RE MANN, KEVIN PATRICK

HCB 8023/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO 8023 OF 2013

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AND

HCB 8025/2013

IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO 8025 OF 2013

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J U D G M E N T

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Introduction

1. There are before this court two bankruptcy petitions dated 5 November 2013 (“Petitions”) presented by the Hong Kong and Shanghai Banking Corporation Limited (“Bank”) against Mr Kevin Patrick Mann (“Mr Mann”) and Madam Chung Yan Hilda Li (“Madam Li”) who are husband and wife (collectively “Debtors”). 

2. The Petitions were served by way of substituted service pursuant to Orders made by Master H. Au-yeung and Master Ho on 6 and 10 December 2013 respectively.

3. The Petitions are based on the Debtors’ non-compliance with two statutory demands dated 16 December 2012 (“Statutory Demands”) for the sum of over HK$1.59 million (“Debt”). The Statutory Demands were served personally on the Debtors on 27 December 2012.

4. Madam Li is present in court while Mr Mann is in Australia. According to the affidavits of Mr Mann filed in these proceedings on 2 December 2014 and 27 February 2015, his absence from these proceedings was due to health issues which need not be elaborated here.

5. The Debtors are the guarantors under a joint and several guarantee (“Guarantee”) of a term loan (“Loan”) granted by the Bank to Manhattan (Asia) Limited (“Manhattan”) up to HK$3 million. The Debtors are the only directors and shareholders of Manhattan.

6. Manhattan used to operate Dymocks Booksellers in Prince’s Building, Central, Hong Kong.  According to Madam Li, Manhattan has ceased business in about 2012. Manhattan has also ceased making monthly repayments to the Bank since about August 2012. In December 2012, the Bank served the Statutory Demands on the Debtors.

7. Evidence filed on behalf of the Bank reveals that the Debtors have made a number of repayments to it in the first half of 2013 amounting to HK$135,250. The latest figure of the outstanding indebtedness due from the Debtors to the Bank was HK$1,889,296.30, as at 19 March 2015.

Litigation in Australia

8. Until the present hearing on 19 March 2015, the Debtors’ principal request to this court was to “delay” the adjudication of the Petitions, which this court understood to mean adjourning or staying them. 

9. Apart from Mr Mann’s ill health, the only other reasons put forward by the Debtors were that Manhattan was engaging in litigation in the Federal Court of Australia against Dymocks Franchise Systems (China) Limited (“Dymocks”), which was still on-going, and the Bank would be fully repaid if the litigation succeeded. Even if the litigation failed, the Bank could still obtain repayment of the Loan under a guarantee provided by the HKSAR Government pursuant to the Special Loan Guarantee Scheme (“Scheme”).

10. At the hearing before this court on 3 December 2014, solicitor acting for the Bank submitted that, on the existing evidence, there was nothing to suggest that the Australian litigation could proceed to trial any time soon.  Nor did the evidence demonstrate Manhattan had a reasonable prospect of success in the Australian litigation so that there would be monetary recovery from Dymocks in an amount sufficient to repay the Bank. At that hearing, the Petitions were, however, adjourned owing to a legal issue which has since been resolved.

11. I agree with the submissions of the Bank’s solicitor.

12. First, this court is not in a position to make any assessment of Manhattan’s prospect of success in the Australian litigation. Second, given that this hearing is already the 9^th hearing of the Petitions, this court is not satisfied that further adjournment of the Petitions for an indefinite period of time is appropriate:  Ho Ying Pat Bobby v Oversea Way (China) Ltd [2001] 2 HKLRD 837.  Further, this court also cannot be satisfied the Debtors are able to pay the Debt or they have a reasonable prospect of being able to pay it within the meaning of section 9(3) of the Bankruptcy Ordinance, Cap. 6 (“Ordinance”) so as to justify dismissing the Petitions.

Existence of other securities

13. As stated earlier, the Loan is guaranteed by the HKSAR Government pursuant to the Scheme. The Scheme was set up by the Government in December 2008 to assist enterprises to obtain loans from participating lending institutions (“Lenders”), including the Bank, for meeting their general business needs and tiding them over any liquidity problems during the global financial crisis.  In brief, under the Scheme, the Government would provide a guarantee up to 80% of the loans granted by the Lenders to the enterprises in question. This guarantee was a matter of private contractual arrangement between the Government and the Lenders and was an additional assurance to the Lenders in their assessment of the credit risk involved. 

14. To be eligible under the Scheme, one of the requirements was that shareholder(s) holding more than 50% of the equity interest in the principal borrower would have to provide a personal guarantee to the Lenders. The rationale behind this requirement was credit risk management. As this court understands it, the Government’s thinking at the time was two-fold: first, adequate safeguards should be put in place to ensure eligible enterprises were those with genuine business needs and reasonable business prospects; second, owners of the eligible enterprises should take some responsibility for their businesses. In other words, the concern of the Government was the familiar concept of moral hazard.

15. In Hong Kong and Shanghai Banking Corporation Limited v Ng Fui unrep.; HCB6506 of 2011; 23 May 2012; Barma J (as he then was) made the following pertinent observations on the nature of the Scheme and the rights of Lenders such as the Bank at [22] – [24]:

“[22] By the scheme, the government does not make a grant of 80 per cent of the loan value to the business – rather it provides a guarantee by way of further security to the financial institution concerned to induce it to make the loan. It therefore remains the obligation of the borrower to repay the loan in full and it remains the obligation of any other guarantor to honour the terms of his guarantee. In this regard the government’s guarantee is, as I have said, no different from any other guarantee or security that the bank may hold.

[23] The effect of this, as is well established (see e.g. Chang Wai Kai v Commerce Bank [2002] 2 HKC 340 and China and South Sea Bank Limited v Tan Soon Gin [1990] 1 AC 536), is that a creditor is entitled to pursue any of the securities available to him and is not bound to exhaust all of his other securities before pursuing a particular guarantor.

[24] In these circumstances it was, I think, entirely open to the bank to pursue Mr Ng under the guarantee that he gave before seeking to invoke the guarantee given by the government under the Special Loan Guarantee Scheme. Indeed, having regard to the purpose of the scheme and to the indications that guarantees from those interested in the business would be expected to be obtained, it might well be said that it was entirely appropriate for the bank to exhaust its other securities before looking to the government guarantee in respect of any shortfall…” (emphasis added)

16. The observations by the learned Judge are not only supported by the authorities referred to in the judgment viz China and South Sea Bank Limited v Tan Soon Gin [1990] 1 AC 536 and Chang Wai Kai v Commerce Bank [2002] 2 HKC 340. They are also fully consistent with a long line of authorities which established that, for the purpose of proceedings under the Ordinance, a petitioner is not to be regarded as a “secured creditor”, and the petitioning debt is not to be regarded as a “secured debt”, where the petitioner holds securities, whatever their form, furnished by third parties rather than the debtor himself: Re Kwok Chok Yee [2000] 2 HKC 543; Lai Yuk Shau v Dao Heng Bank Ltd [2001] 4 HKC 299; Cheng Wai Kei v Commerzbank Aktiengesellschaft [2002] 2 HKC 340.

17. The practical effect is that section 6B of the Ordinance, which concerns “creditor with security”, has no application to the present case.

Bona fide defence on substantial grounds

18. According to the latest affidavit of Madam Li dated 17 March 2015, the Debtors are now contending that they have been misled by the Bank when they procured the Loan in order to assist Manhattan’s operations in March 2010. They also contend that the Bank have failed to make full and frank disclosure of its dealing with the Hong Kong Government.

19. At paragraphs 8 and 9 of her affidavit, Madam Li said this:

“8. It is our position that:

(a) The guarantee sold to us by HSBC was for an 80% guarantee of the outstanding loan amount and not 100% of the outstanding loan. It was our genuine belief and understanding when entering into the loan contract that the guarantee covered 80% of the outstanding loan.

(b) HSBC did not provide full and frank disclosure of all material facts.

(c) HSBC was involved in misleading conduct and deceptive behaviour by not disclosing the full details of the deed agreement.

(d) We are of the belief that there is no debt in regard to the petition to make us bankrupt as the 80% guarantee and our offer of paying the difference of 20% extinguishes the debt.

(e) It is also our position that HSBC used its overwhelming bargaining power over us at the time HSBC offered the guarantee by having the contract being prepared in advance of discussions; the contract being offering in an accept or reject form; there not being a real opportunity for negotiation of contract terms.

9. Our genuine belief in the knowledge that the guarantee was for 80% was evidenced by the statements of the HSBC staff selling the loan.”

20. At paragraph 26 of her affidavit, Madam Li asked this court to inter alia dismiss the Petitions.

21. It is a well-established legal principle that in order to successfully oppose a Petition, a debtor has to show a bona fide dispute to the debt on substantial grounds, by sufficiently precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: Hong Kong Bankruptcy Law Handbook 4^th Ed. at p 47 para. 6A.10; Re ICS Computer Distribution Ltd. [1996] 1 HKLR 181; Re Tam Mei Kam unrep.; HCB 3777 of 2011; 25 April 2012; Barma J (as he then was); Re Yuen Mun Wa (debtor) [2012] 5 HKLRD 108.

22. This court has carefully considered Ms Li’s affidavit and all affidavits/ affirmations previously filed by the Debtors.

23. Applying the aforesaid principle to the present case, this court is not satisfied that the Debtors have shown a bona fide defence of substance to the Bank’s claim on the Guarantee.

24. As pointed out by Mr Chan on behalf of the Bank, Madam Li has previously filed an affirmation in these proceedings on 10 May 2014 (“Affirmation”). At paragraphs 7 to 9 of the Affirmation, Madam Li in effect admitted that:

(1)  she and her husband knew a personal guarantee from them was required under the Scheme;

(2)  they had jointly executed a guarantee for up to HK$ 3 million in favour of the Bank under which they “guaranteed to pay to the [Bank] on demand all moneys and liabilities due owing or incurred by Dymocks [bookstore] operated by Manhattan”;

(3)  Manhattan had failed to keep up with the monthly repayments to the Bank after 2011.

25. There was no suggestion in the Affirmation that the Debtors had been misled by the Bank. Nor was there complaint about the Bank’s failure to make full and frank disclosure. The complaint at that time was the Bank should obtain payment from the Government under the government guarantee instead of petitioning for their bankruptcy and that a bankruptcy order against them would prejudice Manhattan’s litigation in Australia.

26. In another affirmation filed by Madam Li in these proceedings on 28 November 2014, she reiterated the Debtors’ stance that bankrupting them would impede the litigation in Australia.

Conclusion

27. In these circumstances, while this court has considerable sympathy for them, I am satisfied that the Bank is entitled to a bankruptcy order against Mr Mann and Madam Li and shall so order.

Disposition and costs order nisi

28. There will be a usual bankruptcy order against Mr Mann and Madam Li and an order nisi that costs of each Petition, including all costs reserved, be to the Bank.