IN RE MADAM POON YEE PING STELLA

HCB1112/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY

BANKRUPTCY PROCEEDINGS NO.1112 OF 1998

-------------

--------------

-----------------------

J U D G M E N T

-----------------------

1. This petition is based on a judgment debt obtained in proceedings in HCA11449/96. The litigation which led to that judgment has been before Waung J on two occasions and also the Court of Appeal. In short, the debt which arises from two dishonoured cheques is undisputed, but the Debtor maintains that she has a counterclaim which overtops the amount of the judgment debt.

2. A summary judgment application by the Plaintiff first came before Waung J in April 1997. Subsequent to that judgment which was in favour of the Plaintiff, a bankruptcy notice was issued in Bankruptcy Proceedings No.B684/97. The Debtor obtained legal aid to set aside the bankruptcy notice and in respect of her counterclaim in HCA11449/96. The Debtor applied for a stay of execution on the ground that the counterclaim exceeded the judgment sum and that there were special circumstances.

3. Both applications were heard by Waung J in December and were dismissed with costs to the Petitioner. The Debtor obtained legal aid to appeal against Waung J's order and two notices of appeal were issued. The matter came before the Court of Appeal in June 1998 when both appeals were again dismissed. Subsequent to that, the statutory demand which became necessary because of amendments to the Bankruptcy Ordinance was issued and served. The bankruptcy petition was then presented on 19 October and an order for substituted service obtained. That petition comes before me. A preliminary point taken is that the statutory demand was not served on the Debtor. At the last hearing, I had rejected the Debtor's evidence : I found that she did have notice of this statutory demand. There is no good reason for setting it aside.

4. The short point that arises is whether the counterclaim that the Debtor asserts that she has is a serious counterclaim and one that she has hitherto been prevented from litigating. See Re Bayoil SA [1999] 1 WLR 147. The underlying facts to the litigation between the parties in HCA11449/96 are fairly complex. Both Waung J and the Court of Appeal had the assistance of counsel for the Debtor. This court is not so fortunate. It is to be noted that in separate proceedings in the High Court unconnected with this matter, the Debtor is legally represented in a claim she is making against some other party. She has, however, not considered it sufficiently important to engage legal representation to assist this court where her own bankruptcy is at stake.

5. So far as the merits of the counterclaim are concerned, these were gone into at some length by Waung J. I refer to his judgment where having set out the counterclaim as was presented to him, and having analyzed that against the facts that were before him, he concluded that "there is really no substance in the Defendant's 'package deal' allegation and that such allegation is not capable of belief or in other words all 'moonshine'."

6. Before setting out the relevant part of his judgment which demonstrates that the judge had given full consideration to the merits of the counterclaim being asserted by the Debtor, it will be helpful to set out the underlying facts which are succinctly summarized in the judgment of Rogers JA :

" The history behind the Action was that the Defendant was a trader in beer. She traded under the name Sunshine and Company. Sometime in late 1995 or early 1996 she had approached the Plaintiff, which was part of the Dairy Farm Group, with a view to selling beer to the Plaintiff for distribution to the People's Republic of China. It seems that there were some discussion between the Plaintiff's representatives and the Defendant about the Plaintiff's ability to be able to dispose of large quantities of beer and as a result before the first contract for the sale of 50 containers of beer was made, the Defendant gave the Plaintiff a written assurance that it would assist the Plaintiff to sell the beer if they had difficulties in disposing of the same. Whether there was also an oral guarantee to like effect and whether the written undertaking was to cover subsequent orders for beer is unnecessary to go into. Suffice it to say that the first order for 50 containers of beer was fulfilled and duly paid for.

Subsequent to that however, the Plaintiff placed orders with the Defendant for the supply of two further quantities of 50 containers of beer. These were to be paid for by two Letters of Credit, the first of which would expire on the 20th May 1996 and the second of which would expire in the following month. There was delivery of the first 44 containers of beer which were paid for under the first Letter of Credit. However, the Plaintiff notified the Defendant that, because it was having difficulties in selling on the beer, it did not wish to take delivery of the remaining 56 containers.

I should mention at this stage that it is the Defendant's case that she was induced to sign acknowledgment of receipt of that notification, but that she did not intend to indicate her consent to the cancellation of the remaining order. The Defendant also says that the use to which the Plaintiff attempted to put the Defendant's acknowledge, namely to attempt to induce the Bank to cancel the Letters of Credit, was illegitimate.

Very soon afterwards, the Plaintiff notified the Defendant that it wished the Defendant to take back 39 containers of the 44 which had been delivered. There are differences between the parties as to precisely what was agreed between the parties and indeed there is a dispute as to whether one letter was in fact faxed. These are also unnecessary for this Court to go into. The result was that the Defendant agreed to take back the 39 containers and to pay for them by cheque. That cheque was a post-dated cheque dated 5th June 1996. The Defendant says there was an agreement that the Plaintiff would continue to take and pay for the remaining 56 containers which had not yet been delivered but which the Defendant was being forced by its own supplier to pay for. This further agreement or 'package deal' defence as it has been referred to during these proceedings was the subject of a counterclaim. It was considered by the Judge at the Order 14 stage. To complete the picture, the Defendant was unable to have the original cheque for payment of the 39 containers honoured and issued the two cheques the subject of this Action. Those two were dishonoured. The Judge, as I have said, gave judgment on the claim.

On the application which came before the Judge last December, the Judge said that to a large extent he considered the Defendant's counterclaim as part of the Order 14 proceedings. He considered that the counterclaim was not strong. And he went on to say that even assuming that there was a strong counterclaim, the rules were clear that there should not be a stay of execution on a claim for a cheque. That, of course, follows well established principles that a cheque or Bill or Exchange is treated as the equivalent of cash and that any cross-claim that may arise out of a transaction for which a cheque has been given has to be treated separately.

Before us, Mr Hung for the Defendant argued that the approach of the Judge had been wrong in principle because it is said that the reason that cheques were not honoured was because the Plaintiff prevented the Defendant from obtaining payment under the Letters of Credit. It is said that the Plaintiff was well aware that those were the funds that the Defendant had intended to use to fund the payment of the cheques.

7. I now turn to Waung J's judgment which deals with the merits of the counterclaim. He had this to say :

"...the two main issues put before the Court by the parties, namely :-

(1) Factually, whether the Defendant's allegation of a 'package deal' is believable;

(2) Legally, whether the 'package deal' allegation if believable gives rise to a valid defence of partial failure of consideration.

The 'package deal' defence allegation can be summarised, at best, as consisting of an assertion that there was an agreement between the Plaintiff and the Defendant that in return for the Defendant taking back the 39 containers and giving to the Plaintiff the Defendant's 1st Cheque, the Plaintiff agreed to accept delivery of the 56 containers. Is that 'package deal' defence believable.

Mr Chan in his able submissions and as summarised in his Reply Skeleton Argument suggested that the 'package deal' is an assertion not capable of belief. I agree. Apart from there being no proper Affidavit evidence on this wholly unparticularised agreement, the allegation is extremely confusing and unclear. It seems to me that the Defendant by her own conduct had clearly shown that there was no such agreement in terms of the 'package deal' or 'Varied Agreement'. In the Fax dated 4th June 1996, being the very first of the series of faxes from the Defendant to the Plaintiff asking for more time indulgence to effect payment of the amount of $3,387,072.00, the Defendant not only made no mention of the alleged agreement of the Plaintiff to accept delivery of the 56 containers but made it clear that he had an obligation to pay the amount of the Defendant's 1st Cheque. On the 4th June 1996, it was clear that Plaintiff were not taking delivery of the 56 containers and that therefore if the 'package deal' agreement had been made, then it was the Plaintiff which had reneged on that 'package deal' agreement. But rather than complaining to the Plaintiff and justified to the Plaintiff that the Defendant was thereby released from any obligation to make payment under the Defendant's 1st Cheque, the Defendant in her Fax dated 4th June 1996 was seeking the indulgence of the Plaintiff for more time to effect a payment which the Defendant admitted was due to the Plaintiff. This pattern of the Defendant, admitting by her own conduct that the $3.3 million odd was due and seeking again and again for further time indulgence from the Plaintiff, continued in the subsequent correspondence until the end of September 1996. It even went as far as the Defendant giving to the Plaintiff two new post dated cheques (Defendant's 2nd and 3rd Cheques) which must had (sic) been given on the basis that the Defendant acknowledged that she was obliged to make the $3.3 million payment and not on the basis that the Defendant had no obligation to pay because the Plaintiff had broken the promise or agreement in May 1996, made before or at the time of the Defendant's 1st Cheque that the Plaintiff would take delivery and accept the 56 containers in exchange for the giving of the Defendant's 1st Cheque. The other conduct of the Defendant in not negotiating the two Letters of Credit or in sitting idle on the discrepancies waiver document relating to the 15 containers are merely further confirmation that there is really no substance in the Defendant's 'package deal' allegation and that such allegation is not capable of belief or in otherwords all 'moonshine'. In coming to my conclusion, I have not overlooked the fact that the Defendant relied on a Fax dated 17th May 1996 from the Defendant to the Plaintiff (which the Plaintiff challenged as not having been sent by the Defendant to the Plaintiff (which the Plaintiff challenged as not having been sent by the Defendant). It is first to be noted that the so called Fax of 17th May 1996 did not refer to the giving of the Defendant's 1st Cheque as being based on the 'package deal'. Secondly it seems to me that if this Fax of 17th May 1996 was in fact sent to the Plaintiff, then the whole of the subsequent correspondence would simply take a very different course which again confirmed to me that this Fax is not something which can be relied upon or which should lead the Court to a different conclusion. It follows from what I had said that in my view, factually no bona fide defence had been properly raised by the Defendant."

8. Subsequent to that decision, the Debtor filed a 4th Affirmation and then on 27 October 1997, an amendment was made to the counterclaim. It would appear that nothing was done to either obtain leave or to file this amended counterclaim until April 1998 when an order was obtained from Master Jones. It was amended on 21 May, but it is unclear whether it was filed. That, of course, is not a material matter. What is quite clear is that when the matter came back before Waung J in December 1997, counsel who appeared for the Debtor would have put forward such new materials as were contained in the Debtor's 4th Affirmation and the amended counterclaim, though no leave had yet been obtained to file it. The Debtor's application for a stay of execution was dismissed by Waung J and the appeal was heard by the Court of Appeal on 30 June 1998. Of course, by this time, the order of Master Jones had been made and the counterclaim had been amended.

9. The merits of the counterclaim were again fully considered by the Court of Appeal. After summarizing the facts (set out above) Rogers JA then went on to consider the factual basis of the counterclaim :

" However, on a factual basis, the Defendant's argument seems to me to break down. Whereas the Plaintiff attempted, as I have already said, to persuade the issuing Bank to cancel the Letters of Credit on the basis of the Defendant's acknowledge of the fax indicating the Plaintiff's desire not to take the further 56 containers, the Bank never, it seems, cancelled the Letters of Credit. The last payment under the first Letter of Credit was not paid on the grounds that there was a discrepancy in the documents produced to the Bank and the Defendant never apparently sought to make a claim on the second Letter of Credit. Even if the Plaintiff's refusal to sanction a waiver of the discrepancy in the documents produced was not made with the best motives, no explanation has been proferred as to why the Defendant did not seek to gain payment under the second Letter of Credit other than the fact that it sought to accommodate the Plaintiff's employees who were putting pressure on the Defendant to comply with their wishes.

In this case, there is no fraud alleged against the Plaintiff, at the most it is highhanded conduct or perhaps sharp practice and the Defendant retains her counterclaim if that be valid."

10. That passage from the Court of Appeal's judgment indicates quite clearly that the counterclaim that is being asserted does not easily fit the facts. Having read the papers, I come to no different conclusion from that reached by Waung J and the Court of Appeal on the merits of the counterclaim. It is a claim that has little prospect of success. In these circumstances, it is insufficient as an answer to the petition that the Debtor can still pursue, or has a valid crossclaim. What is required is a solid crossclaim : see In re Greenacre Publishing Ltd (unreported) The Times, 17 December 1998. That the Debtor has failed to establish.

11. The Debtor's certificate for legal aid to pursue the counterclaim was discharged on 29 July 1998, approximately a month after the Court of Appeal's judgment. The Debtor did not appeal against that discharge. She has done nothing since then to pursue or advance her counterclaim. To come to this court to say that she does not know the law and does not know how she should proceed is no sufficient answer to the petition. After bankruptcy, her counterclaim can still be pursued on her behalf should the Official Receiver, as trustee in bankruptcy, consider it viable.

12. For these reasons, the Debtor is to be adjudged bankrupt.