CHAN YUK LUN v. CHAN YING CHIT

HCSD 3/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 3 OF 2014

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D E C I S I O N

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1. By my decision handed down on 1 September 2014, I dismissed the applicant’s application to set aside the statutory demand issued by the respondent against him dated 3 June 2013.

2. By a summons dated 11 September 2014, the applicant seeks leave to appeal from my decision to the Court of Appeal.

3. The first question that arises is whether leave to appeal is required by law in these circumstances.  That question has not apparently been specifically determined before.  Both parties in this case have assumed that leave is necessary.

4. S 98(2) of the Bankruptcy Ordinance (Cap 6) provides:

“Every order of the court or the Registrar shall be subject to appeal to the Court of Appeal. The notice of appeal shall be served within the time for appealing against an order made in the matter of any bankruptcy as specified in Order 59, rule 4(1)(b) of the Rules of the High Court (Cap 4 sub. leg. A).”

The “court” means the Court of First Instance sitting in its bankruptcy jurisdiction: s 2.  This provision, if applicable, would suggest that leave to appeal is not required, since it stipulates that an order “shall be subject to appeal”.  This raises the question whether in dismissing an application to set aside a statutory demand, the court is “sitting in its bankruptcy jurisdiction”.  There is some basis for saying that it is, since the jurisdiction of the court in relation to statutory demand is provided for in the Bankruptcy Rules (Cap 6A), in particular rr 47-48 which are found in Part III (Proceedings in Bankruptcy) of the Bankruptcy Rules.  It is, however, unnecessary to decide this question, since I am satisfied that even if s 98 does not apply, leave is nevertheless not required under the general provisions.

5. S 14AA of the High Court Ordinance (Cap 4) provides:

“(1) Except as provided by rules of court, no appeal lies to the Court of Appeal from an interlocutory judgment or order of the Court of First Instance in any civil cause or matter unless leave to appeal has been granted by the Court of First Instance or the Court of Appeal.

(2) Rules of court may specify a judgment or order of any prescribed description to which subsection (1) does not apply and accordingly an appeal lies as of right from the judgment or order.

…”

6. Rules of court as referred to in s 14AA(2) have been made and they are found in RHC O 59 r 21, which so far as relevant provides:

“(1) Judgments and orders to which section 14AA(1) of the Ordinance (leave to appeal required for interlocutory appeals) does not apply and accordingly an appeal lies as of right from them are the following-

(a) a judgment or order determining in a summary way the substantive rights of a party to an action;

…”

7. A statutory demand is a step in the procedure laid down by the Bankruptcy Ordinance and the Bankruptcy Rules.  It is one of two alternative conditions[1] for establishing that a debtor appears to be unable to pay a debt for the purpose of s 6(2)(c) of the Bankruptcy Ordinance; see s 6A(1). 

8. The statutory demand is a creature of the Bankruptcy Ordinance.  It has no independent existence or significance outside that statutory scheme.  All that a statutory demand does, if not set aside or complied with, is to enable the creditor to present a petition for bankruptcy. Indeed, r 48(7) of the Bankruptcy Rules provides:

“If the court dismisses the application, it shall make an order authorizing the creditor to present a bankruptcy petition either forthwith, or on or after a date specified in the order.”

Such petition remains to be heard and determined by the court.  It is only after a bankruptcy order is made on the petition that the consequences of bankruptcy will follow.

9. However, it has been held by Kwan J (as she then was) in the (strangely unreported) case of Re Choy Wai Bor (HCB 8565/2001; 28 May 2002) at §30 that the court’s decision of refusing to set aside a statutory demand gives rise to a determination that, by virtue of the principle of res judicata, precludes the debtor from raising the same issue on the hearing of the bankruptcy petition, at any rate where there has been no material change of circumstances. 

10. Similarly, To J stated in Re Wiemer Mark [2013] 2 HKLRD 1214:

“13. … under the principle of res judicata …, in the absence of any material change of circumstances, a party is precluded from arguing at a subsequent hearing the same issue which has been determined against him at an earlier hearing. Except for the RHL report and CBRE report, all the evidence had been presented and the same issues fully argued before Barma J at the hearing of the Debtor’s application to set aside the statutory demand. There is no change of circumstances. Hence, Mr Kwok, on behalf of the Petitioner, argues, quoting Re Choy Wai Bor HCB 8565/2001, that the principle of res judicata applies and the Debtor is precluded from raising at the hearing of this petition the same issues which have been determined against him.

…

16. The Debtor further argues that as new evidence is now available, the principle of res judicata should not apply. While the principle is open to exception, it was held in Arnold v National Westminster Bank [1991] 2 AC 93 that the principle will only cease to apply under special circumstances, for example, where the further material which became available was relevant to the correct determination of a point involved in the earlier proceedings but could not, by reasonable diligence, have been brought forward in those proceedings.

…

20.  On the facts, the issues raised by the Debtor are issues which have already been determined by the court previously in his application to set aside the statutory demand.  He is therefore precluded by the principle of res judicata from re‑litigating on those issues.  Further, it is not open to this court to review the judgment of Barma J in refusing to set aside the statutory demand served on him.  In the result, the Debtor has no genuine dispute about the petitioning debt.”

See also Re Sy Chin Mong Stephen (HCB 5784/2014, 9 May 2014), Ng J at §§9-10.

11. On this basis, it seems to me that a refusal to set aside a statutory demand may very often in substance determine in a summary way the substantive rights of the applicant.  In particular, it precludes the applicant from relying on the same grounds for opposing the bankruptcy petition unless there is a change of circumstances.  In practice it means that the applicant will often have no defence to the petition after an application to set aside a statutory demand fails.  That is why it is not uncommon, where an application to set aside a statutory demand and a bankruptcy petition based on that demand are both pending, for the petition to be fixed to be heard immediately after the application to set aside, with the expectation that the outcome on the petition will inevitably follow the outcome of the application to set aside.

12. In the present case, I dismissed the application to set aside the statutory demand not merely for some procedural reason, but after an assessment of the merits of the applicant’s arguments on, inter alia, the existence of a cross-claim, service of the statutory demand and the respondent’s motive.

13. Looking at the substance of the matter, such an order refusing to set aside a statutory demand, coupled with the operation of the principle of res judicata, has the effect of a final determination of specific issues as between the parties.  Without going into the question of whether the order is final or interlocutory, it seems to me to fall within O 59 r 21(1)(a) and it follows that by virtue of that rule, leave to appeal from my refusal is not required.

14. It has also apparently been the practice of the Court of Appeal to entertain appeals against refusal to set aside a statutory demand without requiring leave: see Cheung Sun Lam v Lai Kam Man (CACV 148/2011; 18 March 2013); Mark Wiemer v Hang Seng Bank Ltd (CACV 222/2011; 2 May 2012, being the decision on an application for security for costs of the appeal).  Although there was no discussion in those cases of the question whether leave is required, they are consistent with the conclusion I have reached.

15. By the rules, an application to set aside a statutory demand is made in a specific form supported by an affidavit: see Forms 155 and 161 of the Bankruptcy (Forms) Rules.  As an administrative practice each application is treated as a separate case by the Registry and given a specific “HCSD” number.  It may be said that a determination of an application to set aside a statutory demand either by refusing or granting the application amounts to the final disposal of and an end to that proceeding.  This however seems to me to be more a matter of form and administrative practice, on which I place little weight in reaching the above conclusion.

16. I should mention two cases which may, at first sight, be thought to suggest that an order made on an application to set aside a statutory demand is interlocutory.  In Ng Yat Chi v Max Share Ltd (CACV 414/2002; 28 November 2003), on an application for leave to appeal to the Court of Final Appeal, the Court of Appeal said:

“The dismissal of the application to set aside a statutory demand could not be ‘final’ within s. 22 of the [Hong Kong Court of Final Appeal] Ordinance as the debtor (the applicant) would still be entitled to show cause to challenge the bankruptcy petition against him.”

However, as Ribeiro PJ pointed out in Champion Concord Ltd v Lau Koon Foo (No 2) (2011) 14 HKCFAR 837 at §32, the test of whether an order is final or interlocutory in the context of applications for leave to appeal to the Court of Final Appeal is not necessarily the same as that for an appeal to the Court of Appeal, since “considerations going beyond the requirement of finality of the judgment arise in [the former] context”.

17. Likewise, in Andrew Wyles Waters v Malahon Credit Co Ltd (HCSD 24/2001; 27 February 2003), which concerned an application for an order under O 38 r 2(3) for cross-examination at the hearing of an application to set aside a statutory demand, Deputy Judge To (as he then was) said that such a hearing would not lead to a “final order” in the sense used by Fuad JA in Wendy Wenta Seng Yuen v Philip Pak-yiu Yuen [1984] HKLR 436 in deciding whether an order for cross-examination of a deponent of an affidavit should be made:

“Mr Lee submitted that the hearing on 27 February 2003 is not an interlocutory matter but will result in a final order within the meaning of Wendy Wenta Seng Yuen v Philip Pak-yiuYuen. That I respectfully disagree. Even if the application to set aside the statutory demand is dismissed at the hearing on 27 February 2003, the Applicant is still at liberty to show cause against the petition and to challenge the petition at the hearing. It is only when that challenge is unsuccessful would it result in a final order. Even if the hearing on 27 February 2003 will result in a final order, the reason offered by the Applicant is palpably insufficient.”

For the reasons I have set out above, however, the context is again quite different from the present case and, in my view, the passage is not authority against treating a refusal to set aside a statutory demand, in appropriate circumstances, as an order falling within O 59 r 21(1)(a).

18. It follows that the application for leave in the present case must be dismissed, on the ground that leave is not required.

19. I should add, however, that if I am wrong in the above conclusion, I would not have given leave.  In particular, the applicant says that there was procedural injustice vitiating my decision in that I referred to the Court of Appeal’s decision in HCMP 1536/2014 which was handed down after the hearing of the application to set aside (see paragraph 8 of my decision of 1 September 2014).  I do not agree.  The Court of Appeal’s decision was not relied upon as raising some new argument not dealt with by the parties before me.  It was a procedural development relating to the costs orders on which the statutory demand was founded.  In any event, even if the Court of Appeal had not handed down its decision by 1 September 2014, I would have come to the same conclusion, since the applicant’s application for leave to appeal to the Court of Appeal in HCMP 1536/2014 did not operate as a stay of the relevant costs order.

20. I make an order nisi that there be no order as to costs.