XCHRX RE LEUNG HOI

HCSD20/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT STATUTORY DEMAND NO.20 OF 1999

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D E C I S I O N

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1. This is an application by the Applicant Leung Hoi to set aside a statutory demand. The statutory demand was served on him on 11 February 1999.

2. It is common ground that the demand had to be in Form 163. In the section headed "How to comply with a statutory demand or have it set aside" the last part reads :

"If you consider that you have grounds to have this notice set aside or if you do not receive a satisfactory written reply from the person or persons (or one of the persons) named in Part B before the expiration of 18 days after the service you should-

- apply without delay to the Court of First Instance to have the notice set aside.

Remember: You have only 21 days from the date of service on you of this document before the creditor may present a bankruptcy petition."

3. It is also common ground that the demand so served did not contain the following words in italics above, i.e. "before the expiration of 18 days after the service". The Creditor's case is that no prejudice was caused by the omission of these words because on the face of the statutory demand it was made very clear to the recipient of the document that he had to act quickly and apply without delay to the Court of First Instance to have the notice set aside if he considered that he had grounds to do so. There was more than one reference to the need to take action quickly as the recipient only had 21 days from the date of service of the document on him before a bankruptcy petition might be presented.

4. Leading counsel for the Applicant submitted that there are three categories of defects. The first is where the defect is so important that the demand should be set aside without proof of prejudice; the second is where there is a defect in the demand which, coupled with prejudice, calls for the setting aside of the demand; and thirdly, there is the category where the defect is immaterial so it is a mere irregularity and would not cause the demand to be set aside.

5. In support of his first category, the court was referred to the case of Asia Dyeing Co. Ltd. and Others v. The Authority (appointed under the Air Pollution Control Ordinance, Cap.311) [1990] 1 HKLR 263. That, of course, was not a case that concerned the Bankruptcy Ordinance. The respondent in that case had given notifications under the Air Pollution Control Ordinance requiring the owners to take certain anti-pollution measures. The owners took the point that the notifications were invalid because they failed to comply with section 9(1) of the Ordinance. In the course of his judgment, Clough JA dealt with the effect of non-compliance with this requirement. But that is a case that dealt with the performance of a duty, or the exercise of powers by authorities; it is not germane to the question whether non-compliance with a statutory demand should necessarily cause the demand to be set aside.

6. For my part, I do not accept that there are these three categories as leading counsel has submitted. In my view, the correct test in the case of an application to set aside a statutory demand is whether there has been any prejudice to the debtor. In In re A Debtor (No.1 of 1987) [1989] 1 WLR 271, the statutory demand was made on the wrong form and the amount of monies still outstanding had been calculated incorrectly. The Court of Appeal held that :

"... although the statutory demand was confusing and the amount specified as being due was incorrect, there was neither evidence of prejudice to the debtor nor an indication that he would have taken steps to comply with a non-defective demand; ... in the absence of injustice to the debtor, the court would not exercise its discretion to set it aside."

I accept that that is the correct test to be applied.

7. I now turn to the facts to see if any prejudice has been caused to the Applicant.

8. The 18-day period for applying to set aside a statutory demand pursuant to Rule 47 of the Bankruptcy Rules expired on 1 March. It is the Applicant's evidence that at the time when the statutory demand was served on him, he was heavily involved in a disputed takeover of a listed company called Hong Kong Four Seas Tours Limited of which he was a majority shareholder and the managing director. It was a matter that took up all his time and attention and he acknowledged that he did not give the demand the attention it deserved. Further, he said that he does not read English. The demand was passed to his secretary and it was only drawn to his attention after the takeover was completed on or about the 19 and 20 of March. It was only later that week, when his wife consulted his solicitor, that he learned that the time for applying to set aside the demand had lapsed.

9. The 19 March fell on a Friday. I will give the Applicant the benefit of the doubt and assume that his wife did not consult his solicitor until, say, about 25 or 26 March. The application was made on 8 April. Mr Robinson who appears for the Creditor drew attention to the fact that there was no explanation by the Applicant for the delay of 19 days in making the application after becoming aware of the need to do something about the demand. I do not think that that is correct because on the evidence, legal advice was not obtained until probably 25 or 26 March. On that basis, there would have been a delay of 12 days or so, but it is relevant that early April was the Easter vacation, so I do not think that any complaint could be made about undue delay on this score.

10. Of course, the right to apply to set aside a statutory demand is an important one. Where there has been non-compliance with the statutory form, the approach I take is that if an application were made shortly after the Applicant became aware of the need to do so, the court would grant leave to apply to set aside out of time. And it is in this manner that I have approached the matter today. If the Applicant is allowed to make his application today, he cannot complain of having suffered any prejudice. On that basis, I would not refuse to entertain the Applicant's application to set aside the statutory demand. I, therefore, now turn to the merits of that application.

11. Leading counsel for the Applicant acknowledged that on reading the evidence of his client, one's preliminary impression is that it falls into the "fanciful category". Essentially the story is that in settlement of a debt, an arrangement was entered into between the Applicant and the other party whereby a large sum of money was allowed to be drawn down by a limited company subject to guarantees provided by the Applicant and his wife. The Applicant's case is that he is not liable on the guarantees because of a collateral agreement entered into between him and the opposite party.

12. To simplify matters, it is not necessary to go into detail the transactions that have taken place. Suffice to say that the Applicant entered into a transaction in China for the development of a piece of land as part of a joint venture and for which he had advanced $12.07 million. A few years later, he went to arbitration and obtained an award in that sum. It is said that he entered into negotiations with the joint venture partner which resulted in a collateral agreement under which a loan in the form of a facility would be granted to Forever Wise which is a shelf company owned by the Applicant and his wife in the sum of $30 million in return for guarantees to be provided by the Applicant and his wife. It is the Applicant's case that the guarantees were for internal purposes only, and the $30 million was meant to be compensation for him because of the failure of the joint venture partner to obtain a land use certificate causing loss to his company; and it was also to compensate the Applicant in respect of the $12.07 million that he had paid towards that joint venture in respect of which he subsequently obtained an arbitration award.

13. Mr Keane, SC, for the Applicant, drew attention to the fact that here we have a significant sum of money that was lent to a company that had no assets. The transaction, he submitted, had no commercial purpose and there was no commercial justification for the loan. No due diligence had been carried out, either of the drawer of the facilities. The loan, therefore, had incomprehensible uncommercial features. Seen against this background, he submitted that the Applicant's case is not fanciful and that there is, therefore, a bona fide dispute as to whether or not the guarantees were to be enforceable.

14. On the evidence, it would appear that the Applicant and his wife, though owners of this shelf company Forever Wise, were also owners of a Hong Kong listed company, namely Four Seas Tours Limited. Mr Robinson who appears for the Creditor submitted that on this basis, the Applicant was certainly not a man of straw. It is also a fact that he was able to pay over $12 million in his joint venture some years earlier. The advance to Forever Wise, being guaranteed by the Applicant and his wife, was therefore a perfectly normal transaction. The facts are that the loan (or facility) was made on 20 July 1995 and was drawn down 100% by 9 August 1995. It is significant that on 20 December 1996, $10 million of the loan was actually repaid. If, as would appear to be the Applicant's case, the guarantees were not for real, then why was there a repayment of this $10 million, one asks. Moreover, it is the Applicant's evidence (as appears from his second affirmation) that :

"... On 20th December 1996 it was agreed that Forever Wise would repay HK$10 million. A further extension was given on 25th August 1998..."

It is to be noted that the first sentence was not accurate. It was not an agreement to repay : there is evidence of repayment being effected on that date. It is also the Applicant's evidence that an extension was given until 25 August. In this context, I need to mention that under the loan deed, G.I.T.I.C. (Hong Kong) was entitled to demand repayment within seven days. Although the Applicant said it was never intended that such a right be exercised, extensions had certainly been given for the repayment of that loan. Extensions would have had no place were the guarantees intended to be a sham since Forever Wise itself had no assets.

15. In October of 1998, a demand letter was sent to the Applicant. This was followed by other letters on 19 November and 14 December 1998. In addition to these letters, there were also meetings between the Creditor and the Applicant. The Creditor's evidence is that the Applicant explained that he was having financial difficulties and was therefore unable to repay the debt. The present defence was not raised until after the statutory demands were served several months later. Had it been genuine, it would have been raised much earlier.

16. The Creditor relied on Re Claybridge Shipping Co Step Ahead [1997] 1 BCLC 572 in which the English Court of Appeal said that :

"...the court necessarily has to take a view whether, on the evidence, there really is substance in the dispute which is raised".

Where the evidence is tenuous, that would be a reason for refusing to strike out the petition. In Re ICS Computer Distribution Ltd [1996] 3 HKC 440, Rogers J, as he then was, held that in a striking out application of a winding-up petition, the onus must be on the company against which a petition was presented to adduce sufficiently precise factual evidence to satisfy the Companies Court that it had a bona fide dispute on substantial grounds.

17. Having regard to the evidence in this case, I am not satisfied that the Applicant has established a bona fide dispute on substantial grounds. For that reason, I would dismiss the application to set aside the statutory demand. This, of course, would not prevent the Debtor or the Applicant from raising his defence when the petition - if it were to be filed against him - is filed and heard. It would be wrong at this stage to strike out the statutory demand where the evidence adduced by the Applicant is, in the words of Oliver LJ, "tenuous".