RE LAM LAI WAH SUSANNA

HCB2664/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDING NO.2664 OF 2002

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REASONS FOR DECISION

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Introduction

1. On 9 July 2002, after hearing the parties, I allowed the application of Ms Susanna Lam Lai Wah by a summons dated 7 June 2002 pursuant to section 33(1)(a) of the Bankruptcy Ordinance, Cap.6 ("the Ordinance"), ordering (1) that the bankruptcy order made against her on 22 May 2002 ("the Bankruptcy Order") be annulled, (2) that the bankruptcy petition filed on 7 February 2002 ("the Petition") and the statutory demand ("Statutory Demand") be set aside and (3) that a notice of the annulment of the Bankruptcy Order be gazetted by the Official Receivers at the costs of the petitioner. I indicated that I would give my full reasons in writing, which I now do.

2. The events leading to this application may be summarised as follows.

District Court action and Default Judgment

3. Ms Lam has since 1988 been working as an insurance agent. Towards the end of 1993, she joined New Zealand Insurance Company Limited as a unit manager. About one month later, NZI was taken over by Top Glory Insurance Company (Bermuda) Limited. Several months later, she left Top Glory. Subsequently, Top Glory changed its name to Pacific Century Insurance Company (Bermuda) Limited. (Top Glory and PCI for present purposes are referred collectively as the Petitioner.) During her employment, she signed an agency agreement with the Petitioner dated 21 March 1994 ("the Agency Agreement"). Ms Lam's address was stated therein as 1st floor, 340 Nam Wai, Sai Kung, New Territories, Hong Kong ("the Sai Kung address").

4. On 27 August 1998, the Petitioner commenced District Court Action DJJC No.16676 of 1998, claiming against Ms Lam for a loan of HK$80,937.76 made to her since 3 May 1994. In November 1999 the Petitioner applied to the district judge for an order for substituted service of the writ. The application was supported by an affirmation of Mr Roy Chan, the handling solicitor ("Mr Chan"), dated 24 November 1999. Mr Chan deposed that the Sai Kung address was the usual and last known address of Ms Lam, that he personally attended the Sai Kung address on 15 September 1999, that he was told by a gentleman living on the ground floor of the premises that Ms Lam had moved out three years ago, that the first floor was then vacant, and that Mr Chan visited the first floor and knocked on the door but no one answered. Mr Chan went on to say that he had made all reasonable and practicable efforts to serve the writ but without success. He verily believed that Ms Lam was evading service. On 7 December 1999, the district judge made an order for substituted service of the writ by advertisement in Oriental Daily News and by prepaid ordinary post at the Sai Kung address. However, the substituted service was not effected until 21 July 2000. (The reasons for such delay are not apparent from the evidence before me.) In the event, the Petitioner obtained a default judgment on the sum claimed with interest and costs on 31 October 2000 ("the Default Judgment").

Garnishee proceedings

5. On 6 January 2001, the Petitioner applied ex parte for a garnishee order nisi under Order 49 of the District Court Rules. Mr Chan made four affirmations all dated 5 January 2001 in support. In these affirmations, Mr Chan deposed that the Petitioner had instructed him that (1) Ms Lam was then working for four insurance companies of the AIA group and (2) that her last known addresses were that of these companies. The application failed because it did not comply with Order 49 rule 2(c) of the District Court Rules.

Bankruptcy proceedings

6. In September 2001, the Petitioner, represented by another law firm, commenced bankruptcy proceedings in the High Court. The same firm of solicitors at the same time took over the conduct of the District Court action. The following events took place.

7. On 22 September 2001, at about 11:40 a.m., Mr Wong Wai Chuen ("Mr Wong"), a litigation clerk, attempted to serve the Statutory Demand on Ms Lam at the Sai Kung address, which naturally failed. An occupier there told him that Ms Lam had moved out for more than five years. The Petitioner instructed Mr Wong that it was not aware of any other address of Ms Lam. Mr Wong deposed in his affirmation dated 22 November 2001 that he had made all reasonable and practicable efforts to serve the Statutory Demand on Ms Lam but had been unable to do so. On 30 October 2001, he caused an advertisement of the Statutory Demand in the Oriental Daily News, giving Ms Lam 21 days to comply. Mr Wong exhibited a record of the Hong Kong Federation of Insurers provided by the Petitioner obtained through the internet showing that Ms Lam was within jurisdiction as she was still an insurance agent working for the same AIA companies ("the Record").

8. Mr Wong's affirmation was made to support an application for leave to file the Petition. In response to certain enquiries made by the master, Mr Wong made a second affirmation dated 7 January 2002. There he expanded further on the attempted service he made on 22 September 2001. He went on to say that on 3 January 2002, at about 8:50 p.m., he attended the Sai Kung address again with a view to serving the Statutory Demand on Ms Lam, which again failed. He left an appointment letter of the same date at the letter box. On the following day, he received a call from a female occupier who told him that she just moved in the premises and she had no idea of Ms Lam's address or whereabouts.

9. Apparently, the master was satisfied with this affirmation. On 30 January 2002, she granted leave to file the Petition.

10. On 15 February 2002, at about 11:15 a.m., Mr Wong attempted to serve the Petition on Ms Lam again at the Sai Kung address, which like previous attempts failed. He left an appointment letter of the same date. On 21 February 2002, he received a call from the occupier of the premises who told him that she did not know Ms Lam and had no idea of her address or whereabouts. She also asked Mr Wong not to come at the appointed time on the same day. Mr Wong deposed in his third affirmation dated 22 February 2002 that he did not know the usual or last known address of Ms Lam other than the Sai Kung address and although he had made enquiries with the Petitioner for the purpose of ascertaining the same, he could not find the same. The Petitioner further confirmed to him that they did not know any other address of Ms Lam. He said he had made all reasonable and practicable efforts to serve the Petition on Ms Lam but had been unable to do so. He applied for an order of substituted service. The application was allowed by the master on 1 March 2002 whereby substituted service was to be effected by advertisement once in a Chinese newspaper widely circulated in Hong Kong and by prepaid ordinary post at the Sai Kung address.

11. The substituted service of the Petition was eventually effected on 1 April 2002 (by post) and on 13 April 2002 (by advertisement in Ming Pao Newspaper). On 22 May 2002, the Registrar made the Bankruptcy Order in the absence of Ms Lam.

Ms Lam's complaints

12. In her two affirmations filed on 7 June and 6 July 2002, Ms Lam made a number of points. First, she had moved out of the Sai Kung address since 1995. Second, she had never evaded service. Third, she had not been served with any of the court documents in the District Court action, the Statutory Demand or the Petition. Fourth, she denied the loan and complained that the District Court claim lacked particulars. Fifth, she was advised that the Default Judgment was irregular. Sixth, referring to the garnishee proceedings, she noted that the four affirmations of Mr Chan correctly stated that she worked as an agent for the four insurance companies with details of their addresses. The Petitioner could have obtained her information by making enquiry with the companies concerned or with the Hong Kong Federation of Insurers. Seventh, she complained that it was unreasonable for the Petitioner to serve the Statutory Demand and the Petition at the Sai Kung address. The Petitioner had not taken all reasonable steps or efforts to effect service of these documents on her. She complained that these bankruptcy proceedings were used by the Petitioner to apply pressure on her. Finally, she denied the allegation of Mr Wong that the Record was unreliable.

13. This completes the evidence. It should be noted that the Default Judgment has not been set aside yet. It is still subsisting. The attack launched by Mr Cheung, counsel for Ms Lam, focused on the service of the Statutory Demand and the Petition. In the course of submissions, he did make criticism on the service of the process in the District Court action. For present purposes, it is not necessary for me to express my view on those matters. If need be, the district judge or master in dealing with an application to set aside will determine them.

Statutory scheme

14. The main issues concern service of the Statutory Demand and the Petition. The importance of proper service of a statutory demand and a bankruptcy petition on the alleged debtor in a creditor's petition, as is the case here, can be gathered from the statutory scheme as provided in the Ordinance and the Bankruptcy Rules ("the Rules"). To this I now turn.

15. Under section 6(2) of the Ordinance, a creditor's petition may be presented to the court in respect of a debt if but only if at the time the petition is presented, among other things, the debt is a debt which the debtor appears to be unable to pay or to have no reasonable prospect of being able to pay. Section 6(2) is subject to sections 6A to 6C. For present purposes, only certain parts in section 6A are pertinent. In essence, those parts provide that (1) the debtor appears to be unable to pay the debt concerned if but only if the debt is immediately payable and the debtor has not complied with the statutory demand served on him and (2) the debtor appears to have no reasonable prospect of being able to pay the debt if but only if the debt is not immediately payable and the debtor has not complied with the statutory demand served on him.

16. Proper service of the statutory demand on the debtor is thus a pre-requisite for the commencement of bankruptcy proceedings under section 6A if the petition must have been preceded by the demand.

17. The requirements as to service of a statutory demand are found in rules 46 and 49 of the Rules.

18. Rule 46 provides :

" (1) Rule 49 has effect as regards service of the statutory demand, and proof of that service by affidavit to be filed with a bankruptcy petition.

(2) The creditor shall do all that is reasonable for the purpose of bringing the statutory demand to the debtor's attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected.

(3) Where the statutory demand is for payment of a sum due under a judgment or order of any court and the creditor knows, or believes with reasonable cause -

(a) that the debtor has absconded or is keeping out of the way with a view to avoiding service; and

(b) there is no real prospect of the sum due being recovered by execution or other process,

the demand may be advertised in one or more newspapers; and the time limited for compliance with the demand runs from the date of the advertisement's appearance or (as the case may be) its first appearance."

Mr Wong, counsel for the Petitioner, conceded that Rule 46(3) does not apply here.

19. The relevant provisions in Rule 49 read :

" (1) Where under section 6A of the Ordinance the petition must have been preceded by a statutory demand, there must be filed in court, with the petition, an affidavit proving service of the demand.

(2) ...

(3) ...

(4) ...

(5) If neither paragraph (3) nor (4) applies, the affidavit must be made by a person having direct personal knowledge of the means adopted for serving the statutory demand, and must -

(a) give particulars of the steps which have been taken with a view to serving the demand personally;

(b) state the means whereby (those steps having been ineffective) it was sought to bring the demand to the debtor's attention; and

(c) specify a date by which, to the best of the knowledge, information and belief of the person making the affidavit, the demand will have come to the debtor's attention.

(6) The steps of which particulars are given for the purposes of paragraph (5)(a) must be such as would have sufficed to justify an order for substituted service of a petition.

(7) If the affidavit specifies a date for the purposes of compliance with paragraph (5)(c), then unless the court otherwise orders, that date is deemed for the purposes of these rules to have been the date on which the statutory demand was served on the debtor.

(8) ...

(9) The court may decline to file the petition if not satisfied that the creditor has discharged the obligation imposed on him by rule 46(2)."

20. Rule 49(3) and (4) relate to personal service, which is not the case here. I should add that in the past, there was no procedure in place for the vetting of petitions before they were filed under Rule 49(9). The lacuna was addressed on 8 February 1999 when a system was introduced in the High Court Registry whereby the master in charge of the Bankruptcy List vets the information of service of the statutory demand for compliance with the rules prior to the filing of the petition. Recently, the vetting procedure is enshrined in a new practice direction which will come into effect on 15 July 2002.

21. These requirements as to service must be strictly adhered to because of the importance of establishing with certainty the period within which a debtor has to comply with the statutory demand. Non-compliance gives rise to consequences which go far beyond those that would follow from any ordinary action : International Bank of Asia Ltd, a creditor, HCB 865, 866, 867 & 868/1998, unreported, per Le Picheon J (as she then was) at p.8. She held that it was not sufficient because somehow the statutory demand came to the notice of the debtor.

22. Rule 46(2) requires a creditor to do all that is reasonable for the purpose of bringing the statutory demand to the debtor's attention depends on the circumstances of the case. Whether a creditor has done all that is reasonable must be judged objectively but in the light of the information actually or constructively available to the creditor at the time of the service : see Re Li Wai Man, ex parte Hang Tung Securities Limited [1999] HKCU 1310, per Yuen J (as she then was). The rule clearly envisages personal service if practicable in the particular circumstances. If personal service is impracticable (and there must be good reasons to demonstrate that that is the case), other modes of service are permissible provided that they are reasonable within the meaning of the rule.

Service of the Statutory Demand

23. What is in issue here is whether the Petitioner had acted reasonably for the purpose of bringing the Statutory Demand to the attention of Ms Lam. In my view, the answer is no. I will explain why below.

24. As early as November 1999, the Petitioner knew that Ms Lam did not live at the Sai Kung address. When the garnishee proceedings were taken out in January 2001, it was the Petitioner's evidence adduced in support of the application that the usual and last known addresses were those of her employers. But when the Statutory Demand was to be served on Ms Lam in September 2001, the Petitioner gave instruction to Mr Wong that the last known address of Ms Lam was the Sai Kung address. They also confirmed that they knew of no other address. This is in direct contradiction of their case back in January 2001. On the materials before me, there is simply no explanation why the Petitioner would in September 2001 regard the Sai Kung address as Ms Lam's last known addresses again. Nor is there any explanation why the Petitioner did not relate to their solicitors Ms Lam's employers addresses and instruct them to attempt to serve the Statutory Demand on Ms Lam at those addresses. I reject Mr Wong's allegation that the Record was unreliable. It confirmed Ms Lam's employment status and it was relied on by Mr Wong to support the application for leave to file the Petition. In the absence of any satisfactory explanation, I have considerable doubt if personal service was impracticable in the circumstances.

25. I accept that service of a statutory demand by advertisement in newspaper, as is the case here, is not limited to a Rule 46(3) scenario. But if this particular mode of service is to be adopted, Rule 46(2), 49(5) to (7) must be satisfied : see Re Li Wai Man, ex parte Hang Tung Securities Limited, above. I am not satisfied that the circumstances of the present case would have justified an order for substituted service of a petition : see Rule 49(6). Indeed, in my view, had the master been made aware of all the circumstances, she would not have been satisfied that the Statutory Demand had been duly served on Ms Lam. She certainly would not have granted leave to file the Petition.

Service of the Statutory Demand

26. I now turn to the service of the Petition. Rule 59 of the Rules provides :

" (1) Service of a creditor's petition shall be effected by the creditor or his solicitor, or a person in their employment, delivering a sealed copy of the petition to the debtor.

(2) If the court is satisfied by affidavit or other evidence on oath that prompt personal service cannot be effected because the debtor is evading service of the petition or any other legal process, or for any other cause, it may order substituted service to be effected in such manner as it thinks fit.

(3) Where an order under paragraph (2) has been carried out, the petition shall be deemed to have been duly served on the debtor."

27. For the same reasons set out above, I am of the view that the master would not have made the order for substituted service had she been apprised of all the relevant facts.

Conclusion

28. The irregularity in service of both the Statutory Demand and the Petition was fatal. In the circumstances, I am satisfied that the Bankruptcy Order ought not to have been made. It is therefore annulled. Further, the irregularity in the service of the Statutory Demand was such that the court ought to have declined the filing of the Petition. The Petitioner, if they so desire to pursue against Ms Lam, must start afresh. I therefore also set aside the Statutory Demand and the Petition.