RE PAN SUTONG

HCB 6830/2021

[2022] HKCFI 1896

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6830 OF 2021

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J U D G M E N T

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1.  The debtor (“Pan”)  applies to strike out the petition. It is said to be an abuse of process for the petitioner (“XFN”)  to present the petition when Pan is faced with another pending petition presented by his other creditors.

Background

2.  On 23 November 2020, XFN extended a loan (“the Loan”)  to Billion Trend Development Limited (“Billion Trend”), a company owned or controlled by Pan, and the loan was guaranteed by the Pan personally (“the Guarantee”).

3.  On 12 October 2021, on the ground of Pan’s default, XFN served a statutory demand on him for the debt in sum of HK$128,222,506.68.

4.  On 4 November 2021, XFN, Billion Trend and Pan entered into an agreement (“the Settlement Agreement”)  whereby a grace period was given to Billion Trend and Pan.  That effectively stalled XFN from presenting a bankruptcy petition against Pan for the debt.

5.  However, Billion Trend has only partially performed the Settlement Agreement.

6.  On 9 December 2021, XFN issued the petition against Pan (“the Petition”).

7.  After XFN’s statutory demand on Pan but before its presentation of the Petition, other creditors of Pan presented a bankruptcy petition against Pan on 25 November 2021 (HCB 6548/2021)  (“the CITIC Petition[2]”).  The substantive hearing of the CITIC Petition was held on 7 June 2022, and the judgment therein is pending.

8.  On 14 January 2022, Pan filed his summons to strike out the Petition on the ground of abuse of process.

9.  Substantive hearing of the Petition has been adjourned pending the outcome of the present application.  Therefore, merits of the Petition are not relevant for the present purpose.  Indeed, the sole question for the present purpose is whether or not the presentation of the Petition while Pan is faced with the CITIC Petition constitutes an abuse of process.

The law regarding multiple bankruptcy petitions

10.  The express provision of the Bankruptcy Ordinance, Cap 6 (“BO”)  envisages a situation of multiple bankruptcy petitions against the same debtor.  Section 101 provides:

“Consolidation of petitions

Where 2 or more bankruptcy petitions are presented against the same debtor or against joint debtors the court may consolidate the proceedings or any of them on such terms as the court thinks fit.”

Section 102, as will be referred to in the discussion below, should also be noted:

“Power to change carriage of proceedings

Where the petitioner does not proceed with due diligence on his petition the court may either dismiss the petition or substitute as petitioner any other creditor to whom the debtor may be indebted in the amount required by this Ordinance in the place of the petitioning creditor.”

11.  Section 101 is the starting point of reference.  If Pan is right, so that the mere presentation of a bankruptcy petition when another petition is pending against the same debtor is liable to be struck out for abuse of process, the statutory power of the court to consolidate multiple petitions under section 101 would be questionable, if not redundant.  This is readily apparent.

12.  To make good XFN’s position, its counsel also helpfully traces the development of the law regarding multiple bankruptcy petitions in both the English and Hong Kong systems.  The latter was very much based on the former[3].

13.  The provisions under section 101 of the BO could be traced back to its equivalent provisions under the UK Bankruptcy Act, namely section 80(2)  of the 1869 Act and later section 106 of the 1883 Act.  In Re White (1880)  14 Ch D 71, the court explained its jurisdiction under the 1869 Act to decide which of two petitions presented against the same debtor should be heard first for the benefit of all the creditors[4].  The situation of multiple petitions was not argued or considered by the court to be an irregularity, let alone abuse of process.

14.  The 1883 Act was then repealed by the 1914 Act.  The provisions under section 110 of the 1914 Act became those under the current section 101 of the BO.  The provisions have since been in force in Hong Kong up to this day.

15.  The 1914 Act was subsequently repealed by the Insolvency Act 1985, which was further repealed for all material purposes by the Insolvency Act 1986, which was supplemented by the Insolvency Rules 1986 (“IR 1986”).  Whilst the provisions under r 6.236 of IR 1986 continue to be the same as those under section 101 of the BO, the following rules brought about changes, including what the Hong Kong system does not have in operation.

16.  R 6.30 says:

“Substitution of petitioner

(1)  This Rule applies where a creditor petitions and is subsequently found not entitled to do so, or where the petitioner –

(a)  consents to withdraw his petition or to allow it to be dismissed, or consents to an adjournment, or fails to appear in support of his petition when it is called on in court on the day originally fixed for the hearing, or on a day to which it is adjourned, or

(b)  appears, but does not apply for an order in the terms of the prayer of his petition.

(2)  The court may, on such terms as it thinks just, order that there be substituted as petitioner any creditor who –

(a)  has under Rule 6.23 given notice of his intention to appear at the hearing,

(b)  is desirous of prosecuting the petition, and

(c)  was, at the date on which the petition was presented, in such a position in relation to the debtor as would have enabled him (the creditor)  on that date to present a bankruptcy petition in respect of a debt or debts owed to him by the debtor, paragraphs (a)  to (d)  of section 267(2)  being satisfied in respect of that debt or those debts.”

17.  Further, rule 6.31(2)  (1)  says:

“Change of carriage of petition

On the hearing of the petition, any person who claims to be a creditor of the debtor, and who has given notice under Rule 6.23 of his intention to appear at the hearing, may apply to the court for an order giving him carriage of the petition in place of the petitioning creditor, but without requiring any amendment of the petition…”

18.  The provisions under r 6.30, albeit labelled as “substitute of petitioner”, are in substance those regarding power to change carriage of proceedings as in its predecessors, ie section 80(4)  of the 1869 Act, section 107 of the 1883 Act and section 111 of the 1914 Act (and thus section 102 of the BO in Hong Kong).  Albeit labelled as “change of carriage of petition”, r 6.31 of IR 1986 is actually a new rule (“the English Change of Carriage Rule”)[5].

19.  The IR 1986 were later replaced by the Insolvency (England and Wales)  Rules 2016 (“IR 2016”).

20.  The above legislative changes in the UK system brought about noteworthy differences between the UK and the Hong Kong systems regarding multiple petitions against the same debtor.  First, there is no longer provision for the consolidation of multiple bankruptcy petitions in the UK as those in the past or the one like section 101 of the BO in Hong Kong. Second, the provisions in IR 1986 for substitution of petitioner and the English Change of Carriage Rule were re-written (as the new rr 10.27 and 10.29).

21.  That said, the court in the UK did not therefore consider that a person is thus prevented from presenting a petition when there is a pending petition against the same debtor.  In Islandsbanki HF v Stanford [2019] BPIR 876, the court had this to say (at §6):

“a)  Normally there is only one petition. Bankruptcy is a class remedy asking for distribution of the debtor’s realised assets on a pari passu basis subject to the statutory waterfall. Therefore, a petition will not be dismissed (whether by agreement or determination)  without considering whether any supporting creditor might (as appropriate)  take over its carriage or be substituted as the petitioning creditor by amendment (see Rules 10.28 and 10.29 of the Insolvency Rules 2016 (“the Rules”), which applied from 6 April 2017).

b)  In that context, paragraph 12.3 of the Practice Direction: Insolvency Proceedings [2018] B.C.C. 241 requires an intending petitioner to conduct an Official Search with the Chief Land Registrar in the register of pending actions for pending petitions presented against the debtor. If an existing petition is found, the intended petition will normally not be presented. The creditor may support the petition and, if appropriate and necessary, apply for a change of carriage order or substitution.

c)  However, a second petition is not prohibited by the Practice Direction. Paragraph 12.3 requires a certificate to be signed stating that a search has been conducted within 7 days of the date of presentation and either: (a) no petition is believed to have been presented or, (b) if one is pending, that the second petition is issued at risk as to costs.

d)  A reason why that ‘risk’ may be taken might be because the creditor will not be able to ask for carriage of the petition and substitution may not be available. For example, if the petition debt is found to be genuinely and substantially disputed, there could be no change of carriage and the creditor may not be able to ask for substitution because no statutory demand had been served or judgment executed for the purposes of section 267(2)(c)  and 268 of the Act (see Rule 10.27(2)(c))”.

22.  In applying sections 101 and 102 of the BO, the Hong Kong court likewise took the view that there is no impediment to presenting a petition when there is a prior and pending petition against the same debtor: see Re Wong Wai Dai [2001] 2 HKLRD 465 at 467.

23.  In Re Chan Tin Chi HCB 2780/2001 (30 July 2001), the court (§§13-14)  refused to adjourn the hearing of a petition, which was wholly unconnected with another prior and pending petition.  The court proceeded to make a bankruptcy order on the second petition, and left it to the creditor in the other petition to withdraw the other petition on the basis of the bankruptcy order given.

24.  The court in Re Aggarwal [2012] 5 HKC 351 (at §§24-25)  handled the situation of two petitions against the same debtor in a similar manner.  See also Re Hu Ying [2018] HKCFI 2064 at §§1; 17.

25.  The recent case of Edgeworth Capital (Luxembourg)  SARL v Maud [2021] Bus LR 1533 (at §98)  explained the notion that there should only be one petition against a debtor at any one time.  This was cited in the Hong Kong case of Re China Greenfresh Group Co Ltd [2021] HKCFI 36, which Pan relies on heavily.

26.  Re China Greenfresh Group is a winding-up case.  Unlike the BO, the Companies (Winding Up and Miscellaneous Provisions)  Ordinance, Cap 32 (“CO”)  contains no provision for the consolidation of multiple winding-up petitions against the same company.  It may be said that multiple winding-up petitions against the same company is simply not envisaged.

27.  Further, the bankruptcy petitioner substitution rule is strict, requiring the intended substitute petitioner to be able to present a bankruptcy petition at the date of the existing petition: see Re Wong Wai Dai (above)  at 469; Re Hood [2021] Ch 125 at §26.  In the case of a winding-up petition, the right to present a petition under r 33 of the Companies (Winding-Up)  Rules refers simply to a right in respect of a debt which makes the applicant a present, contingent or prospective creditor within the meaning of section 179 of the CO: see Re Sanmenxia Tianyuan Aluminum Co Ltd [2013] 1 HKLRD 393 at §3.  The relative ease of establishing the creditor’s right to substitute a winding-up petitioner may justify the notion that there should be one winding-up petition against a company.  The same may not be true when a creditor intends to substitute a bankruptcy petitioner.

28.  Therefore, what the court said in Maud (above)  must be understood against the difference between the winding-up and the bankruptcy regimes as well as the changes that brought about the difference in the provisions in the bankruptcy regime between the UK and Hong Kong.

29.  First, the starting point of reference, namely the power of the court to consolidate multiple petitions against the same debtor under section 101 of the BO (which was based on section 110 of the 1914 Act)  remains unchanged in Hong Kong as of today.

30.  Second, the new English Change of Carriage Rule was introduced in the UK whereas no similar provision exists in Hong Kong.  This was pointed out by the court in Re Wong Wai Dai (above)  (at 469-470):

“[The creditor] now seeks an order to be put into [the] shoes of the petitioner without an amendment of the petition, so it would be proceeding with the petition on the basis of the petitioner’s debt. This form of order called a change of carriage order, is provided for in rule 6.31 of the Insolvency Rules 1986 ...

There is no equivalent provision in our bankruptcy legislation.”

Likewise, the court in Re Lo Man Hong [2013] 4 HKLRD 126 said (at §32):

“[Section] 102 of the Bankruptcy Ordinance is in quite different terms from Rule 6.31 of the (UK)  Insolvency Rules 1986, and does not permit a change of carriage of a bankruptcy petition without requiring a substitution of the petitioner …”

31.  Third, the difference between the UK and the Hong Kong bankruptcy regimes under currently different rules was most recently explained by the court in the hearing of another bankruptcy matter involving Pan: see Pan Sutong v Bank of China Limited HCSD 28/2021 & HCCW 215/2021 (18 May 2022)  (“the BOC Case”).  Pan argued in the BOC Case that the threat of petition (by statutory demand)  against him in that case while the CITIC Petition is pending amounted to an abuse of process[6].  In rejecting the argument, the court referred to the same point as that taken in the present case (referred to as the 2^nd point raised in the argument of Senior Counsel for Pan in this respect), and had this to say:

“65. However, as the same point has been raised by Pan in HCB 6830/2021, which concerns a bankruptcy petition presented by Xinhua Financial Network Ltd, I will set out the reasons as to why I consider that the 2^nd point is misconceived.

66. Amongst the many cases cited by Mr Yuen, the only cases which may lend support to his proposition are Re China Greenfresh Group and Edgeworth Capital. However:

(1)  Re China Greenfresh Group is concerned with a winding up petition, not bankruptcy petition. The passages cited by Harris J came from Edgeworth Capital.

(2)  Edgeworth Capital is a bankruptcy case. As can be seen from §98, the basis for holding that it is most unusual for 2 bankruptcy petitions pending simultaneously is that under the English Insolvency Rules, there are specific rules in relation to bankruptcy proceedings which provide for (a)  other creditors to give notice of an intention to appear to support or oppose an existing petition; and (b)  a supporting creditor to be substituted for the original petitioner under rule 10.27 (eg. if the original petitioner wishes to withdraw the petition)  or for a change of carriage of the petition under rule 10.29 (eg. if the original petitioner neglects to prosecute the petition). Snowden J considered that the proper construction of rule 10.149(i)  is to enable the court to give priority as expenses of the bankruptcy those costs which relate to the petition upon which the bankruptcy order is made but not the costs of the other petition upon which no order has been made (§§99-100).

(3)  Unlike the Insolvency Rules, our BR do not contain any provisions which allow a creditor to file a notice of intention to appear and to support or oppose the petition. Nor do they allow a creditor to apply for substitution if the petitioner wishes to withdraw the petition.

(4)  While s.102 of the BO provides for substitution, the ground is limited to a situation where “the petitioner does not proceed with due diligence on his petition”. As Kwan J held in Re Wong Wai Dai, at 468I-469B, the court is empowered to dismiss or substitute as petitioner any other creditor only where it is established that the original petitioner does not proceed with due diligence on his petition.

67.  In respect of a creditor’s right to present a second petition against the debtor, I do not think one can equate bankruptcy proceedings with winding up proceedings as they are governed by different Ordinances and Rules.  For winding up proceeding which is a class remedy there are rules designed for creditors to participate in the petition already presented against the company, viz., (a)  rule 30 [of the Companies (Winding-Up)  Rules, Cap 32H] allows every persons who intends to appear on the hearing of the petition to file a notice of intention to appear on petition; (b)  rule 31 requires the petitioner to prepare and make available a list of the persons who have given notice of their intention to appear on the hearing of the petition; and (c)  rule 33 allows any creditor or contributory to apply for substitution as the petitioner. No such rules can be found under the BR.  

68.  Not only is there no provision under the BO or the BR which supports Ps’ contention that it is an abuse of process for a creditor to present a second petition against the same debtor, in fact, s.101 of the BO envisages that more than one petitions are presented against the same debtor:

‘Where 2 or more bankruptcy petitions are presented against the same debtor or against the same joint debtors the court may consolidate the proceedings or any of them on such terms as the court thinks fit.’

69.  On the fact of this case, it is impossible to see how Ps can suggest that BOC’s act in serving the SD or that it intended to present a bankruptcy petition constitutes an abuse of process.  The SD was served on Pan in June 2021, well before CITIC presented its petition against Pan in November 2021.”

32.  With leave of this court, the parties had the opportunity of addressing this court further in writing with reference to the above judgment in the BOC Case which binds Pan.  Not surprisingly, XFN takes that judgment as reinforcement of its argument.  On behalf of Pan, it is argued that the court in that judgment is wrong.

Whether the petition should be struck out

33.  Counsel for XFN goes at some length to urge this court to follow the line of cases which are said to share the same voice on the law regarding multiple petitions against the same debtor in the bankruptcy context.  His focus is on the principle that whilst they may not be strictly binding on this court, there is no good reason not to follow them.  Judicial comity, that is.  Such analysis cannot be faulted as a matter of principle.

34.  However, it is in my view more pertinent to bear in mind that this is a striking out application, where Pan has the burden of demonstrating that the Petition is liable to be struck out as its presentation in the circumstances was plainly an abuse of process.  For the reasons discussed above, even assuming that multiple petitions before the court against the same debtor may somehow be thought to be undesirable for any reason, the presentation of the Petition while Pan is faced with the CITIC Petition per se could not be said to be plainly an abuse of process in the circumstances of this case that should invoke the jurisdiction of the court to strike it out.

35.  As an alternative, Pan asks for stay of the Petition pending the determination of the CITIC Petition.  In principle, stay is not lightly granted: see Re Team Y&R Holdings Hong Kong Ltd [2017] HKCLC 133 at §52; Poon Ka Man Jason v Cheng Wai Tao [2018] HKCFI 771 at §§36-39; ING Bank NV v Banco Santander SA [2020] EWHC 3561 (Comm)  at §210.  In rejecting Pan’s argument, the court in the BOC Case dismissed his application to set aside the statutory demand, and refused a similar application for stay.  Notwithstanding the CITIC Petition, the court further authorised the creditor in the BOC Case to present a bankruptcy petition against Pan.  All circumstances considered, this court refuses the alternative application for stay of the Petition.

Recent development

36.  Just when this court was ready to hand down the judgment as set out above, XFN filed its summons on 9 June 2022, ie 2 days after the hearing of the CITIC Petition mentioned above.  Apparently, the parties have come to terms so that the Petition in the present case will no longer be pursued and Pan would pay XFN’s costs at the agreed sum as stated in the summons.  The summons will be heard before this court on 30 June 2022.  Nevertheless, XFN requested that this court should still hand down this judgment.  Whilst decision or judgment of the court is not issued purely for academic purpose, this court has no strong objection to the request as this judgment is after all ready.

Conclusion

37.  Failing to make out a plain and obvious case for striking out, Pan fails in his application, which should be dismissed with costs.  In view of the terms of the summons to be heard, which would also dispose of the issue of costs between the parties by agreement, I see no need to make any order except for deferring the same to the hearing of XFN’s summons on 30 June 2022.