RE WONG CHEONG FAT

HCB 2058/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 2058 OF 2000

____________

______________

J U D G M E N T

______________

1. In June 2000, the Petitioner ('Madam Lau') filed a petition with this Court seeking a bankruptcy order against the person she alleged to be indebted to her, Wong Cheong Fat ('Mr Wong'). The petition was founded on the failure of Mr Wong to comply with a statutory demand for immediate payment of a liquidated sum of $590,138.05. In this regard, the petition stated:

"The above mentioned debt is for a liquidated sum payable on 1st September 1999 being the amount of a dishonoured cheque No. 081737 drawn by the Judgment Debtor in favour of the Petitioner upon the Wing Lung Bank Limited representing the 1st instalment due under a Settlement Agreement dated 17th March 1997 and the Judgment Debtor appears to have no reasonable prospect of being able to pay it.

On 24th February 2000, a Statutory Demand dated 26th October 1999 was deemed to be duly served upon the Judgment debtor by advertising a Notice of the Statutory Demand once in Sing Pao, a Chinese newspaper circulating in Hong Kong. To the best of my knowledge and belief the demand has neither been complied with nor set aside in accordance with the Rules and no application to set it aside is outstanding."

2. The statutory demand was served by way of advertisement because it appears that Madam Lau's agents had persistently failed to effect personal service upon Mr Wong despite attempts being made at several different addresses.

3. Whether Mr Wong came to know of the advertisement is uncertain. What is certain, however, is that, in June 2000, he was presented with Madam Lau's bankruptcy petition and thereafter filed a notice of opposition. Mr Wong seeks his order dismissing the petition on the basis, as I understand it, that no debt was (or is) due by him to Madam Lau.

A consideration of the background.

4. In my view, the central document in this dispute is an agreement dated 17 March 1997 entered into between Madam Lau and Mr Wong. The preamble to that agreement records that Madam Lau had commenced what is called a derivative action against Mr Wong for the benefit of a company called Mass Exchange Limited ('the company'), a company in which both held shares. The parties had, however, agreed to settle that litigation and the agreement of 17 March 1997 records the terms of that agreement.

5. In order to settle the litigation, Madam Lau agreed to effectively disengage herself from any interest in the company; resigning as a director, transferring her shares and confirming she had no claims against the company. In consideration for those actions on the part of Madam Lau, Mr Wong agreed that she should be paid a sum of money by him, the amount being $2,360,552.20. That sum was to be paid in instalments, the first instalment falling due on 1 September 1999 in the sum of $590,138.05. Each instalment was to be evidenced by a post-dated cheque. It is the first of those post-dated cheques which, when presented for payment by Madam Lau at the Wing Lung Bank, was dishonoured. It is that alleged debt which was the subject of her statutory demand.

6. As to the details of why a total of $2,360,552.20 should be paid by Mr Wong to Madam Lau in settlement of the litigation, clause 14 of the agreement reads (in part) as follows:

"[Madam Lau] acknowledges that a dividend of HK$2,360,552.20 was declared payable by the Company to [herself] on 11 December 1995, which has not been paid to her. [Mr Wong] shall pay the said amount to [her] within 4 years of the execution of this Agreement. Payment shall be by way of post dated cheques in favour of [Madam Lau] which shall be delivered to [her] solicitors upon the signing of this Agreement."

7. The company was not made a party to this agreement. Mr Wong took on the personal liability of paying this sum in order to settle the litigation and be in a position to assume control of the company.

8. It has not been disputed that Madam Lau met her side of the bargain. She duly disengaged herself from the company. How is it then that Mr Wong - in face of the terms of the agreement dated 17 March 1997 and after a silence of over 2 years - now contends that there is no debt due to Madam Lau? It is because Mr Wong alleges that the agreement was, in fact, a sham, to employ my phrase used during the hearing, it had all been a matter of 'smoke and mirrors'. The 'mechanics' of it are complex. But I believe, in broad terms, it may be described in the following terms.

9. Mr Wong alleges that, in reality, at all material times Madam Lau held her shares in the company as trustee for her husband. It was her husband who was the true owner of the shares. This allegation, however, flies in the face of a written declaration of trust dated 21 December 1992, signed by Mr Wong, in which he declares that he holds 1,000 shares in the company on behalf of Madam Lau who is the beneficial owner of those shares. No mention is made of the husband in that declaration.

10. Mr Wong answers that by saying that the husband was an accountant with a leading firm in Hong Kong and did not wish officially to be associated with the company which dealt in money exchange. That was why the shares were in the name of Madam Lau. Suffice to say that in their affirmations both Madam Lau and her husband deny these averments as to beneficial ownership.

11. Mr Wong relies on the assertion that the husband took an active part in the management of the company. But as evidence that the husband was the beneficial owner of the shares, I do not see that this takes the matter any further: it is neutral. No doubt a woman who has an interest in a business and whose husband is an accountant will seek the husband's help from time to time. The husband may well play an active part in management in order to assist the wife and protect her interests. That of itself does not suggest a beneficial shareholding.

12. A material document in the dispute is a letter (or memorandum) dated 11 December 1995 signed by Mr Wong. This document reads:

"Based on the Company records, the actual accumulated profit after tax from 90 to 8/94 is HKD4,342,309.00, out of which Lawrence Chia entitled HK$2,360,552.20; Ronny Wong entitled 990,878.40; Fred Lo entitled HK$990,878.40.

The Board of Directors proposed declare dividend HK$2,781,895.00 on Sept 30,1994.

There being an undeclared dividend HK$1,560,414.00 will be pay in due course. [My emphasis]"

13. This is the document referred to in clause 14 of the settlement agreement reached between Madam Lau and Mr Wong. It will be seen from this document that a dividend of $2,781,895 was declared on 30 September 1994 with the balance - the undeclared dividend - to be paid in due course. Mr Wong avers that the husband was paid his share of that dividend at the time, the money going to him and not the wife. It is accepted, however, that there is no evidence of this payment, a matter of some concern if payment was made by the company in accordance with standard procedures. The husband denies receipt of any such share of a dividend payment.

14. As for the document itself, Mr Wong says that this too is a sham. According to Mr Wong, this document was drawn up in 1997, at or about the time when the settlement agreement was reached and not in 1995. But why would this be necessary? Essentially, as I understand it, Mr Wong avers that the husband had all along been borrowing moneys from him. However, the husband wished such matters kept secret from his wife, Madam Lau. When settlement negotiations were taking place in 1997, the husband somehow convinced Mr Wong to sign this document to satisfy Madam Lau that dividends had at one time been payable. Presumably this was to make Madam Lau believe she would be receiving something out of the settlement even though according to Mr Wong, the husband had in 1995 been paid his due share of the declared dividends - a matter never divulged to the wife - and accordingly had received all that was properly due and payable.

15. Quite why, after litigation, Mr Wong should be convinced by the husband of his adversary to sign such a document is not clear. But the matter goes further. I say that because, according to Mr Wong, he was then convinced by the husband to sign a series of post-dated cheques in favour of Madam Lau and to formalise their payment in terms of the settlement agreement. But why would Mr Wong take such a serious step against his own interests, assuming personal responsibility for a debt in excess of $2,500,000? He only agreed to do it, he says, on the undertaking by the husband that, before the first cheque fell due, he would 'come clean' with his wife and convince her not to present the cheques for payment. In short, Mr Wong, if he is believed, was prepared (for the sake of his old friendship with the husband) to assume personal responsibility for a debt which had already substantially been paid to the husband.

16. Accordingly, the post-dated cheques - a central part of the settlement agreement - were no more than a device to maintain domestic harmony between the husband and his wife until such time as the husband plucked up courage to tell his wife that he had (all along) been borrowing money from Mr Wong and indeed had already received his share of the dividends and that the post-dated cheques - the fruit of the wife's settled litigation - were not due for payment and should be torn up. Suffice to say that these allegations - which, in my view, defy logic - are denied by Madam Lau and her husband.

The position of the bankruptcy court

17. The bankruptcy court is not the forum for resolving the question of whether or not a debt is due.

18. The problem, however, in cases of this kind (where no default judgement has been obtained and where there is an arguable case that the statutory notice did not come to the debtor's notice) is that defences will be raised suggesting a debt was never due. In my judgment, when this occurs, the principles to be applied are no different from those applied in the companies court. In this regard, in Re Bylamson & Associates' (Enterprises) Ltd [1983] 1 HKC 510, Jones J held that, where a dispute on substantial grounds has been raised, the petition should be dismissed. The question for resolution, therefore is whether a dispute on substantial grounds has been raised.

The factual issues

19. Mr Wong's various assertions are no more than bare allegations. Not only are they unsupported by any documentary evidence, they fly in the face of those documents which do exist. They are far-fetched.

20. The only indirect assistance which Mr Wong may rely on is the mention of the husband's name in the letter (or memorandum) of 11 December 1995. But that was signed by Mr Wong and nobody else. The author is not known. It does not suggest that the husband has, in fact, received payment. The mention may equally therefore have been on the basis that the husband - perhaps, active in the company's management - was to receive the dividend, when payable, on behalf of the wife.

21. On the factual basis alone, I am satisfied that Mr Wong has failed to demonstrated any form of substantial dispute. But what then of the various legal issues raised?

Lack of consideration

22. It is contended on behalf of Mr Wong that the series of post-dated cheques was in payment of a dividend which had, in part, already been paid and which, in respect of the much larger balance, had never been declared by the company. There was, therefore, no consideration. But what must be remembered is that the letter (or memorandum) of 11 December 1995 amounted to no more than a statement that, according to the company records at that time, there was an accumulated profit which would allow the company to declare a dividend, Madam Lau's share of which would be $2,360,522.20. There is no evidence, other than Mr Wong's bare assertion, that any portion of that dividend was paid either to Madam Lau or her husband.

23. Thereafter, and before the audited accounts were finalised in mid 1996, it appears that large sums of money were taken from the company. This resulted in Madam Lau instituting her derivative action.

24. On his own admission, Mr Wong was anxious to settle the litigation. He therefore entered into a compromise arrangement with Madam Lau. As Mr Beresford, for the Petitioner, expressed it, the payment Mr Wong agreed to make was to settle his alleged personal liability for mismanagement of the company. At the same time, so that he could assume control of the company, he also procured the release of the company from any claim by Madam Lau. The debt payable was therefore a newly created debt. It may have been calculated on what dividend payment should have been according to the company accounts in late 1995 but it was not itself a dividend payment; it was instead a debt now owned by Mr Wong in consideration for the various matters to which Madam Lau had agreed. There was quite clearly an adequency of consideration.

Illegality

25. Section 79B of the Companies Ordinance, Chapter 32, states that a company "shall not make a distribution except out of profits available for the purpose". In light of this provision, it is argued on behalf of Mr Wong that the payments under the post-dated cheques were illegal. But that, with respect, misses the point. The post-dated cheques were not company cheques. They were Mr Wong's payments made in terms of a compromise agreement which of itself was complete and certain.

26. It is not for us now to attempt to analyse the negotiations that led to the signing of the settlement agreement. But clearly the payment agreed by Mr Wong was calculated on the basis that in late 1995 the company accounts revealed that there was a particular amount available for dividend distribution. A great portion of that sum was subsequently dissipated. That was why Madam Lau instituted her derivative action. What she wanted when the matter was settled was clearly what the records revealed she would have been entitled to if there had been no subsequent mismanagement. Mr Wong agreed to pay her a sum thus calculated. There is, accordingly, no question of illegality.

Collateral agreement with the husband

27. As I have already indicated, I am satisfied that, other than the bare allegation, there is no evidence of any collateral agreement between Mr Wong and the husband. I do not believe the allegation is worthy of consideration.

28. But even if there was some sort of collateral agreement, there is no suggestion that Madam Lau's claim in the derivative action was made in bad faith. There is no suggestion she did not believe she was entitled, in terms of the settlement agreement, to receive the payments Mr Wong undertook to pay to her. The fact, therefore, that, in admitted deceit of Madam Lau, there may have been some agreement between Mr Wong and the husband takes the matter no further. I fail to see how Madam Lau, an innocent party in the matter, loses her rights to payment because Mr Wong and the husband may have entered into some form of deceitful arrangement behind her back.

29. The evidence, in my view, is clear. Madam Lau was the beneficial owner of the shares. As such, she was the one entitled to payment and she remains so entitled.

Conclusion

30. For the reasons given above, I am satisfied that a dispute on substantial grounds has not been raised. There will therefore be a bankruptcy order in terms of the petition with costs to the Petitioner.