RE CHENG WAI KEI

HCB 2109/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 2109 OF 2002

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REASONS FOR JUDGMENT

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1. This is a petition for bankruptcy. At the hearing I made the usual bankruptcy order against the debtor and now give my reasons for so doing.

2. The petitioner bases this petition on a debt of US$5,531,050.52 from WCP International Industry & Commerce (Anhui) Co. Ltd, now known as Philco Air Conditioning (Hefei) Industry & Commerce Co. Ltd (the company), of which the debtor is the guarantor. On 24 August 2001, a statutory demand in respect of the debt was served on the debtor, and since then, apart from a sum of about US$270,000.00 paid by the company, the demand has not been complied with. An application was made to Madam Justice Chu on 28 November 2001 to set aside the statutory demand, on the grounds that it did not specify securities which the debtor claimed that the petitioner held in respect of the debt, and that the value of the securities exceeded the amount of the debt, but this was dismissed by the learned judge.

3. The grounds of opposition which appear from the affidavits filed on behalf of the debtor are that the debt is disputed, that he is able to pay the debt, and that he has made an offer to compound the debt, which offer has been unreasonably refused. At the hearing Mr Fung added further grounds submitting that the petitioner is in breach of the terms of the guarantee and that it was signed on the understanding that the debtor would not be liable for the debt due unless it could be met out of the security held by the petitioner.

4. The basis of the first ground is that the company has repaid over US$35 million to the petitioner and there is consequently nothing now owing, and the debtor has produced in support of this a schedule of payments over the last 5 years showing this total having been paid. However, this is unsupported by any other documents showing how these payments were made, or in respect of which debt. It is no more than a bare allegation in the debtor's, or the company's own document. Further, in another document dated 5 October 2001, produced by the company as a proposal to settle their debt to the petitioner, they concede a loan balance due to the petitioner of approximately US$5.7 million, after allowing for the US$35 million already claimed to be paid. Mr Fung also contends that a further payment by the company of some US$270,000.00 late last year has not been accounted for in the petition. However, the court is not concerned to investigate whether the sum claimed to be owed is precisely accurate at the time of the petition, where no attempt has been made to pay the balance, or indeed any other part of it. Even allowing for that payment, there is a figure well over US$5 million still outstanding which is sufficient to support this petition, and I find that there is no evidence of any substantial dispute.

5. As to the second ground, the debtor has produced no evidence as to his ability to pay the debt, or, indeed, as to his assets and other liabilities at all. His only contention in this regard relates to his ownership of the company itself and its potential value. Ability to pay can only be judged in the light of cash or readily realisable assets in the debtor's hands (see Re Philipp and Lion Far East Ltd, CWU No. 130 of 1991, as applied to bankruptcy by Kwan J in Re Li Chi Ho, HCB No. 10975 of 2001). The debtor here has produced no evidence of such ability to pay, and this ground must accordingly fail as well.

6. The offer to compound the debt is, as Ms Leung has pointed out, not an offer but a proposal. It lacks adequate financial information, and relies upon an investor putting in considerable funds, and restructuring debts. Apart from the lack of any indication that the investor named is committed to the proposal, and in what sum, it also relies on the goodwill of all the company's creditors to cooperate, and, in the case of the unsecured creditors, to voluntarily discharge 50% of their debts. It carries no conviction of any certainty and relies, as Ms Leung says, on unrealistic factors. In any event, it is not the first proposal to have been made by the company. Since September 2001 there have been at least three proposals for repayment made by the company to which the petitioner has agreed, none of which have been complied with, in spite of extensions of time, apart from the payment of US$270,000.00 referred to above. In the light of this, the petitioner is entitled in my view to some certainty before agreeing to any further proposal to settle the debt other than by immediate payment.

7. As to the last two grounds, put forward at the hearing, the first is on the basis that the petitioner has breached the terms of the guarantee itself. Mr Fung relies for this on clause 12 of the guarantee, which is the usual clause as to a statement of account signed as correct by an officer of the lender being conclusive evidence of the amount due. Mr Fung says that as the petitioner has not supplied such an account before serving the statutory demand, it is in breach of the guarantee. However, this is a fallacious argument. The clause is for the benefit of the lender, not the borrower, and permits the former to prove its debt simply by supplying such a statement of account. It does not limit it to proving the debt by this means alone, and the debt has been fully set out in the statutory demand, and proved to my satisfaction by the evidence filed in this matter.

8. As to the alleged understanding of the debtor that he would not be called on under the guarantee until the securities had been realised, this is in direct contradiction of the terms of the guarantee, which, in clause 15.03, clearly provides that it may be enforced without the lender having recourse to any other security or rights. There is no evidence apart from another bare allegation that the debtor did not fully understand the nature and terms of the guarantee, and, as an experienced businessman, it would need strong evidence of such lack of understanding, sufficient to support a plea of non est factum, to overcome the clear terms of this agreement, signed voluntarily by the debtor in the presence of a solicitor.

9. For these reasons I found that the grounds of opposition were insufficient to show why a bankruptcy order should not be made with costs to the petitioner.