RE TAM SIU LEUNG

HCB 6860/2017 and
HCB 7402/2017 and
HCB 7403/2017
(Heard Together)

[2019] HKCFI 186

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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 HCB 6860/2017

BANKRUPTCY PROCEEDINGS NO 6860 OF 2017

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BANKRUPTCY PROCEEDINGS NO 7402 OF 2017

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BANKRUPTCY PROCEEDINGS NO 7403 OF 2017

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(Heard Together)

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REASONS FOR JUDGMENT

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1.  There are three bankruptcy petitions before this court brought by Zhongtai International Securities Ltd for bankruptcy orders against Cheung Sung Kei Civic (“Mr Cheung”), Tam Siu Leung (“Mr Tam”) and Tam Shuk Yi Fanny (“Ms Tam”) respectively (collectively “the Debtors”). The petitions are based on unsatisfied statutory demands. At the conclusion of the hearing, each of the Debtors was adjudged bankrupt for the reasons set out below.

2.  The Debtors did not appear at the hearing.  Until about the second week of January 2019, they were legally represented by the same firm of solicitors who had filed notices in opposition to the petition and the affirmations on behalf of each of the Debtors in similar terms.

3.  On 4 September 2018, it was ordered that all three petitions be heard at the same time.

Background facts

4.  As the opposition to the petitions involves a somewhat convoluted scheme, I propose to set out chronologically the relevant events as well as describing the dramatis personae involved.

5.  The accounts the Debtors maintained with the petitioner were margin trading accounts which were opened in 2015.  Prior to that date, one Lo Hung (“Mr Lo”) was already a customer of the petitioner having opened a margin trading account in 2013.

6.  The debtors and Mr Lo held sizeable holdings of shares in a listed company called Tech Pro Technology Development Ltd (“Tech Pro”).  In July 2016, the share price of Tech Pro fell substantially, resulting in margin calls being made on 28 July 2016 on the debtors and Mr Lo.

7.  A number of events then occurred in August 2016.  The facts are gleaned from the Decision in Zhongtai International Securities Ltd v First Concord Investment Ltd (“FCIL”) [2018] HKCFI 2653 (HCMP 1837/2017, 11 December 2018).  That was an application by FCIL to set aside a default judgment obtained by the petitioner in mortgage proceedings for the enforcement of a legal charge executed by FCIL and the petitioner as security for certain obligations which, as will become apparent, are relevant in the present proceedings. 

8.  FCIL is the registered owner of a duplex apartment and parking spaces in Kennedy Park At Central on Kennedy Road (“the property”).  Its sole shareholder and director is Tin Shuk Chun (“Ms Tin”).  Tian Xiaobin (“Mr Tian”) is Ms Tin’s brother.

9.  The chairman of Tech Pro is the husband of Ms Tin.

10.  According to the Decision, on 22 August 2016, Mr Tian (who had no part prior business relationship with the petitioner) opened a trading account with the petitioner with margin facilities.  There was a meeting held on the same day at which the petitioner, Mr Tian and Ms Tin reached an agreement to the effect that the property would be charged to the petitioner to secure Mr Tian’s indebtedness on Mr Tian’s account subject to a ceiling of $40 million.

11.  By the legal charge executed on 24 August 2016, FCIL in fact secured:  

“ all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally or alone or in any other capacity whatsoever including the capacity of a guarantor of third parties’ indebtedness) of FCIL, Ms Tin and Mr Tian due and payable to [the petitioner]”.

12.  FCIL’s case was that when the legal charge was executed, the petitioner represented that its provisions were standard.  But the security provided was anything but “standard”.  If made out at trial, it would constitute a valid defence.  For, inter alia, that reason, the default judgment was set aside on 11 December 2018.

13.  In the early afternoon of 25 August 2016, Mr Tian executed a security deed in favour of the petitioner undertaking to pay and discharge the obligations owed by Mr Lo to the petitioner up to HK$100 million (“the 1^st security deed”).

14.  Later the same afternoon, Mr Lo also executed a security deed in favour of the petitioner undertaking to pay the obligations owed by the Debtors to the petitioner up to HK$100 million (“the 2^nd security deed”).

15.  When FCIL, Mr Tian and Mr Lo did not reply to the petitioner’s request of 24 August 2017 for repayment of all indebtedness, the petitioner commenced these proceedings against the Debtors and also enforced the legal charge.

The defence

16.  The events set out above (in particular those in §§8 – 14) are relevant to the defence run by the Debtors in their respective notices of opposition.

17.  The effect of the legal charge and the security deeds is that:

(a)  FCIL guaranteed the obligations of Mr Tian;

(b)  Mr Tian guaranteed the obligations of Mr Lo up to $100 million; and

(c)  Mr Lo then guaranteed the obligations of the Debtors to the petitioner also up to $100 million.

18.  It is the Debtors’ case that in August 2006, their respective margins had reached or nearly reached their limits.  Because of its intended listing, the petitioner sought the Debtors’ cooperation to continue to trade with their respective accounts by accepting the 2^nd security deed covering the Debtors’ liabilities to the petitioner so that the petitioner’s portfolio would look better.  

19.  The defence appears from the respective notices of opposition which relied on the following:

(1)  the debt stated in the statutory demand is not a liquidated sum in that under the legal charge and the 1^st and 2^nd security deeds the petitioner is holding the property against the debt;

(2)  even if the debt is still owing after deduction of the value of the property, he is able to pay the same;

(3)  the petitioner’s representation to Mr Lo and the relevant debtor that if FCIL made arrangements for disposing of the property, the petitioner would withhold any legal action enforcing its rights against the debtor; and

(4)  such arrangements having been made, the petitioner is estopped from enforcing its rights against the debtor.

Is there a valid defence?

20.  The statutory demands were not made in respect of the secured portion of the respective debts.  The amount specified in each of the statutory demands represents the net balance due after taking into account the value of the shares realized and/or held by the petitioner as at the date of the demand. 

21.  There has been no application made pursuant to the Bankruptcy Rules rule 48(5)(c) to set aside the statutory demands.

22.  The premise that appears to underlie the notices of opposition is that the petitioner is a “secured creditor” by reason of the legal charge.

23.  As a matter of law, that premise is incorrect. For the purposes of the Bankruptcy Ordinance, the term “secured creditor” means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to the creditor from the debtor: section 2.  Security provided by a third-party and not the debtor himself does not render the petitioner a “secured creditor” vis-à-vis the debtor and is not a defence to an action against the debtor: see Re Kwok Chok Yee [2000] 2 HKC 543 at 548B–E and Lau Yu aka Jaffe Lau v The Hongkong and Shanghai Banking Corporation Ltd [2018] HKCA 744 (CACV 213/2017, 26 October 2018) at §35.

24.  Accordingly, the presence of any security provided by a third-party is not a defence. It is irrelevant as regards unsatisfied statutory demands and does not provide the Debtors with any defence.

Conclusion

25.  There being no valid defence raised by the Debtors, it follows that the petitioner must be entitled to the bankruptcy orders sought.  The petitioner is also entitled to its costs.