CHENG HUNG KIT v. TSOI CHIK SANG LAWRENCE

CACV 199/2017

[2018] HKCA 396

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 199 OF 2017

(ON APPEAL FROM APPLICATION TO SET ASIDE A
STATUTORY DEMAND NO. 32 OF 2016)

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REASONSFOR JUDGMENT

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Hon Cheung JA:

1.  I agree with the reasons for judgment of Yuen JA.

Hon Yuen JA:

2.  This is an appeal by Mr Cheng Hung Kit from a decision of DHCJ Yee given on 22 August 2017 (“the Decision”) dismissing his application to set aside a Statutory Demand dated 1 June 2016 (“the SD”) issued against him by Mr Lawrence Tsoi Chik Sang.  At the conclusion of the hearing, we allowed the appeal, set aside the learned deputy judge’s order, set aside the SD and ordered that Mr Tsoi pay Mr Cheng’s costs of the appeal and below.  As for Mr Cheng’s summons filed on 13 June 2018 for leave to adduce fresh evidence, we did not need to consider it and so we made no order, including no order as to costs.  My reasons appear below.

Background

3.1.   There is a long and complex background to the dispute between the parties, but it suffices for present purposes just to set out the following facts and matters.

3.2.   Hang Heung Cake Shop was established in Yuen Long in the 1920's.  It is well-known for a local delicacy.  The business was established by the forefathers of Mr Cheng and Mr Tsoi. 

3.3.   In the 1980’s, the business was incorporated as Hang Heung Cake Shop Co. Ltd (“HHCS”), with the cakes being manufactured on a property owned by Hang Heung Hop Kee Investment Co. Ltd (“HHHK”).  A total of 60,000 shares were issued in HHCS and 97,970¹ shares were issued in HHHK.  The two families held shares in both these companies, with the Cheng family holding approximately three-quarters of the shares, and the Tsoi family approximately one-quarter.

3.4.   Unfortunately the families began to fall out.  On 1 October 2003, Mr Cheng entered into an agreement to buy out Mr Tsoi and his family.  Mr Tsoi and a company he controlled called Fonduet Industrial Ltd (“FIL”) agreed to sell 15,000 shares in HHCS and 28,000 shares in HHHK (“the Sale Shares”), comprising all the shares controlled by his family, for which Mr Cheng promised to pay $20 million.  However Mr Cheng failed to pay.

Judgment in HCA4341/2003

4.  On 25 November 2003, Mr Tsoi and FIL sued Mr Cheng in HCA4341/2003 for an order for specific performance of the agreement.  Judgment was given for Mr Tsoi and FIL on 30 March 2004 and affirmed on appeal on 15 October 2004.  However Mr Cheng did not comply with the judgment for specific performance. 

Charging Order nisi

5.1.   On 7 February 2005, Mr Tsoi and FIL obtained a charging order nisi against Mr Cheng by which the following shares (“the Charged Shares”) standing in Mr Cheng’s name were charged:

(1)   21,200 shares in HHCS

(2)   28,000 shares in HHHK

(3)   1 share in K.T. Holdings Ltd (“KT Holdings”)

(4)   4,405,764 shares in Honlex Investment Ltd (“Honlex”).

5.2.   The 1 share in KT Holdings represents half of the issued shares of that company, which itself holds² 11,300 shares in HHCS. 

5.3.   The above volume of shares in Honlex represents nearly complete control of that company, which itself holds 10,000 shares in HHCS. 

5.4.   In short, the charge in effect covered 36,850 shares³ (or more than 60%) of HHCS, and 28,000 shares (or 28.5%) of HHHK.

The 2005 Order

6.1.   On 26 August 2005, DHCJ Saunders made an order (“the 2005 Order”) varying the judgment in HCA4341/2003.  Essentially the order was to the effect that:

(1)   on or before 17 November 2005, Mr Cheng should pay Mr Tsoi and FIL the sum of $20 million with interest, upon receipt of which Mr Tsoi and FIL would transfer the Sale Shares to Mr Cheng; and

(2)   the Charging Order nisi referred to above was made absolute, but execution was stayed pending further order, the Charging Order not to be enforced before 17 November 2005.

6.2.   However Mr Cheng failed to pay any sum by 17 November 2005 or thereafter. 

Some events between 2005 and 2016

7.1.   It would appear that between 2005 and 2016, many transactions affecting, or purporting to affect, HHCS and HHHK took place.  The papers placed before this court, which do not purport to encompass all the events which have occurred, show that many other parties have come on the scene, with claims as mortgagees or purchasers of HHCS and/or HHHK shares, or HHHK’s property.  Their claims against one another have spawned many other sets of legal proceedings, including:

(1)   HCA1130/2011⁴ and HCA1137/2011⁵ which are concerned with claims to the ownership of shares in HHCS and HHHK, and

(2)   HCMP527/2012, in which Honlex was given leave to commence a derivative action on behalf of HHCS and HHHK against their former legal advisers, amongst others. 

7.2.   Mr Bernard Man SC⁶, counsel for Mr Tsoi, acknowledges that on the papers before this court, there would appear to be some 6 to 7 camps with claims involving HHCS and HHHK.

7.3.   It would also appear that HHCS has instituted legal proceedings against Mr Tsoi for repayment of loans.

Enforcement actions in 2016

8.1.   Mr Tsoi and FIL had not taken any steps to enforce the 2005 Order in the period between November 2005 and the beginning of 2016. 

8.2.   However Mr Tsoi said he had been advised that there was a statutory limitation⁷ to enforce the 2005 Order and the Charging Order, and so the following steps were taken in 2016:

(1)   on 29 March 2016, Mr Tsoi and FIL issued HCMP735/2016 for an order for the sale of the Charged Shares (“the OS”), Mr Tsoi proposing that the shares be sold by a tender process;

(2)   on 26 April 2016, Mr Tsoi and FIL issued an application under HCA4341/2013 for oral examination of Mr Cheng under Order 49B Rules of the High Court to ascertain his assets and liabilities, etc;

(3)   on 1 June 2016, Mr Tsoi (but not FIL) caused the SD to be issued and served on Mr Cheng.

Subsequent reactions

9.1.   The enforcement actions brought about the following reactions.

9.2.   On 20 June 2016, Mr Cheng issued an application in HCSD32/2016 to set aside the SD, which is the subject-matter of this appeal. 

9.3.   On 20 October 2016, Mr Cheng also issued legal proceedings in HCA2742/2016 (“Cheng’s estoppel action”) against Mr Tsoi and FIL for an order that, by reason of estoppel etc, they were no longer entitled to enforce the 2005 Order.

9.4.   As for the OS, on 7 November 2016 two companies Tasty Catering Group Ltd (“Tasty”) and Federal Management Ltd (“Federal”) applied to the court to be joined as defendants to the OS on the basis that they were the owners of 32,500 shares in HHCS formerly held by Mr Cheng and KT Holdings.

9.5.   On 8 November 2016, Master Lai:

(1)   gave leave to Tasty and Federal to join the OS proceedings as defendants;

(2)   ordered the OS to be adjourned sine die with liberty to restore after the determination of HCSD32/2016 or until further order; and

(3)   ordered that Tasty and Federal inform the court of the progress of HCA1130/2011 and HCA1137/2011 before the restored hearing.

9.6.   On 17 January 2017 Mr Tsoi and FIL issued an application to strike out Mr Cheng’s estoppel action. 

The judge’s Judgment

10.1.   On 12 July 2017, DHCJ Yee heard both (1) Mr Tsoi and FIL’s application to strike out Mr Cheng’s estoppel action, and (2) Mr Cheng’s application to set aside the SD.  Mr Cheng was legally represented at the time.

10.2.   On 21 August 2017, the judge handed down a decision striking out Mr Cheng’s estoppel action. 

10.3.   The following day on 22 August 2017, the judge handed down the Decision refusing Mr Cheng’s application to set aside the SD.   

Appeal

11.  Mr Cheng has appealed the latter Decision.  On appeal he appeared in person.

Discussion

12.  Mr Cheng’s Notice of Appeal contains five grounds of appeal, but the main issue arises from the fact that in the SD, Mr Tsoi claimed as the debt the full amount of $29,678,000⁸, and although the 2005 Order was appended to the SD, and that Order included a schedule setting out the Charged Shares, there was no mention in the SD of:

(1)   Mr Tsoi’s security in the Charged Shares, or

(2)   the value that he put on it.  

13.1.   As Mr Man accepts, that SD contravened Rule 44(5) of the Bankruptcy Rules (“BR”) which stipulates the form and content of a statutory demand:

“(5) If the creditor holds any security in respect of the debt, the full amount of the debt shall be specified, but –

(a) there shall in the statutory demand be specified the nature of the security, and the value which the creditor puts upon it as at the date of the demand; and

(b) the amount of which payment is claimed by the demand shall be the full amount of the debt, less the amount specified as the value of the security”.

13.2.   Accordingly at the hearing before the judge, one of the grounds on which Mr Cheng sought to set aside the SD was Rule 48(5)(c) BR which stipulates:

“(5) The court may grant the application [to set aside a statutory demand] if –

...

(c) it appears that the creditor holds some security in respect of the debt claimed by the demand, and either rule 44(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt;” (Emphasis added).

14.  The judge accepted that Rule 44(5) BR had not been complied with.  The consequence of that is that Mr Cheng had satisfied the first limb of Rule 48(5)(c) BR above.  However there remains a discretion in the court whether to grant the application to set aside.

15.1.   In this connection, it is notable that in Mr Tsoi’s affirmation filed on 31 October 2016, he was ambivalent as to the value of the Charged Shares.  On the one hand, he said he believed “the total value of the Charges Shares will be much lower than the amount of the Debt” and that purchasers would be looking to buy them “at a significant discount”⁹ – thus implying that the Charged Shares did have a value.  On the other hand, he said “on any evaluation, it can hardly be said that the Debt is secured (or fully secured)”¹⁰ – thus implying that the Charged Shares may well have no value at all.

15.2.   At the hearing before the judge, despite Mr Cheng’s reliance on Rule 44(5) BR, Mr Tsoi made no attempt to amend the SD by including the Charged Shares as his security.  More importantly, insofar as he was saying that the Charged Shares did have a value, he made no attempt to amend the SD by putting a value on them.  In other words, he was seeking to utilize the bankruptcy process to demand payment of a sum of “$29,678,000 minus ?”.

16.  However, after considering Re Chan Chi Loi¹¹and Re Chung Sun Kwan¹², the judge was persuaded to exercise his discretion to allow that SD to stand, saying:

“16. Returning to the present case, the Charged Shares are equities in private companies. The unchallenged evidence is that there are legal proceedings on foot regarding the true ownership of some of the Charged Shares allegedly owned by Cheng and that both HHCS and HHHK are involved in some lawsuits. In light of all these matters, I accept Mr Man’s submission that it is impracticable to put down a reliable valuation on the Charged Shares and to realise them to satisfy the Debt by way of a forced sale”.

17.  With respect to the judge, I take the view that in so exercising his discretion, he had failed to take into account the requirement set out in s.6(2)(b) of the Bankruptcy Ordinance (“BO”) that the debt in a creditor’s petition must be for a liquidated sum, and the demand in the SD for “$29,678,000 minus ?” was not for a liquidated sum¹³.

18.1.   Chan Chi Loi was a very different case.  There, the creditor had issued a statutory demand, mistakenly stating that the three underlying debts were all unsecured, when in fact two debts were secured by a charging order on the debtor’s matrimonial home which he held on a joint tenancy with his wife. There was no application to set aside the statutory demand. Subsequently the petition contained a statement¹⁴ by the creditor that he was willing to give up the security for the benefit of all the creditors¹⁵.  On that basis, a bankruptcy order was made.

18.2.   After the bankruptcy order was made, the bankrupt argued for the first time that the statutory demand was defective.  The bankruptcy judge held that even though the statutory demand did not comply with Rule 44(5) BR, the debtor had not applied to set it aside and the statutory demand was thus valid at law.  Moreover the petitioner had stated in the petition that he had given up his security. Therefore, pursuant to s.124 BO, the defect in the statutory demand did not invalidate proceedings, as no injustice had been caused by the defect. 

18.3.   This court¹⁶ upheld the judge’s decision on appeal.  Lam J (giving the judgment of the court) emphasised that the debtor had not applied to set aside the SD¹⁷.  Further, apart from the matters relied on by the bankruptcy judge, he noted that the security was the debtor’s share in the matrimonial home which he owned with his wife as joint tenants, and “on the market nobody would be willing to purchase only the debtor’s interest in the property”¹⁸. In other words, the value of the security was nil. 

19.  That is very different from the present case where, as noted earlier, Mr Tsoi at least on one view accepted that the Charged Shares did have a value, and it would appear that the main obstacle to a valuation was the question of ownership¹⁹.  Pausing here, it seems to me (and Mr Man agreed) that, contrary to the master’s order of 8 November 2016, this question should have been resolved by determining the issue of ownership first in the OS proceedings.  The court’s determination whether Mr Cheng owns (all or some of) the Charged Shares would eliminate the main obstacle to a valuation of the security, and with that, the difficulty posed by Rule 44(5) BR.

20.  In permitting the SD to continue to stand without any valuation of the security, the judge with respect fell into error in failing to take into account that the SD was intended to form the basis of a petition which required a liquidated sum.  This court therefore set aside his exercise of discretion and exercised it afresh.

21.  I took the view that the SD should be set aside.  As a start, as mentioned earlier, Mr Cheng had satisfied the first limb of Rule 48(5)(c). Mr Man referred the court to In re Cahillane²⁰, where the judge²¹ held that the burden is on a debtor applying to set aside a statutory demand under the English equivalent of our Rule 48(5)(c) to prove on the balance of probabilities that the value of the security equals or exceeds the full amount of the debt²².  It is not necessary for me to express a view on that decision, as that was concerned only with the alternative limb of Rule 48(5)(c) BR, not the first limb.  In that case, the creditor had placed a value on the security in the statutory demand²³, something which Mr Tsoi had failed to do, not only when the SD was issued, but even at the hearing before the judge.

22.  More importantly, for a valid statutory demand to form the basis of a petition which required a liquidated sum, it was incumbent on the creditor to state his valuation of the security in the demand.  If his valuation is opposed by the debtor, they would then be able to provide their respective supporting evidence to the judge hearing the application to set aside the SD, who would then determine whether the statutory minimum sum for the presentation of a petition has been reached.  Mr Tsoi failed to embark on that process when he issued the SD, and did not seek to fill the gap in his evidence at the hearing of the application to set it aside.  Nor did he seek to fill the gap even on appeal²⁴.  In the absence of any evidence as to valuation, there was no evidential basis for the court to determine what is the amount of the debt for the purposes of s.6(2)(a) BO.  

23.  It has not been suggested that Mr Tsoi’s failure to specify the security and his valuation of it was due to inadvertence.  Rather, he simply did not attempt a valuation, saying that any valuation may be unreliable due mainly to the question of ownership.  But he did not progress the OS first to resolve that question.  And if I may say so, the valuation problem is one that he can either overcome or not, and if not, then bankruptcy as a means of enforcement would simply not be open to him. 

24.  Further there was evidence before the court that the Charged Shares form the majority holding of HHCS, and that it remains a going concern with valuable goodwill and trademarks²⁵, and HHHK is the registered owner of land in Yuen Long.  Moreover the fact that a number of parties are locked in litigation over the ownership of some of these shares is the best proof that the shares must be of some value.   

25.1.   As a last resort, Mr Man submitted that were this court to allow the appeal and set aside the judge’s order, he would ask us not to set aside the SD despite the failure to comply with Rule 44(5) BR.  He emphasised the point that by reason of the limitation period, Mr Tsoi would no longer be able to enforce the 2005 Order by bankruptcy proceedings if the SD were set aside.  

25.2.   I understand the predicament Mr Tsoi is in, but in my view it would not be fair to Mr Cheng to have the SD hanging over his head.  Mr Tsoi had chosen not to take any steps to enforce the 2005 Order for some 11 years until close to the expiry of the limitation period.  He took the risk that if there was any defect in his enforcement actions, serious consequences may ensue. 

25.3.   Further Mr Cheng had applied to set aside the SD (including on the basis that the security had not been mentioned or valued) as early as 20 June 2016.  The hearing took place in July 2017 so Mr Tsoi had had more than one year to cure the defect in the SD, but he did not do so.  There was no inadvertence.  Mr Tsoi had deliberately maintained the position of not putting a valuation on his security in the SD which was to form the basis of a petition for bankruptcy for failing to pay a liquidated sum. 

Order

26.  For the reasons set out above, the appeal was allowed, the judge’s order was set aside, the application to set aside the Statutory Demand was granted, and Mr Tsoi was ordered to pay Mr Cheng’s costs here and below, to be taxed if not agreed.

Hon Poon JA:

27.  I agree with the reasons for judgment of Yuen JA.