RE CHOW WING KUN

HCB7058/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 7058 OF 2012

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J U D G M E N T

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Introduction

1.  By Petition dated 29 October 2012, Kinform Limited (“Petitioner”) seeks a bankruptcy order against Mr Chow Wing Kun (“Debtor”).

2.  The Petition is based on an Allocatur dated 20 June 2012 in respect of $1,158,353.99.  The debt was the amount of taxed costs awarded in the Petitioner’s favour in DCMP 947 of 2011 (“Contempt Proceedings”).

3.  At the hearing of the Petition, the Debtor (represented by counsel Mr Robert Chan) did not dispute the debt.  I was informed that initially there was some dispute about service of the Petition, but that was no longer in issue.

4.  The Debtor opposed the Petition on the grounds set out in his Notice of Intention to Oppose Petition dated 19 April 2013.  In summary, the Debtor asked that the Petition be dismissed, alternatively stayed, on the following two main grounds stated in Mr Chan’s skeleton submissions:

4.1  The Petitioner brought the Petition with ulterior motive or collateral purpose, ie, to stifle his claims against the Petitioner and its alter ego Mdm Poon Tik Ka (“Mdm Poon”) in HCA 1465 of 2009 (“High Court Action”) and FCMC 11235 of 2010 (“Ancillary Relief Proceedings”).  It was therefore said that the Petition amounted to an abuse of process.

4.2  The Debtor has reasonable prospects of success in the two related proceedings so that he would regain control of the Petitioner and would have funds to discharge the Debt.

5.  At the hearing, Mr Chan clarified that the primary relief that he was seeking was a stay of the Petition.  He also asked this Court to consider adjourning the Petition to after 8 August 2013.  I shall explain the relevance of that date presently.

The parties and other proceedings

6.  In the light of the Debtor’s grounds of opposition, it is necessary to review albeit briefly the relationship between the parties and the related proceedings between them.

7.  The Debtor was married to Mdm Poon since October 1990.  Their marriage broke down in around late 2008 and they have been separated since 9 December 2008.

(1)  High Court Action

8.  On 24 June 2009, the Debtor together with his brother Mr Chow Pui Kun (“Mr Chow”) commenced the High Court Action against Mdm Poon, Mdm Cai Zi Mian (“Mdm Cai”, Mdm Poon’s mother), Mr Pan Di Fan (“Mr Pan”, Mdm Poon’s brother), the Petitioner and another company Shun Fung Timber Factory Limited (“Shun Fung”).

9.  The gist of the claim in the High Court Action is that the Debtor was the beneficial owner of all the shares in the Petitioner and Shun Fung, but the defendants fraudulently deprived him of those shares and his beneficial interest in the two companies.

10.  In summary, the Debtor’s pleaded case in relation to his beneficial ownership in the Petitioner is as follows.  The Debtor worked in the timber trade since around 1984.  In around 1992, his business relationship with his then business partner was turning sour and he decided to set up his own timber trading business.  The company that the Debtor set up was the Petitioner.

11.  To avoid potential complications from disputes with his previous business partner, the Debtor asked Mdm Poon to hold the shares in the Petitioner on trust for him and she did so since May 1992.  In around October 1992, at the Debtor’s instructions, Mdm Poon transferred 99% of the Petitioner’s shares (99 shares) to Mr Chow.  Both Mdm Poon and Mr Chow, so the Debtor alleged, were his trustees.

12.  The Debtor then claimed that in around December 2008, because of his matrimonial disputes with Mdm Poon, he discovered that in November 1996, 9,900 shares in the Petitioner were purportedly allotted to Mdm Cai, and the 99 shares registered in Mr Chow’s name had been transferred to Mdm Cai on 13 March 1998.  There was an increase in the Petitioner’s registered share capital in August 1999 and the annual return of the Petitioner filed in March 2000 and March 2009 respectively showed that Mdm Cai held 99% (990,000 shares) of the Petitioner’s shares while Mdm Poon held the remaining 1% (10,000 shares).

13.  The Debtor claimed that the allotment and transfer of shares were wrongful. In particular, it is his pleaded case that the signatures of Mr Chow on the documents purportedly effecting the transfer of 99 shares from Mr Chow to Mdm Cai in March 1998 were forged.

14.  In relation to Shun Fung, the Debtor claimed that since its incorporation, 9,899 shares (99%) were issued to Mr Chow, who held them on trust for the Debtor. He discovered, also in December 2008, that the shares held by Mr Chow on his behalf had been transferred to Mr Pan.  The Debtor claimed that the signatures of Mr Chow on the purported transfer documents were also forged.

15.  Mdm Poon’s defence is (again in gist) that the Petitioner and Shun Fung were set up by herself, partly with her own and partly with Mdm Cai’s money. The Debtor was only an employee working for the Petitioner and had no interest in it. The allegation of trust is denied. Specifically, the defendants deny the alleged forgery of Mr Chow’s signatures.

16.  The Debtor commenced the High Court Action on 24 June 2009, but pleadings only closed in December 2011 following filing of the Debtor’s Replies to Mdm Cai and Mr Pan’s respective Defences. It is worth noting that the pleadings took so long to close because (at least partly) both Mdm Cai and Mr Pan resided out of jurisdiction, but the Debtor did not apply for leave to serve them out of jurisdiction until around July 2010. Further, the Debtor took some 10 months before seeking extension of time in December 2011 to file his Replies to Mdm Cai and Mr Pan’s Defences, which had been filed in January 2011.

17.  The High Court Action has not progressed further following close of pleadings in December 2011.  In December 2012, the Debtor applied for legal aid, but the application was refused on 10 May 2013.  The Debtor is appealing against the refusal of legal aid and a hearing is scheduled for 8 August 2013.  This explains why Mr Chan suggested that one possibility is to adjourn the hearing until after 8 August 2013.

(2)  Ancillary Relief Proceedings

18.  On 30 August 2010, the Debtor presented a petition for divorce against Mdm Poon.  On 12 May 2011, a decree nisi was granted.

19.  The Ancillary Relief Proceedings are now pending between the Debtor and Mdm Poon.  The Debtor contended that he had reasonable prospects of obtaining substantial funds in the Ancillary Relief Proceedings which would enable him to discharge the Debt.

(3)  Contempt Proceedings

20.  These were proceedings brought by the Petitioner against the Debtor (and two other parties) for contempt of court.  For present purposes it is unnecessary to set out the complicated background to this episode, but very briefly it arose in the following way.

21.  The Petitioner, as I mentioned above, was in the timber trading business.  It commenced a civil action, DCCJ 3854 of 2009, against certain defendants for outstanding price of timber products sold to them.  The defendants in the civil action claimed that the timber sold by the Petitioner was sub-standard.  One of the allegations pleaded by those defendants was that many complaints had been made to the Petitioner, including a written complaint by way of letter dated 30 October 2008.

22.  The Petitioner applied for summary judgment.  In opposition to that application, the defendants filed an affirmation made by the Debtor, who was then still working for the Petitioner, in which the Debtor deposed to the fact that he had received the 30 October 2008 complaint letter.  The Petitioner’s application for summary judgment was dismissed with costs.

23.  The Debtor then made a witness statement on behalf of the defendants, verified by a statement of truth, stating that he had received the complaint letter on 30 October 2008.

24.  However, it was discovered in the course of the civil action that the complaint letter was in fact printed on the back of a letter from a bank dated 24 March 2009, so it could not have been issued or received on 30 October 2008.

25.  This led the Petitioner to commence the Contempt Proceedings against the defendants and the Debtor.  On 19 August 2011, Deputy District Judge Herbert Au-Yeung (as His Honour then was) handed down a detailed judgment, finding (inter alia) that the Debtor had been in contempt of court in making a statement verified by a statement of truth without honest belief in its truth.  He sentenced the Debtor to 6 months imprisonment and ordered him to pay the Petitioner’s costs on an indemnity basis.

26.  The Allocatur was issued in respect of the Petitioner’s costs payable by the Debtor in the Contempt Proceedings.

(4)     Other proceedings

27.  In addition to the above three sets of proceedings there were various other proceedings/criminal complaints between the Debtor on the one hand, and the Petitioner, Mdm Poon and other parties related to her on the other.  It is unnecessary for present purposes to go into them: neither side relied on them at the hearing and I pay no regard to them in my consideration of the matter before me.

Relevant law

28.  The Debtor relies on sections 9(3), 9(5) and 104 of the Bankruptcy Ordinance, Cap 6:

28.1   Sections 9(3) and 9(5) provide that:

“(3) If the court is not satisfied with the proof of the petitioning creditor's debt or of the service of the petition, or is satisfied by the debtor that he is able to pay his debts or has a reasonable prospect of being able to pay them, or considers that for other sufficient cause no order ought to be made, the court may dismiss the petition.

(5) Where the debtor appears on the petition and denies that he is indebted to the petitioner, or that he is indebted to such an amount as would justify the petitioner in presenting a petition against him, the court, on such security (if any) being given as the court may require for payment to the petitioner of any debt which may be established against him in due course of law, and of the costs of establishing the debt, may, instead of dismissing the petition, stay all proceedings on the petition for such time as may be required for trial of the question relating to the debt.”

28.2   Section 104 empowers the Court to:

“… at any time, for sufficient reason, make an order staying the proceedings under a bankruptcy petition, either altogether or for a limited time, on such terms and subject to such conditions as the court may think just.”

29.  Additionally, the Debtor relied on the Court’s jurisdiction at common law to dismiss or stay the Petition on the basis of abuse of process: Re Tang Kar Hung HCB 2416/2000, 8 June 2001, Kwan J (as Kwan JA then was) at §20.

30.  Miss Queenie Lau, who appeared for the Petitioner, submitted that the debt having been admitted, the Petitioner had a prima facie right to a bankruptcy order, and the Court’s discretion to stay or adjourn the Petition should only be exercised where there was a reasonable prospect of the debt being discharged within a reasonable time: Ho Ying Pat Bobby v Overseas Way (China) Ltd [2011] 2 HKLRD 837 per Le Pichon JA (with whom Kwan and Fok JJA agreed) at §12.

31.  As I understand him, Mr Chan did not dispute the principle relied on by Miss Lau.  His contention was that the Debtor had reasonable grounds of success in the two related proceedings, and this case warranted the relief sought by the Debtor.

Discussion

32.  I proceed to examine the Debtor’s grounds of opposition against the factual background summarised above.

(1)  Merits of the Debtor’s case in the High Court Action

33.  It is convenient to start with the merits of the Debtor’s claims in the other related proceedings.

34.  Mr Chan submitted that the Debtor had a “strong case” of forgery in the High Court Action.  He referred me to the relevant documents in relation to the transfer of shares of the Petitioner and Shun Fung, and pointed out that Mr Chow’s genuine signatures in 1992 and 1993 were very different from the alleged forged signatures in 1998.

35.  Mr Chan also drew my attention to two “family letters” written by Mdm Poon to Mr Chow in 1992, ie, shortly after the Petitioner began business.  These letters, so Mr Chan submitted, showed that Mdm Poon acknowledged that the Debtor owned the Petitioner and its business.

36.  With respect to Mr Chan, I do not agree that the Debtor has demonstrated anything beyond an arguable case on the merits of his claim.

37.  First, although the signatures of Mr Chow in question do look superficially different, I am far from persuaded that that the Debtor has thereby shown a strong case.  It is not uncommon for a person to have more than one signature, and one could change one’s signature over time.

38.  Moreover, and importantly, there is no evidence from Mr Chow himself, whose signatures are alleged to have been forged.  His evidence would obviously be most helpful in support of the Debtor’s claim, and he is one of the co-plaintiffs in the High Court Action.  The absence of his evidence is therefore surprising to say the least.  I understand that Mr Chow resided in Canada, but there is no evidence at all explaining why no evidence from him was forthcoming.

39.  As to the family letters, in my view they are at best equivocal.  In fact, the letter with a handwritten date 1 May 1992 [Bundle II/252] may even suggest that Mdm Poon owned 99% of the Petitioner’s shares, and the Debtor did not want to have an interest because of concerns he had about his disputes with his erstwhile business partner.

40.  The Debtor’s failure to prosecute the High Court Action does not assist him.  Although he has explained that he was short of funds, that is not in itself a good explanation if he had genuine conviction in his case.  Although the Debtor has not expressly said so in this affirmations filed in the instant proceedings, I am prepared to assume that his imprisonment might have contributed to the delay in the High Court Action.  Nevertheless, he has not explained why he did not apply for legal aid until December 2012, after the current Petition had been issued.

41.  I note that the Debtor was prepared to make a false statement against the Petitioner at a time when, on his own case, he had discovered Mdm Poon’s alleged wrongdoing and the alleged fraudulent transfer of the Petitioner’s shares.  The Deputy Judge found that he had done so because of his bad relationship with Mdm Poon: see §§35 and 38 of Reasons for Sentence in DCMP 947/2011.  But that would not explain why he would want to hurt the Petitioner financially if he genuinely thought that the Petitioner belonged to him.  However, since Miss Lau did not rely on this fact in her submissions, I place no weight on it.

42.  In my view, taking into account the Debtor’s allegations and the materials placed before me, I am not prepared to accept that the Debtor has shown anything more than an arguable case on the merits.

(2)  Merits of Ancillary Relief Proceedings

43.  I can deal with this relatively briefly.  Although the Debtor complained that Mdm Poon had not been forthcoming in her Form E, I fail to see how that could help him in demonstrating that he had reasonable prospects of getting any substantial financial relief from Mdm Poon.

(3)  Ulterior motive/abuse of process

44.  Mr Chan strongly relied on Re Malcolm Robert Ross (A Bankrupt) (No 2) [2000] BPIR 636.  In that case, a judgment creditor (Stonewood) with a regular judgment presented a bankruptcy petition against the debtor (Mr Ross) who was already declared bankrupt.  The debtor raised a similar argument that the petition was presented by the creditor (which was controlled by the debtor’s former partner Miss Jeffs) with the ulterior motive of stifling his action against Miss Jeffs for the beneficial ownership of the shares in creditor company under her control.  The Court of Appeal dismissed the petition.

45.  The facts of Re Ross bear some superficial similarity to the facts of this case.  However, a careful reading of that case shows that it is distinguishable: there the Court of Appeal came to the view that Mr Ross had a “real prospect of success” in his claim for recovery of the shares in the petitioner company against Miss Jeffs, who in earlier related proceedings effectively capitulated to his claim that she held the shares on trust for him: see 644H-645B. In the present case, for the reasons explained above, I am not persuaded that the Debtor’s claim is anything more than merely arguable.

46.  Further, as Miss Lau rightly pointed out, the debt is not disputed and the Petitioner is entitled to pursue the Petition.  There is no reason why the Petitioner should not be allowed to pursue its legitimate remedy to recover its debt.  In this connection, Miss Lau drew my attention to Re Ross at 643E-644B.  There Nourse LJ (with whom Mantell LJ agreed) said:

“The power [to dismiss a petition] being a general one, its exercise will depend upon the facts of the particular case ...

Although before Jacob J, [counsel for Stonewood] did not shrink from saying that one of the considerations which had led to the presentation of Stonewood’s petition was that Mr Ross would not be able to pursue the claim against Miss Jeff himself … we cannot in my view proceed on the footing that it was presented solely for the purpose of stifling the action. What has to be considered is the purpose of Stonewood, which has obtained a regular judgment against Mr Ross in respect of his unlawful lettings of parts of its property and his unlawful collection of rents therefrom. An assumption of everything in Mr Ross’ favour in regard to his claim against Miss Jeffs could not have justified what he did, which was independently actionable at the suit of Stonewood. It must therefore be assume that part at least of Stonewood’s purpose in presenting the petition was the lawful purpose of seeking to obtain a dividend in the bankruptcy.

Accordingly, although I remain suspicious of Miss Jeff’s motives, I do not think that this case can confidently be treated as one of abuse of process ...” (Emphasis added)

47.  Miss Lau submitted that in the instant case, there was no question about Mdm Poon’s motive or the Petitioner’s purpose in presenting this Petition.  But leaving that aside, the Petitioner plainly had a lawful purpose of seeking recovery of its debt and the presentation of the Petition could not be said to be abuse of process.  Mr Chan was not able to provide any answer to that argument.

48.  Nor has Mr Chan persuaded me that the making of a bankruptcy order would necessarily stifle the Debtor in the two sets of proceedings.

48.1   As to the High Court Action, assuming, for present purposes, that the Debtor’s cause of action would vest in the trustees in bankruptcy, the trustees would be obliged to consider the merits of his case objectively and pursue the same if they consider it appropriate to do so.  I am prepared to take into account the risk that the trustees may be inhibited in pursuing the action because of lack of funds: cf in this regard Re Ross at 645B-D.  But whether that would be the case is far from certain, and it is possible that the trustees could assign the cause of action to the Debtor so that he could pursue the claim himself.  In any case, this risk is one of the factors in the balancing exercise and taking into account all circumstances, including the merits of the Debtor’s case, I am not satisfied that it is sufficient to tip the balance in the Debtor’s favour.

48.2   In relation to the Ancillary Relief Proceedings, the Debtor has obtained legal aid and Mr Chan did not suggest that those proceedings would be stifled if the Debtor were declared bankrupt.

49.  I also bear in mind, as Miss Lau pointed out, that even if granting a bankruptcy order will have a knock-on effect of bringing other claims of the debtor against related parties to a standstill, that, without more, is not sufficient evidence of improper motive: see Re Chung Winston HCA 1283/2011, HCA 1290/2012 & HCB 4005/2012, 27 February 2013, Q Au-Yeung J, §§93-94.  A fortiori, in the instant case, when I am not persuaded that the making of a bankruptcy order would prevent the Debtor from pursuing his claims in the High Court Action or the Ancillary Relief Proceedings.

50.  I therefore reject the Debtor’s argument to dismiss the Petition on the basis of abuse of process.

(4)  Stay/adjournment

51.  Turning to the question of stay, the difficulty facing the Debtor is that the stay sought is entirely open-ended. In the Ho Ying Pat Bobby case, the Court proceeded on the basis that the debtor’s claim against his former solicitors had reasonable prospects of success: see §6; even then, the Court held that an open-ended adjournment would not be granted: see §§13-18.

52.  In the instant case, even accepting that the Debtor had an arguable case in the High Court Action, Mr Chan has not demonstrated any basis on which the Ho Ying Pat Bobby case can be distinguished in this respect.

53.  Similarly, in relation to the Ancillary Relief Proceedings, it is wholly unclear how long those proceedings would take to resolve.

54.  For those reasons, I am not persuaded that the Petition should be stayed.

55.  Nor is there any reason why the Petition should be further adjourned.

Result

56.  In conclusion, I reject the Debtor’s grounds of opposition.

57.  I would make a bankruptcy order against the Debtor as sought in the Petition.

58.  I also make an order nisi that the Petitioner and the Official Receiver shall have their costs of the Petition, to be taxed if not agreed.