RE CHEN YEN FEI

HCB 6092/2019

[2020] HKCFI 1248

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6092 OF 2019

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J U D G M E N T

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The Undisputed Debt

1.  The Petitioner (“WWISIF”) seeks a bankruptcy order against the debtor (“Mr. Chen”).

2.  Mr. Chen does not dispute the debt, which is around HK$228 million. He accepts that it is due and he is unable to repay presently.  He takes no issue with the service of the Statutory Demand dated 14 August 2019 and the Petition dated 9 October 2019.

3.  By his affirmation dated 3 January 2020 and a (somewhat late) Notice of Intention to Oppose dated 30 March 2020, Mr. Chen opposes the grant of a bankruptcy order on the ground that he will be able to repay the debt if given time to liquidate his assets.

4.  Mr. But acting for Mr. Chen in his written submissions and at the hearing confirmed that Mr. Chen seeks only a stay or an adjournment.  The stated intent is to allow time to transfer certain assets to a third party acting as a kind of receiver and for the third party to sell the assets to raise funds to repay the debt.

The Purported Assets

5.  Mr. Chen states, including in a draft Voluntary Arrangement exhibited to his affirmation, that he has various assets amounting to around HK$316 million and comprising:

(a) Cash at bank: ~HK$224,000;

(b) Shares in a private company and already charged to WWISIF to secure the debt: value unknown;

(c) Shares in a listed company and charged to WWISIF to secure the debt: ~HK$82,834,000;

(d) Real properties in various localities in Mainland China;

(i) Under Mr. Chen’s name but already charged to banks: ~RMB 25,400,000 = HK$28,262,000;

(ii) Under the name of a nominee and also charged to banks: ~RMB 13,200,000 = HK$14,687,000;

(iii) Under the name of Mr. Chen and not charged to banks: ~RMB 32,964,000 = HK$36,679,000;

(iv) Under the names of 2 other nominees and not charged to banks: ~RMB 137,958,000 = HK$154,504,000.

6.  Mr. Chen proposes to transfer the real properties in Mainland China which are not already charged to banks, to a third party professional who has experience acting as a receiver, so that that person would sell the properties to raise funds to repay the debt.  Mr. Chen says those properties are worth an aggregate of HK$190,183,000.  This figure, if accurate, would exceed the unsecured part of the debt, approximately HK$228,000,000 - HK$82,834,000 = HK$145,166,000.

7.  Mr. But acting for Mr. Chen confirmed that Mr. Chen’s intent includes to protect his cash at bank (HK$224,000) from WWISIF’s reach.

8.  There are many obvious problems with both the logic and the substance of Mr. Chen’s proposal.

(a) The values given to the properties are his personal estimates.  No effort has been made to provide any professional valuation or even simple market data.  There is no assurance whatsoever that the properties would fetch the prices which Mr. Chen says they are worth.

(b) Most of the properties are said to be held by nominees for Mr. Chen. No effort has been made to obtain acknowledgements of this and confirmations from the nominees that they would follow Mr. Chen’s instructions.  It is entirely unclear whether the transfers could be done, still less done smoothly.

(c) There is no justification why the cash as the most liquid assets should be put outside WWISIF’s reach.

(d) Indeed, there is no explanation why Mr. Chen has not utilized the cash to repay as much as he can.  There is also no explanation why he has not himself already started selling properties to raise funds and instead has proposed to appoint a third party to receive transfers of then to sell those properties.

(e) This last point is all-the-more inexplicable since, as Mr. Chen himself mentioned, transfers of properties in Mainland China involve taxes.  It is difficult to see why Mr. Chen did not start selling directly and instead would want to appoint a third party and to transfer the properties to that party to do the selling.

(f) Mr. Chen says his proposal, if accepted, would save him from the stigma of bankruptcy and from being disqualified to act as a director of his listed company and other companies. The first point is a truism.  The second point is difficult to understand.  Even under his proposal, the shares in his listed company will have to go to discharging the secured part of the debt.

9.  For these and no doubt other commercial considerations, when Mr. Chen made his offer to WWISIF, WWISIF declined to negotiate along the lines he suggested.

10.  Mr. Chen now renews his proposal as support for an argument that, under s6D(1) of the Bankruptcy Ordinance (Cap. 6) (“BO”), he should be viewed as having a “reasonable prospect of being able to pay” his debt, and the Court “shall not make a bankruptcy order” against him.  Mr. Chen also invokes s104, which gives the Court a discretion to stay proceedings for such time and on such terms as the Court may think fit.

11.  Mr. But for Mr. Chen confirmed at the hearing that Mr. Chen is not seeking to dismiss the Petition under s6D(3) or s9(3) of the BO.

12.  In light of the problems with both the logic and the substance of Mr. Chen’s offer, which I have mentioned earlier, it is hardly surprising and not at all unreasonable for WWISIF to decline to negotiate along the lines he suggested.

13.  For the same reasons, I do not think that Mr. Chen has shown a reasonable prospect of being able to pay his debt, nor that there are good reasons for me to exercise a discretion to stay these proceedings.  Mr. But cited a number of interesting cases wherein the Court exercised its powers in favour of debtors.  I am afraid however that the facts of this case are very different and tend clearly against such a course of action.

An Additional Law Point

14.  Moreover, Mr. Chen’s case is legally wrong.  He is essentially arguing that, even where a debtor is unable to pay his debt which has fallen due, as long as he can show a reasonable prospect of becoming able to pay, he would be entitled to more time under s6D(1) of the BO and (as the logic would naturally go) a petition against him should be dismissed under s9(3).  This is an incorrect reading of ss6D(1) and 9(3).

15.  Section 6(2)(c) of the BO allows a creditor to petition against a debtor on a debt which “the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay the debt” (underlining added).  When ss6D(1) and s9(3) speak of “no reasonable prospect of being able to pay”, they are referring to where the creditor had petitioned on that ground, not where the creditor had petitioned on the ground that the debtor is simply and already unable to pay.  See: Re Margaret Chiu [2020] HKCFI 617, per Linda Chan J, at para 38.

16.  A debtor who wishes to propose a plan to repay his debt over time can make an offer to secure and/or compound for the debt.  And if the creditor refuses, the debtor can oppose on the petition under s6D(3) of the BO on the ground that the creditor has unreasonably refused his plan.  The test is high.  He will have to show that no reasonable hypothetical creditor would have refused.  See: See: Re Margaret Chiu, at para 47.

17.  Short of meeting this test, a debtor does not have some other “backdoor” argument to ask the Court to regard his plan as reasonable and deserving time.

18.  Mr. Chen is not relying on and in any event it is clear that his case would not have met the test for s6D(3) of the BO.  Thus, even without regard to the obvious problems with his proposal, his case fails as a matter of law.

Conclusion and Costs

19.  For the above reasons, the Petition succeeds.  I make a usual bankruptcy order against the debtor.

20.  I also make an order nisi that costs be to the petitioner, to be taxed if not agreed, with certificate for counsel.

21.  I thank counsel on both sides for their assistance.