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HCB 9158/2007
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
IN BANKRUPTCY PROCEEDINGS NO. 9158 OF 2007
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| Re: |
CHAN CHI HO LINCOLN（陳子豪） |
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| Ex parte: |
STRONG WELL INTERNATIONAL LIMITED
（強盈國際有限公司） |
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Before: Hon Kwan J in Court
Date of Hearing: 2 October 2008
Date of Judgment: 2 October 2008
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J U D G M E N T
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1. This is an application by a bankrupt, Chan Chi Ho Lincoln, to annul a bankruptcy order under section 33(1)(a) of the Bankruptcy Ordinance, Cap. 6, on grounds existing at the time the bankruptcy order was made that the order ought not to have been made. The bankrupt’s contentions are three-fold:
(1) the default judgment, on which the bankruptcy petition of Strong Well International Limited (“the petitioner”) was founded, is liable to be set aside on the ground that the judgment was irregular in that he had not received the writ before the judgment was entered;
(2) the judgment should also be set aside on the ground that the petitioner’s claim is substantially disputed and he has real prospect of success in his defence; and
(3) the statutory demand was not properly served on him, nor did he have notice of the petition.
Background matters
2. The petitioner was and is at all times the registered owner of the subject premises in Tsuen Wan Hoover Plaza (“the Premises”). By a tenancy agreement dated 20 June 2006, the petitioner let the Premises to Deluxe Way International Investment Limited (“Deluxe Way”) for a term of 3 years from 14 December 2005 to 13 December 2008. The monthly rental from 14 December 2006 was HK$275,000.00. The bankrupt provided a deed of guarantee to the petitioner by which he guaranteed the liability of Deluxe Way to the petitioner under the tenancy agreement. The bankrupt and his mother were the only shareholders and directors of Deluxe Way, which has been wound up by the court on 23 January 2008. The Premises were used by Deluxe Way to operate a restaurant. In May 2007, the restaurant ceased operation due to a severe drop in business.
3. A meeting was held between the bankrupt’s father Chan Tin Cheuk and three representatives of the petitioner on 4 May 2007. What was discussed at this meeting is in dispute.
4. The petitioner repossessed the Premises after the meeting. Correspondence was exchanged between solicitors for Deluxe Way and the petitioner’s solicitors in late May and early June 2007. Deluxe Way alleged there was an agreement for early termination of its tenancy, this is denied by the petitioner. Deluxe Way claimed that the petitioner should refund the balance of the rental deposit after deducting the arrears in rent. The petitioner asserted that the arrears owed for rent and signage fees exceeded the rental deposit and demanded payment.
5. On 4 June 2007, the petitioner’s solicitors served a demand for payment on the bankrupt under the guarantee at the last known address of the bankrupt in Vigor Industrial Building in Kwai Chung.
6. On 6 June 2007, the petitioner issued a writ in the District Court, being DCCJ No. 2463 of 2007, claiming among other things HK$861,675.70, being arrears of rent for February 2007 (partly paid), and for the months of March to May 2007; arrears of signage fees for the months of March to May 2007 at HK$1,900.00 a month; and expenses incurred by the petitioner in sanitising the Premises after repossession at HK$24,500.00.
7. As neither defendant gave notice of intention to defend, on 25 July 2007 default judgment was entered against both in the sum of HK$837,175.70, and for damages to be assessed, with interest on HK$837,175.70 and costs.
8. The petitioner issued a statutory demand for the judgment debt of HK$837,175.70 on 27 July 2007. Personal service was attempted on the bankrupt in July and August 2007 at his last known address in Vigor Industrial Building and was unsuccessful. On 10 August 2007, the statutory demand was sent to this address by post and advertised in a Chinese newspaper in Hong Kong.
9. The petition was presented on 24 October 2007. Personal service of the petition was attempted at the address in Vigor Industrial Building in November 2007 and January 2008, to no avail. On 15 January 2008, the petitioner obtained an order for substituted service to effect service of the petition by advertisement in a Chinese newspaper and by sending a copy of it by post to the address in Vigor Industrial Building. Service was effected in accordance with the directions given.
10. The bankruptcy order was made in the bankrupt’s absence on 30 January 2008. After the order was made the bankrupt contacted the Official Receiver, claiming absence of knowledge of the District Court proceedings and the bankruptcy proceedings.
11. Assets realised by the Official Receiver amounted to HK$344.00 being the bank balance, and part of the proceeds of sale of a property in the name of the bankrupt and another being HK$473,204.55, making a total of HK$473,536.59. The bankrupt however claimed that all the sale proceeds of the property should be taken by the other joint owner.
12. The Official Receiver received three proofs of debt, the petitioner for HK$2,028,074.00 and two creditors in the sums of HK$9,566.00 and HK$4,693.04.
13. On 21 May 2008, the bankrupt filed the present application to annul the bankruptcy order. The application was amended with leave on 25 September 2008.
Applicable principles
14. The applicable principles in an application to annul a bankruptcy order are not in dispute.
15. The burden is on the applicant to show on the balance of probabilities that the bankruptcy order ought not to have been made (Edelsten v Deputy Commissioner of Taxation (NSW) (1989) 86 ALR 257).
16. If the court considering the application for annulment is satisfied that the default judgment on which the petition is founded would have been set aside by reason of irregularity, it would be open to the court to annul the bankruptcy order. However, it should be borne in mind that the court has a residual discretion to refuse to set aside a default judgment even if it is held to be irregular, if there are factors that make it appropriate to do so (Re Mai Xi Hong, HCB No. 550 of 1996, 17 December 2004, Barma J, paras. 33 and 34).
17. It has also been held that a bankruptcy order ought not to have been made where the bankrupt has shown a strong prima facie case that the underlying debt in the default judgment against him is substantially disputed, and has given a plausible explanation of the circumstances relating to his non-appearance at the hearing at which the default judgment was made and at the bankruptcy hearing that resulted in the bankruptcy order (Re Luk Tsun Yin [2000] 1 HKC 774 at 777).
18. Failure to serve the statutory demand properly is a ground for holding that the bankruptcy order ought not to have been made (Re Lam Lai Wah Susanna [2002] 4 HKC 334).
19. If the court is satisfied the order ought not to have been made, it is not bound as a matter of course to annul the bankruptcy order, but must consider in the light of all the circumstances whether the order ought to be annulled (Delph Sing v Wood (1918) 25 CLR 497 at 498 to 499; Re Ditfort, ex parte Deputy Commissioner of Taxation (NSW) (1988) 83 ALR 265 at 267, 293-294). The discretionary power to annul must be exercised with great caution, and should not be exercised except in special circumstances (Ex parte May （1884）12 QBD 497； Butterworths Hong Kong Bankruptcy Law Handbook, 3rd edition, para. [33.03]).
If the default judgment was irregular
20. I turn to consider the three broad issues raised by the bankrupt in support of this application.
21. The writ in the District Court action was served on the bankrupt by insertion into the letter box of the address in Vigor Industrial Building on 7 June 2007. The petitioner claimed this was the usual or last known address of the bankrupt and that the service was effected in accordance with Order 10 rule 1(2)(b) of the Rules of the High Court.
22. The petitioner knew of no other address of the bankrupt at the time. The petitioner’s solicitors had written to the solicitors of Deluxe Way on 31 May 2007 asking if they had instructions to accept service of the writ for the bankrupt. In the reply of the solicitors of Deluxe Way dated 4 June 2007, they did not respond to this question. In the deed of guarantee, the bankrupt’s address was given as the address of the Premises. The registered office of Deluxe Way was also the Premises. The petitioner had already repossessed the Premises after 4 May 2007. The address in Vigor Industrial Building was obtained through a company search of Deluxe Way on 6 June 2007. According to Deluxe Way’s notification of first secretary and director dated 15 December 2005, being the most updated document filed in the Companies Registry, this was stated to be the bankrupt’s address and the form was signed by him.
23. The bankrupt claimed in his 1st affirmation that he no longer attended or used the address in Vigor Industrial Building since about August 2005. There was no further elaboration.
24. This was just a bare assertion. As stated by the Court of Appeal in Bank of China (Hong Kong) Limited v Cheung King Fung [2007] 1 HKLRD 462 at 469H to 470B, paras. 32 to 34, a defendant is required to provide “convincing evidence” that he has not received the writ, the court is not bound to accept the defendant’s assertion no matter how improbable. In the absence of compelling evidence, the court is right to be sceptical of the defendant’s assertion. As for how much evidence is required to discharge that onus, this must depend on the circumstances of the particular case.
25. The assertion by the bankrupt that he no longer used the address in Vigor Industrial Building since August 2005 was not borne out by the document he signed and lodged with the Companies Registry in December 2005. There was no explanation why he did not update the record of his address in the documents registered with the Companies Registry for Deluxe Way. He did not choose to explain on what basis he was permitted to use the address in Vigor Industrial Building. Letters for the bankrupt sent to that address by post by the petitioner’s solicitors on 1 August 2007, 10 August 2007 and 8 November 2007 were not returned undelivered. It was only on 7 December 2007 that a letter sent by the Official Receiver by post was returned marked “Moved, redirection service not arranged by addressee”.
26. I do not think the evidence adduced by the bankrupt is sufficiently cogent to satisfy the court that the writ served on 7 June 2007 at the address in Vigor Industrial Building did not come to his notice. I am not persuaded that the bankrupt would have good grounds to set aside the default judgment based on irregularity of service of the writ.
If the statutory demand was properly served
27. I will deal with this shortly as this was not relied on in the submission of the bankrupt’s counsel.
28. I have considered the affirmations of service filed by the process server of the petitioner’s solicitors. I am satisfied that before the statutory demand was advertised in a newspaper on 10 August 2007, reasonable and practicable efforts had been made to serve the demand on the bankrupt personally. The process server attended the address at Vigor Industrial Building on two occasions, the second occasion was after a letter of appointment was sent. Enquiries were made with an occupant of that address and the caretaker of the building, and no information was provided on the whereabouts of the bankrupt.
29. As for the petition, before the application was made for substituted service, three attempts were made to serve the bankrupt personally at the address in Vigor Industrial Building. The last two occasions were preceded by a letter of appointment.
30. I am satisfied that the service of the statutory demand and the petition was properly made.
If the default judgment is liable to be set aside on merits
31. It was alleged by the bankrupt that an oral agreement was reached between his father acting on his behalf and the representatives of the petitioner at the meeting of 4 May 2007 to this effect:
(1) the tenancy agreement was terminated from 4 May 2007 with no further effect;
(2) the deed of guarantee was terminated from 4 May 2007 with no further effect;
(3) Deluxe Way was to deliver the furniture and chattels in the Premises to the petitioner at no cost; and
(4) the balance of the rental deposit after deducting the arrears of rent and signage fees was to be refunded to Deluxe Way.
32. The petitioner’s representatives who attended the meeting made affirmations denying any oral agreement as alleged. They claimed there was merely a discussion in which the father requested early termination of the tenancy and offered to hand over the furniture and chattels at no cost in the hope of getting the petitioner to accept early termination.
33. In support of his allegation, the bankrupt produced a Chinese letter of Deluxe Way to the petitioner dated 30 April 2007 and amended by his father on 4 May 2007, and a form of the management company of the building entitled “Repossession of vacant premises from tenant” dated 4 May 2007 also signed by his father. It does not appear to me these documents would advance substantially the bankrupt’s case.
34. I have reservations about the evidence of the alleged oral agreement. It does not seem to me that this evidence is believable, for two reasons.
35. Firstly, what the petitioner was alleged to have accepted in the oral agreement was contrary to commercial reality at the time. The petitioner was in a strong bargaining position. Deluxe Way was in arrears of rent. According to the petitioner it was three months in arrears, according to the letter of Deluxe Way’s solicitors rent was in arrears since 14 March 2007. The tenancy still had 19 months to run. The bankrupt was liable under the guarantee for the payment of rent by Deluxe Way. It was commercially inexplicable why the petitioner should be willing to give up its legal entitlement at the request of the bankrupt’s father. The value of the furniture and chattels left in the Premises was hardly commensurate with the rights and entitlement that would be given up by the petitioner with an early termination of tenancy. The furniture and chattels were purchased by Deluxe Way for HK$250,000.00 in 2002. According to the management accounts of Deluxe Way as at February 2005, the value of the utensils with depreciation amounted to only HK$205,610.00. In May 2007, there would have been further depreciation. The proof of debt submitted by the petitioner after giving credit to the rental deposit of HK$825,000.00 was for HK$2 million odd, the difference in the rental for the remaining term of the tenancy agreement amounted to HK$1.7 million.
36. Secondly, the terms of the oral agreement alleged were at odds with the terms alleged in the letter of the solicitors for Deluxe Way dated 21 May 2007. According to the solicitors, one of the terms upon which the petitioner was willing to accept early termination was that Deluxe Way would transfer to the petitioner all relevant licences to run the restaurant business. The bankrupt however claimed in his 2nd affirmation there was no discussion in the meeting of 4 May 2007 of any obligation to transfer the licences to the petitioner and the solicitors had made that allegation in their letter without his instructions or approval. I find it odd, to say the least, that Deluxe Way’s solicitors would have done so as alleged by the bankrupt.
37. Even if there was an oral agreement as alleged, its legal validity is in doubt. It was provided in clauses 6.6(b) and 6.10 of the tenancy agreement that any waiver, variation, modification or termination had to be in writing and signed by the landlord.
38. For the above reasons, the bankrupt’s defence of an agreement to accept early termination and waiver of entitlement to enforce the guarantee does not give rise to a dispute of substance.
39. The argument that the petitioner should have deducted the arrears of rent and other outstanding liabilities from the rental deposit of HK$825,000.00 and that it should not have brought legal proceedings to sue for arrears is equally bad. As pointed out by the petitioner’s counsel, under clause 5.3 of the tenancy agreement, the landlord may apply the deposit towards remedying any outstanding breach, in addition to any other right or remedy it may have. The petitioner was entitled to apply the deposit against the sums claimed only after the final resolution of the dispute in the District Court action, as it has done in the proof of debt submitted.
40. As for the amount of rent in arrears disputed by the bankrupt, it was alleged in his affirmation in reply that various sums in the bank statements of Deluxe Way were payment of rent to the petitioner and that the amount in arrears was only in respect of April 2007 and the pro-rata rent from 1 to 4 May 2007, in the sum of HK$310,483.88. This allegation was again at odds with the allegation in the letters of Deluxe Way’s solicitors dated 21 May 2007 and 4 June 2007, in which it was stated that the period of unpaid rent was from 14 March 2007 to 30 April 2007, and that the amount outstanding should be HK$366,666.66.
41. No evidence was adduced by the bankrupt of receipts issued for rent allegedly paid. It is not sufficient to point to withdrawals in bank statements. Even if the withdrawals were for payment of rent, it is not possible to say the rent of which month was settled by a particular payment as shown in the bank statements.
42. I am not satisfied there is a substantial dispute on the amount of the arrears of rent. In any event, the petitioner would be entitled to claim compensation from the defendants in the District Court action for the loss in rental suffered for the remaining term of 19 months, if there was no agreement to accept early termination. The loss in this respect amounted to HK$1.7 million according to the proof of debt submitted by the petitioner.
43. For the above reasons, it does not appear to me that the default judgment is likely to be set aside on merits.
Conclusion and orders
44. I decline to exercise my discretion to annul the bankruptcy order. The application is dismissed with costs to the petitioner. The Official Receiver seeks costs of this application at HK$5,000.00. I order this to be paid by the bankrupt on a gross sum basis.
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(S Kwan) |
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Judge of the Court of First Instance
High Court |
Mr Abraham Chan instructed by Messrs Baker & McKenzie, for the Petitioner
Mr Louie K K Mui, instructed by Messrs S H Chan & Co., for the Bankrupt
The Official Receiver, attendance excused
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