CCH v. CSY

1.  This is the Applicant’s application on 7 February 2022 (the “Application”)  to set aside a statutory demand dated 18 January 2022 (the “Statutory Demand”), which was served on the Applicant by the Respondent on the same day.

2.  The Statutory Demand is based on (i)  an outstanding debt in the sum of HK$1,000,000 (the “Alleged Debt”)  allegedly due and payable by the Applicant to the Respondent pursuant to a written loan agreement dated 5 November 2019 (the “Loan Agreement”), which sum was covered by a cheque dated 18 December 2019 provided by the Applicant to the Respondent which was dishonorued upon presentation on 15 May 2020 (the “Dishonoured Cheque”); and (ii)  interest from the date of presentation of the Dishonoured Cheque on 15 May 2020 to the date of the Statutory Demand at prime rate plus 1% per annum, in the sum of HK$100,499.44.

3.  The Applicant was legally represented until 12 July 2023 when she filed a Notice to Act in Person.

4.  Whilst she was legally represented, the Applicant filed 2 affirmations in support of the setting aside application on 7 February 2022 and 25 May 2023 respectively.

5.  The substantive hearing of the Application on 31 July 2023 (“Hearing”)  was fixed pursuant to the Order of Ng J dated 9 March 2023, when the Applicant was still legally represented.

6.  The Respondent has filed an affirmation of service confirming the service of documents relevant to the Hearing (including hearing bundles and skeleton submissions)  at the address for service provided by the Applicant in the Notice to Act in Person.

7.  I am satisfied that the Applicant has been given proper notice of today’s hearing but chose not to attend the Hearing to pursue her application.

8.  Nonetheless, Mr. Avery Chan (counsel for the Plaintiff)  invited the Court to deal with the Application on its merits.

9.  Having considered the evidence filed and the arguments put forward by Mr. Chan, I dismissed the Application at the Hearing and made the orders set out in Section E below, with reasons to follow, which are now set out below.

B.  LEGAL PRINCIPLES

10.  Rule 47(4) of the Bankruptcy Rules (Cap 6A) prescribed that a debtor applying to set aside a statutory demand must state the grounds on which he claims the demand should be set aside in the supporting affidavit. The burden is on the debtor to satisfy the court that sufficient cause is shown for the demand to be set aside, see Rule 48(1).

11.  Rules 48(5)(a)  and (b)  of the Bankruptcy Rules permit the Court to set aside a statutory demand if (i)  the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; and/or (ii)  the debt is disputed on grounds which appear to be substantial.

12.  In in DCKD & Anor v JPWL [2022] 4 HKC 261 at §§22-24, Linda Chan J set out the legal principles on setting aside statutory demand which can be summarized as follows: -

(1)  The burden is on the Applicant to satisfy the Court that there are valid grounds to set aside the statutory demand.

(2)  In considering whether to set aside a statutory demand, the Court is only undertaking a limited exercise and will only be concerned with whether the creditor is able to pursue bankruptcy proceedings founded on the statutory demand.

(3)  To demonstrate that the debt is disputed on substantial grounds within r.48(5)(b), the applicant must establish by sufficiently precise factual evidence which is believable that they have a defence of substance, not just a fair probability of one.

(4)  The Court will consider the case being put forward with a reasonably critical eye, testing the case against the other background facts and circumstances.

13.  The burden that the applicant bear in a setting aside application is higher than that of a defendant opposing a summary judgment application: see Ling Wai Hoi v Jetland Global Investments Limited [2022] HKCA 1457 at §§58-61.

C.  APPLICANT’S CASE

14.  It is apparent from the Applicant’s affirmations filed in support of the Application that she seeks to set aside the Statutory Demand on the basis that she has bona fide grounds to dispute the Alleged Debt, or alternatively that she has a counterclaim or cross demand for sums exceeding the sums claimed in the Statutory Demand.

15.  The Applicant’s case can be summarised as follows: -

(1)  On around 16 June 2014, the Respondent (through her younger brother, Mr. CCS (“Respondent’s Brother”))  advanced a loan (“1^st Loan”)  to the Applicant’s son, Mr. CCL (the “Son”), and the Applicant was the guarantor of the 1^st Loan.

(2)  On or around 19 July 2014, the Respondent (through her daughter, Ms. LST (“Respondent’s Daughter”)  advanced another loan (“2^nd Loan”)  to the Son, and the Applicant was also the guarantor of the 2^nd Loan.

(3)  It was agreed between the Applicant and Respondent that the Applicant and her husband would transfer two industrial properties in Hong Kong to the Respondent (or persons appointed by her)  in full and final settlement of sums due and owing under the 1^st and 2^nd Loans. The aforesaid two properties are (i)  Unit 5, 15/F, Technology Park, No. 18 On Lai Street, Shatin, New Territories (“Property 1505”); and (ii)  Workshop 13, 11/F, New Commercial Centre, No.19 On Sum Street, Shatin, New Territories (“Property 1113”). At the time, Property 1505 was held by the Applicant and her husband, whereas Property 1113 was held by HG Limited, a company controlled by the Applicant.

(4)  In respect of Property 1505, a sale and purchase agreement was entered into between the Applicant and her husband (as vendor)  and the Respondent (as purchaser)  on 17 August 2019 (“Property 1505 SPA”), which stipulated that the purchase price was HK$5,055,600 which shall be paid in the following manner: (i)  HK$4,437,626 as deposit and part payment of the purchase price which was paid prior to the execution of the Property 1505 SPA (“Property 1505 Deposit”); and (ii)  HK$617,974 being the balance of the purchase price to be paid before completion on or before 30 September 2019.

(5)  In respect of Property 1113, a sale and purchase agreement was entered into between HG Limited (as vendor) and the Respondent’s Daughter (as purchaser)  on 6 November 2019 (“Property 1113 SPA”), which stipulated that the purchase price was HK$5,773,600 which shall be paid in the following manner: (i)  HK$2,522,862.18 being the initial deposit and part payment of the purchase price which was paid prior to the execution of the Property 1113 SPA (“Property 1113 Initial Deposit”); (ii)  HK$2,250,737.82 being the further deposit and further part payment of the purchase to be paid upon the signing the Property 1113 SPA; (iii)  HK$1,000,000 being the balance of the purchase price to be paid before completion on or before 13 December 2019.

(6)  Despite what was is stated in the Property 1505 SPA, the Applicant (and her husband)  never received the Property 1505 Deposit as it was understood between the parties that such sum was to be treated as partial repayment by the Applicant of the 1^st and 2^nd Loans.

(7)  The completion of the sale of Property 1505 was scheduled for 30 September 2019, but as the property was subject to a mortgage and the Applicant and her husband had to raise funds to discharge the same, it was agreed between the Applicant and the Respondent that the latter would advance HK$1,000,000 under the Loan Agreement to enable the mortgage to be discharged to complete the sale.

(8)  Similarly, despite what was is stated in the Property 1113 SPA, the Applicant (or HG Limited)  never received the Property 1113 Initial Deposit as it was understood between the parties that such sum was to be treated as repayment by the Applicant of all outstanding sums owing under the 1^st and 2^nd Loans and the HK$1,000,000 under the Loan Agreement.

(9)  Since the Respondent was not a party of the 1^st and 2^nd Loans, it was suggested by a common friend of herself and the Respondent in the course of the parties' negotiation that the Applicant should sign a document to evidence the sum of HK$1,000,000 which the Respondent advanced to her under the Loan Agreement and draw up a post-dated cheque to the Respondent so that, if the sale of Property 1505 and Property 1113 fell through for whatever reason, the Respondent could have the sum of HK$1,000,000 returned to her.  Hence, it was in these circumstances that the Applicant provided the Dishonoured Cheque and signed the Loan Agreement (being a Chinese document titled “借據” signed by the Applicant).

(10)  Based on the above, it is the Applicant’s case that the Alleged Debt of HK$1,000,000 advanced by the Respondent under the Loan Agreement had been taken into consideration in the negotiation between the parties of the settlement of the 1^st and 2^nd Loans and that, with the completion of the sale and purchase of Property 1505 and Property 1113, the Respondent is not entitled to demand payment of the said sum.

(11)  Further, the Applicant contends that as she never received the Property 1505 Deposit or the Property 1113 Initial Deposit from the Respondent in the transactions, if the Respondent does not agree that the sum of HK$1,000,000 was paid as part of the settlement arrangement, then she has a counterclaim or cross demand for the Property 1505 Deposit and the Property 1113 Initial Deposit being sums exceeding the claim in the Statutory Demand.

C.  RESPONDENT’S CASE

16.  The Respondent denies that the liabilities of the Son and/or the Applicant under the 1^st and 2^nd Loans and/or the liability of the Applicant under the Loan Agreement would be fully discharged after the completion of the sale and purchase of Property 1505 and Property 1113 as alleged by the Applicant. 

17.  The salient aspects of the Respondent’s evidence is as follows:-

(1)  The Alleged Debt (together with interest)  is an outstanding debt due and payable to the Respondent pursuant to the Loan Agreement.

(2)  Pursuant to the Loan Agreement, the Respondent made the loan of HK$1,000,000 to the Applicant on 5 November 2019 to facilitate the Applicant and her husband to discharge the mortgage loan in respect of Property 1505 for completing the sale and purchase of the property. The repayment date is stated to be 18 December 2019 (5 days after the originally scheduled completion date for the sale of Property 1113).  

(3)  The Loan Agreement is entirely separate from the 1^st and 2^nd Loans.

(4)  The Alleged Debt was covered by the Dishonoured Cheque dated 18 December 2019 provided by the Applicant.

(5)  HG Limited and the Applicant requested to postpone the completion date for sale of Property 1113 by reason they required more time to realise assets to discharge the mortgage for the property. But as the Dishonoured Cheque was only valid for six months, the Respondent presented it for payment on 15 May 2020 which was later returned and found to be dishonoured on 18 May 2020.  The Alleged Debt thus remains outstanding.  

(6)  It was agreed between, inter alios, the Applicant, the Applicant’s Brother, the Applicant’s Daughter and the Son that the Property 1505 Deposit and the Property 1113 Initial Deposit would be settled by way of offsetting part of the outstanding principal and interest under the 1^st Loan.

(7)  The sale and purchase of Property 1505 and Property 1113 were completed 11 November 2019 and 7 August 2020 respectively.  

(8)  On 3 July 2020, the Applicant’s Brother (as the lender under the 1^st Loan)  and the Son (as the borrower under the 1^st Loan)  entered into a written settlement agreement (the “Settlement Agreement”)  confirming, inter alia, that (i)  the Property 1505 Deposit (HK$4,437,626)  and the Property 1113 Initial Deposit (HK$2,522,862.18)  were settled by offsetting part of the principal and interest under the 1^st Loan; (ii)  after such offsets, the outstanding debt under the 1^st Loan remained unpaid are principal of RMB14,705,916.76 and interest after 13 May 2020.  

(9)  It was further stated in the Settlement Agreement that the Son’s liabilities under the 1^st Loan could be fully discharged if (i)  he caused HG Limited to complete the transfer of the Property 1113 to the Respondent’s Daughter before 15 July 2020; (ii)  the Son repaid HK$1,000,000 to the Respondent’s Brother before 31 August 2020 and repaid another HK$1,000,000 to the Respondent’s Brother before 30 September 2020; and (iii)  the Son paid RMB100,000 to the Respondent’s Brother as part of the legal costs incurred by him within 5 days. If the Son failed to fulfill all of the three conditions stated above, the Respondent’s Brother reserved his rights to claim all outstanding principal and interest under the 1^st Loan against him and the Applicant (as guarantor under the 1^st Loan).

(10)  As the Son failed to fulfil the conditions under the Settlement Agreement, the Respondent’s Brother commenced an arbitration action against the Son in Shenzhen claiming for the outstanding debt under the 1^st Loan pursuant to the Settlement Agreement, and obtained an Arbitral Award dated 8 March 2022 (“Arbitral Award”), in which it was found that the Respondent’s Brother and the Son have confirmed the outstanding debt under the 1^st Loan in the Settlement Agreement and the Son shall pay the Respondent’s Brother the outstanding principal of RMB14,705,916.76 as confirmed in the Settlement Agreement, interest and legal costs.

(11)  Based on the above, the Respondent’s case is that there has never been any settlement agreement in respect of repayment of the debts under the 2^nd Loan and/or the Alleged Debt of HK$1,000,000 under the Loan Agreement, which remains outstanding.

D.  DISCUSSION

18.  Having carefully considered the evidence adduced by the parties, I find that the Applicant has not satisfied the burden of showing either that (i)  she has a bona fide defence to the Alleged Debt and the sums claimed under the Statutory Demand, or (ii)  that she has a counterclaim or cross claim against the Applicant for sums exceeding the sums claimed in the Statutory Demand.

D1.  Alleged bona fide defence

19.  Aside from the Applicant’s bare assertion on affirmation, there is not a shred of evidence or any contemporaneous documents to show that the Alleged Debt of HK$1,000,000 advanced by the Respondent under the Loan Agreement forms part of any settlement agreement or arrangement between the parties (whether as part of a settlement in respect of the 1^st or 2^nd Loans or otherwise), or that the parties have otherwise agreed that upon completion of the sale and purchase of Property 1505 and Property 1113, the Respondent is not entitled to demand payment of the Alleged Debt under the Loan Agreement.

20.  On the contrary, the contemporaneous evidence before the Court clearly shows that the Loan Agreement is separate and independent of the 1^st and 2^nd Loans and the Applicant’s liability to repay the loan advanced under the Loan Agreement is unconnected with whether the sale and purchase of Property 1505 and/or Property 1113 proceeds to completion or not:

(1)  The Loan Agreement itself unequivocally stipulates the repayment date (還款日期)  to be 18 December 2019, and that the manner of repayment (還款方式)  was by way of the cheque dated 18 December 2019 issued by the Applicant to the Respondent in the sum of HK$1,000,000 (i.e. the Dishonoured Cheque). 

(2)  The obligation on the part of the Applicant to repay the loan is not stated to be conditional or in any way qualified. If, as alleged by the Applicant, the Loan Agreement was entered into and the Dishonoured Cheque issued just so that if the sale and purchase of Property 1505 and Property 1113 fell through the HK$1,000,000 could be returned to the Respondent, no doubt the parties would have specifically included this in the Loan Agreement itself, especially when both parties were represented by lawyers at the time in relation to the two property transactions.

(3)  Further, the Settlement Agreement (the existence of which is not disputed by the Applicant)  confirms that the Property 1505 Deposit (HK$4,437,626)  and the Property 1113 Initial Deposit (HK$2,522,862.18)  were settled by offsetting part of the principal and interest under the 1^st Loan, leaving the balance of RMB14,705,916.76 and interest after 13 May 2020 outstanding.

(4)  The Settlement Agreement only concerns the 1^st Loan, and does not concern either the 2^nd Loan or the Loan Agreement.  This is confirmed also by the Arbitral Award.

21.  The Applicant, in her reply evidence, stated that (i)  she was advised by her solicitors (to write to the Respondent’s solicitors on 7 May 2020 to put in writing the agreement between the parties, but the Respondent’s solicitors alleged that they did not have instructions to deal with the matter; and (ii)  the Respondent assured her that since they were good friends, the Applicant should trust her that she would not claim further sums from her after the transfer of Property 1113.

22.  I do not find such assertions credible. The Applicant adduced in evidence one letter from her solicitors to the Respondent’s solicitors dated 7 May 2020 which states “We are instructed that the abovementioned transaction forms part of a global settlement agreement……in respect of the outstanding sum under various loan agreements entered between relevant parties in 2014.” (emphasis added). It is plain that the Loan Agreement (entered into on 5 November 2019)  was not referred to as part of the alleged “global settlement”. There is no other solicitors’ correspondence adduced by the parties which refer to the Loan Agreement being the subject of any settlement agreement or arrangement.

23.  Further, as pointed out by Mr. Chan, given the fact that the outstanding principal owed by the Son under the 1^st Loan was RMB 14,705,916.76 (as at the date of the Settlement Agreement), it defies logic for the Applicant to suggest that all outstanding liability of the Son under the 1^st Loan and the 2^nd Loan would be discharged after off-setting the Property 1505 Deposit and the Property 1113 Initial Deposit (totaling HK$6,960,488.18).

D2.  Alleged counterclaim or cross-claim

24.  In the Applicant’s 1^st Affirmation, she described her alleged cross-claim as follows:

“… I have never received deposit for HK$4,437,626 or HK$2,522,862.18 from the Respondent in the transactions. If the Respondent does not agree that the sum ofHK$1,000,000 was paid as part of the settlement arrangement, I have a counterclaim or cross demand for the said sums of HK$4,437,626 and HK$4,437,626, being the sums exceeding the claim in the statutory demand.”

25.  For the same reasons as set out in Section D1 above, in particular, the clear and undisputed provisions of the Settlement Agreement confirmation that the Property 1505 Deposit (HK$4,437,626)  and the Property 1113 Initial Deposit (HK$2,522,862.18)  were settled by offsetting part of the principal and interest under the 1^st Loan, the Applicant has failed to make out any credible case that she has any counterclaim or cross-claim against the Respondent for payment of the same.  In any event, the Respondent is not a party to the assignment of Property 1113 and is not under any obligation to pay the  Property 1113 Initial Deposit.

E.  ORDERS

26.  The Applicant’s application to set aside the Statutory Demand is dismissed.

27.  There is no reason why costs should not follow the event.  I therefore order that the Applicant is to pay the Respondent’s cost of the Application, which I shall summarily assess.

28.  The Respondent shall by 7 August 2023 provide to the Court and to the Applicant a statement of costs for summary assessment.  The Applicant shall then have until 14 August 2023 to provide to the Court and to the Respondent’s solicitors a statement of objections, if any. I will then make a summary assessment of the costs on the papers.

29.  I also make an order under Rule 48(7) of the Bankruptcy Rules, authorising the Respondent to present a bankruptcy petition against the Applicant forthwith.