RE EDDIE LO MAN PUNG

Petitions for a receiving order - defence raised in each case that the assets would not be sufficient to pap a dividend of 15% after all statutory deductions under Section 9(3) of the Bankruptcy Ordinance - consideration of the burden of proof - earlier cases that established that the burden of proof was upon the petitioner were wrongly decided - Held burden of proof is upon the debtor and will be a heavy one to discharge - Official Receiver's attitude to the making of a receiving order is a relevant factor.

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JUDGMENT

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1. I have before me two petitions for a receiving order which concern the vexed question of what is referred to as the 15% rule and in particular upon whom the burden of proof lies in establishing a defence on this ground.

2. The 15% rule is not in fact a rule but a matter for the discretion of the court under Section 9(3) of the Bankruptcy Ordinance.

FACTS

3. The facts in each case are almost identical. On the 29th May 1984 the petitioning creditor, the British Columbia Financial Corporation (H.K.) Limited obtained two judgments against the debtors, Antony Lo and Eddie Lo for the sum of respectively $5,161,263.61 and $1,757,503.68 together with interest to be assessed and costs in each case. These sums remain unpaid. The judgments relate to two joint and several personal guarantees given by the debtors in respect of loans made by the petitioner to two companies, Kar Chuen Limited and Yakut Investments Limited that were under the debtors' control. The petitioner holds a security for payment of part of the debt which is estimated to be worth $4,083,400.00.

4. Bankruptcy notices were served on the debtors in June 1984. Neither debtor comp1ied with the terms of the bankruptcy notices and petitions based upon their failure to do so were presented on the 24th August 1984. Notices that the debtors intended to show cause against the petitions on the grounds that their assets would not be sufficient to pay a dividend of 15% were filed on the 18th October 1984. This is the sole ground upon which the debtors resist the making of a receiving order.

5. The petitions came before me for hearing on the 24th October 1984 when directions were given for the filing of evidence and discovery and the petitions were adjourned for hearing to a date to be fixed. No application was made by the petitioner for leave to cross-examine the debtors. Both debtors have filed two affirmations and two affidavits have been fi1ed by Mr. Hunsworth, the petitioner's solicitor.

LAW

6. The present Bankruptcy Ordinance is based upon the English Bankruptcy Act 1914.

7. Section 9(2) of the Ordinance sets out the matters that are required to be proved on the hearing of a bankruptcy petition. Section 9(2) reads as follows: -

        "At the hearing the court shall require proof of the debt of the petitioning creditor, of the service of the petition and of the act of bankruptcy, or if more than one act of bankruptcy is alleged in the petition, of some one of the alleged acts of bankruptcy, and if satisfied with the proof, may make a receiving order in pursuance of the petition.".

If the court is not satisfied with proof of these matters the court may dismiss the petition under Section 9(3) of the Ordinance. Section 9(3) also contains the provision relating to 15%. Section 9(3) provides: -

        "If the court is not satisfied with the proof of the petitioning creditor's debt or of the act of bankruptcy or of the service of the petition, or is satisfied by the debtor that he is able to pay his debts, or is not satisfied that the assets for division among the unsecured creditors, after payment of all costs, charges and expenses, and the debts which are preferential under this Ordinance, will be sufficient to pay a dividend of 15 per cent, or considers that for other sufficient cause no order ought to be made, the court may dismiss the petition.".

Section 9(3) follows Section 5(3) of the English Act except with regard to the 15% provision which does not apply in England. In fact it appears that this provision is peculiar to Hong Kong. Section 5(3) reads as follows: -

        "If the court is not satisfied with the proof of the petitioning creditor's debt, or of the act of bankruptcy, or of the service of the petition, or is satisfied by the debtor that he is able to pay his debts, or that for other sufficient cause no order ought to be made, the court may dismiss the petition.".

8. The 15% provision became law in Hong Kong in 1932 and it is believed that it was introduced following observations made by Sir Henry Go11an, the Chief Justice in the case of Re Chan Tsz Cheuk, ex parte Ho To Shang (1927) H.K.L.R. 125. At that time the Bankruptcy Ordinance 1891 was based upon the English Bankruptcy Act 1883. The predecessor to the present Section 9(3) was Section 7(4) which provides: -

"(4) If the court is not satisfied with the proof of the petitioning creditor's debt, or of the service of the petition, or of the act of bankruptcy, or is satisfied by the debtor that he is able to pay his debts, or is satisfied that there are and will be no substantial assets for division among the creditors, or that for other sufficient cause no order ought to be made, the court may dismiss the petition.".

At page 127 of Re Chang Tsz Cheuk Sir Henry Go11an approved the meaning of the words "substantial assets for division among the creditors" given in a previous case. He had this to say: -

        "As to the meaning of the words "substantial assets for division among the creditors" this point has been dealt with by Wood J. in In re Chung Fung Ki, exparte the Debtor (1) in the following terms - "In deciding whether assets available are substantial for division among the creditors the Court should have regard to the proportion borne by the liabilities to the assets in each case. Where the anticipated dividend for each creditor will certainly be a negligible amount in each case, it will be a right exercise of discretion to refuse the order.".

Further in his judgment on the same page, he says: -

        "It is from the nature of the case very difficult to lay down a principle for discovering what is a negligible dividend and what is not. Each case must very largely depend on its own circumstances, and not much assistance can be gathered from the opinion of Judges of this Court expressed in other cases.".

Finally, in that judgment on page 128, he said: -

        "I have endeavoured to discover some principle which might be made one of general application in cases of this kind, but I have failed to do so. As I have already said, any decision given must largely depend on the circumstances of each particular case, but subject to that and speaking for myself alone, I think that, ordinarily, no assets can be considered to be substantial unless they amount to a sum capable of securing a dividend of ten per cent or more among the creditors."

The 15% provision was considered in Hong Kong cases by Leonard J. in Re Noel Ernest Lee (1974) H.K.L.R. 313 and by Mayo J. in Hang Seng Bank Limited v. Ho Sum (1983) H.K.L.R. 253, but no reference was made in either case to the burden of proof. However, it was considered by C1ough J. in Re Fan Hung Sang (Bankruptcy 7/1983) unreported where he held that the burden lay on the petitioner. In his judgment at page 3 he had this to say : -

        "In my judgment it is clear from the words "If the court ……… is not satisfied that the assets for division ....... wi11 be sufficient to pay a dividend of 15 per cent ...... the court may dismiss the petition." that the power of the court to dismiss a creditor's petition arises and the court has a discretion to exercise that power unless the petitioning creditor satisfies the court that the available assets of the debtor will be sufficient, after the stipulated deductions, to pay the stipulated 15 per cent dividend. The same position pertains under the proviso to Section 10(1) of the Ordinance where a similar burden is placed upon a petitioning debtor.

 

        I felt constrained by the terms of the 15 per cent provisions to adopt this interpretation of the provisions in Section 9(3) despite the fact that the burden thus placed on a petitioning creditor must be very heavy and in many cases impossible to discharge. Counsel for the Official Receiver referred to Rule 70 of the Bankruptcy Rules on the question of onus. I do not regard the rule as capable of governing the interpretation of the Ordinance, but Rule 70 certainly seems to be consistent with the interpretation of the 15 per cent provisions I have adopted.

 

        Accordingly at the hearing I considered the evidence on the footing that the power of the court to dismiss the petition would be exercisable unless the petitioning creditor satisfied the court on the balance of probabilities that the assets of the debtor available for distribution would be sufficient to pay the stipulated dividend.".

 

I followed this decision in Re Ng Kong Chau Ex Parte Panin International Finance Corporation Limited (Bankruptcy 149/1983) unreported and in subsequent cases where the 15% provision was invoked. No English authorities were cited in either of these cases.

9. Mr. Poon who appeared for the petitioner contended that contrary to the previous cases the burden of proof lies upon the debtor and not upon the petitioner. In support of his submission, he cited a number of English authorities. The first was In re Betts Ex parte Betts (1897) 1 Q.B. 50. Lord Esher, the Master of the Rolls in his judgment at page 52 had this to say: -

        "In this case I think the law on the subject is clear. It is proposed to make the debtor a bankrupt, and he has made an affidavit in which in effect he says that it is no use making him a bankrupt, because he has no assets which could be dealt with in the bankruptcy and no prospect of ever having any. If that were all, I should repeat what I have said in former cases - namely, that the Court is not at this stage of the proceedings in a position to know whether that statement of the debtor is true, and cannot accept it as a sufficient ground for not making a receiving order. But I think that the law may properly be stated thus. If the Court is clearly convinced, not merely by the statement of the debtor, but from all the circumstances of the case, that there cannot be any assets or any prospect of any coming into existence, and that, if a receiving order is made, the only effect will be a mere waste of money in costs, then in such a case the Court has a discretion in the matter, and will be justified in exercising that discretion by refusing to make the order.".

In the next case In re Jubb Ex parte Burman and Greenwood (1897) 1 Q.B. 641 it was held that it was not sufficient cause for refusing to make a receiving order if it appeared probable that the amount of the costs of the bankruptcy proceedings would exceed the amount of the assets available for distribution.

10. The Vice Chancellor, Sir Robert Megarry adverted to the burden of proof in Re Field (a debtor) (1978) 2 All E. R. 981 where the debtor alleged that he had no assets and that for sufficient cause a receiving order should not be made. At pages 984 and 985 in his judgment, he said as follows: -

        "I turn, then, to the first of the propositions that I mentioned, on which the main submissions of counsel for the debtor rested. Put shortly, he contended that where it was established that the debtor had no assets and no prospects of acquiring any, the court should dismiss the petition; for to make a receiving order in such circumstances would merely increase the costs, and would do no good. In the present case, he said the debtor fell within this doctrine, and so the receiving order should be set aside.

 

        Now it is plain that there is considerable support for some doctrine of this sort; but it is equally plain that the doctrine is hedged about by important precautions. After all, if it were open to a debtor to avoid having, a receiving order made against him simply by alleging utter destitution, both present and future, such pleas of destitution might become popular; and prospective bankrupts might hasten to rid themselves of any assets and prospects which might hamper them in making such a p1ea. A man may indeed be too poor to be made bankrupt: but the burden of proof is heavy.".

It is abundantly clear that both in England and in Hong Kong the burden of proof is placed upon the petitioner to establish service of the petition, the debt and the act of bankruptcy nor is there any doubt that the burden shifts to the debtor in England when he raises the defence of for sufficient cause. Apart from the Hong Kong authorities upon which he naturally places reliance Mr. Mayne for the debtors submitted that upon a construction of Section 9(3) of the Ordinance by the use of negative, positive, negative clauses following one another this indicated that the burden is upon the petitioner. He also drew an analogy with Section 10(1) of the Ordinance which relates to a debtor's petition and to Rule 70 of the Bankruptcy Rules which were referred to by C1ough J. in his judgment in Re Fan Hung Sang. However, the rule as said by C1ough J. in his decision does not govern the interpretation of the Ordinance.

11. At the stage when the petitioner has established proof of the matters contained in Section 9(2) he has a prima facie right to a receiving order. If the debtor is able to satisfy the court that he is able to pay his debts the petition will be dismissed. There is no doubt that where this situation arises the burden of proof is upon the debtor. Again if the 15% provision is invoked or there is other sufficient cause the court may again dismiss the petition. Quite obviously, when a petitioner files a bankruptcy petition he seeks a receiving order not the dismissal of the petition. Accordingly, I find merit in Mr. Poon's submission that in construing the section it is necessary to look at the relief that is sought. The burden should therefore fall upon the party who seeks that relief.

12. The additional burden of proof placed on the petitioner when the 15% defence has been raised has resulted in injustice. Considerable delays have occurred before cases have come on for hearing to enable evidence to be filed, for discovery to take place, and for the petitioner to try and obtain details of the debtor's assets. When the case eventually comes to trial the hearing is usually protracted and the greater part of the time has been concentrated on a lengthy cross-examination of the debtor. The petitioner in the majority of cases has had very little information to go on as to the debtor's financial position, so that questions are often no more than a probe in the dark and an attack on the debtor's credibility. Such examinations are for the most part a time consuming exercise with invariably a poor return.

13. The delays and expense incurred to obtain evidence have cast an intolerable burden on the petitioner.  In my view, having heard full argument I cannot conceive that the legislature intended to place such an absurd burden on the petitioner. It is patently unrealistic. That the legislature did not have this intention is supported by the provisions of Section 29 of the Bankruptcy Ordinance which enables the court on the application of the Official Receiver after a receiving order has been made to conduct an enquiry into the debtor's conduct and dealings in his property.

14. Past cases decided in Hong Kong alluded to the fact that the 15% provision was introduced for the benefit of the Official Receiver to avoid the investigation of cases where it is unlikely that there will be any worthwhile assets thereby saving a great deal of unnecessary work, time and expense. However, at the hearing of the petition neither the petitioner nor the Official Receiver can shed much light on the debtor's financial situation for even a tentative view to be taken. Only a proper investigation after a receiving order is made can produce this result. In the case of Re Ng Ping Sam Ex parte Yeung Wai Sin (1915) H.K.L.R. 65, Sir William Rees Davies, the Chief Justice had this to say at page 66: -

        "Section 7(4) of the Bankruptcy Ordinance, 1891, is taken literally from section 7(3) of the Bankruptcy Act, 1883, saving that in the Ordinance the words "or is satisfied that there are and will be no substantial assets for division among the creditors" have been inserted. The object is apparent, and is to ensure that the machinery of the Bankruptcy Court, with the consequent waste of money in costs, shall not be available where no practical advantage can accrue.".

On page 67, he went on to say: -

        "In re Leonard (1896) 1 Q.B. 475 Lord Esher M.R. said "In the case of In re Hecquard, 24 Q.B.D. 71 Lind1ey and Lopes L. JJ. both point out that, at the time when the petition is presented, and before a receiving order is made, it is impossible to tell whether there will prove to be any assets or not. All the petitioning creditor then knows, or reed know, is that a debt is owing to him, and that, after taking the necessary steps to procure payment of that debt, he cannot get payment of it; and therefore he asks that the debtor may be made bankrupt. The Court cannot at that stage tell whether the proceedings in bankruptcy will have no result. If the debtor is made bankrupt, there will be a public examination of him, and then it may be ascertained whether he has any assets. At the time of the petition and adjudication, the Court has not the proper materials for judging whether there are assets or not,".

15. In any event if the court is satisfied that a debtor ought not to have been adjudicated bankrupt where the assets are not sufficient to pay a dividend of 15% the court may annul the adjudication under Section 33(1) of the Bankruptcy Ordinance.

16. In my view the real beneficiary of the 15% provision is the debtor who says it is a waste of time making him bankrupt because he has no assets. He cocks a snook at the bankruptcy laws, escapes their consequences and can continue to obtain credit and carry on business if he is a businessman as if nothing had happened. The result is a complete mockery of justice. It is not surprising that there has been an increase in Hong Kong in cases where the 15% defence has been raised.

17. Having regard to the English authorities which I consider are relevant in Hong Kong and upon a fresh consideration of Section 9(3) I am of the opinion that the earlier cases which decided that the burden of proof was placed on the petitioner were wrongly decided. In my judgment the burden of proof is firmly and squarely on the debtor and it will be a heavy one to discharge.

Evidence of Eddie Lo

18. Eddie Lo in his first affirmation made on the 7th November 1984 says that he was formerly the managing director of LMK Nam Sane Dyeing Factory Limited which is now in receivership. He is now employed by Fu11diamond Limited as a consultant at a monthly salary of $5,000.00. He was also the managing director of Lo's Mee Kong Group of Companies which were family companies and was a director and shareholder in most of these companies. The group collapsed and one of the main companies LMK Garment Factory Company Limited is now in liquidation. He refers to interests that he has had in various land developments in the nature of joint ventures and sets out details of these ventures in his affirmation. All the companies concerned obtained bank loans which with interest accruing now total over $200,000,000. In respect of these loans Eddie Lo was guarantor to an amount exceeding $182,000,000. Judgments in the High Court have been obtained against 8 of the companies. In paragraph 10 of his affirmation, Eddie Lo says: -

"It is not anticipated that in the absence of a very substantial rise in property prices, any money will be available for distribution from these joint venture companies. In any event, if these developments are to proceed, there will be calls on the respective companies' shareholders for further contribution at different stages of the development which I am unable to make.".

He goes on to say: -

"In other words, all these "assets" are "tied up" in land development in Hong Kong."

19. In his summaries of the various developments he sets out his estimate of the present land values which he says will be insufficient to repay the bank loans. In respect of one judgment the creditor has obtained a charging order upon the company's interest in the building the subject matter of the venture.

20. His bank accounts reveal that he has only a few hundred dollars in credit. Details of shares that have been pledged by him are listed together with a number of private companies owned by him which he says only have a negative value, but he does not provide any accounts.

21. Where accounts have been produced they are far from satisfactory. In some cases audited accounts have been produced, but they are not up to date whilst other accounts are neither audited nor up to date. Some of the accounts do not show by whom they were prepared.

22. It is significant that Eddie Lo in his second affirmation said that there were so many companies in the Lo's Mee Kong Group that he could not remember each of them. A table of the corporate structure was also exhibited to his affirmation which he says is not exhaustive. Again this is a good illustration as to why the burden of proof should be on the debtor with regard to the 15% provision when it is raised by way of defence.

23. In his second affirmation Eddie Lo refers to a number of other companies with which he is connected to which he made no reference in his first affirmation. This arose as a result of enquiries made by the petitioner's solicitor and are referred to by Mr. Hunsworth in his affidavit of the 13th March 1985.

24. Investigations into Eddie Lo's interests in these companies are clearly merited. It is evident that the affairs of the debtor are very complicated. Some judgment creditors have seized assets and there are no accounts of these assets. Some companies borrowed monies from the bank and monies went to shareholders including the debtor for reasons which were unknown. There is prima facie evidence that the companies were used by the debtor for his own benefit.

Evidence of Antony Lo

25. Much of the evidence adduced by Antony Lo is identical with that of Eddie Lo and the comments that I have made with regard to Eddie Lo equally apply to him. I will therefore only refer to some of the differences. In his affirmation of the 7th November 1984 in paragraph 5, he says: -

"I receive salary of $7,600.00 per month from the Great Eagle Company Limited. As from 1st April 1984 I also received salary from Hang Sing Construction Company Limited in which I am the Managing Ditector at $50,000.00 per month. Due to the financial position of my company, the payment of salary will stop after 31st December 1984. I also receive director's fees and bonuses from these two companies."

He was also concerned in the same land development joint ventures as Eddie Lo and in addition there were 3 other joint ventures with which Eddie Lo was not concerned. His tota1 liabilities as a guarantor amount to over $180,000,000. He says he is the owner of three other private companies, but their shares have been pledged to banks and the property of one is mortgaged to a bank. Judgments have been obtained against these companies by the banks. He described the companies as having a negative value. Antony Lo goes on to say that he has an interest in a number of other dormant companies and uses the term that they have a negligible value. In paragraphs 12 and 13 of his first affirmation, he says : -

He says that he is a broker with a seat on the Kam Ngan Stock Exchange, but the seat cannot be transferred. So far as it is effective, he says the seat has been pledged to his company, the Hang Sing Land Company Limited. No details have been proffered with regard to this evidence. He refers to a number of shares that have been pledged to L.B.I. which appear to have been sold and to bank accounts garnished by the same bank.

26. Finally reference is made to a judgment obtained against him by the Chartered Bank for the sum of $18,567,891.58 in respect of his liability under a guarantee for the indebtedness of Earna11 Investments Limited. Antony Lo in his second affirmation gives details of other companies, 5 of which were not connected with Eddie Lo that were not referred to in his first affirmation and as with Eddie Lo this arose from the enquiries made from Mr. Hunsworth, the petitioner's solicitor.

CONCLUSIONS

27. A re1evant factor to be taken into consideration upon an application for a receiving order is the attitude of the official Receiver. Mr. Berry for the Official Receiver supported the applications.

28. The affirmations filed by the debtors are not satisfactory for several reasons. They are incomplete and reveal a lack of knowledge by the deponents on several issues to which I have referred. They are insufficient to discharge the burden of proof placed upon them. It is indeed pertinent to refer to the case of In Re Birkin (1896) Vol. III Manson 291 which was cited to me by Mr. Poon where it was held that the debtor’s own affidavit is not sufficient to discharge the burden of proof. In his judgment at page 294, Rigby L.J. said: -

"Here we are asked to rely only on an affidavit of the debtor. I am of opinion that an affidavit by the debtor only is not enough to establish no assets; even if we were entitled to rely upon it, the evidence is insufficient.".

In re Barakat (1920) N.Z.L.R. 134 the court there adopted the same approach by making an order of adjudication in its discretion where the only evidence of want of assets was the uncorroborated evidence of the debtor.

29. If I had held that the burden of proof rested with the petitioner I would in this case in any event have exercised my discretion by granting the applications for a receiving order having regard to the views of the official Receiver, the unsatisfactory nature of the debtor’s evidence, and their conduct which merits a thorough investigation. It is clearly in the public interest that the applications should be granted.

30. Upon the hearing of an application for a receiving order it is not the function of the bankruptcy court to launch into a full sca1e investigation of the debtor’s financial position and to work out the percentages. Again unless cogent reasons are put forward leave should not be granted to cross-examine the debtor whose evidence by itself will generally not be sufficient to determine whether there are no assets. This would hinder the prosecution of the proceedings which in the public interest should be dealt with as expeditiously as possible. Only in rare cases where from all the circumstances the evidence is absolutely clear that no worthwhile assets will be discovered and provided that the debtor’s conduct is seen to be beyond reproach should the court even begin to consider exercising its discretion under the 15% provision. However, I can see no justification for retaining the provision which I strong1y recommend should be repealed at the earliest possible opportunity.

31. There will be a receiving order in respect of both petitions together with the usual order for costs.