RE LI LIU ZHU

HCB 6751/2019

[2020] HKCFI 2194

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6751 OF 2019

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J U D G M E N T

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1.  There is before me a creditor’s petition (“the Petition”) filed on 1^st  November 2019 by one Mr Shih Chia Cheong (“the Petitioner”). 

2.  By a judgment in District Court civil proceedings, DCCJ 1378/2013, entered on 17 September 2018, Madam Li Liu Zhu (“the Debtor”) was adjudged to pay the sum of HK$1 million, together with interest and costs from 19 April 2013.

3.  The Petition also relies on two further costs order dated 5 March and 15 March 2019 in the aggregate sum of HK$110,000. As at 1 April 2019, the Debtor was said to be indebted to the Petitioner in the aggregate sum of HK$1,586,494.38.

4.  On 26 March 2020, Anthony Chan J gave directions for the filing of evidence and for the Petition to be adjourned for argument with three hours reserved. 

5.  This is the hearing before me today. 

6.  The costs orders referred to above arose because the Petitioner had commenced proceedings against the Debtor in the District Court, seeking possession of her matrimonial home which was in the name of the Petitioner, but which the Debtor claimed the Petitioner did not have beneficial interest.

7.  The Debtor opposes the Petition on the basis either that she is “able to or have a reasonable prospect of being able to repay the debt.” 

8.  She, together with her son, are the only two beneficiaries of the estate of Mr Shih Chia Ying, who passed away intestate on 8 January 2008 (“the Husband”). 

9.  The Debtor married her Husband in 2003, and in 2005 their son was born.  He is still currently a minor.  The estate, as I understand it, is comprised of two main assets; originally three properties held under the name of the Husband, one of which was sold for slightly over HK$16 million, and 10 units of what appear to be industrial property held through a corporate vehicule, one Ying Lee Fat Company Limited (“YLF”). 

10.  YLF is, on its face, 60 per cent held by the estate and 40 per cent by the Petitioner, although I note that the Debtor suggests that that 40 per cent is held by the Petitioner on trust for her Husband, and now the estate. 

11.  The Debtor calculates the estate to be worth in excess of HK$56 million, and therefore prima facie, her share would be worth  in excess of HK$28 million. 

12.  Originally, the Petitioner and the Debtor were the administrators of the estate. 

13.  In 2012, they were replaced by professional administrators, by an order made by Lok J on 26 September 2012.  To date, no distribution has been made and the Debtor, as a widow looking after her minor son and with no income, obviously faces some hardship as a result. 

14.  I should mention that in HCMP 1891/2011 (“the HCMP Proceedings”) the administrators are apparently advancing the claim that the Debtor had taken some assets out of the estate. 

15.  Mr Brian Lo who appeared on behalf of the Debtor has taken me to two letters from the brokers dated February 2008 and July 2014 respectively, which tended to suggest that those shares (ie the assets which the administrators alleged were taken out of the estate by the Debtor) were held in an account where both the Husband and the Debtor were joint tenants with right of survivorship, and therefore, a large chunk of the claim in the HCMP Proceeding, he submits, were bound to fail and therefore misconceived. 

16.  I should also mention that in the HCMP Proceedings, the administrators allege that the Debtor had taken rental income in the sum of approximately HK$3.3 million. 

17.  All in all, the Debtor’s position is that, at most, the administrators claim would only amount to HK$8.5 million at its highest, and therefore that her entitlement, even after those setoffs, would still be in the region of HK$20 million. 

18.   Finally, the Debtor deposes to the fact that there are ongoing without prejudice negotiations with the administrators for an interim distribution to be made, which if made, would extinguish or satisfy the Petitioner’s debt.

LEGAL PRINCIPLES AND ANALYSIS - LEGAL PRINCIPLES

19.  There was a technical and narrow dispute on the applicable legal principles as applied to the present facts. 

20.  This was centred on section 6 and section 9 of the Bankruptcy Ordinance (“the Ordinance”); in particular, whether it is sufficient, in present circumstances where a debtor is unable to pay her debts but says she has a reasonable prospect of being able to pay them, then what the legal consequence would flow from that  in that scenario. 

21.  Mr Brian Lee, who made succinct and persuasive submissions on behalf of the petitioner drew my attention to two recent authorities. 

22.  The first one was a decision of Madam Justice Linda Chan  in Re Margaret Chiu, a judgment dated 22 April 2020 [2020] 2 HKLRD 1118.  In that case, the debtor sought to argue that she had “reasonable prospect of succeeding” in certain proceedings brought against the administratrix for interim distribution of the estate, and therefore that it was only a matter of time before which the debtor would receive, “her undisputed entitlement under the estate”, which she believed to be in that case in excess of $80 million.

23.  Counsel for the debtor there further submitted that in considering whether the debtor had a reasonable prospect of being able to pay the petitioning debt, the test was whether the debtor could pay it out of cash or readily realisable assets in his hands, relying on Sandell v Porter (1966) 115 CLR 666, and for that purpose, that no regard should be given to “future contingencies” or “future income” as such contingencies and income may or may not be available, citing the decision of DHCJ To in Re Lam Ngai Fung Tony, HCB 4641/2001 dated 3 December 2001.

24.  Her Ladyship held that, paragraphs 38 and 39:

“ I do not think the argument assists the debtor, as the petition is based on the debtor’s ‘inability to pay’ a debt which is payable immediately (under s 6A(1)(a), rather than ‘no reasonable prospect of being able to pay a debt which is not immediately payable’ (a separate limb under s 6A(ii)). For the reasons stated at paragraphs 31-32 above, the petitioner has establish the debtor’s inability to pay the petitioning debt for the purpose of s 6(2)(c) of the Ordinance.”

25.  Although not included in the dicta, on those particular facts, I note that her Ladyship also noted that:

“ Despite a lapse of 15 months since her enquiry made with the Administratrix, the debtor is still unable to say what is the value of entitlement under the Estate or when she will receive distribution. While the debtor may have done all that she could in obtaining an account of and an interim distribution from the Estate, I consider a reasonably hypothetical creditor in the position of the petitioner would say enough is enough, and did not want to wait until the debtor receives distribution from the Estate. This is particularly so when the full extent of the debtor’s liabilities remains unclear, such that it is possible that some creditors will take enforcement action against any distribution which will be paid to the debtor. If this happens, the debtor will not be able to apply the distribution from the Estate to pay the judgment debt.”

26.  The above dicta was cited with approval and applied in the recent decision of DHCJ Laurence Li, SC, Re Chen Yen Fai (18 June 2020), where at paragraphs 14 and 15, he held as follows:

“ Moreover, [the debtor’s] case is legally wrong. He is essentially arguing that, even when a debtor is unable to pay his debt which has fallen due, as long as he can show a reasonable prospect of becoming able to pay, he would be entitled to more time under section 6D(i) of the BO and (as the logic would naturally go) a petition against him should be dismissed under section 9(iii). This is an incorrect reading of section 6D(1) and 9(3).

       Section 6(ii)(c) of the Bankruptcy Ordinance allows a creditor to petition against a debtor on a debt which ‘the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay the debt’ (underlining added).  When sections 6D(1) and 9(3) speak of ‘no reasonable prospect of being able to pay’, they are referring to where the creditor had petitioned on that ground, not where the creditor had petitioned on the ground that the debtor is simply and already unable to pay.  See: Re Margaret Chiu (supra).”

15.   It would appear that prior to the decision in Re Margaret Chiu that proposition was not made as clearly, at least as the Hong Kong authorities stood, although I note that that position is consistent with the decision made by Barma J (as Barma JA then was) in Re Lau Wing, (unreported, 31 October 2005). 

16.   In response, Mr Brian Lo skilfully and fairly sought to argue that I should not follow those two decisions, and that in any event, those decisions were distinguishable. 

17.   I would respectfully agree with the dicta of Madam Justice Linda Chan and DHCJ Laurence Li, SC in the two cases mentioned above.

18.   It seems to me that those statutory provisions are to be construed strictly.

19.   However, they do not detract from the wide jurisdiction that the Court has in its bankruptcy jurisdiction to adjourn, or on occasion to stay, a petition for a short period if it is satisfied on the evidence before it that it would be appropriate and that the circumstances otherwise justify it.

20.   For example, where it can be demonstrated by a debtor on the evidence with sufficient certainty that sufficient funds would come in very shortly, or at least shortly the Court may (not must) consider a short adjournment appropriate.

21.   Notwithstanding the width of that jurisdiction, and the flexibility of its exercise, the starting point is of course always that a creditor who relies on a judgment debt is prima facie entitled to seek a bankruptcy order.  How and when to exercise that jurisdiction would depend on specific facts of the case before it.

DISCUSSION

22.   As explained above, the Court does not consider that the Debtor can rely on the “no reasonable prospect of being able to pay a debt” limb to defeat the Petitioner’s entitlement. 

23.   However, the ability to pay the sum sought would be a relevant consideration.  The court is prepared to proceed on the assumption that there is a reasonable prospect that the Debtor will eventually receive some distribution (there being some uncertainty depending on at least the following:  volatility of property prices, fees incurred by the administrators and the result of the extant HCMP proceedings). 

24.   On the present facts, the main hurdle faced by the Debtor is to establish the timing of such a payment.  Although the Debtor asks for a period of six months, on the evidence before the Court, there has not been established that there are good or solid or even real prospects that the payment would be made within that period. 

25.   One has to bear in mind that whilst the Husband passed in 2008 and administrators were appointed in 2012 and that the Petition itself was filed in November 2019, no interim payment or distribution has been made to date. 

26.   So whilst the court has sympathy for the plight and difficult circumstances (personal and familial) of the Debtor as explained above, on the evidence before it, it is unable to accede to any application to further adjourn the petition or otherwise stay it.

27.  For the same reasons, even if the applicable legal standard was for the Debtor to establish some reasonable prospects of repayment which I have ruled against above, on the facts before me, I do not consider that there are reasonable prospects of repayment, at least within a reasonable period from today. 

Disposition

28.  I therefore make the usual bankruptcy order with costs.

29.  I would further note that if and when a distribution is made by the administrator and such amount exceeds the Debtor’s debts, including that owed to the Petitioner, then no doubt the trustee in bankruptcy will take that consideration on board and make the relevant application if appropriate.

30.  I should note that the costs and other inconvenience associated with a Bankruptcy Order which would be later annulled or rescinded is a matter that I have taken into account in my decision above.

31.  It remains for me to thank parties’ counsel for their helpful assistance.