Re: PAI CHUNG YING, Judgment Debtor and Ex Parte: SUPER ELECTRIC MOTOR LTD., Judgment Creditor

HCB413/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO.413 OF 2001

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J U D G M E N T

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1. This is a bankruptcy petition presented by Super Electronic Motor Limited ("the Judgment Creditor") against Mr Pai Chung Ying ("the Judgment Debtor") on the ground that the Judgment Debtor is unable to pay his debt in that he has failed to comply with a statutory demand served on him on 13 November 2000. The statutory demand is in respect of a judgment given on 12 May 1998 in High Court Action No.1916 of 1993 ("HCA1916/1993"). The judgment is for the sum of HK$2,282,901.07 together with interest at judgment rate from 11 February 1998 ("the Judgment Debt"). As at 19 September 2000, the accrued interest is HK$698,506.39. The total amount due from the Judgment Debtor under the judgment is therefore HK$2,981,407.48 together with further interest.

2. There is no dispute that the Judgment Debt remains unsatisfied. It is also not in dispute that the statutory demand has not been complied with. The Judgment Debtor opposes the Petition on two basis : Firstly, he claims to be entitled to set off the Judgment Debt against certain debts allegedly due from the Judgment Creditor. Secondly, the Judgment Debtor relies on section 9(3) of the Bankruptcy Ordinance, Cap.6 and asserts that he is able or has a reasonable prospect of being able to pay his debt.

BACKGROUND

3. The Judgment Debtor is a shareholder of the Judgment Creditor. He holds 900 shares while his wife holds 100 shares. The rest of the shares were held between a Mr Hady Hartanto, a Mr Ratnawati Indra and a Super International Enterprises Limited ("Super International"). The Judgment Creditor initially challenged the beneficial ownership of 600 of the Judgment Debtor's shares. At the hearing of the petition, the Judgment Creditor indicated that for the purpose of this petition, the challenge would not be pursued. Until June 1991, the Judgment Debtor was a director of the Judgment Creditor.

4. In HCA1916/1993, the Judgment Creditor claimed against the Judgment Debtor the sum of HK$12,282,901.07, being money withdrawn by the Judgment Debtor from the bank account of the Judgment Creditor in breach of his fiduciary duties. In the same action, the Judgment Debtor and his wife, who was added as a defendant upon her application, counterclaim against the Judgment Creditor for debts owed to a Trinitrade Company ("Trinitrade"). Trinitrade is a partnership owned by the Judgment Debtor and his wife. The counterclaim is disputed by the Judgment Creditor, who in turn counterclaims against Trinitrade for money owed to it.

5. On 12 May 1998, Deputy Judge Wong gave judgment on the claim for the Judgment Creditor and ordered that, as between the Judgment Creditor and Trinitrade, an account be taken by a mutually agreed public certified accountant. The Deputy Judge also refused to stay the execution of the judgment pending the taking of account. Shortly thereafter, the Judgment Creditor obtained a charging order based on the judgment. The charging order remains unenforced and the Judgment Creditor has offered to give up the security in the event a bankruptcy order is made herein.

6. On 7 December 2000, the Judgment Debtor applied for leave to appeal against the judgment out of time. The application was dismissed by Mayo VP on 17 January 2001. On 19 January 2001, the petition herein was issued.

7. On 11 May 2001, the Judgment Debtor commenced High Court Action No. HCMP2575 of 2001 ("HCMP2575/2001") claiming for a winding-up order be made against the Judgment Creditor and, alternatively, for an order under section 168A of the Companies Ordinance that his shares be bought out.

APPLICATION FOR CONSOLIDATION

8. On 13 September 2001, the Judgment Debtor applied in both HCMP2575/2001 and herein for the two actions to be consolidated and heard together. On 15 September 2001, the Judgment Creditor applied to strike out HCMP2575/2001. All three summonses came before Master Ho on 25 September 2001 and the Master quite rightly adjourned them to be heard by the bankruptcy judge, having regard to the fact that the backruptcy petition had been set down for trial on 16 October 2001.

9. On 12 October 2001, the Judgment Debtor applied by summonses to restore the two summonses for consolidation. The applications to restore and the applications for consolidation were heard immediately before the hearing of the backruptcy petition. After hearing submissions, I dismissed the applications for consolidation. Principally, I am of the view that the issues in HCMP2575/2001 and their resolution are irrelevant to the determination of the backruptcy petition and that consolidation will only serve to delay these bankruptcy proceedings unnecessarily.

10. In HCMP2575/2001, the Judgment Debtor complains that Mr Hartanto had acted oppressively and wrongfully in diluting the value of his shareholding through the creation and allotment of new shares to Super International, which is owned and controlled by Mr Hartanto. The Judgment Debtor also claims that he had been wrongfully removed as a director in June 1991, and that he has been denied access to information of the company. The petition also pleads that the bankruptcy petition herein was presented fraudulently and with a view to force him to relinquish his shares in the company.

11. In an affirmation filed in HCMP2575/2001 on 6 August 2001, the Judgment Debtor further complains that the Judgment Creditor has wrongfully withheld dividends declared and bonus payable to him. These allegations do not form any part of the winding-up petition. Further, while the petition only prays for a winding-up order and, as an alternative, a buy-out order, this affirmation seeks payment of compensation for loss of office and also unpaid dividends and bonus.

12. In opposing the bankruptcy petition herein, the Judgment Debtor has also raised the issues of unpaid dividends and bonus and sought to set-off these sums against the Judgment Debt. He has also made references to the dilution of his shares and the termination of his directorship. The Judgment Creditor accepts that two dividends had been declared in 1993 and 1995 and that the amounts had been withheld. As to the bonus, the Judgment Creditor also accepts that bonus for the year 1991 had been withheld, although it denies that the Judgment Debtor is entitled to receive bonus for the years preceding 1991. The Judgment Creditor's position is that any claim for the bonus or dividends has become time-barred so that there can be no set-off. The same argument is employed in respect of the claim for compensation arising from the removal as a director.

13. It is therefore apparent that it is not necessary to bring in HCMP2575/2001 in order that the Judgment Debtor can rely on the issues of unpaid bonus and dividend and compensation for loss of office to oppose the bankruptcy petition. As to the other complaints of dilution of shares, it is irrelevant to and its resolution is not necessary for the purpose of determining the bankruptcy petition.

14. Further, HCMP2575/2001 is nowhere near being ready for determination. The procedural requirement for the presentation of a winding-up petition, such as advertisement and the issue of the Registrar's certificate, have yet to be complied with. The gaps between the winging-up petition and the affirmation evidence also remain to be closed. It is going to take a substantial while before the winding-up petition is ready to be set down, let alone determined. It is certainly not in the public interest for bankruptcy proceedings to be prolonged indefinitively.

15. It is for these reasons that I dismissed the applications for consolidation with costs in any event. I now turn to deal with the bankruptcy petition.

SET-OFF

16. The Judgment Debtor relies on a number of matters as giving rise to a set-off against the Judgment Debt. I shall deal with these in turn.

(1) Money due to Trinitrad

17. Pursuant to the Order of Deputy Judge Wong in HCA1916/1993, Messrs Nelson Wheeler has been appointed to deal with the taking of account and to prepare a report on it. A draft report was produced on 27 April 2001, which found that a sum of HK$1,851,341.50 is due from the Judgment Creditor to Trinitrade. The finding was said to be provisional as the accountant was hoping to receive more information from the parties. Both the Judgment Creditor and the Judgment Debtor had written to the accountant to challenge the provisional finding.

18. On 15 October 2001, the accountant produced a full report which confirms the finding in the draft report. It is however unclear whether this is intended by the accountant to be a final report because the finding is still expressed to be provisional. The report also says that the figure may have to be revised upon further information being made available. Be that as it is, the Judgment Debtor through counsel has indicated that he accepts the finding. The Judgment Creditor, on the other hand, maintains its objection.

19. In the meantime on 10 May 2001, the Judgment Debtor's wife has assigned to the Judgement Debtor her interest in the amount which may be found due to Trinitrade and payable by the Judgment Creditor.

20. It is plain that, prior to this assignment, the amount that may be found due to Trinitrade does not provide the Judgment Debtor with a set-off against the Judgment Debt. The debts are not mutual in that the joint debt of a partnership cannot be used to set-off the debt owed by one of the partners : In Re Pennington and Owen [1925] 1 Ch 825, Arnold v. Bainbridge (1853) 9 Ex.153, Piercy v. Fynney (1871) LR 12 Eq. 69. It is also for this reason that Deputy Judge Wong refused to stay the Judgment Debt, a decision which was approved by Mayo VP when refusing to grant leave to appeal out of time.

21. The assignment by the wife in favour of the Judgment Debtor does not advance the Judgment Debtor's case of a set-off. The assignment being made and the interest being acquired after the judgment was obtained cannot give rise to a set-off against the Judgment Debt : Whyte v. O'Brien (1824) 1 Sim & St 551, Maw v. Ulyatt (1862) 31 LJ Ch.33, see also Halsbury's Laws of England, 4th edition (Reissue), para.444.

22. Therefore irrespective of whether the finding of the accountant on the taking of account is accepted by the Judgment Creditor, there is no basis in law to set-off the Judgment Debt against the amount provisionally found by the accountant to be due to Trinitrade from the Judgment Creditor.

(2) Declared dividends

23. It is not disputed that on 31 December 1993 and 30 December 1995, the Judgment Creditor had declared dividends of HK$300 and HK$100 per share respectively. The amount of dividends that should have been received by the Judgment Debtor is therefore HK$360,000 (i.e. $300 x 900 + $100 x 900). The Judgment Debtor says that taking into account interest at 12% p.a., the amount has now become about HK$700,000. However, he has not explained the basis for claiming interest. The Articles of Association of the Judgment Creditor is not before the court and there is no evidence to show that it provides for interest to accrue on unpaid dividends. On the contrary, Article 123 of Table A, Companies Ordinance provides that no interest is payable on dividend as against the company.

24. Quite apart from the question of interest, it is obvious that any claim based on the 1993 dividend is now time-barred, being more than six years from the date of it being declared : see Re Companisa de Electricidad de la Provincia de Buenos Aires Ltd [1978] 3 All ER 668, 695-698. Mr Cheung for the Judgment Debtor seeks to argue that since time starts to run either from the declaration of the dividend or the declared date of its payment : Re Electricidad de Buenos Aires Ltd, supra, at 699C, it is possible for time to run on a date after 31 December 1993 when the dividend was declared. This argument overlooks the fact that the burden is on the Judgment Debtor to adduce evidence of the date declared for the payment of the dividend if he contends that time should only run from this date. There is no evidence that a date had been declared for the payment of the 1993 dividend. The court can therefore only take the date of declaration of dividend in reckoning the limitation period.

25. Mr Cheung further argues that the court should consider whether time ought to start to run in this case since admittedly the dividend declared had been withheld by the Judgment Creditor pending the determination of HCA1916/1993. It seems to me that Mr Cheung is not arguing that time should not start to run, but that he is merely putting the question to the court without providing an answer. He has also not referred to any authority which suggests that time should not start to run in such a case. Mr Cheung at one point seems to be arguing that the Judgment Creditor has not shown that the Judgment Debtor was given notice of the declaration of dividend so that time should only start to run when the Judgment Debtor first had knowledge of the declaration. Again, this argument overlooks the fact that the burden is on the Judgment Debtor to adduce evidence that the fact of declaration of dividend was concealed from him or that he was otherwise unaware of it so that time should only start to run on a later date. There is plainly no evidence as to when the Judgment Debtor first came to have knowledge of the declaration of dividend.

26. In the circumstances, no set-off can be based on the 1993 dividend. It is however open to the Judgment Debtor to set-off the 1995 dividend against part of the Judgment Debt.

(3) Bonus

27. The Judgment Debtor's case is that in an Annual General Meeting on 29 November 1986, it was resolved that he be paid an annual bonus based on 15% of the annual net profit commencing from the year 1986-1987. This entitlement was confirmed by a resolution in the Annual General Meeting held on 12 December 1990. Up to June 1991 when he ceased to be a director, none of the bonus had been paid. The Judgment Debtor therefore says that a sum of HK$1,277,605 is due from the Judgment Creditor, being bonus for the years ending 31 March 1987 to 31 March 1992. In addition, he claims interest at 12% p.a. giving rise to HK$1,585,327.74. The total amount he seeks to set off is in the region of HK$2,862,932.74.

28. The Judgment Creditor disputes the resolution of the 1986 Annual General Meeting. The Judgment Creditor's case is that no such resolution had been passed, and that the minutes had been altered to include such a resolution on the instruction of the Judgment Debtor. The Judgment Creditor however accepts that a resolution had been passed in the 1990 Annual General Meeting approving the payment of 15% bonus to the Judgment Debtor as from 1990. Hence according to the Judgment Creditor, the Judgment Debtor is only entitled to a 15% bonus as from December 1990.

29. There can be no doubt that this dispute of fact cannot be resolved on the affidavits. The parties had indicated that no cross-examination was required. This is however immaterial since the set-off based on the 15% bonus cannot stand as a matter of law.

30. Firstly, the right to claim the 15% bonus, on the Judgment Debtor's case, has begun to accrue from 1986. He has also stated in his affirmations that he has since 1991 constantly demanded payment of his bonus but without success. He is therefore fully aware of his right to claim the bonus from the Judgment Creditor. The entitlement to bonus is thus a subject matter which could and should have litigated in HCA1916/1993. The Judgment Debtor had seen fit to counterclaim for sums allegedly due from the Judgment Creditor to Trinitrade, there is no reason why he could not include his claim for bonus in the counterclaim. The wider doctrine of res judicata therefore applies and it is an abuse of process of the court to litigate it in these proceedings : Yat Tung Investment Co. Ltd v. Dao Heng Bank Ltd [1975] AC 581, 590.

31. Secondly, any right to claim bonus is more than six years old and is therefore time-barred : section 4(1) Limitation Ordinance. Mr Cheung has endeavoured to argue that because the bonus was withheld by the Judgment Creditor, the Judgment Debtor's claim is in trust so that the limitation period is longer. Mr Cheung is however unable to identify the legal basis for the trust. In my view, this argument is unsustainable.

32. The set-off based on the 15% bonus therefore fails. In any event, given the very substantial delay in pursuing the claim and the failure to justify the delay, it will not be right to award to the Judgment Debtor interest on the bonus for the full period from 1986 : Metal Box Ltd v. Currys Ltd [1988] 1 WLR 175. The Judgment Debtor has also given no explanation for adopting the rate of 12% p.a.

(a) Claim for damages for loss of office or unpaid salaries

33. The Judgment Debtor in his affirmation filed in HCMP2575/2001 on 6 August 2001 claims for damages for loss of office or unpaid salaries on account of his being removed as a director in June 1991. The affirmation was exhibited to the Judgment Debtor's latest and 5th affirmation herein. It is sought to be argued that the claim should also be taken into account in determining the backruptcy petition.

34. It is plain that the right to claim unpaid salaries or damages for wrongful termination of his directorship arose in June 1991, almost 10 years ago. The claim is clearly time-barred : section 4(1) Limitation Ordinance. Further, this is also a claim which could and should have been litigated in HCA1916/1993 such that the Judgment Debtor is estopped from making any further claim for damages arising out of the termination of his directorship.

35. In the circumstances, apart from 1995 dividend, there is no sum that can be applied to set-off the Judgment Debt. The 1995 dividend is however insufficient to extinguish the Judgment Debt.

(b) Ability to pay

36. Apart from claiming to set-off the Judgment Debt, the Judgment Debtor also contends that there is a prospect of him being able to pay off the Judgment Debt on account of the wrongful dilution of the value of his shareholding in the Judgment Creditor. It is argued that he stands to recover damages for the depreciation in the value of his shares occasioned by the wrongful creation and allotment of shares.

37. It is common ground that between 1993 and 1996, 16,800 shares in the Judgment Creditor were created and allotted to Super International. The Judgment Debtor alleges that the allotment was at an undervalue and done with a view to diluting his shareholding and reducing the value of his shares. The Judgment Creditor through Mr Hartanto denies these allegations.

38. Assuming that the Judgment Debtor's allegations can be substantiated, any claim for damages can only be brought against the directors or shareholders who authorized the creation and allotment the shares or otherwise responsible for the oppressive conduct. No claim can be brought against the Judgment Creditor, being the company itself. In view of this, no set-off can arise on such a claim. Mr Cheung however argues that the potential claim gives rise to a reasonable prospect that the Judgment Debtor is able to satisfy the Judgment Debt.

39. It is to be noted at the outset that the Judgment Debtor bears the burden of establishing that he has a reasonable prospect of being able to pay off the Judgment Debt. While the Judgment Debtor alleges that the allotment was made at an undervalue and that there were procedural irregularities and oppressive conduct in the manner in which the shares were issued and allotted, the evidence adduced in support of the allegations was extremely brief. It is not possible for the court to come to a view that there is a reasonable prospect of the Judgment Debtor succeeding in the claim and being in a position to pay off the Judgment Debt.

40. Quite apart from the uncertainty as to the prospect of a successful claim for damages, there is also no immediate prospect of the Judgment Debtor succeeding in the claim and being in a position to discharge the Judgment Debt. In the first place, he has made no claim for compensation against the individual shareholders/directors in the petition in HCMP2575/2001. The commencement of HCMP2575/2001 is therefore irrelevant to the question of the Judgment Debtor's ability to pay. Secondly, even if the Judgment Debtor were to amend the petition in HCMP2575/2001 or to bring fresh proceedings for damages against the wrongful shareholders or directors, it is going to take a considerable while before any award will be made.

41. In short, the Judgment Debtor has failed to make out a case under section 9(3) of the Bankruptcy Ordinance that he is able or has a reasonable prospect of being able to pay off the Judgment Debt.

CONCLUSION

42. For the reasons aforesaid, I am satisfied that the backruptcy petition has been proved and that there is no valid ground to oppose it. Accordingly, there shall be a bankruptcy order against the Judgment Debtor with costs.