RE AGGARWAL, NAVIN KUMAR

HCB 135/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 135 OF 2012

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AND

HCB 1901/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 1901 OF 2012

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(HEARD TOGETHER)

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J U D G M E N T

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1. At this hearing, there were before the court two bankruptcy petitions in respect of Mr Navin Kumar Aggarwal (“the Debtor”).  The first, HCB 135/2012, was presented on 9 January 2012 by Melco Crown Gaming (Macao) Limited (“Melco”).  It is based on a debt of HK$4,634,346.21 said to be owed by the Debtor to Melco, in respect of which a statutory demand dated 22 December 2011 was served on the Debtor.  Despite service of the statutory demand, no payment has been made in respect of any part of the debt.  The second petition, HCB 1901/2012 was presented by the Debtor himself.  According to the Debtor’s Statement of Affairs, he had liabilities of some HK$217,283,570.55 and assets worth a total of HK$45,503,453.58.  Both petitions are opposed by K&L Gates (“the Firm”), which is a judgment creditor of the Debtor in the amount of HK$131,126,936.00.

2. The Debtor was, until his resignation on 11 June 2011, a partner of the Firm, a firm of solicitors practising in Hong Kong.  It appears that over a period of years, the Debtor engaged in massive defalcations and breaches of fiduciary duty involving thefts of many millions of dollars from the Firm’s client accounts.  Much of the monies so stolen appear to be have been used to fund the Debtor’s gambling activities at various casinos in Macau, some of which were owned and operated by Melco.  These defalcations were discovered in June 2011, and led to the Debtor’s resignation and his subsequent arrest.  He is currently remanded in custody, and has been charged with three counts of theft and three counts of forgery.  According to the Firm, it is likely that these are holding charges and that further charges may be laid against the Debtor in due course.  It is not presently known when the Debtor will have to stand trial in respect of the charges that have been laid (or may in future be laid) against him, but it does not seem likely that this will happen until some time in 2013.

3. The Firm has brought proceedings against the Debtor in respect of his breaches of fiduciary duty, and has, as I have noted, obtained judgment against him for HK$131,126,936.00.  Since obtaining judgment, the Firm has been trying to execute the judgment, but does not appear to have recovered any significant amounts so far.

4. On 23 December 2011, Melco’s solicitors advised the Firm that Melco was owed HK$4,634,346.21 by the Debtor.  On 9 January 2012, Melco’s solicitors notified the Firm that Melco had presented its petition against the Debtor.  When the petition was first heard by the court on 12 March 2012, the Debtor indicated that he did not oppose the petition.  The Firm, however, indicated that it did, and accordingly directions were given for evidence to be filed.  Pursuant to those directions, two affirmations have been filed on behalf of the Firm, and two affirmations in reply have been filed by Melco.

5. According to Melco, the debt owed to them arises under a credit agreement made between the Debtor and Melco on about 22 August 2009, under which Melco agreed to advance credit to the Debtor from time to time to enable the Debtor to gamble at its casinos. According to Melco, funds were advanced to the Debtor, and repayments were made by the Debtor, from time to time.  The last advance to the Debtor was made on 14 May 2011, when the Debtor signed a marker for HK$5,000,000.00 to obtain chips for gambling at one of Melco’s casinos.  After giving credit to the Debtor for a balance of HK$63,730.00 in his account with Melco, and HK$396,950.00 of commissions earned by him for gambling at Melco’s casinos, the Debtor was indebted to Melco for HK$4,539,320.00.  It is this amount, plus accrued interest, which forms the subject of Melco’s petition.

6. The Firm’s opposition to Melco’s petition led the Debtor to present his own petition on 26 March 2012.  This petition too, is opposed by the Firm.

7. At the hearing, Melco was represented by its solicitor, Mr Law, while the Debtor was represented by Mr Hon, and the Firm by Mr Coleman SC and Ms Lok.

8. Mr Coleman opposed Melco’s petition on three broad grounds.  These were:-

(1)   That there was a dispute (on the Firm’s part) as to the debt on which Melco’s petition was based.  This submission had three main aspects to it:-

(a)   Reliance was placed on what was said to be an admission by an associated company of Melco, Golden Future (Management Services) Limited, the 8^th Defendant in HCA 1061/2011 (in which the Firm made claims against a number of defendants to recover misapplied funds from its client accounts on the basis that the defendants had knowingly received misapplied trust funds from the Debtor) that Melco had a net winning from the Debtor of about HK$9,918,500.00, which was said to include the debt on which the petition was based.  Mr Coleman submitted that this net winning was something in respect of which the Firm had proprietary rights, as it represented the fruits of the trust monies misapplied by the Debtor, and that therefore the alleged debt, as part of the net winnings was subject to a bona fide dispute as to whether it was Melco or the Firm that was entitled to it.

(b)   In any event, the role of the various casinos (including Melco) in the Debtor’s defalcations was a matter which needed to be investigated, and the position as between Melco, the Firm and the Debtor needed to be fully investigated, and an account taken before it could be known what the true position was.

(c)    The evidence in support of the alleged debt was, at best, weak, in that the only documentary evidence put forward by Melco consisted of the credit agreement of 22 August 2009, which was signed only by the Debtor but not by Melco, and the marker signed by the Debtor on 14 May 2011.  In these circumstances, Mr Coleman submitted, there must be real doubt as to whether there was in fact any concluded credit agreement, and as to whether funds or credit had actually been advanced to the Debtor as Melco claimed.  Mr Coleman also suggested that there was no clear explanation as to the amounts allowed by way of offset to the amount of the marker, a matter which he said cast further doubt on the genuineness of the debt relied upon by Melco.

(2)   Melco’s petition was an abuse of process, as it was presented, not with any genuine purpose of seeking to enforce a debt owed by the Debtor to Melco, but with a view to interfering with the Firm’s attempts to enforce the judgment it had obtained against the Debtor.  This, Mr Coleman said, was evident from the timing of the petition – it having been presented shortly after the Firm obtained judgment on admissions against the Debtor, from the fact that Melco’s alleged debt was a relatively small one, and from references made in Melco’s solicitors’ correspondence with the Firm to the provisions of section 45 of the Bankruptcy Ordinance (Cap 6), which provides that a creditor may not retain the benefit of any execution issued against a bankrupt unless the execution had been completed before the making of the bankruptcy order, and before notice of the presentation of any bankruptcy petition against the bankrupt.

(3)   In the circumstances of the case, it would be more appropriate for a criminal bankruptcy order to be made against the Debtor under section 84A of the Criminal Procedure Ordinance (Cap 221). Mr Coleman submitted that it was likely that such an order would be made following conviction of the bankrupt (this being highly likely in the light of his admissions made in the High Court action against him which had led to the judgment on admissions), and that it would be appropriate here because of the public interest involved, having regard to the Debtor’s position as a solicitor, and the scale of his wrongdoing.  Further, Mr Coleman suggested that the making of a criminal bankruptcy order would also be beneficial to the Debtor’s creditors, particularly those who had been victims of his crimes, because it would be easier to prove the criminal bankruptcy debts, and because the date for avoidance of dispositions would be likely to be earlier, being the date when the earliest of the offences was committed – sometime in 2007.

9. As far as the Debtor’s petition was concerned, Mr Coleman opposed it on substantially the grounds mentioned in sub-paragraphs (2) and (3) of the preceding paragraph.

10. I shall deal first with the position in relation to Melco’s petition.

11. So far as the suggestion that the debt relied upon is the subject of a genuine dispute is concerned, I observe first that the debt (and the petition) is not disputed by the Debtor himself.  At the end of the day, I do not think that there is merit in the points advanced by the Firm.

12. As to the suggestion that the debt said to be owed to Melco forms part of the net winnings of Melco from the Debtor, and so is something in respect of which the Firm can assert a proprietary claim, it seems to me that this suggestion misunderstands the nature of the debt and of the net winnings, and the relationship between them.  As Mr Law explained, Melco’s net winnings from the Debtor are simply the net amount of the profit made by the casino from the gambling of the Debtor at the casino.  The net winnings can derive from monies put up by the Debtor, or monies advanced by the casino to the Debtor, or a combination of the two.  But they have little to do with whether or not the Debtor is indebted to the casino in respect of credit that may have been advanced to him.

13. To take an example, if a customer were to come to a casino with HK$10 million, he could acquire chips for a value up to that amount.  After gambling, he might have only HK$4 million of chips left.  He could then cash in those chips, and leave with HK$4 million, leaving the casino with net winnings of HK$6 million.  These net winnings would be derived from money brought in by the customer.  Suppose instead that the customer came with no cash, but was granted a credit facility of HK$10 million, signed a marker for that amount, and was given chips worth HK$10 million.  If he then gambled with the same results, he could cash in his remaining chips, thereby reducing his debt to the casino under the credit facility to HK$6 million, and would be liable to repay that amount to the casino.  The casino’s net winnings would still be HK$6 million, but it would be derived from the money lent by the casino to the customer.  Now take a case in which the customer came with HK$5 million, and was also granted a credit facility of HK$5 million.  He would also be able to obtain HK$10 million worth of chips.  If he gambled with the same results as in the two previous examples, he could return the remaining HK$4 million of chips to the casino, which would again have net winnings of HK$6 million.  But in this situation, the net winnings would be derived from money brought in by the customer of HK$5 million, and credit extended by the casino of HK$1 million.  Having borrowed HK$5 million from the casino, but repaid HK$4 million (by returning the remaining chips), the customer would still owe the casino HK$1 million, which the casino could recover from him if he failed to repay it.

14. The present case comes within the third of these examples.  Melco’s case is that, the net winnings are made up in part of funds brought in by the Debtor himself (whatever their provenance, which might include monies stolen by the Debtor from the Firm’s client accounts), and in part of funds advanced to him by Melco itself.  On this basis, while it might be possible for the Firm to assert a proprietary claim to that part of the net winnings that derive from funds misappropriated from its clients accounts, it would not seem possible to make a proprietary claim in respect of the debt owed to Melco in respect of credit given to the Debtor under the credit agreement, even though they form part of the net winnings.  Indeed, it seems to me that the net winnings are not particularly relevant to any proprietary claim which the Firm might have against Melco or its associated casinos – for the purposes of those claims, it would be necessary to show that funds originating from the Firm’s client accounts found their way into the hands of Melco or its casinos, in circumstances in which Melco or the casinos in question knew or must be taken to have known that they were the proceeds of breaches of trust by the Debtor.  Whether such funds were applied so as to generate net winnings for the Debtor, or, conversely (and as might be expected more usually to be the case), net winnings for the casino, is neither here nor there.

15. I therefore do not think that the fact that Melco may have had net winnings made up in part of the debt claimed gives rise to any bona fide dispute of substance as to the ownership of the debt.

16. Nor do I think that there is any real substance in the suggestions that it is necessary to have a full accounting as between Melco, the Firm and the Debtor.  The suggestion that such an accounting might somehow cast doubt on Melco’s claim in relation to the debt is, in my view, mere speculation on the part of the Firm, for which no real foundation has been put forward.  The fact that there have been payments to Melco or Golden Future from time to time goes only to show that the credit extended to the Debtor was repaid and redrawn over a period of time.  It does not suggest that Melco is not actually owed money by the Debtor in the amount that it claims.

17. Finally, as to the suggestion that the evidence suggests that there might not be any debt at all owed to Melco, it seems to me that this, too, is not a substantial argument.  While it is true that the credit agreement consists of an application form signed by the Debtor, but not countersigned on behalf of Melco, it does nonetheless amount to a request for credit, and any advances made by Melco pursuant to it would amount to an acceptance by Melco of that request, and would therefore, in principle, be recoverable by Melco from the Debtor in accordance with the terms of the credit agreement.  It is clear from the terms of the credit agreement that credit will be given in the form of chips against the signing of a marker to acknowledge an advance made by Melco to the Debtor.  There is, in this case, evidence in the form of the marker of 14 May 2011 that the sum of HK$5,000,000.00 was advanced by Melco to the Debtor on that date.  There is nothing to suggest that it has been repaid.  Melco has given credit for sums that it acknowledges to be owing by it to the Debtor, leaving the balance which (with interest) forms the debt on which the petition is based.  I do not think that it is necessary, for the purposes of its petition, for Melco to go into the whole history of the relationship between it and the Debtor (although, as I have noted, it seems clear from Golden Future’s own defence in the High Court action against it that there were a series of advances and repayments, so that the credit agreement operated very much as a revolving credit arrangement).

18. Mr Coleman also sought to draw some support for this argument from the fact that in the Debtor’s statement of affairs filed with the Debtor’s petition, there was nothing filled in against Melco’s claim in the column designated for the Debtor to set out his view of the amount owed to the creditor concerned.  I do not think there is anything in this point. With one exception, the Debtor left that column blank in every case involving claims made against him (including in relation to the Firm’s claim).  Of more significance, I think, is the fact that the Debtor stated at the bottom of that page that his total debt was some HK$217 million odd – a figure that can only be arrived at by taking account of all the debts referred to on the page, including both the Firm’s and Melco’s.  Moreover, as I have already noted, the Debtor himself did not oppose Melco’s petition, a matter which also suggests that the Debtor accepts that he is indebted to Melco for the amount claimed.

19. For all of these reasons, I do not think that the Firm has established that there is any real or bona fide dispute of substance in relation to the debt relied upon by Melco.

20. I turn to the suggestion that the presentation of the petition is an abuse of process on Melco’s part.  In this regard, while I have no doubt that Mr Coleman is right to say that a petition which is presented in circumstances which amount to an abuse of process is liable to be dismissed, I confess to having real difficulty in seeing how it could be said that Melco’s petition (assuming, as I have found to be the case, that it is a creditor of the Debtor) could be said to be an abuse of the process.

21. While I would accept, in the light of the correspondence, and the history of the matter, that one purpose of Melco’s in presenting the petition was to prevent the Firm from obtaining the benefit of any execution that it might be able to levy against the Debtor, I do not see that there is any abuse in that.  This would not show that Melco does not also bring the petition in order to recover for itself a dividend in the Debtor’s bankruptcy in respect of the debt owed to it.  That debt, although representing a small proportion of the debt owed to the Firm, and a smaller proportion of the overall debts of the Debtor, is nonetheless not an insignificant one.  Having regard to the assets which the Debtor himself admits to having (some HK$45 million odd), there would seem to be prospects of a dividend of over 20% being paid.  This would produce a recovery of close to HK$1 million for Melco, which although well short of the debt owed to them, is a not insignificant amount of money.  I see no reason to disbelieve Melco’s evidence that it wishes to recover what it can through the bankruptcy process.

22. Further, it seems to me that there is nothing wrong in principle with a creditor seeking to prevent another creditor from retaining the benefit of execution levied against an insolvent debtor.  Where a debtor is insolvent, it is entirely in accordance with the policy of the law that his assets should be realised for the benefit of all his creditors, and for them to recover their debts on a pari passu basis.  This is what is provided for in the Bankruptcy Ordinance and in the provisions relating to winding up in the Companies Ordinance (Cap. 32).  That being so, I cannot see that there is any abuse in Melco seeking to achieve this.

23. The last point that Mr Coleman advanced was the suggestion that a criminal bankruptcy order would be more appropriate in the circumstances of this case.  However, as Mr Coleman fairly accepted, a criminal bankruptcy order can be made notwithstanding that a bankruptcy order has already been made, and if made, will supersede the earlier bankruptcy order. That being the case, there would seem to be no real advantage in waiting for the conclusion of the criminal proceedings until making a bankruptcy order against the Debtor, other than, perhaps, there being some risk of duplication or waste of costs.  However, I do not see that this risk is a particularly significant one – whatever steps were taken by a trustee in bankruptcy prior to the making of a criminal bankruptcy order would reduce the work that needed to be done by a trustee appointed in consequence of such an order.  Indeed, it would seem to me that there are advantages to the making of a bankruptcy order sooner rather than later, as this would enable the debtor’s affairs to be investigated much sooner, which may well be of benefit to his creditors.  Further, the advantages of a criminal bankruptcy order identified by Mr Coleman would seem to remain available.  Finally, the making of a bankruptcy order now would seem to be better calculated to advance the principle of pari passu distribution, whereas the refusal to make one by dismissing the petitions would be likely to give a potentially significant advantage to the Firm, which is actively seeking to enforce its judgment against the Debtor by process of execution, which, if successful, would be likely to benefit it to the exclusion of the Debtor’s other creditors.  I therefore do not think that this argument provides a reason for declining to make a bankruptcy order against the Debtor if it would (as I think it would) otherwise be appropriate to do so.

24. Accordingly, I shall make a bankruptcy order against the Debtor on Melco’s petition.

25. In consequence, the Debtor’s petition serves no useful purpose, and I shall dismiss it.  That said, however, had I come to the view that Melco’s petition should have been dismissed on the basis that there was a bona fide dispute of substance in relation to the debt that Melco relied upon, I would have made a bankruptcy order against the Debtor on his own petition, as I am satisfied, from the Debtor’s evidence that he is clearly insolvent, and am also satisfied, for the reasons explained above, that the arguments put forward by the Firm in respect of abuse of process are without merit, as are the arguments to the effect that no bankruptcy order should be made because of the possibility, or even likelihood, of a criminal bankruptcy order being made at some future date.

26. So far as costs are concerned, it seems to me that in relation to Melco’s petition, the appropriate order to make would be that the Firm is to pay Melco’s costs in relation to that petition, as the Firm unsuccessfully opposed it.  So far as the Debtor’s petition is concerned, it seems to me that the appropriate order to make would be that there should be no order as to costs, as, while it has turned out to be unnecessary, I do not think that the bringing of it, in the light of the opposition to the Melco petition, was so unreasonable as to merit an adverse costs order against the Debtor, particularly where the Firm’s opposition to it would otherwise have been unsuccessful.  I therefore make an orders nisi that the Firm is to pay Melco’s costs of Melco’s petition, such costs to be taxed on the party and party basis if not agreed, and that there should be no order as to costs in relation to the Debtor’s petition.