RE CHEUNG KWOK LUN ALAN

HCB 10968/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPCTY PROCEEDINGS NO. 10968 OF 2001

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J U D G M E N T

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1. This is a creditor's petition for a bankruptcy order presented by Pacific Century Insurance Company Limited, formerly known as Top Glory Insurance Company (Bermuda) Limited ("the petitioner"), against Mr Cheung Kwok Lun Alan ("Mr Cheung") based on a statutory demand served on Mr Cheung on 21 June 2001. The petition herein was presented on 22 November 2001. Mr Cheung was an agent and a unit manager of the petitioner until the termination of his services on 11 December 1998.

2. The debt in the statutory demand and in the petition was for a sum of HK$322,526.91 with interest at the contractual rate on the sum of HK$70,507.86. The amount of contractual interest, calculated up to 19 October 2001, came up to HK$20,445.07. According to the statutory demand, the principal sum represented "refund of commissions, bonuses, expense allowances and advanced payments" repayable by Mr Cheung to the petitioner pursuant to various agreements made between Mr Cheung and the petitioner, namely, the Agent's Contract for Selling Long Term Insurance Business dated 24 February 1994 ("the Agent's Contract"); Agent's Guarantee Finance Schedule dated 24 February 1994; Agent's Financing Agreement dated 1 February 1995; Unit Manager's Contract dated 1 February 1995 ("1st Manager's Contract"); Manager's Rollover Financing Agreement dated 1 February 1995; and Unit Manager's Contract dated 1 April 1998 ("2nd Manager's Contract").

3. At the first hearing of the petition before me on 11 March 2002, Mr Cheung indicated that he would not dispute that part of the debt relating to advanced payments under the Agent's Financing Agreement and the Manager's Rollover Financing Agreement. I therefore made an order that he should pay into court the sum of HK$242,412.04 which is not in dispute. Mr Cheung has complied with this order on 13 March 2002. As he has further accepted in his affirmation made on 18 March 2002 that he would not dispute the petitioner's entitlement to interest on the sum of HK$70,507.86 and was willing to pay the interest owing if the petitioner would provide a detailed calculation of the interest due, on 22 April 2002 I ordered Mr Cheung to pay into court the further sum of HK$23,443.45, which was calculated by the petitioner for the interest due. He has made another payment into court on 2 May 2002.

4. The balance of the petitioning debt in the sum of HK$80,114.87 is disputed by Mr Cheung. I will first give a breakdown of this figure before I explain the basis upon which the petitioner claims this amount from Mr Cheung.

5. The figure in dispute is made up of the following items:

Item		Amount (HK$)
(1)	Deduction for Reduced First Year Commission ("RFYC" or "commission") as at 11/12/98	(11,409.78)
(2)	Deduction for RFYC after 11/12/98	(1,415.35)
(3)	Deduction for Monthly Bonus as at 11/12/98	(22,819.57)
(4)	Deduction for Monthly Bonus after 11/12/98	(2,902.70)
(5)	Deduction for Expense Allowance	(42,064.59)
		__________
Less:	Renewal Commission	533.12
		__________
	Total due to the petitioner:	80,114.87
		=========

6. The date of 11 December 1998 was the date of termination of Mr Cheung's services with the petitioner. Mr Cheung has confirmed that he does not dispute the calculation of the above figures. What he disputes is his liability to make payment.

7. Under the Agent's Contract, Mr Cheung as the agent was entitled to remuneration calculated in accordance with the schedules thereto. Commission is provided in schedule 1(a) and a Monthly Bonus, which is equal to 200% of the first year commission earned during the month in question, is provided in schedule 1(b). Further, under the 2 Manager's Contracts, Mr Cheung was entitled to an Expense Allowance calculated in accordance with schedule A(1) thereto. According to that schedule, the Expense Allowance is based on (i) the aggregated actual commission earned by Mr Cheung as an agent and by the agents under his direct supervision as a unit manager (they are collectively referred to as "the Agency" in the Manager's Contracts); and (ii) the persistency rates of the policies arranged by the Agency.

8. Thus, it can be seen that the 3 items that the petitioner had deducted and sought to claim from Mr Cheung, namely, the RFYC, the Monthly Bonus and the Expense Allowance, are all related to the commission payable to an insurance agent for the policies issued as arranged by the agent.

9. It is the petitioner's case that it is entitled to deduction of these 3 items because of a rule enforced by the petitioner known as the "Internal Replacement Rule", which was binding on Mr Cheung.

10. Mr Cheung's contention is that the Internal Replacement Rule only came into effect on or about 1 April 1999, after he had left the petitioner's services; that the Rule had not been enforced against him at any time before his service was terminated; that no officer of the petitioner had ever informed him orally or in writing that the Rule was in force during his service with the petitioner. Hence, the Rule was not binding on him and the petitioner is not entitled to make deductions of the above 3 items.

11. For a bankruptcy order to be made, the petitioning creditor is required to establish the debt in respect of which the petition is presented to the satisfaction of the court. If the debtor has raised a bona fide dispute of the debt on substantial grounds so that the court is not satisfied with the proof of the petitioning creditor's debt, the court may dismiss the petition (sections 9(2) and (3) of the Bankruptcy Ordinance, Cap. 6).

12. The petitioner has filed affirmations from 3 persons. They are Mr Oliver Mak Kwok Wing, who was at the material time an Agency General Manager of the petitioner with Mr Cheung under his direct supervision and has since been promoted to Regional Director; Mr Tang Wai, a Senior Administrative Assistant of the petitioner who had had left its service in June 2002; and Mr Arthur Chan, a Senior Administrative Assistant of the petitioner. I gave leave to the petitioner to rely on the affirmation of Mr Tang, who cannot be located after his resignation, as Mr Chan has made an affirmation stating that he has personal knowledge of all the matters deposed to by Mr Tang.

13. Mr Cheung has filed a total of 5 affirmations.

14. All the above deponents have attended the hearing and they have given evidence and were cross-examined. Before I consider their evidence, I would go first to the documents.

15. Under clause 6.3 of the Agent's Contract signed by Mr Cheung in February 1994, it was provided as follows:

"In case a policy is issued within twelve months before or after the termination of a previous policy issued by [the petitioner] on the same life, commissions on the new policy shall by [sic] determined by the rules of [the petitioner] in effect at the time of its issue."

16. It would appear from this provision that it was envisaged there might be some rules governing the aforesaid situation. The question here is whether there is satisfactory evidence of any rules in this respect, at the time when the petitioner issued the new policies which were arranged by Mr Cheung or by the agents under his direct supervision.

17. According to the memorandum issued by the petitioner to all its agents dated 10 March 1999, which came after the termination of Mr Cheung's service and is not disputed by him, it was provided that with effect from 1 April 1999, the Internal Replacement Rule "will be revised" as follows:

"In case a policy is issued or a rider is added within twelve months before or after the termination of a previous policy or rider issued by [the petitioner] on the same life, commission on the new policy or new rider shall be adjusted. The adjustment will be based on the difference in premium and the commission rate of the new policy."

The adjustment would be deducted on a "drip-feed" basis, i.e. based on the paid-to-date of the new policy instead of based on "full first year commission". It was further provided in this memorandum that "after the new rule is effective, deduction on new policy commission will be processed regularly", so for example, the deduction based on April 1999 data would be processed on 10 May 1999 and a detailed report would be distributed to each agency in due course.

18. It would thus appear from the above memorandum that there was a previous form of the Internal Replacement Rule before it was "revised" with effect from 1 April 1999. The rationale for the Rule, according to the petitioner's witnesses, is that when an agent has arranged a life insurance policy for the petitioner, the major part of the commission payable to the agent would be paid to him during the first 12 months after the policy is issued. If the same insured, during the first 12 months of the policy, terminates the existing policy and applies for a new policy to be issued in substitution for the lapsed policy, the agent would be "unjustly enriched" by receiving the commission already paid to him for the lapsed policy as well as the commission payable in respect of the substituted policy. Hence, the Rule was introduced to prevent an agent from obtaining "double commission" for the same insured.

19. The only documentary evidence the petitioner has produced in support of the existence of the Rule prior to the termination of Mr Cheung's service in December 1998 is a document bearing the heading of "A16 Life Business Protection Rules" and the reference number of "AG 05/05/98 Rev. 2". "05/05/98" is obviously the date of this document being 5 May 1998. According to Mr Mak, "Rev. 2" stands for the second revision, so there would have been a first revision and the original version. This document contained a description of the Internal Replacement Rule, which read as follows:

"If a new application on the same insured is submitted within 12 months from the last paid-to-date of a lapsed policy, commission paid to the producing agent of this second policy will be adjusted on basis of the difference between the first year premium of the two policies. This rule also applies to an application produced by the same agent as that of the first policy."

Mr Mak claimed that this document was sent to him with a covering memorandum of Ms Esperanza Ma, who was then the Vice President of the Agency Administration Department and who had also issued the 1999 memorandum. He gave evidence that after receiving the 1998 document, he had sent a copy of it to all the managers under his supervision, including Mr Cheung, but without the covering memorandum of Ms Ma.

20. Mr Cheung has challenged the authenticity of the 1998 document. He asserted that throughout his service of 4 years and 9 months with the petitioner, he had never received or seen any such document or any document relating to the Internal Replacement Rule and he maintained categorically that neither Mr Mak nor any one from the management had ever explained the Rule to him verbally.

21. Obviously, the 1998 document is of importance to the petitioner's case. If it is an authentic document and if it was indeed distributed by Mr Mak to Mr Cheung, it would support the petitioner's allegation that prior to the termination of Mr Cheung's service, there was in force the Internal Replacement Rule by which the petitioner would be entitled to make the deductions in question.

22. I have considered the evidence of Mr Mak in this respect very carefully. It is correct that there is some discrepancy between his testimony in court and his second affirmation. In his affirmation, he claimed that the 1998 document was a memorandum "issued" by him, not by Ms Ma. Mr Mak explained in evidence that what he meant was that he had "distributed" the document and he claimed he did not notice the error in his affirmation because his English is not "good enough".

23. In his evidence in court, Mr Mak stated that for the purpose of these proceedings, he has asked one of his down-line managers, Mr Edmond Tong, to search for documents relating to the Internal Replacement Rule prior to the 1999 memorandum and Mr Tong has provided from his own file the 1998 document, which Mr Mak then supplied to the petitioner's solicitors. The 1998 document is, on the face of it, not a complete document. I have asked for the original to be produced and this was done in the course of the hearing.

24. The original document produced is a document of 8 pages. The first 6 pages bore the heading of "Rules & Regulations 2000" and a date of 22 December 1999, and they were stapled with the 1998 document which had come into existence earlier. I am satisfied that the 1998 document is a genuine and authentic document which came into existence in May 1998. It would appear from this document that the Rule would have been in force before May 1998 as there would have been a first revision and the original version. I turn to consider the evidence relating to the distribution of this document to Mr Cheung.

25. According to Mr Mak, the Rule had been in force when he and Mr Cheung joined the petitioner from another insurance company in 1994 (he asserted there is another error in his second affirmation in that the date when the Rule had been in place should have been "1986" instead of "1996"). He had explained the Rule orally to all new managers and agents directly recruited by him, including Mr Cheung, when they first joined the petitioner, because the Rule would affect their remuneration. When a memorandum or document was issued by the petitioner in respect of the Rule, he had distributed a copy of the memorandum or document to his down-line managers. He had also made a "public announcement" of the Rule to agents and managers at the regular meeting on Monday mornings and posted a copy of the memorandum or document on the notice board in his branch of the sales department. He was sure that he had followed this practice when the 1998 document was sent to him in May 1998. Mr Mak was unable to recall when the first revision of the 1998 document was issued.

26. Mr Cheung has pointed out to Mr Mak that there is a significant difference between the 1998 document and the 1999 memorandum. In the former, the Rule was to apply where a new application on the same insured is submitted "within 12 months from the last paid-to-date of a lapsed policy", whereas in the latter the Rule was to apply if a substitute policy is issued "within 12 months before or after" the termination of a previous policy. Mr Mak has acknowledged the difference but claimed that it was his understanding all along that the Rule that was in force at all material time was as stated in the 1999 memorandum, i.e. with the "before or after" provision, as provided in clause 6.3 of the Agent's Contract entered into by Mr Cheung in February 1994. His evidence here is supported by Mr Chan. Mr Mak said that the only difference between the 1998 document and the 1999 memorandum is that the 1999 memorandum had extended the application of the Rule to "medical plans".

27. I do not think Mr Mak's evidence is shaken. I accept his evidence that the 1998 document produced to the court was taken from the file of one of his down-line managers to whom he had distributed a copy in May 1998 and that he had likewise given a copy to Mr Cheung at the same time. I also accept his evidence that he had explained the Rule to Mr Cheung verbally with other new recruits in 1994. His evidence that the Rule was already in force at the time he and Mr Cheung joined the petitioner is supported by the evidence of Mr Chan. Mr Chan stated that when he joined the petitioner in October 1994, his supervisor or manager had notified him of the Rule verbally.

28. I do not accept Mr Cheung's evidence that he was not supplied with a copy of the 1998 document at the time or that the Internal Replacement Rule was not explained to him verbally when he first joined the petitioner. Mr Cheung might not have paid attention to the 1998 document as no deductions were made from his commission at the time for the reason that I shall come to and he could have forgotten that he had seen this document. As for his submission that with over 2,000 agents in the service of the petitioner, it is incredible that the petitioner could not have obtained from any of these agents any document showing that the Rule was in force at the material time apart from the 1998 document, I do not know and should not speculate if enquiries were ever made by the petitioner's solicitors in this regard. On Mr Mak's evidence, he had only asked his down-line manager Mr Tong to search for documents when he failed to find any previous document in his own records.

29. A peculiar feature about this case is that throughout the period of Mr Cheung's service with the petitioner, no deductions were made in respect of his remuneration by virtue of the Internal Replacement Rule. It was only upon Mr Cheung leaving the petitioner in December 1998 that he was charged with the deductions for the first time. This might well give him a sense of grievance when he was charged with deductions over a three-year period at one go. The commission statement of Mr Cheung for December 1998, which was run on 8 January 1999, showed for the first time deductions to be made for the RFYC, Monthly Bonus, and Expense Allowance. The petitioner has called Mr Chan to explain why.

30. According to Mr Chan, the computer programme for doing the calculations for deductions on account of the Rule was not installed until April 1999 when the 1999 memorandum came into effect. Before that, there was only one staff that was responsible for checking the policies manually on a random basis for policies caught by the Internal Replacement Rule and calculating the deductions that should be made once an agent was found to have arranged policies caught by the Rule. This was time consuming because of the considerable number of agents and the substantial number of policies arranged by them. Because of the shortage of manpower, deductions owing to the Internal Replacement Rule were made long after the event. In the case of Mr Cheung, the earliest instance in which there was internal replacement was in early 1996. Mr Chan also stated that although the deductions were not made when the event that gave rise to the Rule occurred, an agent should be able to work out for himself approximately the figure that ought to be deducted, as he would have information on the amount of the new premium payable as well as the old premium and the rate of commission which is based on the premium.

31. I accept Mr Chan's evidence. Where his evidence differs from Mr Mak as to when the computer programme for making the deductions was installed, I prefer his evidence, as Mr Mak does not appear to have accurate information here because this was handled by a different department. I am satisfied that the reason why Mr Cheung was not charged with the deductions before December 1998 was as stated by Mr Chan and not because the Rule was not in force, as suggested by Mr Cheung.

32. For the above reasons, I am satisfied that the petitioner has proved the debt in the petition. As the balance of the debt disputed by Mr Cheung has not been paid, and I have ruled against him that there is a bona fide dispute of the debt on substantial grounds, a bankruptcy order should be made. In this instance, what I propose to do is to give a further opportunity to Mr Cheung to make payment, having regard to his willingness in the past of paying the amounts into court in respect of those parts of the debt that he did not dispute. If no payment is made within the time that I indicate, the bankruptcy order will come into effect.

33. The orders I make are as follows:

(1) A bankruptcy order is made against the debtor, this order is to lie in the court file and is not to come into effect until after 7 days from today. If HK$80,114.87 is paid by the debtor to the petitioner within 7 days from today, the bankruptcy order is rescinded. If no payment is made to the petitioner within this period, the bankruptcy order will take effect on 14 March 2003.

(2) The amounts paid into court by the debtor in the respective sums of HK$242,412.04 and HK$23,443.50 with interest thereon are to be paid out after 7 days from today as follows:

(i) where the bankruptcy order is rescinded, the amounts are to be paid out to the petitioner's solicitors;

(ii) where the bankruptcy order is to take effect on 14 March 2003, the amounts are to be paid out to the Official Receiver.

(3) The petitioner is to have the costs of this petition, to be taxed if not agreed.