LAW v. CHANG

HCSD 48/2020

[2021] HKCFI 789

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 48 OF 2020

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J U D G M E N T

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1.  This is my decision on Mr Law’s application to set aside the statutory demand dated 5 September 2020 issued by Ms Chang against him. By consent, the application is determined without an oral hearing.

2.  The parties were husband and wife, but obtained a divorce in proceedings numbered FCMC 7162/2013 in the Family Court (“divorce proceedings”).  By a consent order made in May 2014 and amended in March 2015 and another consent order dated 5 February 2015 in those proceedings (collectively, “the maintenance orders”), Mr Law was ordered to pay Ms Chang $20,000 per month for her maintenance and $80,000 per month by way of maintenance for their child (until she attains the age of 18 or completes her full‑time education, whichever is later).  In the amended order of March 2015, the parties acknowledged that in case of increment in the school fees and educational expenses of the child, her periodic payment should be adjusted.  In fact, the child’s maintenance has since July 2015 (apparently by agreement) been increased to $90,000 per month.

3.  Ms Chang says that since January 2019, Mr Law has failed to make full and punctual payment of the maintenance payments.  On her calculations, the outstanding amounts as at January 2020 totalled $531,900.  Her solicitors wrote to Mr Law on 14 January 2020 demanding payment of the arrears, and interest in the sum of $23,383.63, totalling $555,283.63.  She also applied ex parte in the divorce proceedings for, and obtained on 23 January 2020, a charging order nisi on Mr Law’s property being a flat and a car parking space in Winfield Building, Ventris Road, Happy Valley. 

4.  Mr Law says that after receiving the solicitors’ letter of 14 January 2020, he contacted Ms Chang and was given the impression that she was willing to reach an amicable agreement.  He says that they subsequently reached an oral agreement on 21 April 2020 that he would help Ms Chang to pay the surrender fee of her Manulife insurance policy as a way of repaying and settling the arrears and interest of $555,283.63.  On around 8 May 2020, the policy was surrendered and Manulife paid Ms Chang a sum of $466,957.29.  Mr Law said he thought that the demand in the solicitors’ letter had been resolved.

5.  At a hearing on 30 June 2020 (which was adjourned from 31 March 2020 due to the pandemic) which Mr Law did not attend, the charging order was made absolute, and costs summarily assessed in the sum of $6,100 were added to the judgment debt. 

6.  Mr Law said that when he received a copy of the order on 7 July 2020, he was shocked that Ms Chang had proceeded with her application despite their settlement through the oral agreement of April 2020.  Mr Law then took steps to apply for the charging order to be discharged.  He first did so by starting new proceedings in HCMP 1164/2020 against Ms Chang.  Pursuant to queries raised by the court, the parties filed a consent summons dated 7 September 2020 for the originating summons in HCMP 1164/2020 to be dismissed.  Those proceedings were replaced by an inter partes summons issued on 18 September 2020 in the divorce proceedings, whereby Mr Law seeks an order that the charging order absolute be discharged.  Directions have been given for that summons to be determined on paper by the Family Court, whose decision is pending.

7.  Meanwhile, on 5 September 2020, Ms Chang’s solicitors issued the statutory demand herein and served it on Mr Law personally.  The debts relied upon are:

(1)     arrears of maintenance (for Ms Chang and for the child respectively) for January 2019 to January 2020, in the total sum of $531,900, and costs of $6,100 for the charging order, as referred to above; and

(2)     arrears of maintenance (for Ms Chang and for the child respectively) pursuant to the maintenance orders for the period from 1 February to 1 September 2020 in the total sum of $63,042.71.

8.  On 22 September 2020, Mr Law issued the present application to set aside the statutory demand.  In his skeleton submissions, Mr Billy Poon advanced the following grounds on behalf of Mr Law:

(1)     The debts relied upon are arrears of periodic maintenance payment and are, as such, not provable in a bankruptcy.  There is no prospect of the court making a bankruptcy order on a petition founded on such debts.

(2)     The debts covered by the charging order are bona fide disputed on substantial grounds, in that Mr Law contends that they had been fully or partially settled by the insurance payment of $466,957.29.

(3)     The service of the statutory demand pending the determination of Mr Law’s application to set aside the charging order absolute was calculated to stifle his application.

(4)     Ms Chang has failed to comply with rules 44(5) and 48(5)(c) of the Bankruptcy Rules and state the value of the security held and the shortfall after deducting the alleged debts.

Non‑provable debts

9.  There is no dispute between the parties that the arrears of periodic maintenance payments ordered against Mr Law under the maintenance orders referred to above would not be provable in his bankruptcy: Re Cheuk On Ching [2004] 3 HKC 192; Re Lo Man Hong (a Debtor) [2013] 4 HKLRD 126, §§17-18.  Further, although a non‑provable debt may technically be within the type of debts on which a bankruptcy petition may be founded having regard to the wording of the statute, the courts do not in practice make a bankruptcy order on a petition founded on such debt: Re Lo Man Hong, §§27-33.  On this basis, Mr Poon, acting for Mr Law, submits that the statutory demand should be set aside.

10.  Against this, Mr Jonathan Tai, acting for Ms Chang, makes 2 points.  First, he submits that this ground was not stated in the first affirmation of Mr Law, contrary to the requirement of rule 47(4)(b) of the Bankruptcy Rules (Cap 6A).  This is correct, but not fatal, because the court has power under rule 203 to deal with any proceeding notwithstanding such non‑compliance and, given its nature as a point of law, I consider it appropriate to allow the ground to be advanced, subject to the question of costs.

11.  Secondly, Mr Tai submits that the debts in the statutory demand are not all arrears of maintenance but include a sum of $6,100 being legal costs relating to the charging order awarded to Ms Chang. The problem with this is that this is below the threshold of $10,000 for a creditor’s petition under section 6(2)(a) of the Bankruptcy Ordinance (Cap 6).  I do not accept the submission that this is a consideration relevant only to the bankruptcy court if and when Ms Chang presents a bankruptcy petition against Mr Law.  It is in my view material to whether the statutory demand can found a petition for bankruptcy.  As stated in Chan Yuk Lun v Chan Ying Chit [2015] 1 HKLRD 501 at §8:

“ The statutory demand is a creature of the Bankruptcy Ordinance. It has no independent existence or significance outside that statutory scheme. All that a statutory demand does, if not set aside or complied with, is to enable the creditor to present a petition for bankruptcy. Indeed, r 48(7) of the Bankruptcy Rules provides:

‘ If the court dismisses the application, it shall make an order authorizing the creditor to present a bankruptcy petition either forthwith, or on or after a date specified in the order.’ ”

12.  Rule 48(5)(d) of the Bankruptcy Rules (Cap 6A) provides that the court may set aside a statutory demand if it “is satisfied, on other grounds, that the demand ought to be set aside”.  Thus it has been held in In re a Debtor (Nos 49 and 50 of 1992) [1995] Ch 66 at 70C-G that where part of the debt is disputed and part is not, but the undisputed part is less than the prescribed bankruptcy level, the statutory demand “may be set aside without further ado”.  Similarly, if, as here, the only “live” debt in the demand is below the statutory threshold of $10,000, there is no basis for taking the bankruptcy route and the demand should in my opinion be set aside.  There is nothing to show that there are other proper debts due to Ms Chang which can be combined with the $6,100 to found a petition subsequently.

13.  Accordingly, the application should be granted on this ground alone.  As such, I shall deal with the remaining grounds only briefly.

Bona fide dispute on substantial grounds

14.  Mr Law contends that the sum of $466,957.29 that he procured to be paid to Ms Chang on 18 May 2020 was for full settlement of the arrears of maintenance accrued between January 2019 and January 2020 plus interest.  For her part, Ms Chang accepts that the sum was used to pay maintenance, but contends that it was for payment of maintenance due from 1 February 2020 onwards.  This seems to me to depend on the evidence of the parties as to what was orally agreed between them.  I do not think I can at this stage say that what Mr Law has said is obviously incredible or not bona fide.  Nor do I think that by the charging order the court adjudicated on the issue whether there was a debt outstanding. 

15.  However, the statutory demand is also based on the arrears of maintenance for the period of 1 February to 1 September 2020 less the sum of $466,957.29.  If Mr Law is right and that sum should have been used to settle the 2019 arrears instead, then there would correspondingly be a higher amount of 2020 arrears outstanding.  In any event, there is as things stand a claim for $63,042.71 in respect of the 2020 arrears in the statutory demand, which is not affected by the settlement alleged by Mr Law.

16.  Accordingly, this ground fails.

Stifling application to set aside the charging order

17.  It is said that the service of the statutory demand pending the application to discharge or vary the charging order was a prejudicial act calculated to stifle that application.  There is no substance in this ground, which I reject.

Non‑compliance with rules 44(5) and 48(5)(c)

18.  Rule 44(5) requires a creditor holding any security in respect of the debt to specify in the statutory demand the nature of the security and the value put upon it as at the date of the demand, and provides that “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”.

19.  Rule 48(5)(c) provides that the court may grant the application to set aside the statutory demand if “it appears that the creditor holds some security in respect of the debt claimed by the demand, and either rule 44(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt”.

20.  It is true that the statutory demand does not strictly comply with these rules, but it actually stated that the creditor was willing, in the event of a bankruptcy order being made, to give up her security for the benefit of all the creditors.  In these circumstances I do not think the non‑compliance is fatal to the validity of the demand.

Conclusion

21.  For the reasons above, the statutory demand is set aside based on the first ground.  Since this ground was not raised in the affirmation but only in counsel’s skeleton, I order on a nisi basis that Ms Chang is to pay the costs of Mr Law of this application beginning from (and including) the skeleton argument of 8 February 2021, to be taxed if not agreed.