FU CHI MAN v. CHAN KIN WING

HCB 280/2021

[2021] HKCFI 3330

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 280 OF 2021

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J U D G M E N T

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1.  This is a petition for bankruptcy on the ground of the debtor’s failure to comply with a statutory demand for payment of debt pursuant to an alleged shareholders’ agreement. Both the alleged agreement and service of the demand are disputed.

Background

2.  Since 2001, the petitioner (“Fu”) and the debtor (“Chan”) have been equal shareholders (each holding 50 of the 100 shares issued) and directors of Linka Building Materials Company Limited (“Linka”) in the construction business.  Chan and Fu shared the profit and loss equally.

3.  Meanwhile, Colmat Construction and Engineering Co Ltd (“Colmat”) was a company owned by Chan and his ex-wife.  According to Chan, his ex-wife was his nominee until she transferred her shareholding to him and resigned as director in 2019 upon their divorce.

4.  The business of the parties operated this way. Various construction projects contracted by Colmat from third parties would be referred to Linka.  Of the payments from these projects received by Colmat, it would retain only 3% while the other 97% would be paid over to Linka as the latter’s business income.

5.  The debt in question arose out of the repayment of the loan facilities taken out by Linka from the bank.  As evidenced by the facility letters dated June 2018, Linka obtained from the bank, amongst other facilities, import trade loans being term loans of up to 90 days in order to pay its suppliers.  The facilities were secured by, amongst others, a guarantee provided since 3 July 2013 (“the Guarantee”) by Chan and Fu, who jointly and severally guaranteed the repayment of all monies owed by Linka to the bank.  In 2019, 8 import trade loans drawn down by Linka became due.

6.  Fu made payments in the total sum of HK$4,157,993.81 to Linka on diver dates between September 2019 and February 2020, and Linka then repaid those import trade loans to the bank.  Fu claims that Chan is liable to contribute 50% of such sum and hence HK$2,078,996.91.

7.  On the basis of the above alleged debt, Fu has served two versions of the statutory demands dated 6 March and 30 June 2020 respectively.  The second version contained an additional address of Chan for service.  Both set out the basis of the alleged debt in these terms, namely, by a shareholders’ agreement, the parties agreed that each was required to contribute sufficient funds from time to time according to their respective shareholding of 50% each, so as to punctually repay all import trade loans (and interest and charges) owed by Linka to its banks.  In breach of the agreement, Chan failed to make any contribution.  As a result, Fu repaid to the bank for and on behalf of Chan.

8.  For failure to comply with the second statutory demand, Fu filed the petition for bankruptcy against Chan on 14 January 2021.  In line with the statutory demand, the petition says that pursuant to the alleged shareholders’ agreement, the parties were contractually liable to timely contribute sufficient funds according to their respective shareholdings (i.e. 50% each) for repayment of all import trade loans as well as interest and charges owed by Linka to the bank.

9.  As mentioned, Chan disputes both the alleged shareholders’ agreement, and hence the debt, as well as service of the statutory demand.  Service of the petition was at one stage also in dispute, but has ceased to be an issue taken by Chan by the present hearing.

Bona fide dispute on the debt

10.  The principles are trite.  The bankruptcy jurisdiction of the court should be exercised only in clear case.  A real and substantial factual dispute regarding the debt which entails resolution by considering viva voce evidence should normally entail the dismissal of the petition: Re Leung Cherng Jiunn (debtor) [2016] 1 HKLRD 850 at §27(5).  The burden is on the debtor to demonstrate by sufficiently precise factual evidence that there is a bona fide dispute on substantial ground in respect of the debt.  It is not enough to just raise objections on affidavit or rely on un-substantiated and un-particularized assertions: Re Hong Kong Investments Group Ltd [2018] HKCFI 984 at §§12-14; Re Guy Kwok Hung Lam [2021] HKCFI 2135 at §31.

11.  In the present case, Chan does not dispute that the parties as shareholders shared the profits and loss of Linka in equal shares.  This is reflected by the equal shareholdings of the parties.  However, Chan denies the existence of the shareholders’ agreement in terms as alleged in the statutory demand and the petition as mentioned above or at all.

12.  To start with, the alleged shareholders’ agreement was admittedly oral without evidence in writing.  In the circumstances, one has to turn to the contemporaneous circumstantial and documentary evidence to see whether they demonstrate that the dispute raised by Chan in respect of the existence of the alleged agreement cannot be real or bona fide.

13.  The statutory demand and the petition were silent as to when the alleged shareholders’ agreement was entered into and whether it was oral or written.  It was only in his affirmation that Fu stated that the alleged agreement was made orally in about 2001.  By his affirmation in reply, Fu added that it was reached in July 2001.

14.  As set out in the statutory demand and the petition, the relevant term of the alleged shareholders’ agreement was that each of the parties was required to contribute sufficient funds from time to time according to their respective 50% shareholdings so as to enable Linka to (specifically) punctually repay all trade import loans (and the incidental interest and charges) to the bank.  According to his affirmation filed subsequently, the parties’ agreement was that it was only when Linka was generally unable to repay its debts that the parties would have to step in and make repayment on a 50/50 basis.  The contention in respect of the relevant obligation and liabilities undertaken by the parties under the alleged shareholders’ agreement lacks consistent precision.

15.  On behalf of Chan, it is submitted that the alleged shareholders’ agreement in terms as set out above were vague, uncertain and ambiguous.  In my view, if what Fu contends is essentially that the parties agreed to contribute if and when Linka did not have the cash flow to repay its liabilities, an agreement in such terms may not necessarily be too uncertain to be enforceable.  The state of the cash flow was reasonably ascertainable without questionable technicality. The more pertinent question however is whether and when Chan may be said to have been in breach of the alleged contractual obligation, when that was allegedly agreed to be timely contribution.  In practice, this could be triggered by the request of either shareholder to contribute.  However, the alleged requests by Fu to Chan to do so were allegedly made orally and are in fact disputed.

16.  In connection with the statutory demand and the petition, Fu refers specifically and only to the import trade loans contracted by Linka pursuant to the facility letters in 2018.  There is no evidence as to whether and, if yes, how the parties have acted in pursuance of the alleged shareholders’ agreement which has allegedly existed since 2001.  Had there been such evidence, one would have expected that to have been produced and relied on.  It will be discussed below the relevance of the personal guarantee of the parties to secure the repayment of such loans.  The guarantee was provided in 2013. The audited reports and financial statements of Linka for 2016 to 2019 produced by Fu also suggested the existence of bank loan facilities secured by a director’s guarantee prior to the 2018 loans in question.  However, no evidence has been adduced to demonstrate how Linka managed to repay such loan facilities or, more pertinently, whether the parties have acted in terms of the alleged shareholders’ agreement.  There is no suggestion that over the 18 years since the alleged shareholders’ agreement in 2001, Linka has never encountered any cash flow concern that would require the shareholders to honour their undertakings in terms of their agreement as alleged by Fu.  There is also no evidence of that.

17.  The audited reports and financial statements of Linka mentioned above do not cast light on any account by the company of such alleged equal contributions by the shareholders to fund the company from time to time.  One way to account for them would have been to record them as amounts received from and thus due to them.  Instead, the statements recorded that there were invariably equal amounts due from the directors every year.

18.  Chan criticizes that the alleged agreement of the shareholders to be personally liable for repayment of the company’s loan owed to the bank makes no commercial sense, as this would be contrary to the very purpose of the parties carrying on the business via a corporate vehicle with limited liability.  The registered capital of Linka was HK$10,000.  The shareholders have each been issued 50 fully paid up shares of HK$1 per share (ie issued share capital of HK$100).  Legally, what Fu and Chan committed to personally share would be the liabilities of Linka to the extent so defined by their shareholdings.

19.  In response to the above, Fu refers to the joint and several personal guarantee provided by the shareholders in 2013 mentioned above.  The impression that Fu conveyed by his affirmation is that the parties accepted personal liability to repay Linka’s loans owed to the bank by executing the guarantees.  When Fu had to pay the entire outstanding sum owed to the bank, he claims to be entitled to contribution by Chan to half of such sum as the other joint and several guarantor: see Law of Guarantee (7^th ed) at §§12-001; 12-003.

20.  However, a petitioner is not entitled to petition for a bankruptcy order other than on the basis of the debt as set out in the statutory demand: see Leung Cherng Jiunn (above) at §§24; 28(1) and 31; on appeal [2016] 1 HKLRD 850 at §§13-16.  The basis of the debt in the present case is said to be a matter of the contractual right pursuant to the alleged shareholders’ agreement, not a matter of right to contribution between joint and several co-guarantors upon payment pursuant to the guarantee.  Counsel for Fu apparently acknowledges that in her submission. Hence her reference to the guarantee merely as evidence of parties’ understanding allegedly in line with the parties’ understanding under the alleged shareholders’ agreement.

21.  As evidence of conduct in line with the alleged shareholders’ agreement, the execution of the guarantee by the parties in my view is probative but not conclusive.  To begin with, it is most likely that the guarantee came about as part of the terms of the loan facilities imposed by the bank.  However, this happened only in 2013, which was twelve years after the making of the alleged shareholders’ agreement in 2001.  Further, in case of default by Linka in repayment of its primary liabilities, the shareholders, as guarantors, would be personally liable to the bank for the same.  The parties as the joint and several guarantors of course must face the consequence of the bank’s enforcement against them personally.  However, the legal consequences of the alleged shareholders’ agreement and that of the guarantee, as counsel for Chan submits, were not identical.

22.  The fact, according to the evidence, was that Fu put Linka on funds so that Linka could then repay the import trade loans and the incidental interest and charges.  The account records as at 31 August 2019 recorded such repayments by Linka to the bank.  They were not repayments by Fu to the bank pursuant to the directors’ personal guarantee.  Except for the undertaking of personal liability for the repayment of the import trade loans in question by way of the guarantee, the guarantee does not further or conclusively evidence the existence of the alleged shareholders’ agreement as suggested.

23.  The above arrangement of funds by Fu to Linka to enable it to repay the bank leads to the consideration of how the amounts were treated in Linka’s company accounts.  This was mentioned above.  It is expected that such amounts would be treated as amount owed by the company to Fu.  However, the state of the evidence is both disputed and unclear.

24.  Chan produced receipt vouchers which recorded 4 of the 8 payments made by Fu to Linka in September 2019 as a director’s loans to the company in connection with the repayment of the import trade loans.  This was admittedly inconsistent with the statement of Chan in Form NDR1 dated 12 April 2021 filed with the Companies Registry for application to deregister Linka. According to Chan, the application was made pursuant to a company’s resolution signed by the parties on 13 November 2020.  In the form, Chan stated that the company has no outstanding liabilities.

25.  Chan explained that it was a mistake committed without the benefit of these receipt vouchers and legal advice as they were obtained only afterwards in late April to early May 2021.  Upon discovering the mistake, Chan had his solicitors notified the Registry of the correction of the mistake in June 2021, and the de-registration has since been withheld.  The letter from the Registry dated 6 July 2021 was received after Chan has filed his affirmation in opposition.  Hence Chan’s summons filed on 23 August 2021 for leave to file and rely on his further affirmation for the sole purpose of adducing such correspondence between his solicitors and the Companies Registry.

26.  Considering the applicable principles, the nature of the documents sought to be adduced by this further affirmation as well as the likely prejudice to Fu if the documents are adduced, I am prepared to allow that subject to costs, which I shall address at the end of this judgment.

27.  Yet if one examines the audited financial statements of Linka, one could not find amounts due to directors but only amounts due from directors.  However, that does not necessarily help advance Fu’s case.  Such amounts due from directors were invariably in equal amounts, and were described as unsecured, interest-free and without fixed repayment terms. They seem to reflect the equal sharing of profits and loss.  However, had such item in the statement consisted of amounts owed by the directors to the company because of the repayments of the import trade loans owed to the bank, one would have expected disparity in the amount due from the two directors.  In other words, the audited financial statements do not corroborate either party’s case conclusively.  For any amount categorized as amount due from a director, the right to claim also belongs to the company.

28.  The present proceedings are amidst the collapse of the parties’ business cooperation.  Chan refers to the dispute between Linka and Colmat regarding the business loss which has led to the correspondence between the parties’ solicitors back in September 2019.  The application for de-registration of Linka in April 2020 mentioned above refers.

29.  All matters considered, including those discussed above, I am not prepared to rule out a bona fide dispute in respect of the existence and terms of the alleged shareholders’ agreement, and thus the debt, that cannot be resolved by the available circumstantial and documentary evidence at this stage.  Fu fails not because of the lack of a probable claim for from Chan, but because of inability to meet the requirements of these proceedings that he chose for pursuing his claim.  This is just not a clear case for bankruptcy order on the basis contended.

Service of the statutory demand

30.  Rule 46(2) of the Bankruptcy Rules, Cap. 6A (“the Rules”) requires the creditor to do all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, by way of personal service.

31.  It is trite that failure to properly serve a statutory demand is a serious irregularity which renders a bankruptcy petition defective even where the debt may not be disputed: see Re Lam Chik Sing [2009] 2 HKLRD 107.  The strict requirement as to service cannot be waived even if the demand somehow came to the debtor’s notice: see Re Cheung Hoi Chu HCB 865-868/1998 (24 December 1998) at §§13-14.

32.  In Re Chiu Chi Hong [2020] HKCFI 2486 (citing Re Pang Mei Lan May [2005] 1 HKC 319 and Practice Direction (“PD”) 3.1 at §§2.1-2.6), the following steps expected of the creditor were summarized (at §34):-

(1)  If practicable, personal service of the statutory demand should be effected, including attempting to arrange an appointment for personal service through the debtor’s solicitors.

(2)  If not, the creditor should do all that is reasonable to bring the statutory demand to the debtor’s attention, i.e. by making two personal calls to the debtor’s address on separate days, the second of which should be by appointment letter.

(3)  Failing all other reasonable means of bringing the statutory demand to the debtor’s attention, the creditor should apply for substituted service by advertisement of the statutory demand.

33.  If the petitioner has done all that are practicably reasonable, whether or not the debtor had in fact received the document is beside the point: see Chiu Chi Hong (above) at §36 (citing Re Li Wai Man, HCB 211/1999 (1 November 1999 at §43).

34.  As mentioned, Chan no longer challenges the validity of the service of the petition, which was done pursuant to the order for substituted service on Chan’s solicitors.  That however does not prevent the court from considering whether the statutory demand, on which the petition is based, has been validly served: see Re Yau Chi Hang [2001] 3 HKLRD 24.

35.  The following steps were taken to serve the second statutory demand:

(1)  On 6 July 2020, enquiry was made for serving the demand on Chan’s former solicitors.  By letter dated 7 July 2020, the firm stated that they were taking instructions from Chan.

(2)  On 30 June 2020, an appointment letter together with the demand addressed to Chan at his last known residential address was sent by way of email and ordinary post for an appointment to serve the demand on 7 July 2020.  No reply has been received.  When the server attended the address on 7 July 2020, the security guard appeared to have contacted the occupant but did not allow the server to attend the unit or to leave any documents.

(3)  On 30 June 2020, an appointment letter together with the demand addressed to the last known work address of Chan was sent by way of email and ordinary post for an appointment to serve the demand on 9 July 2020.  No reply has been received.  When the server attended the address on 9 July 2020, he was told that Chan was not in office at the time.

(4)  On 9 July 2020, an appointment letter together with the demand addressed to the last known residential address of Chan was sent by way of email and ordinary post for another appointment to serve the demand on 15 July 2020.  No reply has been received.  When the server attended the address on 15 July 2020, the server was allowed to attend the unit when he also left a copy of the demand with whom he was given to understand was the domestic helper at the unit.  The domestic helper indicated that she would pass the document to Chan when he was expected to return in the evening.

(5)  On 9 July 2020, another appointment letter together with the demand addressed to the last known work address of Chan was sent by way of email and ordinary post for another appointment to serve the demand on 15 July 2020.  No reply has been received.  When the server attended the address on 15 July 2020, he was told that Chan was not in office.

(6)  On 27 July 2020, a copy of the demand was sent to the last known residential address of Chan by registered post.  Fu’s case is that the letter was confirmed to be delivered on 30 July 2020.

(7)  The solicitors for Fu also made various phone calls to Chan by his last known telephone number on 5, 20 and 25 November 2020 respectively, but the calls would not connect and no voice message could be left.

36.  Chan does not dispute that personal service was not practicable in the particular circumstances.  He also does not dispute that Fu has attempted to arrange an appointment for personal service through solicitors.  However, he did not explain why he has not responded to those letters or emails, when none of them has been returned in post or bounced.

37.  According to Chan, he ceased to reside at the residential address last known to Fu after his divorce which was decreed absolutely on 11 June 2020.  He has moved to his current residential address at Shamshuipo, Kowloon.  He did not say or produce evidence when he moved though. Somehow when he signed the annual return of Colmat and Linka in November and December 2020 respectively, his residential address remained as before instead of an address in Shamshuipo.  He even provided the same address for the incorporation of a new company solely owned by him in January 2021. Whether or not he has another residential address in Shamshuipo as alleged, Chan as a matter of fact maintained the previous residential address last known to Fu for the purpose of official correspondence.

38.  According to Chan, he subsequently understood from his ex-wife that a registered post addressed to him has been received but returned by her to Fu’s solicitors because he no longer resided there.  This, according to the above chronology, would be the one sent on 27 July 2020 and delivered on 30 July 2020.  However, his ex-wife has also forwarded to him the demand but could not recall when.  That said, that was said to be the copy received by her domestic helper, which, according to the above chronology, would have been the one handed to her on 15 July 2020.

39.  Against the fact that Chan continued to use the previous residential address for public record as mentioned above, and the alleged manner of how his ex-wife is said to have handled those documents, all that one is left with about his explanation is nothing but scepticism.

40.  Chan complains that whilst Fu has made 2 personal calls to each of his residential and work addresses last known to Fu, such calls were not made in compliance with PD 3.1.

41.  First, Chan argues that the 4^th attempt to effect service at his residential address last known to Fu mentioned above was made at 10:31 am, which was outside the range of hours stipulated by §2.6(b) of PD 3.1 (ie before 7:30 am or after 7:30 pm). Technically, this may be true.  Factually, the demand was left with the domestic helper at the address, who represented that Chan would return in the evening.  Chan’s own case is that the demand that his ex-wife subsequently forwarded to him was what she was alerted to by her domestic helper.

42.  Second, Chan argues that during the 2^nd attempt to effect service at his residential address last known to Fu, when the server was told by the security guard that the occupant would not allow him to go up to the address, the server pursuant to §2.6(f) of PD 3.1 should have asked the security guard whether the debtor (Chan) has received the appointment letter (dated 30 June 2020).  One wonders how meaningful it would have been to ask the security guard, who had nothing to do with the occupants at the address, about that.

43.  Third, Chan complains that during each of the 3^rd to 5^th attempts to effect service mentioned above, when the server was told that Chan was not around, he pursuant to §2.6(g) of PD 3.l should have asked the person present whether letters to Chan were being or had been forwarded to another address.  One wonders why that could have been expected when the persons conversing with the server made no indication that Chan was unknown or no longer at the addresses.  The fact was quite the contrary.  There is also no evidence of suggestion that there was another address of Chan as a matter of fact.

44.  Fourth, Chan questions the service of the demand by registered post after the experience from the previous attempts.  It is pointed out that it is hardly proved that the registered post would have come to Chan’s attention.  Whilst the evidence may show the posting and delivery of the post, there is no evidence of receipt by the addressee.  The Hongkong Post’s policy that postmen would not require signature in acknowledgement of receipt with effect from 28 March 2020 due to social distancing policy, Chan argues, reinforces the uncertainty.  In the circumstances, the server also could not, as he did not, depose to when to the best of his knowledge the statutory demand should come to Chan’s attention, which is a requirement under r49(5)(c) of the Rules.

45.  Contrary to Chan’s argument, the experience from the previous service by the server on behalf of those acting for Fu, as mentioned above, reasonably led them to the belief that mail to the residential address would reach Chan.  The lack of strict compliance with r49(5)(c) in respect of the affirmation of service must be understood in such light.  I do not see the assertion that the registered post has been returned by Chan’s ex-wife, in view of the observations made above regarding the alleged handling of the documents served at her address, is more credible than the denial of those acting for Fu, as officer of the court, of return of the mail.

46.  Last, Chan argues that it was apparent from the circumstances that substituted service by advertising the statutory demand was called for.  First, the means of substituted service by advertisement of the demand is an alternative, which must be justified by the circumstances, namely that all other reasonable steps that could be taken have been taken but there was no information or idea about the where about of the debtor for effecting service.  As discussed above, this was not exactly the situation in the present case.  Second, and merely as a matter of background, the matter did come before the masters, who have raised requisitions.  However, neither master raised requisition on the basis that the circumstances might call for substituted service before allowing the petition to be filed.

47.  All matters considered, I am not inclined to find that the service of the statutory demand should be impeached on the basis that Chan may be entitled to the benefit of any doubt by adopting the strictest approach to such service as argued on his behalf.  Even if I am wrong, Chan is still home dry in resisting the petition on the basis of a bona fide dispute in respect of the debt on substantial ground discussed above.

Order

48.  In respect of Chan’s summons filed on 23 August 2021, I give leave to him to file and serve the further affirmation.  This is indulgence of the court.  I therefore order nisi that Chan should pay Fu’s costs of and occasioned by the summons.

49.  The petition is dismissed.  Taking into account the costs incurred for the purpose of the distinct issue of service of the statutory demand, I order nisi that Fu shall pay 50% of Chan’s costs of and occasioned by the petition.  All costs shall be taxed, if not agreed.

50.  In the absence of application in 14 days to vary, the above costs order shall become absolute without further order.

51.  Upon the above event, costs of the Official Receiver in the sum of HK$5,300 shall be deducted from the petition deposit.