LI CHUN v. LI WING FUNG

HCSD 7/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE

A STATUTORY DEMAND NO. 7 OF 2002

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D E C I S I O N

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1. This is an application to set aside a statutory demand served on 1 February 2002, based on a Consent Order in High Court Action No. 12694 of 1996 dated 16 February 2001 ("the Consent Order"). The demand was for US$357,202.04, being the balance of what the applicant was required to pay to the respondent at the time the statutory demand was issued on 17 January 2002, according to the respondent's interpretation of the Consent Order.

2. The relevant facts not in dispute may be set out as follows.

3. On 12 April 2000, the respondent obtained a judgment against the applicant in the High Court Action aforesaid for the sums of US$229,880.00 and US$319,120.00 making a total of US$549,000.00; interest on US$549,000.00 at 9.5% per annum from 15 August 1994 until 12 April 2000; and costs of the action.

4. The applicant defaulted in payment of the judgment debt. The respondent filed a petition for bankruptcy against him in HCB No. 2870 of 2000 based on the judgment debt. In the meantime, the applicant lodged an appeal against the judgment in the High Court Action in Civil Appeal No. 185 of 2000. An overall settlement was then reached to compromise the judgment obtained on 12 April 2000, HCB No. 2870 of 2000 and CACV No. 185 of 2000. The settlement was embodied in the Consent Order.

5. As the Consent Order is of central importance to the present application, I set out the relevant terms verbatim below. In that order the defendant is the applicant herein and the plaintiff is the respondent in this application.

"UPON the application by the Solicitors for the Plaintiff by way of Consent Summons filed on 28 November 2000 BY CONSENT IT IS ORDERED that:-

1. There be stay of execution of the Judgment dated 12 April 2000 upon the following terms:-

(1) The Defendant shall pay the Plaintiff the sum of US$860,000.00 or its equivalent in HK dollars at the time of payment being the full and final settlement of the Judgment dated 12 April 2000 by 6 instalments as follows:-

(i) the 1st instalment in the sum of US$130,000.00 or its equivalent in HK dollars at the time of payment be paid on the date of signing of the Consent Summons dated 27 November 2000;

(ii) the 2nd instalment in the sum of US$130,000.00 or its equivalent in HK dollars at the time of payment be paid on or before 31 December 2000;

(iii) the 3rd instalment in the sum of US$130,000.00 or its equivalent in HK dollars at the time of payment be paid on or before 28 February 2001;

(iv) the 4th instalment in the sum of US$160,000.00 or its equivalent in HK dollars at the time of payment be paid on or before 28 July 2001;

(v) the 5th instalment in the sum of US$155,000.00 or its equivalent in HK dollars at the time of payment be paid on or before 28 November 2001;

(vi) the 6th instalment in the sum of US$155,000.00 be paid on or before 30 March 2002;

(2) the Defendant as the Appellant shall pay the Plaintiff as the Respondent costs and disbursements under Civil Appeal No. 185 of 2000 within 7 days from date of Allocatur or within 7 days from date when the Plaintiff's said costs is agreed, as the case may be;

(3) the Defendant shall pay the Plaintiff as the Petitioner costs and disbursements under Bankruptcy Action No. HCB 2870 of 2000 within 7 days from date of Allocatur or within 7 days from date when the Plaintiff's said costs is agreed, as the case may be;

(4) the Defendant shall pay the Plaintiff costs and disbursement of these proceedings within 7 days from date of Allocatur or within 7 days from date when the Plaintiff's said costs is agreed, as the case may be;

2. In the event of default by the Defendant of any payment in accordance with paragraph 1 hereinbefore, the Plaintiff shall be at liberty to proceed to enforce the then outstanding balance of the Judgment, the Plaintiff's said costs under Civil Appeal No. 185 of 2000, the Plaintiff's said costs under Bankruptcy Action No. HCB 2870 of 2000 and the Plaintiff's said costs under these proceedings."

6. The applicant has paid all six instalments under paragraph 1 of the Consent Order but he has failed to make punctual payment for three of the instalments. The dates and the amounts he had paid in respect of the instalment payments are as follows.

7. The first payment due on 27 November 2000 in the sum of US$130,000.00 was paid on time. The second instalment of US$130,000.00 was due on 31 December 2000 and the applicant had only paid US$90,000.00 on 2 February 2001 (being 33 days late) and the balance of US$40,000.00 on 26 March 2001 (being 85 days late). The third instalment also in the sum of US$130,000.00 was due on 28 February 2001 and the applicant made payment on 26 March 2001, 26 days after the due date. The fourth instalment in the sum of US$160,000.00 was paid punctually on 28 July 2001. The fifth instalment in the sum of US$155,000.00 was due on 28 November 2001. The applicant made part payment of US$38,461.54 on 10 December 2001 when he was 12 days late and the balance of HK$116,538.46 on 1 February 2001 on the day the statutory demand was served on him and he was 64 days late. The sixth and last instalment in the sum of US$155,000.00 was due on 30 March 2002, which was after the statutory demand was served, and the applicant made payment on 28 March 2002.

8. It is the respondent's contention that on a proper construction of the Consent Order, once there is default by the applicant of any payment in accordance with the timetable in paragraph 1 of the order, the respondent would be at liberty to lift the stay of execution of the judgment dated 12 April 2000 in paragraph 1 and enforce the then outstanding balance of the judgment dated 12 April 2000 by virtue of paragraph 2. As it is ordered in the judgment dated 12 April 2000 that interest should accrue on the judgment sum of US$549,000.00 at 9.5% per annum from 15 August 1994 to 12 April 2000, if the respondent's interpretation of the Consent Order is right, it would mean that the applicant would still owe a substantial sum to the respondent, notwithstanding that the applicant has by now paid the entire sum of US$860,000.00, which has included an element of interest on the judgment sum of US$549,000.00. On the respondent's calculation, the applicant would still owe the respondent US$90,420.91, taking into account the fifth and sixth instalments which were received after the service of the statutory demand.

9. The construction that the applicant seeks to place on the Consent Order is very different. On the applicant's interpretation, on default of payment of any instalment in accordance with the timetable in paragraph 1, the respondent would be at liberty to enforce the outstanding balance of the judgment in paragraph 1 of the order, being US$860,000.00 less any payments already made, not the judgment dated 12 April 2000 which provided that interest was to accrue on the judgment sum of US$549,000.00 at 9.5% per annum from 15 August 1994 to 12 April 2000. If the applicant's interpretation is correct, the applicant would be liable to pay interest at the judgment rate on those instalments which the applicant had failed to pay on time. If the interest rate of 8.5% per annum is adopted (this may not be the correct rate of interest but it is unnecessary for present purpose to ascertain what should be the correct rate), for the amounts due on the second, third and fifth instalments for the respective periods of late payment, the total amount of interest which the applicant is liable to pay on this calculation is only US$4,114.92. There is thus a substantial difference in the amount that the applicant is liable to pay, depending on which is to be adopted as the correct construction of the Consent Order. The applicant has stated in his last affirmation that he is ready and willing to pay US$4,114.92 to the respondent, if the respondent would accept the amount on the basis that the applicant would have complied with the entire Consent Order.

10. The applicant has applied to set aside the statutory demand on a number of grounds. The only ground of substance, as I see it, is the ground advanced under r. 48(5)(b) of the Bankruptcy Rules, Cap. 6A, that the debt is disputed on grounds which appear to the court to be substantial. For the purpose of this application, it is not necessary for me to come to a firm view whether the construction that the applicant seeks to place on the Consent Order is correct. It would be sufficient for the applicant to show that there is a genuine dispute as to which interpretation is correct and that the construction he has advanced would appear to be reasonably arguable.

11. On behalf of the respondent, it was submitted by Mr Horace Wong that the applicant's construction of the Consent Order is just not a possible construction. Mr Wong argued forcefully that paragraph 1 of the Consent Order provided for a stay of execution of the judgment dated 12 April 2000 upon terms, namely, that the applicant was to make payment of US$860,000.00 by six instalments on specified dates. If that condition was not complied with, there could be no full and final settlement of the judgment dated 12 April 2000 and the stay of execution of that judgment would be removed, with the result that the respondent would be at liberty to enforce the then outstanding balance of that judgment, less any payment that the applicant might have made pursuant to paragraph 1. Mr Wong also submitted that the sum of US$860,000.00 cannot be regarded as a judgment imposed by the court. It is merely a sum that the applicant had agreed to pay by instalments as a condition for the stay of execution of the judgment dated 12 April 2000 and embodied in a court order made by consent.

12. I am not persuaded that the respondent's construction is the only possible construction to be placed on the Consent Order. Paragraph 1 of the order used twice the expression "the Judgment dated 12 April 2000". Thus, it was provided that there was to be a stay of execution of that judgment and that the payment of US$860,000.00 would be in full and final settlement of that judgment. In paragraph 2 of the order, this expression was not used. It was provided that the plaintiff would be at liberty to proceed to enforce "the then outstanding balance of the Judgment", not "the then outstanding balance of the Judgment dated 12 April 2000". Could the sum of US$860,000.00 which the applicant was ordered to pay in paragraph 1 be regarded as "the Judgment" referred to in paragraph 2? It is to be noted that the Consent Order is not in the form of a Tomlin Order, the obligation to pay US$860,000.00 by six instalments was embodied in an order of the court, whether it was made by consent is not relevant. There is an argument, which cannot be summarily dismissed, that the "then outstanding balance of the Judgment" in paragraph 2 could refer to the balance of the amount that the applicant was ordered or adjudged to pay in paragraph 1. Further, it seems to me that it does not necessarily follow from the fact that a stay of execution was imposed on the judgment dated 12 April 2000 that it must have been envisaged in paragraph 2 it was the stay of execution of that judgment which would be lifted in the event of default. It would all depend on the language used. As I see it, there is an ambiguity in the wording of paragraph 2 as to which judgment the respondent would have liberty to enforce, in the event of default of payment of the instalments in paragraph 1.

13. In the course of the arguments, I have put to Mr Wong this scenario. Take for instance the applicant had paid in full on the due dates all six instalments making up US$860,000.00 but had failed to pay one or more of the items of costs in paragraphs 1(2) to (4) of the Consent Order. Would the respondent be at liberty to proceed to enforce not only the costs that the applicant is required to pay under paragraphs 1(2) to (4) but also the then outstanding balance of the judgment dated 12 April 2000, notwithstanding it was expressly provided in paragraph 1 that the sum of US$860,000.00 paid by six instalments on the respective due dates would be in full and final settlement of that judgment? Mr Wong was driven to contend that that would indeed be the case, as he had submitted that "the Judgment" in paragraph 2 could only refer to the judgment dated 12 April 2000. I see a logical difficulty about this. As Mr Wong has accepted, punctual payment of the six instalments making up the US$860,000.00 would be in full and final settlement of the judgment dated 12 April 2000. That being the case, I fail to see what could be the "then outstanding balance of the Judgment" in the situation that I have posed to Mr Wong. In my view, the construction that the respondent has placed on the Consent Order is not without difficulty. This would have been sufficient for the applicant to establish a ground for setting aside the statutory demand under r. 48(5)(b) of the Bankruptcy Rules.

14. For the sake of completeness, I should mention that I have also raised with Mr Wong in argument what could be the legal basis or entitlement for the respondent in appropriating the instalment payments made by the applicant to the discharge of interest first before applying the payments to discharge the judgment sum of US$549,000.00, for that is how the latest outstanding figure of US$90,420.91 is arrived at. If the instalment payments made by the applicant had been applied towards the discharge of the principal judgment sum first, the outstanding figure would have been less, even if the respondent's construction of the Consent Order is adopted. Mr Wong submitted that when the applicant made the instalment payments, the payments had been appropriated towards satisfying his liability under the timetable provided in paragraph 1. Hence, the applicant's right of appropriation had been "spent", so once the respondent was at liberty to enforce the outstanding balance of the judgment in the event of default by the applicant, the respondent would be entitled to appropriate the payments previously made towards interest first, before applying them to discharge the principal debt. Again, it is not necessary for me to rule on the correctness of this submission. Suffice it to say that I have reservations whether it could be said that the applicant had already exercised his right of appropriation when he made the instalment payments, bearing in mind that the sum of US$860,000.00 to be paid by instalments had included an element of interest and it was not envisaged by both parties that there was to be any separate amount of interest to which the whole or any part of any instalment payment could be appropriated.

15. For the above reasons, I am satisfied there is a genuine dispute of the debt in the statutory demand on substantial grounds. I therefore set aside the demand and I make an order nisi that the applicant is to have his costs of this application, to be taxed if not agreed.