BANK OF COMMUNICATIONS v. AU WAI MING

HCB4016/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO.4016 OF 2004

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D E C I S I O N

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1. This is a creditor’s petition against the debtor on the ground of failure to comply with a Statutory Demand under section 3(1)(a) of the Bankruptcy Ordinance, Cap.6.  The Statutory Demand dated 10 November 2003 is based on :

(a)	the balance of $102,125.17 under a judgment debt in HCA6843/1999 (“Judgment Debt”) plus interest; and
(b)	$200,000.00 under a Deed of Guarantee dated 28 September 1994 in respect of the principal debtor Windsor Engineering Company (“Windsor”) plus interest.

2. The Notice of Intention to Oppose Bankruptcy Petition dated 14 June 2004 sets out 2 grounds :

(a)	the debtor is not indebted to the petitioner; and
(b)	further or in the alternative, the debts as alleged are disputed by way of set off and counterclaim.

3. The point on the service of the Statutory Demand is not pursued.

Background

4. Since about 1994, the debtor has guaranteed the liabilities of several borrowers of the petitioner: (a) Windsor; (b) Tsang Wing Cheong; (c) Orient Concord Limited (“Orient Concord”); (d) Prime Faith Limited (“Prime Faith”).

5. The debtor is also a director and shareholder in Silver Curve Development Limited (“Silver Curve”).  Silver Curve was the owner of a 2 storey village house situated at Lot No.3 in D.D.5, Lamma Island (“Lamma Property”).  On 30 December 1999, the Lamma Property was sold at $660,000.  By a letter dated 2 February 2000 signed by the debtor and two other directors of Silver Curve, Silver Curve agreed that the surplus of proceeds of sale after the repayment of the mortgaged debt and expenses be paid to its three shareholders including the debtor, and the debtor’s share was $201,338.08.  By another letter dated 2 February 2000, the debtor authorised the petitioner to apply his share of $201,338.08 towards the repayment of the debts guaranteed by him.  An the sum was applied towards the repayment of the guaranteed debt of Orient Crest, and part payment of the guaranteed debt of Prime Faith.

6. On 15 January 2002, a Statutory Demand against the debtor was issued in respect of the Judgment Debt and the Windsor guarantee.  On 15 May 2002, a petition was presented against the debtor in HCB9284/2002 (“1^st Petition”).  After several call-over hearings, the debtor paid $65,000 to the petitioner.  By a receipt dated 13 September 2003, the petitioner acknowledged receipt of repayment of two instalments of $10,000 each, and costs of $45,000 in HCB9284/2002.  On 16 September 2002, leave was granted to withdraw the 1^st Petition.

7. From December 2002 to June 2003, the debtor made further repayments totalling $50,000, being $10,000 on 4 December 2002; $20,000 on 18 June 2003; and $20,000 on 30 June 2003.  Thereafter, no payment was made.  The total amount paid was $115,000, and deducting the $45,000 allegedly for costs, $70,000 was applied towards the part payment of the Judgment Debt.

8. On 11 November 2003, the Statutory Demand herein was issued.  On 16 April 2004, the petition herein was presented.

The dispute

9. The debtor alleged that there was a global settlement of his outstanding indebtedness towards the petitioned :

(a)	he agreed to procure Silver Curve to sell the Lamma Property in full and final settlement of all outstanding indebtedness against him there and then;
(b)	notwithstanding (a), upon presentment of the 1st Petition, it was agreed that the debtor would pay $115,000 as a global settlement of all outstanding indebtedness against him, and hence the debt was compounded.

10. Further, the debtor alleged that the petitioner was entrusted by Silver Curve to sell the Lamma Property and was under a duty not to sell it at under value.  Some time in 1998 nor 1999, it was agreed by the petitioner through its Regional Head, Mr Fong and the Head of the Loans Department, Mr Lau, that the Lamma Property should be sold at the price of at least $1.68 million, and it was further agreed that after the sale of the Lamma Property, all sums of monies owed by the debtor to the petitioner should be deemed to be repaid or otherwise settled.  Hence, the petitioner is liable to him for the shortfall upon sale by way of set-off.

11. The petitioner denied any agreement of global settlement, whether in relation to the sale of the Lamma Property or the withdrawal of the withdrawal of the 1^st Petition.  The petitioner’s case is that the 1^st Petitioner was withdrawn because the debtor was willing to pay instalment of $10,000 each until full repayment.  Any agreement as to minimum sale price of the Lamma Property is also denied.

The law

12. To draw on the analogy of the winding up cases, it is trite that in disputing the debt, the debtor must show a bona fide dispute on substantial grounds, by sufficient precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one (see Re ICS Computer Distribution Ltd [1996] 1 HKLR 181 per Rogers J (as he then was); and Periwin Development Ltd v. Granfield Pacific Hotel Ltd HCCW29/2001 per Kwan J).

13. But if there is a real dispute turning to a substantial extent on disputed questions of fact which require viva voce evidence, the bankruptcy court is not the forum in resolving whether a debt is due, and it ought to be resolved by ordinary litigation (see Re Lympne Investments [1972] 1 WLR 523 per Megarry J; Re Bylamson & Associates (Enterprises) Ltd [1983] 1 HKC 510 per Jones J.)

14. For a court to reject a petition because of the existence of an unlitigated cross-claim, it has to be shown, that the cross claim is genuine and one of substance, the company has been unable to litigate, and that it must be an amount exceeding the amount of the petitioner’s debt (see Seawind Tankers Corporation v. Bayoil SA [1999] 1 Lloyd’s Rep 211; Re SY Engineering Co Ltd CACV1896/2001 per Le Pichon JA.)

Whether the dispute is believable

15. Mr Wong for the petitioner submitted that there is a singular lack of evidence in writing as to any full and final settlement, which is incredible in the context of business relationship of a bank and its debtor. 

16. In neither the letter of Silver Curve nor the debtor both dated 2 February 2000 was there any mention of any full and final settlement.  It would have been easy for the debtor to add full and final settlement in his letter authorising the application of his share of the net proceeds towards the repayment of the guaranteed indebtedness.

17. The sale of Lamma Property pre-dated the 1^st Petition.  When the 1^st Petition was presented, there was no complaint nor protest that the petitioner breached the agreement on full and final settlement.  On the contrary, he paid the further sum of $115,000.

18. The debtor in his affidavit stated that he was shocked and angry when the 1^st Petition was presented as his liabilities had already been settled.  But the petitioner’s Deputy Business Manager, Mr Lee, exerted pressure on him by saying that the agreement between the petitioner and him only made orally, and his case in opposing the 1^st Petition was weak.  Mr Lee said that after he paid $115,000, the petitioner would not bother him anymore.

19. Even if there were any truth in such evidence, one would have expected the debtor to be wise after the event, and insisted that the global settlement second time round to be evidenced in writing.  The debtor said he raised the matter with Mr Lee and Mr Lee said there was no need to have any agreement in writing as the Court order would be the best evidence.  The Court order merely recorded the leave to withdraw the 1^st Petition.  There is nothing to indicate any full and final settlement.  Even if Mr Lee were reluctant to reduce the agreement in writing, there is nothing to prevent the debtor to do so upon the payment of the $115,000, given his allegedly unfortunate experience from the Lamma Property.

20. Mr Wong pointed out that in his 2^nd Affirmation, the debtor stated that the sale proceeds of $660,000 from the Lamma Property far exceeded the present petitioned debts of $302,125.17 plus interest.  The lie was exposed when the two letters dated 2 February 2000 were later produced, disclosing that the debtor’s share was only $201,338.08.

21. Mr Lai for the debtor submitted that the lack of evidence in writing cuts both ways.  There must have been some agreement leading to the withdrawal of the 1^st Petition.  It meant that the petitioner’s case that there was no full and final settlement upon the payment of $115,000 is equally unbelievable.  Mr Lai submitted that whether the debtor is or is not to be believed, it is not unbelievable, and the matter should be resolved by litigation.

22. Perhaps Mr Lai had overlooked the fact that the petitioner had an otherwise undisputed debt as evidenced by accounting evidence.  Any dispute would only arise by way of alleged full and final settlement.  I find that the debtor’s defence that there was a full and final settlement upon the withdrawal of the 1^st Petition is unbelievable.

23. Mr Lai also queried as to why only $70,000 as opposed to $115,000 was deducted towards the Judgment Debt.  I note that the Order withdrawing the 1^st Petition awarded costs to the Petitioner, to be taxed if not agreed.  I am satisfied that the $45,000 was for costs of the 1^st Petition as evidence by the receipt dated 13 September 2002.  Any dispute to the contrary can only be by way of full and final settlement, which is unbelievable.

24. As to the cross-claim on the Lamma Property, the petitioner had produced professional valuation report dated 22 November 1999 to show that the fair market value was $650,000.  Mr Lai criticised the valuation report in not giving comparables.  On the other hand, the debtor has not produced any evidence on valuation.

25. Mr Wong also submitted that even if there were any sale at undervalue, which is denied, any cause of action would accrue to Silver Crest and not the debtor, by virtue of the rule in Foss v. Harboottle.

26. Be that as it may, Mr Lai was asked how an action, say on misrepresentation, would be framed and substantiated.  Mr Lai quite rightly conceded that there is no valuation evidence either at the time or the alleged agreement in 1998 or 1999, nor at the time of sale at the time of 1999 for under value to be substantiated.

27. I daresay that any representation by the mortgagee bank as to the minimum price upon sale is contrary to common experience, not to mention the falling of the market within a year or so from $1.68 million in 1998 or 1999 to $666,000 at the end of 1999 (which is supported by expert evidence) is also contrary to common experience.

28. Mr Wong also pointed out that if the Lamma Property were really worth $1.68 million, then it is unbelievable that the debtor was willing to give up the entire property as claimed (as opposed to his share of the proceeds as demonstrated by the two letters dated 2 February 2000) for the repayment of debts which according to the debtor was only about $500,000.

29. I also find the cross-claim unbelievable and unsubstantiated.

Conclusion

30. The debtor’s dispute and cross-claim to the petitioned debts are of no substance.  I shall adjudge the debtor to be bankrupt.  I shall grant an order nisi for costs of the petition to be paid by the debtor.