petitioner's legal costs. It was further agreed that if the rental deposit was insufficient to cover the Petitioner's loss and damages in this respect and its legal costs, the Petitioner would be entitled to claim the shortfall from the tenant.

24. I find Mr Ngai to be a credible and truthful witness and I accept his evidence on the agreement he had reached with Mr Ngan. I also find that Mr Ngan had purported to act on his own behalf and on behalf of the debtor when he reached the agreement with Mr Ngai. I accept the explanation given by Mr Ngai why he had not told the Petitioner's solicitors of this agreement until two to three weeks before this hearing. In view of this agreement reached between the Petitioner and Mr Ngan, the debtor is not entitled to a set-off of the balance of the judgment debt against the rental deposit as the rental deposit was, by the agreement of the parties, treated as "forfeited" in that it was applied towards reduction of the loss and damage suffered by the Petitioner in respect of the reduction in rental during the unexpired term of the tenancy. Even if the Petitioner's claim for the loss of future rental might be doubtful and that it might not be able to establish a repudiatory breach on the part of the tenant as submitted by Mr Chain, there would be good consideration moving from the Petitioner in its promise to forbear to enforce its claim in this respect up to the amount of the rental deposit of HK$180,000.00.

25. For the above reason, I am of the view that this ground of opposition raised by the debtor must also fail. As I have found against the debtor on both grounds of opposition, and I am satisfied that the Petitioner has proved its debt being the subject of a statutory demand properly served on the debtor, it would be appropriate to make a bankruptcy order against the debtor.

The orders

26. At the conclusion of the hearing and after counsel had made submissions, Mr Chain urged me not to make a bankruptcy order even if I were to find against the debtor on his grounds of opposition upon the undertaking of the debtor's solicitors to pay the outstanding balance of the judgment debt being HK$100,000.00 with interest thereon to the Petitioner's solicitors within two days of the delivery of my judgment. If the debtor was minded to test and litigate the point whether the Petitioner was entitled to claim damages for loss of future rental in alleging repudiatory breach having regard to the decisions cited by Mr Chain, it seems to me that there is a better way of going about this instead of contesting the petition and then asking the court to stay its hand if the judgment should go against the debtor by giving an undertaking to make full payment within two days. Under section 9(5) of the Bankruptcy Ordinance, Cap. 6, there is a mechanism provided for this situation. Where the debtor denies that he is indebted to the petitioner or that he is indebted to such an amount as would justify the petitioner in presenting a petition against him, upon giving such security as the court may require for payment to the petitioner of the debt which may be established against the debtor, and of the costs of establishing the debt, the court may stay all proceedings on the petition for such time as may be required for trial of the question relating to the debt. Instead of proceeding to a fully contested hearing of the petition, it would have been more appropriate for the debtor to seek a stay of the bankruptcy proceedings upon giving the security as offered, pending trial in the High Court action of the question whether the Petitioner was entitled to claim damages for repudiatory breach.

27. In the special circumstances of this case, and upon the undertaking given by the debtor's solicitors as mentioned above, I make the following orders:

(1) I make a bankruptcy order against the debtor. The bankruptcy order is not to take effect until after two clear days from the handing down of this judgment. In the event that full payment of the judgment debt is made to the Petitioner pursuant to the undertaking given by the debtor's solicitors, the bankruptcy order is rescinded forthwith;

(2) I order the Petitioner's solicitors to inform the Official Receiver in writing on the expiry of two clear days from the handing down of this judgment whether the Petitioner has received payment of the judgment debt pursuant to the undertaking given by the debtor's solicitors; and

(3) I make an order nisi that the Petitioner is to have its costs in this petition.