RE LAU WING

HCB 10760/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 10760 OF 2004

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J U D G M E N T

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1.  This was the hearing of a bankruptcy petition presented by the Bank of China (Hong Kong) Limited (“the Bank”) against Mr Lau Wing.  The petition was based on a judgment debt of HK$427,784.01 (plus further interest) under a District Court judgment obtained by the Bank against Mr Lau on 24 March 2003.  A statutory demand in respect of this debt was served on Mr Lau on 11 March 2004, but nothing was paid pursuant to it.

2.  At the hearing, Mr Lau did not dispute his liability to pay the Bank the judgment debt, which arose from a guarantee (limited to HK$400,000) which he had given to the Bank in 1998 as security for the debts of a firm called Battery City, which was operated by a friend or acquaintance of his, Mr Ma Sai Chung (“Mr Ma”).  However, Mr Surman, appearing for Mr Lau, submitted that no bankruptcy order should be made, as Mr Lau had a reasonable prospect of being able to pay his debts.

3.  The basis of this submission was that Mr Lau was the owner of a property that had been charged by Mr Lau to the Bank in 2001 as security for banking facilities granted to Hang Fat Trading Company (“Hang Fat”), another firm operated by Mr Ma.  The legal charge granted to the Bank over this property was an all monies legal charge, under which the property was charged to secure all liabilities of Hang Fat to the Bank.  The charge also provided that Mr Lau was personally liable to the Bank as a guarantor of such liabilities of Hang Fat.  Mr Surman submitted, however, that this legal charge was either void, or alternatively only enforceable to the extent of HK$800,000.  As the property was valued at HK$1.2 million in 2001, and was said by Mr Surman to be worth about HK$1.6 million today (although there was no evidence of this before me, Mr Surman suggested that I could take notice of the fact that property prices have increased since 2001 and infer that the property was at least worth more than HK$1.2 million today), Mr Lau had sufficient equity in the property to be able to repay the debt on which the petition was based, even if the charge were valid to the extent of HK$800,000.

4.  The bank does not agree that the legal charge over the property is either void, or only enforceable to the extent of HK$800,000.  It contends that it is fully enforceable in respect of all debts owed by Hang Fat to it, and that the extent of such debts means that there will be no surplus left over for Mr Lau if the property is sold, even if it is worth HK$1.6 million.  There are currently in existence other legal proceedings (HCMP No. 3439 of 2002) (“the HCMP proceedings) in which the Bank is seeking vacant possession of the property pursuant to the legal charge, and judgment against Mr Lau as guarantor in respect of all sums owing to it by Hang Fat.

5.  Mr Surman said that Mr Lau had, through his solicitors, suggested to the Bank that the property should be sold and the proceeds used to satisfy the debt on which the petition is based.  Unsurprisingly, given the view it takes as to the validity of the legal charge, the Bank has declined to do so.

6.  While accepting that if Mr Lau was unsuccessful in his defence of the HCMP proceedings he would have no prospects of being able to pay his debts, Mr Surman submitted that Mr Lau in fact had good prospects of succeeding in his defence to those proceedings, from which it followed that he did in fact have reasonable prospects of being able to pay his debts, so that the court should dismiss the petition under the power granted to it to do so by section 9(3) of the Bankruptcy Ordinance, which provides:-

“(3)     If the court ... is satisfied by the debtor that he is able to pay his debts or has a reasonable prospect of being able to pay them ... the court may dismiss the petition.”

7.  Mr Ng, appearing for the Bank, submitted that:-

(1)	a bankruptcy order should be made regardless of the merits of Mr Lau’s defence in the HCMP proceedings, because it was plain that Mr Lau was presently in no position to pay his debts; and
(2)	even if it were relevant to have regard to the HCMP proceedings, it was clear that Mr Lau’s prospects of success in such proceedings fell far short of whatever might be required to justify the court in declining to make a bankruptcy order against him.

8.  Having regard to the conclusion to which I have come in relation to the second question, I propose to deal with that first.

9.  As to this, it seems to me that it is necessary for Mr Lau to establish that he has (at least) reasonable prospects of succeeding in his defence to the HCMP proceedings.  If he does not have such prospects, it would not be possible for him to suggest that he has reasonable prospects of being able to pay his debts.  Although this threshold is, in my view, a higher one than would arise in the context of an inquiry as to whether a debtor has shown a bona fide dispute of substance in relation to a debt on which a bankruptcy petition is based, the outcome would in this case have been the same whichever test were applied.

10.  Mr Lau did not put before me any of the evidence filed in the HCMP proceedings.  His case is contained in his affirmation filed in opposition to the petition.  In that affirmation, he describes his relationship with Mr Ma, the circumstances in which he came to decide to assist Mr Ma in relation to the facilities to be granted to Hang Fat, and the circumstances in which he signed the legal charge.

11.  Mr Lau says that he was educated up to the level of Form 2 in 1941, and had worked for 35 years as a clerk with the Standard Chartered Bank from 1948 until 1983.  His duties were mainly data entry and checking.  He has known Mr Ma for over 25 years, having first met him while working for Standard Chartered Bank.  He says that he trusted Mr Ma, who seemed to be an honest and successful businessman.

12.  Mr Lau described (in paragraph 7 of his affirmation) how he came to give a the guarantee of Battery City’s debts in 1998.  He says that Mr Ma told him that he wanted to expand Battery City’s business, and that the Bank had agreed to grant Battery City an overdraft facility, but required a personal guarantee.  Mr Ma assured him that Battery City would be able to service and repay that overdraft, and that there would be another guarantor (a Mr Au) apart from Mr Lau.  Mr Lau decided to support Mr Ma and gave the guarantee.  There is no suggestion of any undue influence or misrepresentation in relation to this guarantee.

13.  Mr Lau then described (in paragraph 8 of his affirmation) the way in which he agreed to provide the legal charge for Hang Fat’s debts.  He says that Mr Ma came to him in April 2001 to ask for more help, saying that he had used up his overdraft facilities, and that the Bank would only give him further credit if he could provide some property as security.  Mr Ma asked him to charge the property which he owned to the Bank to enable Mr Ma to obtain a further facility of HK$800,000.  Mr Ma claimed that he was owed some money, which would bring in enough money to pay off all his debts to the Bank, and that this was just a matter of time.  Mr Lau says that he finally agreed to help Mr Ma out in consideration of their long friendship, thinking that at worst, he would lose up to HK$800,000.

14.  Mr Ma later went with him to the Bank’s solicitors.  There, a Mr Kenneth Tse (“Mr Tse”) told Mr Lau that his firm was acting for the Bank in relation to the execution of the legal charge.  He also said that the property was to be charged as security in connection with an advance of HK$800,000 to be made by the Bank to Hang Fat, and provided Mr Lau with the legal charge, and a facility letter, for signature.  The facility letter made reference to an advance of HK$800,000.  Mr Lau signed the documents, without having them read or explained to him, and without being told that he should consider getting independent legal advice before signing them.  Mr Lau’s evidence as to what was said by Mr Tse has not been disputed by the Bank.

15.  Mr Lau says that it was not until he consulted solicitors on receipt of the Originating Summons in the HCMP proceedings that he became aware that the legal charge was an all monies legal charge, under which he was liable for all monies owing by Hang Fat to the Bank.  He says that had he realised that he was making himself liable for potentially far more than HK$800,000, he would not have charged his property for Mr Ma’s benefit.

16.  Mr Lau goes on to allege that his signing the legal charge was due to misrepresentation or undue influence by the Bank or its agents, so that as he was neither told of the true effect of the legal charge, nor advised to take independent legal advice, the charge should be unenforceable against him.

17.  So far as misrepresentation is concerned, Mr Surman acknowledged in the course of his submissions that on the basis of the material in Mr Lau’s affirmation, there was not much material in support of this allegation.  For my part, I am unable to see that there is any evidence of misrepresentation by the Bank or its agents.  There is no suggestion that Mr Ma was acting as the Bank’s agent in connection with this transaction.  Thus, nothing that he may have said or done can have any effect on the Bank’s position.  So far as Mr Tse, the Bank’s solicitor, is concerned, I am unable to see that anything which he said could amount to a misrepresentation.  He may have informed Mr Lau that the charge was in connection with a loan or advance of HK$800,000, but this was in fact the case.  There is no suggestion that he in any way misrepresented the effect of the legal charge.  On the contrary, it is said that he said nothing about its terms or effect.  Although the facility letter did mention a loan of HK$800,000, it was also clear from its heading that what was being taken was an all monies legal charge.

18.  In these circumstances, I am unable to see that a claim that the legal charge is void for misrepresentation has any, let alone any reasonable, prospects of success.

19.  So far as undue influence is concerned, I am afraid that I do not consider Mr Lau’s position, on the evidence before me, to be any better.

20.  It is well established that for a party to a contract to be affected by the fact that the other party’s apparent consent to entering into the contract has been procured improperly, by the exercise of undue influence by some third party, it is necessary to show three things:-

(1)	that the other party was procured to enter into the guarantee by the exercise of undue influence over him;
(2)	that the party relying on the contract wasput on inquiry as to whether or not the other party understood the implications or consequences of entering into it;
(3)	if so, that the party relying on the contract took reasonable steps to satisfy itself that the other party understood such implications or consequences.

21.  Dealing first with the first of these points, so far as undue influence by the Bank or its agents is concerned, there is nothing in Mr Lau’s affirmation to suggest that any such influence was exercised over him by either the Bank itself or any person who could be regarded as its agent.

22.  At the hearing, however, Mr Surman submitted that it was strongly arguable that undue influence had been exercised by Mr Ma over Mr Lau.  He relied on the fact of entering into the earlier guarantee and the legal charge, neither of which could have been for the benefit of Mr Lau, as indicating the existence of a relationship of trust and confidence and the exercise of undue influence over Mr Lau by Mr Ma.

23.  With respect, I am unable to agree.  Nothing in Mr Lau’s evidence suggests that he regarded, or regards, the relationship between himself and Mr Ma as one in which he reposed such trust and confidence in Mr Ma as to place Mr Ma in a position of ascendancy over him.  On the contrary, the evidence indicates that Mr Lau regarded Mr Ma as a friend, whom he was willing to assist, apparently after having considered matters for himself.  While it is of course possible for undue influence to exist in a relationship between friends, it seems to me that it is necessary for some evidence, at least, as to the nature of the relationship to be put forward, from which the court can properly find that the relationship was such that one party had gained an ascendancy over the other, so as to be able to dominate or influence that other to act in a way which was contrary to his best interests, before any such finding can be made.  While the question of whether undue influence existed in any given case is undoubtedly a question of fact, which can generally only be resolved after trial, it is necessary for there first to be some evidence of undue influence before the question can arise for resolution.  In this case, there does not appear to me to be any such evidence.

24.  I do not consider that, save in wholly exceptional cases, one can reason backwards, from the apparently disadvantageous nature of the contract entered into, to conclude that there must have been undue influence.  People do enter into guarantees and other obligations, of no ostensible benefit to themselves, out of friendship and for other reasons not involving the exercise of undue influence over them.

25.  Thus, it does not seem to me that the evidence in this case establishes that there was any undue influence exercised over Mr Lau by Mr Ma (or by anyone else), and Mr Lau’s case based on undue influence therefore falls at the first hurdle.

26.  Further, I would also add that I do not think that it could be said that Mr Lau has a strong case for saying that, had there been any undue influence exercised by Mr Ma, the Bank should have been put on inquiry.

27.  I do not think that the fact that he was accompanied by Mr Ma to the Bank’s solicitors should have put them on notice that he might not understand the consequences of signing the legal charge.

28.  Further, the fact that Mr Lau had given a previous guarantee to support Mr Ma’s business ventures (in respect of which it is not suggested that there was any undue influence) would also, I think, tend to lead the Bank to believe that there was nothing unusual about his providing further support for such ventures.

29.  Finally, although Mr Surman suggested that the extent of the liability being undertaken was much greater on this occasion, and that while Mr Lau was willing to put his property at risk, it did not follow that he was willing to go further, and put himself at risk of being made bankrupt, I think it should be borne in mind that Mr Lau was (even on his own case) willing to grant a legal charge of up to HK$800,000 to assist Mr Ma.  This was itself a significant increase on his previous liability.  Although it may have been that there was sufficient equity in the property to cover such a liability and the existing liability under the guarantee, this would only remain the case so long as the property maintained its value.  If its value were to drop, the position would be that even if the charge were limited to the extent alleged by Mr Lau, there would not be sufficient surplus to discharge his liability under the guarantee, and he would accordingly still be at risk of being made bankrupt.

30.  I therefore am not persuaded that the Bank would have been put on notice that Mr Lau might not have understood the consequences of signing the legal charge.

31.  Having regard to my conclusions as to the merits of Mr Lau’s defences to the claim in the HCMP proceedings, I am unable to say that I am satisfied that he has reasonable prospects of being able to pay his debts, and will therefore make a bankruptcy order against him.

32.  In these circumstances, it is not necessary to deal with Mr Ng’s first point.  However, it seems to me that there is also considerable force in that point.  The position at present is that Mr Lau is unable to pay his debts.  His only prospect of doing so would be if his defence to the HCMP proceedings succeeded, which might not be until some considerable time has elapsed.  There is no suggestion that he has any other means to pay the debt on which the petition is based.  In these circumstances, it seems to me that it would be open to the court to make a bankruptcy order against him, on the grounds that he is unable to pay his debts.

33.  Had the HCMP proceedings involved some party other than the Bank, it would avail Mr Lau nothing to say that he was expecting, at the end of those proceedings, to be in a position to pay his debts, although he was not presently able to pay them.  In general, a creditor with an undisputed debt is entitled to expect it to be paid, failing which he is entitled to exercise any course of action open to him, including petitioning for the debtor’s bankruptcy.  The making of a bankruptcy order would not shut out Mr Lau’s defence of the other proceedings, since the trustee could either carry on such defence, or (more likely) invoke it (if he thought it had merit) in the context of any proof of debt lodged in the bankruptcy by the plaintiff in the other proceedings.  I do not see that the position is any different simply because the plaintiff in the other proceedings happens to be the petitioning creditor.

34.  Had it been necessary to do so, I would have made a bankruptcy order against Mr Lau on this basis also, and I shall therefore make the usual bankruptcy order against Mr Lau with costs.