RE CHAN CHI LOI

[English Translation]
HCB 8632/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT BANKRUPTCY PROCEEDINGS NO. 8632 OF 2006

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JUDGMENT

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1. Mr. Tiu Pui Kwong (“the Creditor”) commenced these proceedings on 20 October 2006 by presenting a petition for bankruptcy against Mr. Chan Chi Loi (“the Debtor”).

2. The Creditor passed away on 15 December 2006. On 26 February 2007, Barma J gave leave to Mr. Tiu Ming Kam to continue with these proceedings in the capacity as agent of the deceased.

The subject actions and costs orders

3. The present bankruptcy petition rests upon costs orders made by the court in three actions, namely: (1) High Court Civil Action No. 22136 of 1998 (“HCA 22136/1998”); (2) Court of Appeal Civil Appeal No. 243 of 2003 (“CACV 243/2003”), which arose from (1); and (3) High Court Civil Action No. 540 of 2006 (“HCA 540/2006”).

4. The Debtor was formerly a teacher employed by Yuen Long Merchants Association Secondary School (“the School”) on a contractual basis. The contract expired in August 1998, and upon the recommendation made by the School Management Committee (“the Committee”), the School did not renew the contract with the Debtor. The Debtor then commenced HCA 22136/1998. The first defendant in that action was the 10 members of the Committee for the year 1997-1998, the second defendant (i.e. the Creditor) was the Principal of the School, and the third defendant was the School itself. The Debtor claimed damages against the defendants, alleging that the Committee and the School had acted in breach of contract and that the Creditor had maliciously procured the Committee and the School not to renew the contract with him. After trial, Yam J gave judgment against the Debtor on 17 June 2003 and ordered him to pay the defendants’ costs. The costs of the first to third defendants were assessed by a Taxing Master at $779,392.60, and the relevant Allocatur was issued on 24 March 2006.

5. In CACV 243/2003, the Debtor appealed to the Court of Appeal against Yam J’s judgment. On 20 January 2004, upon the defendants’ application, Cheung JA ordered the Debtor to provide security for costs in respect of his appeal against the first and second defendants in the total sum of $100,000 and to pay costs of the first and second defendants in their application for security for costs. The costs of the first and second defendants in that application were assessed by a Taxing Master at $54,745.36, and the relevant Allocatur was issued on 22 May 2006.

6. After hearing, the Court of Appeal dismissed the Debtor’s appeal in CACV243/2003 on 17 December 2004 and ordered him to pay costs of the first to third defendants. Those costs were assessed by a Taxing Master at $190,745.66, and the relevant Allocatur was issued on 22 May 2006.

7. The Debtor intended to appeal to the Court of Final Appeal against the judgment of the Court of Appeal. On 3 May and 12 August 2005, his applications for leave to appeal to the Court of Final Appeal were respectively refused by the Court of Appeal and the Appeal Committee of the Court of Final Appeal (Case Number: FAMV 11/2005).

8. On 13 March 2006, the Debtor brought an action, namely HCA 540/2006, against the same defendants as in HCA 22136/1998, seeking to overturn the judgments in HCA 22136/1998, CACV 243/2003 and FAMV 11/2005; to recover the costs he had incurred in those three actions; and to apply for an order relieving him of liability to pay costs in those three actions. Upon the application by the second defendant (i.e. the Creditor) and third defendant, Master Wong struck out the Debtor’s claim and dismissed HCA 540/2006 on 7 July 2006. The Debtor appealed but his appeal was dismissed on 2 August 2006 by Recorder Mr. Anthony Chan SC, who also ordered the Debtor to pay the second and third defendants’ costs of appeal in the sum of $24,000.

9. In respect of the sum of $779,392.60 as set out in the Allocatur dated 24 March 2006 together with interest, the defendants in HCA 22136/1998 obtained a charging order absolute on 5 June 2006 against the Debtor’s property at Flat D, 48^th Floor, Block 1, Coastal Skyline, Tung Chung (“the Tung Chung property”). On 2 August 2006, the defendants in CACV 243/2003 were granted leave by the court to charge a total sum of $245,491.02, being the amount of costs listed in the Allocatur dated 22 May 2006 together with interest, against the Tung Chung property.

Bankruptcy petition

10. On 20 September 2006, the Creditor issued a Statutory Demand against the Debtor in respect of the following debts:

	Debts	Amount
(1)	Costs set out in the Allocatur dated 24 March 2006 in HCA 22136/1998 (i.e. Judgment by Yam J on 17 June 2003)	$779,392.60
(2)	Interest on the above sum of $779,392.60 from 17 June 2003 to 20 September 2006	$221,057.55
(3)	Costs set out in the Allocatur dated 22 May 2006 in CACV 243/2003 (i.e. the costs order on 20 January 2004 in the application for security for costs of the appeal)	$54,745.36
(4)	Interest on the above sum of $54,745.36 from 20 January 2004 to 20 September 2006	$12,923.53
(5)	Costs set out in the Allocatur dated 22 May 2006 in CACV 243/2003 (i.e. the costs order on 17 December 2004 in the application for security for costs of the appeal)	$190,745.66
(6)	Interest on the above sum of $190,745.66 from 17 December 2004 to 20 September 2006	$31,148.63
(7)	Costs order on 2 August 2006 in HCA 540/2006	$24,000.00
(8)	Interest on the above sum of $24,000 from 2 August to 20 September 2006	$359.05
	Total:	$1,314,372.38

11. The Statutory Demand was served personally on the Debtor on 21 September 2006. The Debtor did not dispute the receipt of the Statutory Demand. He neither applied to the court to set aside the Statutory Demand nor satisfied the debts set out in the Demand. As the Debtor had not made any payment, the Creditor filed the present bankruptcy petition on 20 October 2006.

Grounds for opposing the bankruptcy petition

12. The Debtor opposes the bankruptcy petition. Based on his affirmation and the submission he made at the hearing, his grounds of opposition can be summarized as follows:

(1) The costs orders in HCA 22136/1998, CACV 243/2003 and HCA 540/2006 were granted in favour of the Creditor and other defendants, not just the Creditor alone. The other defendants had neither transferred their rights in the debts to the Creditor nor authorized him to recover the debts. By misappropriating the rights of the other defendants in the debts and presenting the bankruptcy petition without authority, the Creditor was monopolizing the lawsuits.

(2) The various items of costs set out in the Statutory Demand were awarded to the Creditor and the other two defendants in the three actions as compensation, but the bankruptcy petition was taken out by the Creditor alone. The creditors in the two documents are different. Therefore, the bankruptcy petition was not issued for a lack of response to the Statutory Demand. For the same reason, the bankruptcy petition was issued without being preceded by the Statutory Demand and hence failed to comply with the provisions of the Bankruptcy Ordinance.

(3) The costs for HCA 22136/1998 and CACV 243/2003 were charged against the Tung Chung property on 23 June and 18 August 2006 respectively. Being secured debts, they are contrary to the provisions in section 6(2)(b) of the Bankruptcy Ordinance and should be struck out from the bankruptcy petition. Furthermore, the other defendants in the aforesaid actions have not stated in the bankruptcy petition that they are willing to give up their security in the event of a bankruptcy order being made, and this is inconsistent with the provisions in section 6B(1) of the Bankruptcy Ordinance.

(4) The $24,000 being costs in HCA 540/2006 is a small sum, and the suggestion that the Debtor is unable to pay it is inconceivable.

(5) The market value of the Debtor’s property exceeds $3,000,000. He is not unable to pay the debts, but he has not complied with the Statutory Demand as it was issued in contravention of the law.

(6) The Debtor is pursuing an appeal to the Court of Appeal against the judgment by the Recorder in HCA 540/2006, and the appeal hearing has been fixed for 12 September of this year. The Debtor should not have to comply with the various costs orders pending the outcome of the appeal.

(7) The Creditor has filed the bankruptcy petition unlawfully with the malicious intent to tarnish the reputation of the Debtor and to obstruct him in conducting HCA 540/2006.

13. The Debtor urges the Court to make an order debarring the Creditor from claiming the costs involved in the present petition pending the conclusion of the proceedings in HCA 540/2006. He also claims against the Creditor for $60,000 as compensation for damage to his reputation.

Grounds of Opposition (1) & (2): Debts involved in the bankruptcy petition

14. The issue arising from the Debtor’s first two grounds of opposition is whether the Creditor is entitled to file a bankruptcy petition when other beneficiaries of the costs orders have not joined as parties to the petition.

15. As regards the relevant facts, the bankruptcy petition relates to costs orders that require the Debtor to pay costs to the Creditor and other defendants in the relevant cases. Messrs. Raymond T.M. Lau & Co., the law firm which represented the three defendants in HCA 22136/1998 and CACV 243/2003, confirmed in writing on 14 December 2006 that the costs and expenses incurred by the defendants in the above two actions were all paid by the Creditor and the School. On the other hand, the School confirmed in writing on 7 December 2006 that the School had given consent to the Creditor to file a bankruptcy petition against the Debtor and claim the costs incurred in HCA 22136/1998, CACV 243/2003 and HCA 540/2006 together with interest.

16. As regards the law, in each of the three aforesaid actions, the costs order awarded by the court in favour of the defendants was one set of costs which did not distinguish the costs payable to the individual defendants. Therefore, the costs are joint debts in nature and the various defendants are jointly and severally entitled to the taxed costs. As one of the defendants in those actions, the Creditor is certainly entitled to the taxed costs and to pursue the same against the Debtor. Therefore, in respect of the debts arising out of the costs, he has locus standi as a creditor and is entitled to issue a statutory demand. Once the Debtor paid to him all the taxed costs, the Debtor’s obligation under the costs orders would be discharged in full, and the other defendants could not make another claim against him for the same matter despite their also being beneficiaries of the costs orders. The facts of the present case are no different from those of Mahmood v. Penrose [2005] BPIR 170, a case relied upon by Mr. Tsui, Counsel for the Creditor, and the legal principles enunciated in that case (see paragraphs 20 to 24) are also applicable to the present case.

17. Furthermore, the joint creditors of the debts involved in the present case have confirmed in writing that the Creditor has the right to pursue and receive payment for all the costs. This further protects the Debtor from any future duplicate claims by the other defendants after he has paid the costs to the Creditor.

18. Therefore, although the costs orders and allocaturs involve a number of defendants and not only the Creditor, it is neither improper nor unlawful for the Creditor to file a bankruptcy petition on his own. There is no inconsistency or discrepancy between the Statutory Demand and the bankruptcy petition.

Ground of Opposition (3): The debts are secured

19. It is beyond doubt that the costs orders in HCA 22136/1998 and CACV 243/2003 are charged against the Tung Chung property. Moreover, in CACV 243/2003, the Debtor has paid $100,000 into court as security for costs. Therefore, the Creditor holds security in respect of the debts arising out of these three costs orders, and these debts are secured. 

20. Section 6(2) of the Bankruptcy Ordinance provides that:

(2)        Subject to sections 6A to 6C, a creditor’s petition may be presented to the court in respect of a debt or debts if, but only if, at the time the petition is presented ― <* Note - Exp. X-Ref.: Sections 6A, 6B, 6C *>

(a)        the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds $10,000 or a prescribed amount;

(b)       the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured;

(c)        the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay; and

(d)       there is no outstanding application to set aside a statutory demand served under section 6A in respect of the debt or any of the debts.

21. As regards a secured creditor, section 6B(1) provides that:

(1) A debt which is the debt, or one of the debts, in respect of which a creditor’s petition is presented need not be unsecured if either ―

(a)        the petition contains a statement by the person having the right to enforce the security that he is willing, in the event of a bankruptcy order being made, to give up his security for the benefit of all the bankrupt’s creditors; or

(b)       the petition is expressed not to be made in respect of the secured part of the debt and contains a statement by that person of the estimated value at the date of the petition of the security for the secured part of the debt.

22. The provisions in section 6(2) do not apply to cases governed by sections 6A to 6C, and section 6B allows for a bankruptcy petition in respect of certain secured debts. In light of this, the costs in HCA 22136/1998 and CACV 243/2003 may still be included in the present bankruptcy petition notwithstanding they are secured debts.

23. Furthermore, in paragraph 5 of the bankruptcy petition, the Creditor expressly stated that “I hold security for the payment of the above-mentioned sums. I will give up such security for the benefit of all the Creditors in the event of a bankruptcy order being made.” This statement has complied with the requirement under section 6B(1)(a) of the Bankruptcy Ordinance. As the petition was presented by the Creditor on his own and, as aforesaid, he was not obliged to add to the petition the other defendants in HCA 22136/1998 and CACV 243/2003, the petition does not have to contain a statement that those defendants also give up their security.

24. At the hearing, the Debtor complained that the Statutory Demand did not state that part of the debts (i.e. the costs in HCA 22136/1998 and CACV 243/2003) was secured or specify the value of the security, and that the bankruptcy petition did not specify the market value of the security (i.e. Tung Chung property).

25. Rule 44(5) of the Bankruptcy Rules provides that:

(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.

26. Pursuant to the provisions in Rule 44(5), the Creditor should have stated in the Statutory Demand that part of the debts owed to him by the Debtor is secured by a charging order against a property and that the Debtor has paid $100,000 into court as security for costs in CACV 243/2003. Therefore, the Statutory Demand does fail to comply with Rule 44(5).

27. However, the Debtor has never applied to the court to set aside the Statutory Demand on this ground. As at the date of hearing of the bankruptcy petition before me, the Statutory Demand was still valid.

28. As regards the bankruptcy petition, the legislation does not require a creditor to specify in the petition the nature and value of the security he holds, save where section 6B(1)(b) applies. Section 6B(1)(b) does not apply in the present case because the petition does not state that it is “not made in respect of the secured part of the debts”.

29. Section 124(1) of the Bankruptcy Ordinance also provides that:

No proceeding in bankruptcy shall be invalidated by any formal defect or by any irregularity unless the court is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of the court.

30. In the present case, the Debtor certainly knows that he has paid into court $100,000 as security for costs and that the Creditor holds a charging order in respect of part of the debts. Ever since he received the Statutory Demand, he has neither applied to set it aside nor satisfied any part of the debts. On the other hand, the Creditor has not applied to the court to enforce the charging order by selling the subject property so as to set off the debt.  The Creditor has also stated in the bankruptcy petition that he will give up the security in the event of a bankruptcy order being made. In the circumstances, although there are irregularities in the Statutory Demand and even assuming there are also irregularities in the bankruptcy petition (with which I do not agree), none of these have caused any injustice, let alone substantial or irremediable injustice. By virtue of section 124(1), the present bankruptcy petition shall not be invalidated.

31. In any event, this ground of opposition does not affect the costs in HCA 540/2006, which constitute an unsecured debt. The Creditor is entitled to issue a Statutory Demand and file a bankruptcy petition on this particular debt.

Grounds of Opposition (4) & (5): Whether the Debtor is unable to pay the debts

32. There is no evidence in the present case to support the Debtor’s assertion that the market value of the Tung Chung property exceeds $3,000,000. Besides, the burden of proof is on him to satisfy the Court that he is able to pay the debts: see section 9(3) of the Bankruptcy Ordinance.

33. To support the assertion that he is able to pay the debts, he Debtor relies on the judgment of Cheung JA on 20 January 2004 in the application for security for costs of the appeal. Paragraph 3 states that the Debtor did not work after 1998 when his contract was not renewed, but he received some $950,000 as provident fund. He also had other savings and owned a property jointly with his wife, valued at about $2,300,000. Therefore, Cheung JA concluded that the Debtor could not be regarded as impecunious.  

34. While the judgment of Cheung JA reflects the financial condition of the Debtor in early 2004, it does not indicate directly whether the Debtor is now able to satisfy the debts presented in the petition.

35. More importantly, section 6A(1)(a) of the Bankruptcy Ordinance provides that, where 21 days have lapsed after a creditor has served a statutory demand on the debtor and the debtor has neither complied with nor applied to set aside the demand, the debtor shall be regarded as appearing to be unable to pay the debts in question within the meaning of section 6(2)(c). The Debtor in the present case clearly appears to be unable to pay the debts set out in the bankruptcy petition, within the meaning of section 6A(1)(a).

36. The Debtor also alleges that the costs involved in HCA 540/2006 were only $24,000 which is not a large sum of money and he cannot possibly be unable to pay it. However, the undisputed fact is that he has not paid a single cent so far. He also made it clear at the hearing that he would not pay those costs and would only consider the question of payment at the conclusion of the appeal from HCA 540/2006.

Ground of Opposition (6): HCA 540/2006 is on appeal

37. In respect of the argument that the appeal from HCA 540/2006 is still underway, it is a well-established legal principle that, unless the court orders otherwise, the parties to a case have to comply with the judgment and orders of the court even though the case is on appeal. Although the Debtor has lodged an appeal against the judgment of the Recorder, he has not been granted any order for stay of execution of the order and costs order of the Recorder. In the circumstances, it is not for the Debtor to unilaterally repudiate the costs orders in HCA 22136/1998 and CACV 243/2003 or refuse to pay the costs of $24,000. The court dealing with the bankruptcy petition has no power to allow the Debtor to postpone compliance with the various costs orders.

Ground of Opposition (7): The petition was filed by the Creditor maliciously

38. There are factual and legal bases upon which the Creditor can seek recovery of costs from the Debtor and institute legal proceedings to enforce the costs orders. He has a legal right to file a bankruptcy petition. As a matter of fact, when the Debtor brought an action against the Creditor and others, he should have realized that he would have to pay the other parties’ costs if he lost the case and should have expected that the other parties would take legal action to recover any unpaid costs. The Debtor instituted HCA 540/2006 after the commencement of the taxation proceedings in HCA 22136/1998 and CACV 243/2003 with the obvious intent to shirk his legal obligations under the costs orders. In my judgment, the Debtor’s allegation that the bankruptcy petition has been presented maliciously as an unlawful means to tarnish his reputation and trustworthiness and to obstruct him in conducting HCA 540/2006 is ill-founded and does not constitute a valid ground of opposition.

Conclusion

39. For the above reasons, the Debtor’s grounds of opposition cannot be sustained. The Creditor has proved that the Debtor owes the debts as set out in the bankruptcy petition and appears to be unable to pay them. I therefore make the usual bankruptcy order against the Debtor.

40. I also make an order that the Debtor do pay to the Creditor and the Official Receiver their costs occasioned by the petition, such costs to be taxed if not agreed. This costs order is an order nisi and will become absolute after 14 days from the date of this judgment unless either party applies to the court to vary the order.