RE FOOK HAU TRADING COMPANY (a firm)

HCB 6222/2016

[2018] HKCFI 165

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6222 OF 2016

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DECISION

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Introduction

1.  This is the hearing of the petitioner’s petition dated 29 August 2016 (the “petition”) under the Bankruptcy Ordinance for a bankruptcy order against Fook Hau Trading Company (the “Debtor”).  The Debtor was a partnership comprising of three brothers, Chang Hoi Kau (“Chang”), Tsang Poa Kau and Tsang Moon Kau, and their sister Chang In Seong (the “Sister”), collectively, the “Partners”.  These Partners are the exclusive shareholders of Fook Hau Company Limited (“Fook Hau”), Fook Lai Development Limited (“Fook Lai”) and Florich Investment Limited (“Florich”), collectively, the “associated companies”.

2.  The petitioner is a bank (the “Bank”) which granted banking facilities to the Debtor.  The petition is based on a statutory demand dated 15 January 2016 for a debt of $22,468,662.86 (the “debt”), which remains neither set aside nor satisfied.  The petition is supported by two affidavits made by Li Siu Mei and an affirmation made by Lam Lai Kwan on behalf of the Bank.  Chang filed one affirmation in opposition on behalf of the Debtor.  He did not dispute that at one stage the Debtor owed the Bank the said debt, but opposed the petition on two grounds:

(1)   that there was some form of waiver by and/or estoppel against the Bank to the effect that the Debtor would be discharged from repayment of any outstanding debt due to the Bank, if it complied with certain conditions (the “consideration”) (the “estoppel defence”); and

(2)   that the Debtor as a partnership was dissolved on 12 February 2015 prior to the issue of the statutory demand and the presentation of the petition (the “dissolution defence”).

At the previous call over hearing, the Debtor also argued that the service of the statutory demand had been irregular. However, that defence and the dissolution defence were not pursued at the hearing.

The applicable legal principles

3.  The legal principles applicable to a bankruptcy petition are well settled.  A debtor may oppose a petition on the ground that there is a bona fide dispute on substantial ground as to the existence of the petitioning debt.  See Hong Kong Bankruptcy Law Handbook [1].  A bona fide dispute is not a trivial or insubstantial dispute, but one based on solid grounds disputable both in law and on the facts of the case.  In Re ICS Computer Distribution Ltd, Rogers J (as he then was) said [2]:

“ Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court that it has a bona fide dispute on substantial grounds. This seems to me to be the proper approach which emerges both from the cases where the petition has been struck out and those for example as the Great Britain Mutual Life [3] to which I have referred and Re Janeash Ltd [1990] BCC 250. In that case Browne-Wilkinson VC said at 252 ‘That huge weight of material has remained unanswered’. He went on to doubt the truth of such material as had been put in by the company, but that does not, in my view, detract from the basic point that the company’s evidence must establish a substantial case. If the evidence fails to establish that case the company cannot satisfy the test by arguing hypotheses of fact on which it is said that such a case exists or could exist.”

This is a higher standard than that required of a defendant in resisting an application for summary judgment under Order 14 of the Rules of the High Court.  The burden is on the debtor to show not only that his case is believable but also that there is precise factual evidence in support of his case, which are not just mere assertions.  The court will look at the debtor’s evidence against so much of the background and incontrovertible evidence that is not disputed or not capable of being disputed.  An honest belief on the part of the debtor that he has a substantial ground of defence is not sufficient to avoid a bankruptcy order from being made: Re Malcolm Westley Casselle (a debtor) [4].

4.  A waiver by estoppel has the effect of preventing a party, the promisor, who made certain representation to another, the promise, from asserting his strict legal right against the promisee.  The party pleading estoppel must establish that:

(1)   there is a clear and unequivocal promise or assurance from the promisor which is intended to affect the legal relations between the parties;

(2)   the promisee relied on and/or acted upon such promise or assurance to his detriment; and

(3)   it would be inequitable to permit the promisor to withdraw the promise.

Background

5.  The Debtor became a customer of the Bank in or about 1993.  By a facility letter dated 19 October 2004, the Bank granted the Debtor over­draft facilities of $4 million and general banking facilities of $25 million (the “2004 Facility Letter”).  The 2004 Facility Letter was signed by all the four Partners.  The facilities were secured against the mortgage of five properties (the “mortgaged properties”) held by its associated companies which are exclusively owned and controlled by the Partners.

6.  Since about January 2006, the Debtor defaulted in paying its debts due.  As at March 2006, the Debtor was indebted to the Bank in the sum of about $24.5 million.  Two officers of the Bank had a meeting with Chang and the Sister to discuss resolution of the Debtors’ liquidity problem (the “March 2006 Meeting”).  Following that meeting, the Bank issued a facility letter dated 18 April 2006 to the Debtor (the “2006 Facility Letter”).  The 2006 Facility Letter indicated a total indebtedness of $24,703,955.39, comprising of five packing loans of $3,589,675.48 and other loans of $21,114,279.91.  The Bank proposed to restructure the repayment of the five packing loans from sale proceeds payable to the Debtor by its buyers and the other loans by 24 monthly instalments of $200,000 each for the first 23 months and $16,514,279.91 for the final instalment.  The Debtor did not accept the repayment proposal and refused to execute the 2006 Facility Letter.  Then, by a letter dated 28 April 2006 served on the Debtor and each of the Partners, the Bank demanded repayment of the outstanding debt of $24,891,071.99 as at 27 April 2006.  

7.  The Debtor did not repay.  The five mortgaged properties were sold between September 2006 and December 2007 and the sale proceeds were applied to repay part of the outstanding debt.  The sale of the first mortgaged property was completed on 28 September 2006.  The sale of the second, third and fourth mortgaged properties was competed on 23 February 2007.  The sale of the fifth mortgaged property was completed on 7 December 2007 almost a year later and under special arrangement between the Bank and the Debtor.  The total sale proceeds were inadequate to repay the outstanding debt. As at 10 December 2007, a sum of $13,221,120.36 remained outstanding. 

The alleged promise from the Bank

8.  The Debtor had no dispute that it was in default with repayment of the loan under the trade finance facilities since about January 2006. Its case is that in February 2006, a “Mr Lee” of the Bank approached the Debtor expressing the Bank’s intention to take possession of the five mortgaged properties. Chang and the Sister asked for time to repay.  This discussion is consistent with the Bank’s case except as to the identity of that Mr Lee.  Then, in March 2006, Mr Lee, Chang and the Sister had a further meeting in the Bank’s headquarters in Central.  Except for the identity of Mr Lee and what was discussed and agreed at that meeting, it is common ground that there was a meeting in March 2006 between the Debtor and officers of the Bank to discuss resolution of the Debtor’s indebtedness, ie the March 2006 Meeting.

9.  The Debtor’s initial case is that during the March 2006 Meeting, Mr Lee for and on behalf of the Bank represented to Chang and the Sister that the Debtor would be discharged from any repayment of the outstanding debt due to the Bank (the “alleged promise”), if the Debtor:

(1)   would surrender and move out of the five mortgaged properties on its own initiative within a short period of time, without any legal proceedings having to be taken by the Bank (“the first consideration”);

(2)   would not be involved in the sale of the five mortgaged properties (“the second consideration”); and

(3)   would not disclose the arrangement discussed during the meeting to any of its other creditors (“the third consideration”). 

While it is common ground that there was a meeting between the Bank’s officers, Chang and the Sister, the Bank’s case is that the meeting was to discuss re-structuring of the Debtor’s debt and on 18 April 2006 it offered a re-structuring scheme under the 2006 Facilities Letter, which was rejected by the Debtor.  Then, on 27 April 2006, the Bank promptly issued letters of demand to the Debtorand its Partners.  In the face of this incontrovertible evidence, which is fully supported by contemporaneous documentary evidence, the Debtor’s case lacks conviction.

10.  The Debtor’s case is that it was Chang’s understanding that even if all the five mortgaged properties were sold, the sale proceeds would not be enough to cover the total outstanding debt due to the Bank.  He therefore raised this with Mr Lee.  Then, Mr Lee assured him that if the Debtor complied with the three considerations, the Bank would honour the alleged promise because the Bank could save a lot of time and costs in its debt collection process if the Debtor would cooperate by compliance with the three considerations.  At the time, the five mortgaged properties were occupied by the Partners and their relatives.  In his affirmation filed on 19 April 2017, Chang affirmed that genuinely believing that the Bank wouldhonour its alleged promise if it complied with the three considerations, the Debtor caused the Partners and their relatives to move out of the five mortgaged properties and surrendered them to the Bank without any legal proceedings having to be taken out by the Bank and they kept the arrangement secret.  Chang further averred that as a result, the Partners and their relatives suffered hardship, having to vacate within a short time and to pay market rent for their new accommodation.

The first consideration not met

11.  However, even on the Debtor’s own initial case, it failed to comply with the first and second considerations in full.  There is no dispute that between May and July 2006, the Partners and their relatives moved out of four of the five mortgaged properties.  In respect of these four mortgagedproperties, the move may be regarded as having been made within a short time.  However, the fifth mortgaged property was not vacated until 7 December 2007, more than a year later, when its sale was completed.  That move could not be regarded by any standard, short of an express agreement, as having been made within a short time.  In the face of the above incontrovertible evidence, the Debtor has simply not complied with the first consideration and cannot raise estoppel.

12.  Faced with the above difficulties, Mr Chong, counsel for the Debtor, attempted to argue on an amended case that the first and second considerations had been varied by the parties subsequently such that it was sufficient to raise an estoppel if the Debtor vacated and surrendered all five mortgaged properties, though only four within a short time.  He argued that in view of the old age of Chang, who is aged 72, and the long time lapse since the March 2006 Meeting, Chang could be regarded as having given sufficiently precise details of the meeting, including when, where and who were present and the content of the alleged promise.  He argued that had there been no promise made by the Bank, there was no motivation for the relatives to move out of the five mortgaged properties on their own initiative.  He submitted that that was sufficient evidence that the alleged promise had been made.  Alternatively, he submitted that there was conflicting evidence whether the alleged promise had been made and/or the content of the March 2006 Meeting which required to be investigated by viva voce evidence at trial such that this petition should not be determined summarily.

13.  With respect, Mr Chong’s submission is only to be rejected.  The burden is on the debtor to show not only that his case is believable but also that there is precise factual evidence in support of his case, which are not just mere assertions.  The debtor has to condescend on particulars.  Chang on behalf of the Debtor has pleaded an alleged promise founded on a consideration that the Debtor would move out and surrender all five mortgaged properties within a short time.  Counsel cannot now change the Debtor’s case to the extent that the consideration was to move out of and surrender only some of the five mortgaged properties within a short time.  Mr Chong tried to excuse Chang from the ambiguity by pleading on his old age and by arguing that there was a variation on the mode of compliance of the first and second considerations with consent of the Bank.  But Chang had not given any particulars about such variation.  The alleged variation suggested by Mr Chong is a mere assertion from counsel’s table, which is not even supported by an affirmation from the Debtor.  There is no reason why a strict interpretation of the first consideration should not be applied to a serious promise of this kind.  The evidence as asserted by Chang, even if believed, could raise no estoppel as the consideration has not been fully met. There is also no room for any argument that the dispute should be resolved by viva voce evidence.  On this ground alone, the defence should be struck out.  Furthermore, as mentioned in paragraph 10 above, Chang’s evidence is so inconsistent with the contemporaneous 2006 Facilities Letter that it is incapable of belief.  Mr Chong argued that the 2006 Facilities Letter was issued unilaterally by the Bank.  Be that as it may, the issue and receipt of that letter was not disputed.  If the Bank had offered the alleged promise, it would not have issued the 2006 Facilities Letter.  It could be argued that the Bank nevertheless did so to preserve its position.  Even so, upon receipt of the 2006 Facilities Letter, the Debtor would not have remained silent without protesting to the Bank by asking “what about your promise?”  This defence is just moonshine.

The second consideration not met

14.  The Debtor’s case of the second consideration for the alleged promise is that it would not involve itself in the sale of the five mortgaged properties.  The first and fifth mortgaged properties were owned by Fook Lai.  The first mortgaged property had never been surrendered by the Debtor.  It was sold by Fook Lai with the sale completed on 28 September 2006 without surrendering vacant possession to the Debtor.

15.  It is not disputed that despite completion of the sale of the first four Mortgaged Properties by February 2007, the fifth Mortgaged Property had never been surrendered by the Partners and their relatives.  It was only until half a year later that Fook Lai initiated discussion for repayment of the debt for the redemption of that property on 9 July 2007 to enable it to sell the property.  On the incontrovertible evidence, the Debtor itself requested and actively conducted the sale of the fifth mortgaged property.  This is clear non-compliance with the second consideration of not being involved in the sale of the mortgaged property.

16.  I note, of course, Mr Chong’s argument about variation of the considerations in the paragraph 13 relating to the first consideration.  For similar reasons, such argument in respect of the second consideration must also be dismissed as being an assertion from counsel’s table which is not supported by any evidence.  The defence as advanced by Mr Chong was so wanting in particulars that it must also be struck out for failure to condescend on particulars.

The parties’ conduct negates existence of the alleged promise

17.  The thrust of the Debtor’s defence is the Bank’s alleged promise that they would be discharged from repayment of any outstanding debt.  But, the existence of the alleged promise is inconsistent with the parties’ conduct and contemporaneous documents.

18.  First and foremost, upon the Debtor’s refusal to accept the terms of the 2006 Facilities Letter, the Bank issued demand letters to the Debtor and each of its Partners terminating the facilities granted under the 2004 Facilities Letter and demanding immediate repayment in full of the total sum of $24,703,955.39 plus interest of $187,116.60.  That demand was dated 28 April 2006 and was duly served on the Debtor and all its Partners. The significance is that the demand pre-dated the surrender and sale of the mortgaged properties, which commenced since May 2006.  If the Bank had made the alleged promise, there was no reason why it would issue the demand letters. While it could be argued that the demand was issued as a precautionary or routine measure, the Debtor did not protest about the demand and did not seek a confirmation that the promise was still binding before they started to surrender or sell the mortgaged properties.  The demandis more consistent with the absence of the alleged promise than its existence. 

19.  Second, on 22 May 2006, the Bank issued statutory demands against each of the Partners, stating that the Debtor owed the Bank $25,143,205.40, demanded immediate repayment and threatened bankruptcy proceedings.  In the face of the threat of bankruptcy proceedings, the Partners did not respond. They did not apply to set aside the statutory demand nor did they protest to the Bank holding the Bank to the alleged promise, which according to them had the effect of discharging all outstanding debt.  Their silence is more consistent with the absence of the alleged promise than its existence.  Instead, the Partners started to vacate, surrender or sell the mortgaged properties in the following manner, which indicated that there was no such alleged promise.

20.  In the letters of surrender in respect of the second, third and fourth mortgaged properties executed by Fook Hau and Florich as mortgagor,all dated 7 August 2006, the Debtor, Fook Hau and Florich expressly agreed and confirmed, contrary to the alleged promise that:

“ 1. events of default under the Legal Charges have occurred and the [Bank] is entitled to recover possession of the Properties and to sell the same;

2. we do owe [the Bank] a total sum of HK$25,944,349.58 (as at 3^rd August 2006) together with interest thereon from 4^th August 2006 until payment under the said Legal Charge.”

Clearly, the Debtor acknowledged owing the outstanding debt and liability for repayment of the debt and interest until full repayment.  There was absolutely no mention of the alleged promise or any discharge.

21.  In the correspondence relating to the sale of the fifth mortgaged property which ensued between the solicitors for Fook Lai and the Bank, it was manifestly clear that the repayment for redemption of the fifth mortgaged property, while it released the property from the mortgage, did not release Fook Lai or the Debtor from its total indebtedness under the 2004 Facilities Letter.  These correspondences demonstrate two things: first, that the alleged promise and second consideration are concoctions; and second, that the Debtor clearly knew that the sale proceeds did not dischargeall its indebtedness. The whole defence of promise and consideration is just moonshine.  I now turn to these correspondences.

22.  After some verbal discussions with the Bank, the solicitors for Fook Lai, Messrs Pang, Wan & Choi (“PWC”) wrote to the Bank enclosing a cheque in the sum of $1,520,000 being total repayment for the redemption of the fifth mortgaged property.  The Bank’s solicitors, Messrs Tsang, Chan & Wong (“TCW”) replied on 10 July 2007:

“ We are instructed to inform you, … that our client will not presentthe cheque that you have sent … unless and until the present matter has been clarified.

Your client, Fook Lai Development Limited, the mortgagor undera mortgage of the captioned property owes to our client all monies which it and/or Fook Hau Trading Company owes to our client, the amount of which well exceeds the sum of HK$1,520,000.00. Our client is minded to accept a sum of HK$1,520,000.00 for its execution of a release of the said mortgage without in any way releasing the liabilities of your client, Fook Lai Development Limited or Fook Hau Trading Company in respect of the payment of the balance of the money due by them or any of them to our client. …

Please kindly confirm to us that the above is acceptable to your client and there is no other proposal not to mention agreement from your client in respect of the present matter.”   

A letter on similar lines dated 17 July 2007 was also sent to Fook Lai.

23.  On 28 August 2007, TCW wrote to PWC as follows:

“ We are instructed that your client, Fook Lai Development Limited is desirous to come to an agreement with our client that:-

1. It is to pay ours a sum of HK$1,560,000.00 and our client, after receipt of such money, shall execute a Release of the Legal Charge on the captioned property releasing the said property but without releasing the obligations on the part of your client and all the other parties including Fook Hau Trading Company on payment of the indebtedness still due under the said Legal Charge to our client.

…

Please confirm that the above is the understanding of your client as well such that we can commence drafting the necessary documents.  There is no binding agreement unless and until a written agreement is signed between our respective clients.”

24.  In the sale and purchase agreement of the fifth mortgaged property dated 31 October 2007, the Partners through Fook Lai expressly acknowledged that the property was subject to the existing mortgage in favour of the Bank, and that Fook Lai undertook to redeem the said mortgage/‌charge thereof at its own costs on or before completion and forthwith obtain a discharge/release.

25.  It was under these circumstances that the Bank executed a release containing, inter alia, the following term:

“ … AND IT IS HEREBY DECLARED AND AGREED that nothing herein contained shall prejudicially affect the remaining or other security (if any) which the Mortgagee may now or at anytime hold or take from the Mortgagor and/or the Principal or fromany other person in respect of any moneys which may remain dueand owing by the Mortgagor and/or the Principal or any of them tothe Mortgagee and provided further that the right of the Mortgagee to recover from the Mortgagor and/or the Principal and/or other responsible parties (if any) in respect of the said moneys which may remain due and owing to the Mortgagee by the Mortgagor and/or the Principal or any of them is unaffected by this Release ‌…”

Thus, what was released was the security and not the Debtor’s entire indebtedness under the legal charge or the 2004 Facilities Letter.  There is no misunderstanding by Fook Lai or the Debtor that the payment of the proceeds of sale of the fifth mortgaged property did not have the effect which the Debtor now contended of a promise discharging all its outstanding debt.  It is significant to note that not only did the Debtor not allege that it was discharged from their debts, it actually acknowledged that it remained liable for all outstanding debt.  These correspondences were conducted by the Debtor’s solicitors.

26.  The Debtor accepted a similar release executed by the Bank in respect of the first mortgaged property, acknowledging its continued liabilityfor all outstanding debt.

27.  The Debtor argued that since the release of the fifth mortgagedproperty on 7 December 2007, for a period of over eight years the Bank took no action to demand any repayment until the issue of the statutory demand dated 15 January 2016 and that this inaction by the Bank supported the existence of the alleged promise.  The Bank’s reply is that it had been sending monthly statements showing the outstanding sum and interest accrued to the Debtor. However, Chang alleged that the Debtor had moved out from its office in Sands Building in Tsim Sha Tsui in June to July 2006 and had not received any bank statements.  This assertion is contradicted by the contemporaneous documents.  All along, the Bank had been sending monthly statements showing the outstanding sum and accrued interest to the Debtor at the address of its secretarial company at Room XXXX, Ginza Plaza, Kowloon for the period from July 2006 to November 2009 and then at Room YYYY, Ginza Plaza for the period from December 2009 till now.  Both Ginza Plaza addresses were provided by the Debtor voluntarily on 3 July 2006 and 1 December 2009 respectively and the Debtor provided no change of correspondence address thereafter.  In reply, Chang said he had checked with its secretarial firm at the Ginza Plaza addresses and was advised that no letter had been received after termination of the secretarial service.  That assertion is not supported by evidence from the secretarial company and Chang was not specific as to when the Debtor terminated the secretarial service.  His evidence lacks any ring of truth because the two Ginza Plaza addresses were provided by the Debtor to the Bank at the material time.  Not only do these monthly statements negate the existence of the alleged promise, the Debtor’s silence upon receipt of these statements throughout these years suggests that it accepted liability for the outstanding debt.

28.  The Parties’ conduct as reflected in the contemporaneous documents negates the existence of the promise as alleged by the Debtor.  The whole defence of promise and consideration is clearly moonshine and afterthought.

Conclusion

29.  In the light of the above analysis, there is no dispute as to the petitioning debt and the Debtor has failed to discharge the burden of showinga bona fide dispute on substantial ground as to the existence of the petitioning debt.  Accordingly, I make the usual bankruptcy order with costs against the Debtor.