RE GABRIEL RICARDO DIAS-AZEDO

HCB 2212 / 2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 2212 OF 2010

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J U D G M E N T

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A. Introduction

1.  This is a contest between two judgment creditors as to whether a bankruptcy order should be granted against the judgment debtor Mr Diaz-Azedo (“the Debtor”).

2.  The Petitioner (Ms Gardner) is a judgment creditor of the Debtor pursuant to a default judgment (“the Default Judgment”) dated 14 January 2010 obtained under HCA 2082/2009 for the judgment sum (“the Judgment Sum”) of US$9,756,879.63 with interest.

3.  Mr and Mrs Da Silva (“the Opposing Creditors”) also obtained a default judgment against the Debtor on 27 November 2009 under HCA 2158/2009 for a judgment sum of USD$2,339,992.07 with interest.  

4.  There is unchallenged evidence that the Debtor is likely to have already absconded from Hong Kong before these default judgments were obtained.

5.  By way of the Petition^[1] dated 23 March 2010, the Petitioner asks to bankrupt the Debtor based on the debt of the Judgment Sum (with interest) which is not satisfied under a the statutory demand (“the Statutory Demand”) dated 20 January 2010.

6.  The Opposing Creditors however oppose the Petition.    The principal bases of the opposition (which I would elaborate more later) can be summarized as follows:

(1)    The Default Judgment is an irregular one and the Petitioner’s debt is triable.

(2)    The Statutory Demand was irregular both as to its form and service.

(3)    The Petition was issued for an ulterior motive to take unfair advantage of the Opposing Creditors’ effort in tracking down the Debtor’s assets and thus is an abuse of process.

7.  In order to properly understand these grounds of opposition, it is necessary to set out the background leading to the Petition as follows.

B. Background

8.  The Debtor was formerly the Managing Partner of Grant Thornton (“Grant Thornton”), which is a firm of accountants practising in Hong Kong.   Grant Thornton is a member firm of Grant Thornton International Ltd (“Grant Thornton International”).

9.  The Debtor:

(1)    is a distant cousin of the Petitioner,

(2)    had been a long time friend of the Opposing Creditors.

10.  It is the Petitioner’s evidence (filed under HCA 2082/2009) that the Debtor had persuaded her to entrust him to invest (purportedly via Grant Thornton) for her. She had therefore between late 1999 and mid 2009 transferred some US$9 million to him or Grant Thornton for investment purposes.   The Debtor has also set up a BVI company known as Senning International Ltd (“Senning”) as a trust vehicle for holding these purported investments.  A substantial part of the money was so transferred under the Debtor’s instruction via Senning.

11.  At the same time, it is the Opposing Creditors’ case that in 1995, the Debtor had also persuaded the Opposing Creditors to transfer some US$2.2 million to Grant Thornton to set up an offshore trust fund for their estate planning.  The Debtor represented that he would be personally managing the trust fund for them.

12.  Under different circumstances (which are irrelevant for the present purpose), the Petitioner and the Opposing Creditors discovered respectively in 2009 that the Debtor had failed to account for or return their invested money.  It also appears that it is likely that he has defrauded them and pocketed the funds himself.  

13.  In around October 2009, the Debtor could no longer be contacted by the Petitioner and his firm’s staff.  There is every indication that he has fled Hong Kong and could no longer be located.

14.  On 12 October 2009, the Petitioner issued a generally endorsed writ under HCA 2082/2009 (“the Petitioner’s Action”) against the Debtor (as the 1^st Defendant) and Senning (as the 2^nd Defendant) seeking (a) a declaration that Senning was beneficially owned by her, and (b) the return of US$9,756,879.63 or an account or enquiry for this sum.

15.  In November 2009, the Petitioner further issued a claim under HCA 2348/2009 (“the Vicarious Liability Action”) against Grant Thornton and Grant Thornton International claiming for the same sum.  The principal basis of the claim is that Grant Thornton and Grant Thornton International are vicariously liable for the Debtor’s wrongful acts of misappropriating the money. 

16.  On 22 October 2009, the Opposing Creditors issued the writ under HCA 2158/2009 (“the Opposing Creditors’ Action) against the Debtor (as 1^st Defendant) and Grant Thornton (as the 2^nd Defendant) claiming for an account of trust assets or alternatively damages or restitution of not less than US$2,339,922.07.

17.  As mentioned above:

(1)    On 27 November 2009, the Opposing Creditors obtained a default judgment under the Opposing Creditors’ Action against the Debtor for the sum of USD$2,339,992.07.

(2)    On 14 January 2010, the Petitioner obtained the Default Judgment for the Judgment Sum (i.e., US$9,756,879.63). 

18.  After the Opposing Creditors have obtained their default judgment, they have through their lawyers taken out enforcement proceedings in Hong Kong and London.  They have so far managed to track down 2 landed properties in London that they say are the Debtor’s assets.  The Opposing Creditors have sought to obtain in London a charging order over these properties.

19.  One of these properties has recently been sold by the mortgagee bank and some surplus of the sale proceeds are presently charged in favour of the Opposing Creditors through the interim charging orders obtained by them. The other London property is now subject to a competing claim by the Debtor’s wife, who contends that the property belongs to her beneficially.   The estimated value of this remaining London property is about GBP3.5 million.  The hearing of the competing claims (between the Opposing Creditors and the Debtor’s wife) will continue on 8 to 10 November 2010 in the London.

20.  On the other hand, the Petitioner issued the Petition against the Debtor on 23 March 2010.  The Petition was based on the unsatisfied Statutory Demand. 

C. The Petition

C1. The discretion to grant a bankruptcy order

21.  Under s 9(2) of the Bankruptcy Ordinance (Cap 6) (“the Ordinance”), if the Court is satisfied on the evidence of the proof of an underlying debt and proof of service of the Petition, it has a discretion to grant a bankruptcy order.

22.  Where the underlying debt is proved and there is a valid statutory demand, the Court should normally exercise its discretion to grant a bankruptcy order unless there are other reasons pointing the other way.  See: s 9(3) of the Ordinance, TSB Bank plc v Platts (No.2) [1997] BPIR 302 at 321C-E.

23.  In the present Petition, the Opposing Creditors have put forward 3 reasons why the Court should not grant the bankruptcy order.  I would consider them in turn as follows.

C2. Grounds of opposition

C2.1 No proper proof of debt

24.  It is trite that under the summary nature of a bankruptcy petition, the Petitioner has to prove that there is bona fide underlying debt owed to her before the Court would consider granting the order.  If it is shown that there is a genuine dispute on the debt, the Court should not grant the order.

25.  Mr Barlow SC, for the Opposing Creditors, submits that notwithstanding the Default Judgment, the underlying debt said to be owed to the Petitioner (i.e., the Judgment Sum) is doubtful (and thus at least triable).   His contention runs in substance as follows:

(1)    The sum said to be owed by the Debtor to the Petitioner under the Petitioner’s Action is the same sum claimed against Grant Thornton and Grant Thornton International under the Vicarious Liability Action.

(2)    On the other hand, it is the Petitioner’s own pleaded case under the Vicarious Liability Action that the money she said to have been advanced to the Debtor had been made to Senning.

(3)    Thus, taking the Petitioner’s own pleaded case to the highest^[2], the Petitioner is either (a) the beneficiary of the trusteeship of Senning, or  (b) merely the sole shareholder of Senning.

(4)    But under both of these scenarios, the Petitioner cannot possibly be able sue on her own for the return of the money under the Petitioner’s Action as (a) if she is a beneficiary under Senning, only Senning (as the trustee) can sue the Debtor, or (b) if she is merely a shareholder, she herself also cannot sue under the reflective loss principle^[3].

(5)    As a result, the Petitioner’s claim under the Petitioner’s Action cannot stand (as she is suing on her own right), and thus the Default Judgment obtained could not possibly stand.  It is noteworthy (Mr Barlow further submits) that the Default Judgment was obtained solely on the basis of the general endorsement without a statement of claim, and thus it is unclear on what bases she said the Debtor should repay her directly the sum.

(6)    The Petitioner’s Default Judgment (says Mr Barlow) is therefore irregular and liable to be set aside.  In other words, the Petitioner cannot rely on the Default Judgment alone to prove the underlying debt.

26.  With respect, I am not persuaded by the Opposing Creditors’ contentions.  My reasons are as follows.

27.  First, unless there are very good reasons to do so, it has been repeatedly said by the Court that in relation to a bankruptcy petition based on a judgment sum, it is not for the Court to look into the merit of the underlying judgment absence any application to set it aside under the relevant action[4].

28.  Secondly, even if the Court is prepared to look at the merit of the Default Judgment, I do not think Mr Barlow has demonstrated that there is no genuine underlying debt to support the Petition.  This is so because:

(1)    Although a beneficiary cannot on her own sue for the return of misappropriated trust assets, it could do so by joining the trustee as one of the defendants in cases where the trustee refuses to sue[5].  In the Petitioner’s Action, Senning was in fact sued as the 2^nd Defendant, and a relief for the declaration it is a trustee of the Petitioner is claimed.   On this basis, I am not convinced by Mr Barlow’s submission that the Petitioner’s Action is on its face defective.

(2)    Further, even based solely on the Amended Statement of Claim of the Vicarious Liability Action, it is clear that there is more than HK$10 million odd which was advanced by the Petitioner to the Debtor (or Grant Thornton) without the involvement of Senning[6].  In the circumstances, the Opposing Creditors cannot satisfy me that there could be a genuine dispute as to this extent of the Judgment Sum.  Based on this part of the debt alone, the Court can in any event grant the bankruptcy order.

29.  For these reasons, I reject the Opposing Creditors’ first ground of opposition.

C2.2 Irregularity of the Statutory Demand

30.  Under s. 6(2)(c) of the BO, a creditor’s petition may be presented in relation to a debt if and only if, amongst others, it is one which the debtor appears to be unable to pay or to have no reasonable prospect of being able to pay.

31.  S.6A(1)(a) of the BO further provides that the debtor so appears to be unable to pay under 6(2)(c) if and only if he has been served a statutory demand in the prescribed form and has not complied with the same 3 weeks after being served. 

32.  The Petition herein is presented based on the unsatisfied Statutory Demand. 

33.  The Opposing Creditors now say the Petition is defective as there are two irregularities of the Statutory Demand, namely (a) it was not made in the prescribed form, and (b) its service was insufficient.

34.  I will now deal these irregularities in turn in greater detail.

C2.2.1         The irregularity on the form

35.  In relation to the first irregularity, the Opposing Creditors’ submissions that the statutory prescribed form of the Statutory Demand has not been fully complied with run as follows:

(1)    One part of the Statutory Demand (as in the prescribed Form 162 under the Bankruptcy Rules) provides as follows:

“This demand is served on you by the creditor –

Name __________________________________

Address__________________________________

            __________________________________”

(2)    Further, it is also provided expressly in the Statutory Demand (as prescribed) that “The person making the demand must complete the whole of this page and Parts A, B, C on page 2”.

(3)    The Debtor (through her solicitors) however has not filled in the section as set out in (1) above.

(4)    As the Debtor “must complete the whole of” that page (where the above section has been left blank), the failure to complete that section of the form renders the Statutory Demand defective.  In turn, the presentation of the Petition is also defective since it could only be so presented with an unsatisfied statutory demand made in the prescribed form by reason of s 6A of the Ordinance. 

(5)    Further, without this part of the Statutory Demand having been completed, it is prejudicial to the Debtor as he would not be able to know who is the creditor that he should pay even if he wants to settle the demand. 

36.  I am unable to agree.

37.  In Re Leung Hoi [2000] 1 HKC 276, it has been held by Le Pichon J (as she then was) at 278C-G that a statutory demand is not necessarily defective and invalid simply because some parts of the prescribed form have not been followed or complied with.  The correct test is whether the non-compliance has caused any real prejudice to the debtor. 

38.  Applying this test, I am not satisfied that the failure to fill in that part of the Statutory Demand would cause any real prejudice to the Debtor.  Although it is not provided in it the name of the creditor (i.e., Ms Gardner), it has provided the name of the handling solicitor and the firm of solicitors acting for the creditor with their contact details. Thus, if the Debtor wishes to clarify and identify who the creditor is, there is no difficulty for him to contact the creditor’s solicitors to find out.   

39.  My above view is further fortified by rules 44 and 45 of the Bankruptcy Rules, which provide for what is the necessary information that should be set out in the statutory demand:

“44. Form and content of statutory demand

(1) A statutory demand under section 6A of the Ordinance must be dated, and be signed either by the creditor himself or by a person stating himself to be authorized to make the demand on the creditor's behalf.

(2) The statutory demand must specify whether it is made under section 6A(1) or (2) of the Ordinance.

(3) The statutory demand must state the amount of the debt, and the consideration for it (or, if there is no consideration, the way in which it arises) and-

(a) if made under section 6A(1) of the Ordinance and founded on a judgment or order of a court, it must give details of the judgment or order; or

(b) if made under section 6A(2) of the Ordinance, it must state the grounds on which it is alleged that the debtor appears to have no reasonable prospect of paying the debt.

(4) If the amount claimed in the statutory demand includes-

(a) any charge by way of interest not previously notified to the debtor as a liability of his; or

(b) any other charge accruing from time to time,

the amount or rate of the charge must be separately identified, the grounds on which payment of it is claimed must be stated, and in either case the amount claimed must be limited to that which has accrued due at the date of the demand.

(5) If the creditor holds any security in respect of the debt, the full amount of the debt shall be specified, but-

(a) there shall in the statutory demand be specified the nature of the security, and the value which the creditor puts upon it as at the date of the demand; and

(b) the amount of which payment is claimed by the demand shall be the full amount of the debt, less the amount specified as the value of the security.

45. Information to be given in statutory demand

(1) The statutory demand must include an explanation to the debtor of the following matters-

(a) the purpose of the demand, and the fact that, if the debtor does not comply with the demand, bankruptcy proceedings may be commenced against him;

(b) the time within which the demand must be complied with, if that consequence is to be avoided;

(c) the methods of compliance which are open to the debtor; and

(d) his right to apply to the court for the demand to be set aside.

(2) The statutory demand must-

(a) specify one or more named individuals with whom the debtor may, if he wishes, enter into communication with a view to securing or compounding for the debt to the satisfaction of the creditor or (as the case may be) establishing to the creditor's satisfaction that there is a reasonable prospect that the debt will be paid when it falls due; and

(b) in the case of any individual so named in the demand give his address and also his telephone number (if any).”

40.  All the information required under rules 44 and 45 is contained in the Statutory Demand.

41.  Mr Barlow further submits that as it is s. 6A of the Ordinance which requires the statutory demand to be issued in the prescribed form, any non-compliance of the form is a breach of the primary legislation but not the rules.  As such, rule 203 of the Bankruptcy Rules would not enable the Court to waive the non-compliance.  Rule 203 provides as follows:

“Non-compliance with any of these rules, or with any rule of practice for the time being in force, shall not render any proceeding void unless the court so directs, but such proceeding may be set aside, either wholly or in part, as irregular, or amended or otherwise dealt with in such manner and upon such terms as the court may think fit.”

42.  I also do not agree:

(1)    Although s 6A of the Ordinance provides that the statutory demand is to be issued under the prescribed form, it does not itself “prescribes” the form.  The statutory form is governed and prescribed by rules 44 and 45 and Form 162 under the Bankruptcy Rules.   Thus, whether there is compliance of the form is a matter of the relevant rules, and Rule 203 still applies in the case of any non-compliance.

(2)    Further, even if Rule 203 does not apply, s 124(1) of the Ordinance similarly provides for the waiver of any formal defect or irregularity.   S. 124(1) provides as follows:

“(1) No proceeding in bankruptcy shall be invalidated by any formal defect or by any irregularity unless the court is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of the court.”

(3)     As I mentioned above, I do not find any real or substantial justice to have been caused by reason of the Petitioner’s failure to complete that section of the Statutory Demand.  Thus, whether under s. 124 of the Ordinance or Rule 203 of the Bankruptcy Rules, I do not find that the bankruptcy proceedings before me should be invalidated by this formal defect or irregularity.

C2.2.3 Irregular service of the Statutory Demand

43.  The Statutory Demand was served by way of putting an advertisement notice on a local newspaper.  This was done pursuant to rule 46(3) of the Bankruptcy Rules, which provides as follows:

“46. Requirement as to service

…

(3) Where the statutory demand is for payment of a sum due under a judgment or order of any court and the creditor knows, or believes with reasonable cause-

(a) that the debtor has absconded or is keeping out of the way with a view to avoiding services; and

(b) there is no real prospect of the sum due being recovered by execution or other process.

The demand may be advertised in one or more newspapers; and the time limited for compliance with the demand runs form the date of the advertisement’s appearance or (as the case may be) its first appearance.”

44.  The Opposing Creditors contends that, as the Petitioner had previously also served its Writ of the Petitioner’s Action on the Debtor at a London address, she should have also served the Statutory Demand on the London address as well.  The service of the Statutory Demand merely by way of advertising the same on a local newspaper is therefore not sufficient in the circumstances.

45.  I reject this submission:

(1)    The evidence before me shows that by the time the Statutory Demand was issued, it was clear that the Debtor was likely to have absconded, and there was no real prospect that the Judgment Sum being recovered by execution or other process in Hong Kong. 

(2)    In the premises, the Bankruptcy Rules have provided that advertising the Statutory Demand on a local newspaper amounts to prima facie good service, unless there are circumstances showing the other way.

(3)    Given that the Writ served at the London address was not acknowledged by the Debtor one way or the other, I do not think this amount to circumstances that would outweigh the above prima facie sufficiency of the service of the Statutory Demand.

(4)    Therefore, in all the circumstances, I hold that there was good service of the Statutory Demand. 

46.  For the above reasons, I also reject the second ground of objection raised by the Opposing Creditors.

C2.3 Abuse of process

47.  It has been held that:

(1)    The Court may dismiss a petition for bankruptcy if it is of the view that the bankrupting proceedings are an abuse of process.

(2)    Although each case must be decided on its own facts, where the core or principal purpose or part of such purpose is for seeking to obtain a dividend in the bankruptcy, it is not an abuse of process in presenting a bankruptcy petition.

See:     Malcolm Roberts Ross (a Bankrupt) (No. 2) [2000] BPIR (CA) 636, 643A- 644B per Nourse LJ; s. 5(3), the Ordinance.  

48.  In the present case, the Opposing Creditors submit that the Petition amounts to an abuse of process because the Petitioner has brought these proceedings in order to obtain an illegitimate advantage in the London execution proceedings brought by the Opposing Creditors, in light of the facts that:

(1)    She chose not to litigate in London;

(2)    She has sat back and watched the Opposing Creditors incurring substantial expenses in the London litigation; and

(3)    She chose not to petition for the Debtor's bankruptcy in London.

49.  I am not convinced by the Opposing Creditors' contention.

50.  There is nothing before me to suggest that the main purpose of the Petition is not for the Petitioner to obtain a share in the dividend of bankruptcy, especially in light of the unchallenged fact that the Debtor has already absconded and there are no substantial assets available in Hong Kong for execution under the Default Judgment.  This is a clear and legitimate purpose of issuing the bankruptcy proceedings.

51.  The mere facts that (a) the Opposing Creditors for their own benefit have chosen to bring their own execution and enforcement proceedings in London, (b) the Petitioner is aware of these London proceedings before she took out the Petition, and (c) if the bankruptcy order is granted, it may have an impact on Opposing Creditors’ interest in enforcing their default judgment over the London properties do not make the Petition an abuse of process.   

52.  If the Opposing Creditors' contention were correct, it would have the effect of practically elevating the Opposing Creditors’ status to a secured creditor over the Debtor's London assets, if any.  This is precisely what the bankruptcy law seeks to avoid and prevent. 

53.  I am therefore not satisfied that the Petition is an abuse of process and would similarly reject this ground of opposition.

D. Conclusion

54.  The Petitioner has proved her debt and there are no good reasons to oppose the Petition. 

55.  I therefore grant the usual bankruptcy order against the Debtor with costs, save and except costs of and occasioned by the Opposing Creditors' opposition (including the costs of this hearing) be paid by the Opposing Creditors to be taxed if not agreed.  The costs order nisi will be made absolute 14 days from today unless any of the parties applies to vary it.