XCHRX CHEUNG WAH v. THE CHINA STATE BANK LTD.

HCB 659/1999

Headnote

Bankruptcy - Rescinding bankruptcy order - order made on basis of petitioner's claim for solicitors' costs not owing by the debtor - unreasonable refusal of settlement offer - meaning of "compound for" - test of unreasonableness of refusal - Bankruptcy Ordinance (Cap 6) sections 6, 6D and 98.

HCB 659/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY NO. B659 OF 1999

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J U D G M E N T

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1. I have before me an application under section 98 of the Bankruptcy Ordinance to rescind a Bankruptcy Order made against the Applicant, Madam Cheung Wah, on 27 July 1999. The events which have led to this application are as follows.

2. As a result of mortgage proceedings brought by The China State Bank Limited ("the Bank") against the Applicant in HCMP 734/1997, the Bank secured judgment on 16 May 1997 in the sum of HK$511,240.67. Interest was awarded on that sum and also costs. It has been pointed out to me that the Petition refers in the Chinese version to the award being only of a sum of fixed costs in the amount of HK$1,550.00 whereas in the English version, the reference is to an order for the costs of the proceedings. The Judgment itself is not in evidence but I do not think there is anything ultimately turns on this point.

3. On 15 July 1998, the Bank took possession of the mortgaged premises which were valued at HK$350,000. It then decided to take bankruptcy proceedings against the Applicant for the balance of the judgment debt.

4. The Bank apparently lost contact with the Applicant, so that there was some difficulty serving the statutory demand. However, with the leave of the Court, this was eventually done by newspaper advertisement on 21 January 1999. The statutory demand, which was dated 26 October 1998, calculated the outstanding balance due as at that date as HK$252,876.41, representing the judgment sum of HK$511,240.67 plus the sum of HK$91,635.74 interest, less $350,000 being the attributed value of the mortgage security. It will be noted that nothing was said about any additional sum in respect of legal costs in the statutory demand.

5. The Petition was then presented on 25 March 1999. The debt forming the basis of the Petition was stated to be the judgment sum which I have mentioned, plus interest at a contractual rate for a stated period and then at the judgment rate. It relies on the statutory demand for establishing inability to pay. Like the statutory demand, it says nothing about any further sum due by way of legal costs. It too was served by newspaper advertisement.

6. The Applicant says that she first learned of the Petition in June 1999. She contacted the Bank and agreed to pay off the outstanding debt in full but by instalments and with interest charged over the repayment period. This is evidenced by a letter from the Bank to its solicitors, dated 13 July 1999, instructing them to draw up a Deed of Settlement. This letter states that the indebtedness, calculated up to 15 July 1999, stood at HK$632,526.92. It contains terms involving repayment by instalments and with an agreed interest rate. The letter says nothing about costs but in her Affirmation filed on 13 August 1999, the Applicant says that she had also agreed to pay the bank's legal costs and that the Bank was going to inform her later of the amount.

7. The Deed of Settlement was never signed. This was because the Applicant was told on 19 July 1999 that the Bank required her to pay legal costs in the sum of HK$100,000, which she considered to be a sum which was far too high.

8. The Bank therefore pressed on with the bankruptcy proceedings and the matter came before the Court on 21 July 1999 when an adjournment was granted to enable the parties to negotiate further on the issue of costs. However, these negotiations did not bear fruit and on 26 July 1999, Mr Justice Chung was apparently informed that while the Applicant (who was appearing in person) was willing to pay the outstanding debt, the stumbling block was still the bank's requirement of HK$100,000 by way of legal costs. It appears that when, in response to the Judge's question, the Applicant said she could not pay such costs over three months, a Bankruptcy Order was made.

9. It therefore appears clear that the only amount which the Applicant was unable or unwilling to pay was the sum of HK$100,000 claimed by the Bank in respect of its legal costs. This was the basis upon which the Bank sought and obtained the Bankruptcy Order.

10. At today's hearing, the Applicant, by her counsel indicated that she was still offering to pay off the sums outstanding in accordance with the terms set out in the letter of 13 July 1999, suitably updated, together with the Bank's taxed legal costs.

The claim to be paid HK$100,000

11. The position may best first be considered leaving aside the balance of the mortgage debt and focussing on the claim for legal costs. In my judgment, the Bank was clearly not entitled to obtain a Bankruptcy Order on the basis of the costs claim.

12. By the combined effect of s. 6(1) and s. 6(2)(b) of the Bankruptcy Ordinance, a debt can only form the basis of a petition and hence a bankruptcy order if (i) it is a debt owed by the Debtor to the Petitioning Creditor and (ii) if the debt is for a liquidated sum payable at the time the petition is presented.

13. In my view, the evidence does not disclose the existence of any debt of HK$100,000 owing by the Applicant to the Bank at the time the Petition was presented. Mr Cheng Siu Hang, who appeared for the Bank informed me that the HK$100,000 represented merely the estimate which his firm of solicitors gave the Bank as the sum of fees that they were likely to charge. It was therefore not a debt due from the Applicant to the Bank but was at most a sum which the Bank was likely to be charged by its own solicitors and which it was trying to get the Debtor to pay. No contractual obligation to pay it had been assumed by the Applicant as she had refused to sign the Deed of Settlement. While the evidence is not entirely clear as to the exact nature of the Order for costs made against her in the mortgage proceedings, it certainly does not show that she was ordered to pay the HK$100,000 to the Bank. Even if there was an Order of costs made against her, as the English version of the Petition suggests, unless and until such costs became ascertained as a liquidated amount, either by agreement of the parties or after taxation, no liquidated debt arose capable of satisfying the requirements of section 6.

14. Moreover, as I have stated, the HK$100,000 sum was not mentioned in the statutory demand. This means that the Bank is unable to establish inability to pay such a debt since it is unable to rely on the statutory demand and the deeming provisions of section 6A to establish such inability.

15. It follows in my view, for all these reasons, that if the claim for costs in the sum of HK$100,000 had formed the only foundation for the Petition, the Petition would inevitably have been dismissed.

The offer of settlement

16. I turn now to consider whether the Bankruptcy Order can nonetheless be justified on the basis of the balance of the mortgage debt mentioned in the Petition, notwithstanding the Applicant's willingness to pay the same in accordance with the terms of the 13 July letter.

17. Section 6D(1) of the Bankruptcy Ordinance provides as follows:-

"(1) The court shall not make a bankruptcy order on a creditor's petition unless it is satisfied that the debt, or one of the debts, in respect of which the petition was presented is either-

(a) a debt which, having been payable at the date of the petition or having since become payable, has been neither paid nor secured nor compounded for; or

(b) a debt which the debtor has no reasonable prospect of being able to pay when it falls due."

18. The Bank surmounts the hurdle if one of the debts in respect of which the petition was presented was payable at the petition's date, but has neither been paid nor secured nor compounded for. On the evidence, the balance of the mortgage debt satisfies these requirements. The Court therefore had jurisdiction to make the Bankruptcy Order on the basis of the outstanding mortgage debt, notwithstanding that the Bank also misguidedly relied on its claim for legal costs and even though, after the date of the petition, the Applicant became (and remains) ready and willing to pay the mortgage debt.

19. However, in my view, it was precisely to cater for this kind of situation that s. 6D(3) exists. It provides as follows:-

"The court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts or is satisfied-

(a) that the debtor has made an offer to secure or compound for a debt in respect of which the petition is presented;

(b) that the acceptance of that offer would have required the dismissal of the petition; and

(c) that the offer has been unreasonably refused,

and, in determining for the purposes of this subsection whether the debtor is able to pay all his debts, the court shall take into account his contingent and prospective liabilities."

20. Mr Firoz Nasir, who appears for the Applicant, has fairly drawn to my attention a possible difficulty he faces in that the relevant offer must be "an offer to secure or compound for" the petition debt. Plainly, the offer of settlement by the Applicant did not involve providing security. Strictly speaking, Mr Nasir submitted, an offer to "compound" may mean an offer to settle for less than the full amount. If so, then it may be that the Applicant has not made an offer to "compound for" the debt in that the offer was to pay it in full, albeit by instalments over a period of time and with additional interest.

21. In my judgment, section 6D(3) does not merit such a strict and, if I may say so, negative, construction. The object of the section is to empower the Court to dismiss a petition where the Debtor has made a reasonable settlement offer which the Creditor has unreasonably refused to accept. I cannot see any justification for construing it to mean that the Court is given such a power where the Debtor has offered to pay less than the full debt but that the Court is deprived of such power where the Debtor has offered to pay it off in full. It seems to me that no such meaning was intended and accordingly I hold that in section 6D(3), the words "compound for" are of sufficient width to encompass offers to pay in full generally, and certainly where the agreement is for this to be done by instalments over a period of time.

22. The evidence therefore in my view establishes that the Applicant made an offer to compound for the mortgage debt, being the only debt in respect of which the Petition was presented. Acceptance of that offer would have led to a dismissal of the Petition by virtue of section 6D(1)(a), since there is no suggestion that the Applicant has any other debts that she is unable to pay. Indeed, Mr Cheng sought to suggest that the Debtor is a woman of means (although in the context of inviting me, in the absence of evidence, to find that she was evading her payment obligations).

23. The reason why the offer of settlement was refused is, as I have said, the Bank's insistence on payment of HK$100,000 by way of legal costs. The key question therefore becomes whether such insistence made the refusal unreasonable.

24. In this context, Mr Nasir has helpfully cited the decision of Timothy Lloyd QC sitting as a Deputy Judge of the English High Court in Re A Debtor (No 32 of 1993) [1995] 1 All ER 628. That was a case involving section 271(1)(3) of the Insolvency Act 1986 which is in all material respects the same as the relevant provisions of our section 6D. The learned Deputy Judge there held (i) that the reasonableness or otherwise of the refusal was to be judged at the date of the hearing and (ii) that the test was :-

" ....... whether a reasonable creditor, in the position of this petitioning creditor, and in the light of the actual history as disclosed to the court, would have accepted or refused the offer."

He added:-

"However, I think it has to be borne in mind that there could be a range of reasonable positions on the part of the hypothetical reasonable creditors. In order to conclude that the refusal was unreasonable, it seems to me that the court has to be satisfied that no reasonable hypothetical creditor would have refused the offer, and that the refusal of the offer was therefore beyond the range of possible reasonable actions in the context."

That is p.69 of the Report.

25. I gratefully adopt the test so formulated to be applied in the present case. In my judgment, the bank's refusal was indeed unreasonable in the above mentioned sense. The letter dated 13 July 1999 (containing instructions to the bank's solicitors to draft a Deed of Settlement) shows that terms for repayment of the mortgage debt in full by instalments and at interest over the repayment period, had been agreed and were obviously considered acceptable and reasonable by the Bank. The Applicant was not saying that she was unwilling to pay any legal costs but rather that she considered the HK$100,000 sum subsequently demanded to be excessive. In my view, that was not an unreasonable stance for the Applicant to take. Bearing in mind that as at 26 October 1998, the outstanding balance due was HK$252,876.41, the legal costs demanded constituted almost 40% of the unpaid debt. It was unreasonable for the Bank to insist on payment of that sum and not to offer, for example, to submit the claim for costs to taxation by the court. Indeed, the evidence indicates that no itemisation or breakdown of that amount was ever provided, notwithstanding the fact that, when asked to reduce this sum, a Mr Wong of the Bank told the Applicant that he would consult the solicitors about such reduction. In the event, on 19 July 1999, the Bank peremptorily told her that the amount could not be reduced and that if she did not agree to pay it, she did not need to attend for execution of the Deed of Settlement. This hard line stance was evidently maintained at the hearing before Chung J.

26. In my view, such conduct took the Bank's refusal beyond the range of reasonable actions in the context and if the facts had been properly laid before the Court, no bankruptcy order would have resulted.

Conclusion

27. As the Court of Appeal held in Wing Lung Bank v Ho Shiu Sun [1986] HKLR 1134, the jurisdiction conferred on the Court by section 98 of the Bankruptcy Ordinance is a jurisdiction to rehear and to rescind or vary orders made in the exercise of its bankruptcy jurisdiction which, in a proper case, is "almost without limit". I have come to the conclusion, for the reasons I have mentioned, that this is a proper case for rescission.

28. I would add that Mr Nasir also sought to rely on a line of cases beginning with In re A Debtor [1927] 1 Ch 199 and culminating in In re Majory, A Debtor [1955] 2 WLR 1035 for the submission that I should treat the Bank as having abused the process by using the bankruptcy proceedings as a form of extortion to secure payment of a sum which the Bank plainly had no entitlement to. I am not persuaded that as a matter of fact, the Bank's conduct should be so characterised. In any event, in the light of the decision that I have come to, it is unnecessary for me to dwell further on that line of argument.

29. I will therefore direct that the Bankruptcy Order made against the Applicant on 26 July 1999 be rescinded; and that the Petition be restored for hearing before me or such other Judge as may be hearing the Companies List on 30 August 1999, to be appropriately dealt with.

30. At the restored hearing, the Court will obviously wish to hear whether the Applicant has continued to make an offer of settlement in the terms of the Bank's letter dated 13 July 1999, which is bona fide and suitably updated, together with an offer to pay the Bank's reasonable costs to be taxed by the Court if not agreed, and whether such offer has been accepted or refused by the Bank.