RE LAU WANG CHI, BARRY

CACV 147/2024

[2024] HKCA 490

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 147 OF 2024

(ON APPEAL FROM HCB NO 1018 OF 2024)

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REASONS FOR JUDGMENT AND DECISION ON COSTS

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Hon Kwan VP (giving the Reasons for Judgment and Decision on Costs of the Court):

1.  This is the appeal of the debtor, Lau Wang Chi Barry (“Debtor”) against the order made by Linda Chan J (“the Judge”) on 15 April 2024 (“Order”) on the first hearing of a bankruptcy petition brought by Cachet Asset Management Limited (“CAM”) and Cachet Multi Strategy Fund SPC (“CMS”). The relevant part of the Order provides as follows:

“AND UPON the Debtor’s undertaking not to oppose the Petition should he fail to make payment into Court or secure the Sum to the satisfaction of the Petitioners pursuant to paragraph 1 below

IT IS ORDERED that:-

1. The Petition be adjourned for hearing on 3 June 2024 at 10 a.m. on the condition that the Debtor makes payment into Court in the sum of HK$25,800,000 (“the Sum”) or secures the Sum to the satisfaction of the Petitioners on or before 4:00 p.m. on 20 May 2024;

2. The payment of HK$25,800,000 shall remain with the Court pending the determination of the appeal in CACV 371/2022 or the dismissal of the Ladd v Marshall applications (whichever is earlier);”.

2.  The sum ordered to be paid into court is the full amount of the petition debt.

3.  The Debtor filed a notice of appeal against the Order on 16 April 2024 seeking to remove the condition imposed in the Order for adjourning the petition. We heard the appeal on an expedited basis.

4.  At the conclusion of the hearing, we allowed the appeal to the extent of varying the condition such that the amount to be paid into court was reduced by half. These are the reasons of the court.

Background

5.  The relevant background matters for present purpose may be briefly stated as follows.

6.  On 12 August 2022, Cheng J granted summary judgment for CAM and CMS on their counterclaim against the plaintiffs in HCA 494/2021 (“Order 14 Judgment”)[1]. The Debtor is the 3^rd plaintiff and the sole shareholder and director of the 1^st and 2^nd plaintiffs, Grade One Limited (“GOL”) and Surplus Gain Global Limited (“SGGL”). The 1^st defendant, Chow Chin Yui Angela (“Angela Chow”), controls the Cachet group of companies, including CAM and CMS, who are the 3^rd and 4^th defendants.

7.  CAM had counterclaimed against GOL, SGGL and the Debtor for outstanding principal, interest and default interest under the Facility Agreement of 29 November 2019. CMS had counterclaimed against SGGL and the Debtor for the outstanding commencement amount, interest and default interest under the Supplemental Deed of 24 April 2020.

8.  GOL, SGGL and the Debtor filed a notice of appeal against the Order 14 Judgment on 8 September 2022. This is CACV 371/2022.

9.  On 6 February 2023, CAM and CMS served a statutory demand against the Debtor for the judgment sum in the Order 14 Judgment in the aggregate amount of HK$16,964,389.63 and £905,925.53. The Debtor made an application to set aside the statutory demand three days out of time. This is HCSD 6/2023.

10.  On 5 December 2023, GOL, SGGL and the Debtor filed a summons in CACV 371/2022 for leave to adduce new evidence on appeal (“1^st New Evidence Application”). The new evidence sought to be adduced is the 2^nd affidavit of the Debtor sworn on 4 December 2023 with an indexed and paginated bundle of documents, the affirmation of Henry Lee Him Wai dated 24 February 2023, and the affirmation of Henry Lee Him Wai dated 21 September 2023 filed under HCSD 6/2023.

11.  On 8 December 2023, GOL, SGGL and the Debtor filed a summons in HCA 494/2021 seeking a stay of execution of the Order 14 Judgment pending determination of their appeal in CACV 371/2022.

12.  On 22 December 2022, Cheng J heard the application for stay of execution and the application to set aside the statutory demand and dismissed both applications with costs on an indemnity basis. Reasons for her decision and judgment were given on 4 January 2024[2]. Mr Sussex, SC, who appeared for the Debtor throughout, indicated to Cheng J that for the purpose of the hearing, the reasoning in the Order 14 Judgment would not be challenged and instead he relied on a ground of appeal, which did not yet appear in the notice of appeal[3]. This ground is based on a claim that the Debtor’s former business partner, Paul Heffner (“Heffner”), who committed suicide on 31 December 2020, had obtained a loan from an entity related to the Cachet group to discharge the liabilities of GOL, SGGL and the Debtor under the Facility Agreement and the Supplemental Deed. Hence, GOL, SGGL and the Debtor were not liable to CAM and CMS.

13.  In rejecting this new ground of appeal intended to be raised, Cheng J had considered the new evidence sought to be adduced in the 1^st New Evidence Application. She concluded that GOL, SGGL and the Debtor have not shown any arguable, let alone strong, case that the new evidence demonstrates an arguable and believable defence that their liabilities under the Facility Agreement and the Supplemental Deed were discharged. Furthermore, this new ground of appeal is inconsistent with one of the key defences advanced at the Order 14 hearing in June 2022 (which defence is still relied on in the notice of appeal), namely, that it was represented to GOL, SGGL and the Debtor that CAM and CMS would not enforce the guarantees given by the Debtor and SGGL, the Facility Agreement and the Supplemental Deed.

14.  In light of her view that the minimum requirement of an arguable appeal was not established, Cheng J did not find it necessary to consider whether she would have exercised her discretion to order a stay of execution of the Order 14 Judgment.

15.  As it was accepted that the application to set aside the statutory demand stood or fell with the stay application, the application for extension of time to make the set aside application and the set aside application were dismissed. Cheng J ordered that CAM and CMS be authorised to present a bankruptcy petition against the Debtor forthwith.

16.  The bankruptcy petition based on the statutory demand was presented on 8 February 2024. This is HCB 1018/2024. The first hearing of the petition before a Master was scheduled on 9 April 2024 and before a judge on 15 April 2024.

17.  The Debtor filed a number of documents in CACV 371/2022 and HCB 1018/2024 on 2 and 3 April 2024.

18.  In CACV 371/2022, he filed the following documents:

(1)  supplementary notice of appeal

19.  This is to raise a further or alternative ground of appeal in that there is a triable issue whether the liabilities of GOL, SGGL and the Debtor under the Facility Agreement and the Supplemental Deed had, before the commencement of HCA 494/2021, been discharged with the proceeds of a loan of US$3 million made in or about October 2020 by Cachet Capital Investment Limited (“CCIL”) to Net Effect Limited (“Net Effect”)[4]. It is contended that there ought to be a trial of this issue because if such a loan was in fact made with the purpose of discharging the aforesaid liabilities, the defendants in HCA 494/2021 must have known about it. In such event, the Order 14 Judgment was obtained by fraud because the defendants have suppressed relevant evidence.

(2)  3^rd affidavit of the Debtor (“Debtor’s 3^rd CACV Affidavit”)

20.  In his 3^rd affidavit, he sought to address points in reply to the affirmation of Angela Chow filed on 30 January 2024 (in opposition to the 1^st New Evidence Application) and to adduce two further documents which are the subject of his second application to adduce new evidence. The two further documents are referred to as “Discussion draft (1)”[5] and “Discussion draft (3)”[6]. He also sought to explain why the evidence he now relies on has been provided to him in a piecemeal manner.

(3)  summons to adduce new evidence on appeal (“2^nd New Evidence Application”)

21.  The Debtor sought to adduce as new evidence his 3^rd CACV Affidavit, with the indexed and paginated bundle of documents marked “LWCB-3”.

22.  In HCB 1018/2024, the Debtor filed the following documents:

(1)  notice by debtor of intention to oppose petition

23.  The Debtor gave notice he intends to dispute the petitioning creditors’ debt on these grounds: (i) the Order 14 Judgment upon which the petitioning debt is based is subject to an appeal in CACV 371/2022, in particular based on the grounds in the supplementary notice of appeal; (ii) he issued two extant applications in CACV 371/2022 to adduce new evidence on appeal on 5 December 2023 and 2 April 2024; (iii) the appeal and the two New Evidence Applications are meritorious and at least have reasonable prospect of success; and (iv) there is a bona fide dispute of the debt on substantial grounds.

(2)  1^st affidavit of the Debtor

24.  This is filed in opposition of the bankruptcy petition. The Debtor referred to his affidavits and notices of appeal filed in HCA 494/2021, HCSD 6/2023 and CACV 371/2022. He contended that the petition should be dismissed or at least adjourned pending the determination of CACV 371/2022 or at least pending the determination of the two New Evidence Applications.

The hearing of the petition

25.  The first hearing came before the Judge on 15 April.

26.  Mr Eugene Kwan, who appeared for the petitioners before the Judge and on appeal, lodged skeleton submissions on 11 April 2024, seeking an immediate bankruptcy order. He drew attention to the fact that the Order 14 Judgment was obtained more than 19 months ago, that the Debtor’s applications for stay of execution of the judgment debt pending the appeal in CACV 371/2022 and for setting aside the statutory demand were dismissed by Cheng J on 22 December 2023, and that the New Evidence Applications were filed belatedly. He referred to Re Tam Mei Kam, CACV 87/2012, 8 May 2013 at §25.2 for the proposition that whilst a bankruptcy court may, in an appropriate case, stay the petition to await the result of an appeal, it need not do so in every case and may proceed to make a bankruptcy order if the judgment debtor fails to satisfy the court that he has reasonable prospect of succeeding in the appeal. He submitted that the Debtor’s appeal in CACV 371/2022 clearly has no reasonable prospect of success, as the new ground in the supplementary notice of appeal has been considered and rejected by Cheng J and the new evidence sought to be adduced in the 2^nd New Evidence Application would not assist the Debtor.

27.  Mr Sussex lodged his submissions on 12 April 2024. He submitted there is credible evidence that the liabilities of the Debtor and his companies (upon which the petitioning debt is founded) were discharged with the proceeds of a loan of US$3 million in about October 2020 by CCIL to Net Effect and the Order 14 Judgment was obtained by fraud. He contended that the two judgments of Cheng J were given when the evidence upon which the Debtor now relies was less clear and many of the questions posed in those judgments can now be answered. He referred also to Re Tam Mei Kam and submitted that the two New Evidence Applications and the appeal have reasonable prospects of success and invited the court to adjourn the petition pending the determination of the appeal or the dismissal of the New Evidence Applications, whichever is earlier.

28.  At the hearing before the Judge, both parties took her to the new ground in the supplementary notice of appeal and the new documents sought to be adduced in the 2^nd New Evidence Application. The entire hearing lasted for about 30 minutes, with a break of about an hour when the matter was stood down for Mr Sussex to take instructions after the judge indicated that an adjournment would only be granted on condition of the Debtor providing security in the amount of the petitioning debt and on the Debtor giving an undertaking he would not oppose the petition if he failed to comply with the condition within time. Although the Judge did not give detailed reasons for making the Order, we have been provided with a full transcript of the hearing.

The grounds of appeal

29.  As mentioned earlier, the main dispute is whether the condition imposed in the Order for adjourning the petition should be removed.

30.  Mr Sussex[7] raised 12 grounds in the notice of appeal against the Order. In gist, his main contention is that the Judge misdirected herself she was only entitled to look behind a judgment if it was obtained in default or by fraud. She did not consider whether the Debtor has reasonable prospects of success in his appeal and did not exercise a discretion at all but purported to follow a practice which was at variance with the principles stated in Tam Mei Kam where a bona fide appeal is pending. There is ample credible evidence from which the Judge could and should have concluded that the Debtor has reasonable prospects of success on the ground raised in his supplementary notice of appeal in CACV 371/2022. And the Judge had no power to make the Debtor undertake not to oppose the petition if he failed to make payment into court.

31.  Before discussing the Debtor’s main contention, the matter regarding the judge’s power to ‘make’ the Debtor give the undertaking may be dealt with first. Mr Kwan submitted that no appeal lies against an undertaking, since the giving of an undertaking is a voluntary litigation act of the litigant (even if given under threat of an order in the same terms or a more drastic order), and not a coercive order made by the court. Absent extraordinary circumstances, a litigant who wishes to cease to be bound by his undertaking should apply for release or discharge of the undertaking (either unconditionally or on condition of offering a new undertaking), rather than to pursue an appeal against the undertaking. The court’s power is only to grant or refuse the application for release. (Bell Davies Trading Ltd v Secretary of State for Trade and Industry [2005] BCC 564 at §104; Birch v Birch [2017] UKSC 53 at §5; Hart v Hart [2018] EWCA Civ 1053 at §60; Schettini v Silvestri [2019] EWCA Civ 349 at §21)

32.  The statements of principle submitted by Mr Kwan are supported by the cases he cited. But the cases also envisaged situations that are “not … a typical case” (Bell Davies at §105) or “extraordinary circumstances” (Schettini v Silvestri at §21), in which the court would entertain an appeal against an undertaking. In the present case, the Debtor’s appeal is against the condition imposed in the Order that the bankruptcy petition be adjourned upon his payment into court or providing security of the petitioning debt, although he also complained about the undertaking he was asked to give that he will not oppose the petition should he fail to comply with the condition[8]. Rather than insisting that the Debtor should apply to the Judge for a release or discharge of the undertaking, we consider it is appropriate to allow him to bring up his complaint about the undertaking in this appeal, given the reality of the situation. For even though it was contended on his behalf that his pending appeal has reasonable prospects of success, it seems to us he had little choice but to give the undertaking as indicated by the Judge to obtain an adjournment and avoid an immediate bankruptcy order.

33.  We understand that such an undertaking has been given by debtors as the usual practice of the court, and its purpose is to address the prejudice which may be caused to petitioners when the court decides to grant one last chance to debtors to pay the debt. So if the condition for payment into court or providing security is not complied with within time, the petitioner would not be required to attend the next hearing and would simply inform the court of the non-compliance and the court would make a bankruptcy order at the next hearing without further ado[9].

34.  If the only practical advantage is to save the petitioner’s time and costs in a further court attendance, which do not appear to be significant, we have reservations about the desirability of such an undertaking. What if there should be a significant change of circumstances that may impact on the making of a bankruptcy order? Would the debtor be precluded from bringing this to the court’s attention by virtue of the undertaking? Would he need to be released from the undertaking first and, if so, whether unconditionally or upon terms? This may lead to further arguments. If there is no undertaking and there is non-compliance with the condition, the court would simply consider at the next hearing whether to exercise its unfettered discretion to make a bankruptcy order in all the circumstances. Weighing the pros and cons, we are not persuaded that such an undertaking would be of much benefit.

If the Judge’s approach is in error

35.  The Court of Appeal in Tam Mei Kam has set out the relevant principles where the petition presented is based on a judgment debt. The judgment is prima facie evidence of indebtedness and may be rebutted. Where the judgment debtor has lodged an appeal or an application to set aside the judgment, the bankruptcy court may stay the petition to await the outcome of the appeal or application, if satisfied that the debtor has reasonable prospect of succeeding. An appeal or an application to set aside falling short of that standard would not be viable or bona fide, and the debtor would have failed to rebut the prima facie evidence of indebtedness (at §§25.1 and 25.2). The present case falls within the above situation.

36.  The Court of Appeal also discussed other situations.

37.  Another situation is where the debtor has not lodged an appeal or an application to set aside by the time the petition comes to be heard but intends to do so. In this instance, he must satisfy the bankruptcy court of the reasonable prospects of success of his intended application or appeal and provide reasonable explanation why he has failed to act in time. If he meets these requirements, the bankruptcy court may adjourn the petition to enable him to bring the application or appeal and give directions to ensure it is conducted expeditiously, with liberty to either party to apply to restore or dismiss the petition (at §26.1).

38.  A third situation is where the judgment debtor is unlikely to be able to pursue an application to set aside the judgment or an appeal due to procedural obstacles. The bankruptcy court may consider his case to see if he can rebut the prima facie evidence of indebtedness and in doing so consider the circumstances in which the judgment was obtained, such as whether it was obtained by default or after a full trial on the merits (at §26.2).

39.  The last situation is where the debtor has already failed in his application to set aside or in his appeal on substantive grounds at the time of the petition hearing. Where there is a judgment obtained after a full trial on the merits, whether in this situation or the previous, it would be unlikely that the bankruptcy court would find that the debtor could impugn the judgment and rebut the prima facie evidence of indebtedness. The general principle is that the bankruptcy court would inquire into the judgment and go behind it only if the debtor can show fraud, mistake, collusion or miscarriage of justice (at §§26.2, 27).

40.  As mentioned earlier, both parties had addressed the Judge on the new ground in the supplementary notice of appeal, focussing on the new evidence sought to be adduced that had not been considered by Cheng J. The Judge stressed to Mr Sussex that the Order 14 Judgment was entered 19 months ago, so to allow the Debtor to rely on the new material and have the petition adjourned would be tantamount to giving him a stay of execution of the judgment. She stated that the bankruptcy court is not the forum to reopen the judgment. She would make a bankruptcy order in the ordinary course and would consider granting an adjournment only if the debtor was to make a payment into court or provide security for the judgment debt[10].

41.  In several exchanges with counsel, the Judge made clear she would not go behind the judgment save in very limited circumstances:

“Mr Sussex: It is of course still open to my client to attempt to rebut the prima facie evidence of indebtedness represented by the Order 14 judgment.

Court: Yes, but it’s a judgment.

Mr Sussex: It is a judgment.

Court: And you can’t go behind the judgment.

Mr Sussex: Well, I can …

Court: I won’t go behind the judgment.

Mr Sussex: I can go behind the judgment if I can show that there was no consideration for the judgment.

Court: Well, only if it’s obtained by fraud, only if it’s obtained by fraud.”[11]

“Court: … that is how the court operates, otherwise, everyone would just come up with something and say, ‘Oh by the way the judge has not considered this and that.’ I won’t --- we won’t proceed on that basis. If it’s a judgment debt, you want time then provide security.”[12]

“Court: Yes, but it’s not the forum to reopen the matter for the reason I articulated. I only --- I’m only aware of a situation where if you want to reopen the judgment, you have to show that a judgment was obtained by fraud or that it’s a default judgment or else, there’s no proper basis for the bankruptcy court to allow a party to reopen the judgment.

Mr Sussex: Well, my Lady, what I am essentially saying is that this judgment was obtained by fraud because the necessary consequence of the point that I was saying is this must have been known to the other side. … what we are looking at is an Order 14 appeal, the onus is upon my client to show a triable issue. … I can discharge the onus of showing that this was a judgment obtained by fraud because if your ladyship takes the view that there is triable issue on the issue of whether or not the --- my client’s indebtedness was actually paid by Net Effect from the proceeds of the $3 million loan. …

Court: Yes, Mr Sussex, the reality is because your client chose to challenge the judgment and to adduce the so-called second Ladd v Marshall application so late. …

Court: And therefore, I go back to my earlier point, you have to provide security or else I will not agree to adjourn the petition.”[13]

42.  We are mindful that this was the first hearing of the petition before a judge who was presiding over the bankruptcy and winding-up lists on a Monday, and it is understandable that the Judge did not give detailed reasons. The Judge had been taken by both sides to the new ground of appeal and the new evidence, she might or might not have considered whether the Debtor has reasonable prospects of success on appeal. There is no indication in the transcript that she had done so. What gave us particular concern is her repeated emphasis that she would not go behind the judgment and would only do so if it was obtained by fraud or by default. That appears to be at odds with the principles discussed in Tam Mei Kam, as we have here an extant appeal and the bankruptcy court ought to assess whether the appeal has reasonable prospect of success in exercising the discretion whether to adjourn the petition to await the outcome of the appeal. This is not a situation where the appeal is unlikely to be pursued due to procedural reasons or where the appeal has been heard and dismissed, such that the bankruptcy court would decline to go behind the judgment obtained on the merits save where the debtor can show fraud, mistake, collusion or miscarriage of justice.

43.  It seems to us that the Judge had misdirected herself in law and erred in principle in her approach. We therefore set aside the Order and exercise the discretion afresh. We need to consider whether the petition should be adjourned pending the determination of the New Evidence Applications and the appeal in CACV 371/2022, and, if so, whether security should be provided as a condition for adjourning the petition and the appropriate amount of the security.

Exercising the discretion afresh

44.  Mr Sussex submitted that the pending appeal does have reasonable prospect of success as further credible evidence has come to light since the hearing before Cheng J in December 2023. In the Debtor’s 3^rd CACV Affidavit, details have been provided of the background and negotiations regarding the loan of US$3 million. Counsel pointed to three documents as indicating that the purpose of this loan was to discharge the Debtor’s liabilities to CAM and CMS. They are as follows:

(1)  a side letter from the Debtor to Heffner dated 20 September 2020 (which impliedly authorised Heffner and his affiliates to discharge the liabilities of the Debtor and the Debtor’s companies to CAM and CMS);

(2)  Discussion draft (3) (which provided in clause 2.2(a) that the loan of US$3 million to Net Effect then negotiated was to be used inter alia to refinance outstanding liabilities incurred by the Debtor on behalf of the group as defined); and

(3)  the document entitled “Net Effect Facility, Summary of Outstanding Items” (the first two items specifically referred to providing the amount owed to CAM and CMS under the Facility Agreement and the Supplemental Deed).

45.  Although a signed version of the loan agreement for the US$3 million has not been located by Richard Clarke (“Clarke”), the former chief operating officer of Adamas Asset Management (HK) Limited (Adamas HK”)[14], the Debtor was informed by Clarke from the latter’s own knowledge that the loan was in fact made in or around October 2020[15].

46.  There is also evidence indicating that the lender of the US$3 million loan was CCIL:

(1) An undated “Notice to Debtor” records that a deed of assignment was entered into between Adamas Global Alternative Investment Management Inc (“Adamas Global”) as assignor and CCIL as assignee. Mr Sussex submitted that this was evidently given in compliance with the requirement in clause 3.1.2(f) of Discussion draft (3) for a “Charge Over Receivables” to be given by Adamas Global in favour of the “Lender”, thus pointing to CCIL being the lender.

(2) There was a payment of US$75,000 by Heffner to CCIL on 20 October 2020. Mr Sussex contended this is likely to be a prepayment under clause 6.2 of Discussion draft (3).

(3) On 31 December 2020, Angela Chow as director of CCIL sent a “Demand for Payment” to Heffner recording that he was in default of his personal guarantee obligation to repay HK$17,200,000, which was advanced to him on 28 October 2020 and had been overdue since 27 November 2020. This may be unrelated to the US$3 million loan, as the loan amount and term appeared to be different, but if there were two loans it appears that the lender was CCIL in each instance[16].

47.  The point was made that in Angela Chow’s affirmation filed in opposition to the 1^st New Evidence Application after the judgments of Cheng J, she made no attempt to explain the documents the Debtor is seeking to adduce on appeal. It is the Debtor’s contention that if his liabilities and those of his companies were discharged by the US$3 million, it is inconceivable that CAM and CMS, through their common director Angela Chow, could have been unaware of this. In such event, the Order 14 Judgment was obtained by fraud because of the suppression of evidence that the debt had been discharged.

48.  As to the two extant New Evidence Applications, Mr Sussex submitted that the requirements in Ladd v Marshall [1954] 1 WLR 1489 at 1491 may require some modification in an appeal from a summary judgment (Langdale v Danby [1982] 1 WLR 1123 at 1133 D to E), and the court may suspend or relax and apply with greater flexibility the reasonable diligence requirement where the judgment was obtained by fraud (Skone v Skone [1971] 1 WLR 812 at 816C; Couwenbergh v Valkova [2004] EWCA Civ 676 at §33). As Ward LJ said in the last mentioned case, whether or not the Ladd v Marshall requirements are satisfied, “there remains the crucial over-arching consideration of fairness and justice. … if there is a risk that a fraud has been perpetrated on the court, then the court should whenever possible allow the truth to come out.”

49.  Mr Kwan repeated his submissions below that the appeal in CACV 371/2022 does not have reasonable prospect of success to warrant an adjournment of the petition pending appeal. He referred us to the judgment of Cheng J in dismissing the stay of execution pending appeal, in particular §20, and the inconsistency of the new ground of appeal with a key defence raised in the Order 14 hearing as mentioned earlier. He emphasised that the Debtor could not even get past the first hurdle of an arguable appeal for a stay of execution to be considered. He addressed us on the new evidence sought to be adduced in the 2^nd New Evidence Application and submitted that the further documents are far from cogent and compelling, commensurate with a serious allegation of fraud. He argued forcefully it is inherently improbable that Heffner would secretly pay off the Debtor’s liabilities without informing the Debtor. And there is no evidence to show that the US$3 million loan being negotiated in Discussion draft (3) was in fact made, other than the assertion of Clarke who has not been able to locate a signed version of the loan agreement.

50.  Our assessment on the available materials is that the two New Evidence Applications and the appeal in CACV 371/2022 do have reasonable prospect of success in establishing a triable issue whether the liabilities of the Debtor and his companies were discharged in October 2020. This is but a tentative assessment, as the evidence at this stage is not complete. At the conclusion of the present appeal, we have given directions in CACV 371/2022 for evidence to be filed in opposition and in reply regarding the 2^nd New Evidence Application, and for evidence to be filed in opposition and in reply on a contingent basis in the event that new evidence is allowed to be adduced on appeal. With a view to expediting matters, we have directed that the two New Evidence Applications and the appeal are to be heard at the same time. It would not be appropriate to say anything further at this stage about the merits on the available materials.

51.  We turn to consider if security should be provided as a condition for adjourning the petition pending the determination of the appeal.

52.  Mr Sussex emphasised that if the appeal appears to be bona fide, it is the “invariable practice” to adjourn the bankruptcy petition until the appeal has been decided (Heath v Tang [1993] 1 WLR 1421 at 1426E to F; Royal Bank of Scotland v Farley [1996] BPIR 638 at 641H). A bankruptcy order should not be made while a bona fide appeal is pending, as a bankrupt cannot in his own name appeal from a judgment against him which is enforceable only against the estate vested in his trustee in bankruptcy, unless the latter is willing to permit the use of his name on suitable terms for bringing the appeal. In the event of the trustee’s refusal, the bankrupt’s recourse is to apply to the court to reverse or modify the trustee’s decision, pursuant to section 83 of the Bankruptcy Ordinance, Cap 6 (Heath v Tang at 1423G, 1425G to H). He urged the court not to impose any condition for providing security.

53.  Mr Kwan submitted that the present situation is similar to that in which the debtor seeks to stay bankruptcy proceedings pending an appeal against the dismissal of his application to set aside a statutory demand. It was said by Poon J (as the Chief Judge then was) in Re Sy Chin Mong Stephen, HCB 1772/2009 and HCSD 31/2006, 9 March 2009, at §12 that even where there is an arguable appeal:

“… the fairest way to proceed is to impose a condition of stay requiring the applicant to pay into court a sum of money as security for the respondent’s claim. It would address the applicant’s concern that he will not be able to recover his payment if he wins the appeal later. It would also provide sufficient security for the respondent’s claim so that if the applicant’s appeal fails the respondent may resort to the payment into court without ado.”

54.  The statements of Poon J were obiter, as he was not satisfied that the applicant debtor had an arguable appeal with reasonable prospect of success and he refused to stay the bankruptcy proceedings pending appeal. Nonetheless, we do not understand Mr Sussex to have disputed that in the exercise of its discretion, the bankruptcy court may impose such a condition in granting an adjournment of the petition in this instance. The bankruptcy court clearly has power to do so. We would like to sound a word of caution that the condition should not be imposed invariably as the usual practice of the court or “the fairest way to proceed”, without regard to the particular circumstances of each case. We are well aware that a judge presiding over the bankruptcy and winding-up lists on a Monday has an onerous task, as there is often a long list of cases for hearing. Nevertheless, each case that comes before the court requires the exercise of discretion and consideration of individual circumstances to decide how the discretion should appropriately be exercised.

55.  Mr Kwan emphasised the following matters to support his contention this is an appropriate case to order security to be provided:

(1)  The judgment debt was obtained more than 19 months ago and remained wholly unpaid. It was a fully contested Order 14 hearing, where the parties’ respective cases were considered in detail.

(2)  The Debtor’s application for stay of execution pending his appeal was dismissed in December 2023. No hearing date for his appeal has been fixed as yet. It is wholly uncertain how long the bankruptcy petition would be held up by the adjournment.

(3)  Cheng J has considered the merits of the Debtor’s appeal. She came to the view that he failed to establish even the “minimum requirement of an arguable appeal”, that the application for stay of execution was “beset by delay”[17] and dismissed the application with indemnity costs.

(4)  Cheng J has identified deficiencies in the further evidence sought to be adduced in the 1^st New Evidence Application[18]. The 2^nd New Evidence Application was made in an attempt to address the deficiencies so identified, the Debtor claimed it was only in January 2024 that Clarke provided him with Discussion draft (1) and Discussion draft (3).

(5)  Cheng J has criticised the Debtor for his delay in making the 1^st New Evidence Application only in December 2023, when he apparently had all the information he needed by September 2022 (with the exception of the letter of demand from CCIL to Heffner dated 31 December 2020, which the Debtor claimed to have obtained only in June 2023)[19]. The 2^nd New Evidence Application was made only in April 2024 when the bankruptcy petition was due to be heard. Apart from the Debtor’s assertion, there is no evidence to support his claims that he had “repeatedly” pressed Clarke for documents formerly in the possession of Heffner or Adamas or that Clarke was “reluctant” in disclosing such documents to him[20]. The Debtor’s explanation for his delays lacks credence.

(6)  The further evidence sought to be adduced in the 2^nd New Evidence Application is far from cogent and compelling, commensurate with this serious allegation of fraud. The Debtor has not been able to adduce a signed version of the loan agreement for US$3 million.

56.  We think there is much to be said in the matters urged upon us by Mr Kwan. This is hardly a typical case of adjourning a petition pending the determination of a bona fide appeal. Our assessment that the appeal has reasonable prospect of success is tentative only. There have been twists and turns in the proceedings to enforce the claims against the Debtor and his companies, with two applications so far to adduce new evidence on appeal. The delays of the Debtor in adducing evidence to support his case are lengthy, and have not been fully or satisfactorily accounted for. Granted that the Debtor would only need to establish a triable issue whether the alleged liabilities were discharged for the Order 14 Judgment to be set aside on appeal, the Court of Appeal may still consider whether to grant unconditional leave or conditional leave to defend upon payment into court of the full sum or a lesser amount.

57.  We think it is appropriate to order security to be provided in this situation.

58.  When this was canvassed with Mr Sussex in his oral submissions, he submitted that no security should be ordered as this is placing a “formidable obstacle” in the way of a bona fide appeal. The court should not “take the risk” that if the Debtor is unable to comply with the condition for providing security, a bankruptcy order would be made and he would not be entitled to pursue the appeal in his own name. Mr Sussex indicated to this court he has no information on the Debtor’s financial circumstances.

59.  We declined to stand down the matter for him to take instructions as to the amount of security the Debtor is able to provide.

60.  In the proceedings below, it has not been suggested that the Debtor would not be able to provide security in the full judgment sum which the Judge was minded to order. His counsel only asked for a few weeks’ time to pay. The relevant parts of the transcript read as follows:

“Court: Well, this is a judgment debt in the absence of stay. If your client want to secure an adjournment, it has to be -- I would consider that only if your client agree to pay the amount into court.

Mr Sussex: Well, my Lady, we need time to be able to do that.”[21]

“Court: And therefore, my starting point is, and I still want to know, whether your client is willing and able to pay the amount into court.

Mr Sussex: Well, willing …

Court: And if he …

Mr Sussex: Willing, yes. Able, possibly not, that’s what I got to find out.

Court: Yes.

Mr Sussex: And we would need time …

Court: Yes.

Mr Sussex: … in order to be able to do that.”[22]

“Court: And therefore, I go back to my earlier point, you have to provide security or else I will not agree to adjourn the petition.

Mr Sussex: Well, my Lady, if that is the position your Ladyship is taking, I do have to ask for time …

Court: Yes.

Mr Sussex: … for my client to be able to find out whether he can in fact pay.

Court: Yes, yes.”[23]

“Court: Sorry, does your client want to consider how much time he needs to pay the judgment debt into court?

Mr Sussex: My Lady, I’d ask for three weeks.”[24]

61.  The petition was then stood down for Mr Sussex to take instructions whether the Debtor would give the undertaking indicated by the Judge, namely, that he would not oppose the petition if he failed to comply with the condition to provide security within time. After a recess of almost an hour, the parties returned to the court and Mr Sussex informed the Judge that Mr Kwan indicated he was prepared to give five weeks (instead of three weeks as proposed by Mr Sussex) for the Debtor to come up with the full amount of the judgment debt of HK$25,800,000[25].

62.  In light of the clear stance taken before the Judge, it is unacceptable for Mr Sussex to now contend there is “a risk” that the Debtor might not be able to provide any meaningful security, not just seeking a short time to come up with the money. It would have been wholly disingenuous to ask for time to pay if the Debtor were simply unable to come up with the sum or any meaningful sum at all.

63.  Furthermore, the inability of the Debtor to provide any meaningful security did not feature in any of the 12 grounds of appeal in the notice of appeal, nor was it mentioned in the skeleton submissions lodged by Mr Sussex in this appeal. There was a gap of four weeks from the making of the Order to the hearing of this appeal. So there should be adequate time for the Debtor, who was formerly a solicitor with extensive experience in finance and represented by Mr Sussex throughout, to reflect on his position in light of the legal advice given to him.

64.  For the above reasons, we declined to allow Mr Sussex to run the point of inability to make payment into court. And there is no reason to think that the appeal in CACV 371/2022 would be stifled by ordering the Debtor to provide security for the adjournment of the petition.

65.  A meaningful sum and substantial security should be provided. Having taken all the circumstances into account, we ordered the Debtor to provide security in half of the amount of the judgment sum, namely, HK$12,900,000. We decided to allow the Debtor eight weeks to make payment into court or provide security to the satisfaction of the petitioners, with liberty to the Debtor to apply.

Costs

66.  We would not disturb the costs order of the Judge, so the costs below would be in the cause of the petition.

67.  We have heard submissions on the costs of this appeal. Mr Sussex asked for costs as he has succeeded in setting aside the Order. Mr Kwan sought an order there be no order as to the costs of the appeal. As the Debtor is not entirely successful on appeal, we think it appropriate to award 50% of the costs to him and we so order, with a certificate for two counsel.