ANDREW WYLES WATERS v. MALAHON CREDIT CO LTD

HCSD 24/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND
NO. 24 OF 2001

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D E C I S I O N

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Background

1. In these proceedings, the Applicant seeks to set aside the statutory demand served on him by the Respondent. For the purpose of that hearing, he applies for (1) an order under Order 38 rule 2(3) of the Rules of High Court for the Respondent's deponent of affirmation to attend the hearing for cross examination and (2) a writ of subpoena to secure a witness to attend the hearing for the purpose of giving evidence on his behalf.

2. The statutory demand was based on a loan agreement dated 28 September 1999 signed by the Applicant. The Respondent alleged that the Applicant owed the Respondent an amount of $1,725,202.97 which was due and payable immediately.

3. The Applicant's case is that he worked for the First Euro Asia Finance Co. Ltd. ("FEAFCL") as its Chief Executive Officer at a salary of $38,000. It was agreed between him and Mr Chou, on behalf of the First Euro Asia group and the Respondent that his salary would be paid by way of a loan from the Respondent to the Applicant until FEAFCL could generate its own income when he would draw his salary directly from FEAFCL and then the loans advanced to the Applicant would be extinguished and treated as loans from the Respondent to FEAFCL. The Applicant also relies on a counterclaim and/or set off against the Respondent. The arrangement was merely for accounting and tax avoidance purposes, especially when the Applicant's application for employment visa was not approved until April or May 2000. After Mr Chou suffered a second stroke in about February 2001, Mr Chwoon Ang Lim was appointed as Mr Chou's attorney to look after the affairs of FEAFCL. Then the Applicant was forced to resign as Chief Executive Officer and director of FEAFCL in July 2001.

4. The Applicant has filed three affirmations exhibiting certain documents in support of his application to set aside the statutory demand. The Respondent has filed two affirmations from Mr Jason Cheung and one affirmation from Mr Chou. For the purpose of this application, it is both unnecessary and inappropriate for me to go into any details of these affirmations, or to compare them, or to express any views about them whatsoever. As is expected, the Respondent's affirmations denied what is said by the Applicant in his affirmations.

The law on setting aside a statutory demand

5. The need to cross examine a deponent of affirmation or to subpoena a witness must be considered in the light of the purpose of the proceedings for which such need is said to have arisen. It is therefore pertinent for me to state the test for setting aside a statutory demand. Rule 48 of the Bankruptcy Rules made under the Bankruptcy Ordinance, Cap 6, provides that the court may grant an application to set aside a statutory demand if -

(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand;

(b) the debt is disputed on grounds which appear to the court to be substantial;

(c) it appears, in certain circumstances, that the creditor holds some security in respect of the debt claimed by the demand; or

(d) the court is satisfied, on other grounds, that the demand ought to be set aside.

It is obvious that the Applicant is disputing the debt on the basis of ground (b) above. In my view, in respect of this ground, the same principles should be applied as those which apply to the setting aside of a petition to wind up a company. In Re ICS Computer Distribution Ltd [1996] 3 HKC 441, Rogers J, as he then was, refused to apply the Order 14 test to a dispute on substantial grounds. He held at 443:

"The analogy with O. 14 breaks down in a number of respects. As Oliver LJ said in the Claybridge case the analogy may be fair for many purposes but is not perfect..."

Then at 444, he continued:

"Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court that it has a bona fide dispute on substantial grounds."

6. Translating this principle in companies winding up to bankruptcy, the test to be applied in determining whether the debt is disputed on grounds which appear to the court to be substantial is this: The court has to take a view on the evidence before it, to see if on the evidence there is a genuine triable issue that the debt is disputed on substantial as opposed to trivial or frivolous grounds. The burden is on the applicant to put forward his defence with sufficient clarity and to adduce sufficiently precise factual evidence to satisfy the court that he has a bona fide dispute on substantial grounds. He does not have to show that his evidence is believable, but he has to satisfy the court that he has a bona fide dispute as to the debt in that the dispute is not a cloud of objections without substance. Statutory demands are only meant for clear cases. Once the court finds some substance in the defence, the court shall set aside the statutory demand. It would not undertake a trial during this summary procedure. The party claiming to be the creditor has to establish its claim to the alleged debt by instituting a proper action for determination of that claim.

7. The court does not have to satisfy itself that the debt is a valid one before it will dismiss an application to set aside a statutory demand; or that it is not valid before it will allow the set aside application. Usually the court will not embark on an inquiry as to the validity of the debt unless the dispute is capable of summary disposal, for example, that the facts are not in dispute or indisputable in the light of incontrovertible evidence. This is because if the applicant cannot even discharge the burden of proving that he has a dispute on substantial grounds, he cannot prove that the debt is invalid. Likewise, if he can discharge that burden, the statutory demand will be set aside. There is nothing to be gained by making further finding that the debt is valid. That should be left to be fought out in an appropriate action and not on a bankruptcy petition.

8. Having stated the law and the court's approach on an application to set aside a statutory demand, I now turn to the Applicant's two applications.

Application to cross examine Mr Chou

9. The court has discretion under Order 38 rule 2(3) of the Rules of High Court to order the attendance for cross examination of the maker of an affidavit. In Wendy Wenta Seng Yuen v Philip Pak-yiu Yuen [1984] HKLR 436, Fuad JA held that the court has an unfettered discretion to permit cross-examination on an affidavit but the applicant is not entitled to this right as of course. He has to establish that in all the circumstances of the case there is a good and sufficient reason for the application. Where the evidence on the affidavits will result in a final order, the court will bend in favour of finding a good and sufficient reason for granting the application. The reason offered by the Applicant for cross-examining Mr Chou is to show whether he has the mental capacity to make the affirmation in July 2002 in view of the minor stroke he suffered in January 2001.

10. Mr Lee submitted that the hearing on 27 February 2003 is not an interlocutory matter but will result in a final order within the meaning of Wendy Wenta Seng Yuen v Philip Pak-yiu Yuen. That I respectfully disagree. Even if the application to set aside the statutory demand is dismissed at the hearing on 27 February 2003, the Applicant is still at liberty to show cause against the petition and to challenge the petition at the hearing. It is only when that challenge is unsuccessful would it result in a final order. Even if the hearing on 27 February 2003 will result in a final order, the reason offered by the Applicant is palpably insufficient.

11. What constitutes a good and sufficient reason must be examined in the light of the nature of the proceedings in which the affirmation is used. As the Applicant is seeking to set aside the statutory demand, his burden is to put forward his defence with sufficient clarity and to adduce sufficiently precise factual evidence to satisfy the court that he has a bona fide dispute on substantial grounds. As I have already indicated, he does not have to prove that the debt is invalid and usually the court will not endeavour to determine the validity or otherwise of the debt because it is unnecessary. In this sense, this court is not required to make a final order. In this as well as in many other similar proceedings in chambers, the court is faced with affidavits filed by the parties, which are usually contradictory. It is never the function of the court to conduct a mini trial on affidavits or to compare affidavits and make finding of fact. In the present case, what the court has to do is to consider all the evidence presented by the parties and ask whether the Applicant has raised a genuine triable issue that the debt is disputed on substantial as opposed to trivial or frivolous grounds. For that purpose and without expressing any view as to whether the Applicant would be able to discharge that burden, I am confident that any court could determine this issue by reading the affirmations, albeit conflicting, without the need of cross-examining the deponents. To allow the deponents to be cross-examined is to take an inquiry to a depth which is unnecessary and would only add to unnecessary costs.

Application for subpoena

12. The Applicant applies, pursuant to Order 38 rule 2(3), for Mr Gordon Chan, a former director of First Euro Asia group, to be subpoenaed to attend and give evidence at the hearing. The purpose of calling Mr Chan is to testify as to who had the actual authority at the material times to make orders and decisions regarding the affairs of First Euro Asia group and the Respondent company, the general health of Mr Chou and whether there was the salary arrangement between the Applicant and Mr Chou as alleged by the Applicant. While I shall not question issues relating to the relevance of any evidence that may be given by Mr Chan and its usefulness, it remains my duty to filter such application for subpoena: see Li Man York Evelyn v Li Wai Tat Walton [1997] 3 HKC 534. I have to ask myself whether the proceedings are of such a nature as one would expect evidence to be called; whether this is a cause or matter, being heard in chambers, in which oral evidence is appropriate and whether the application for a subpoena is an abuse of process.

13. Given the nature of the proceedings as I have analysed earlier, the test that the court has to apply in setting aside the statutory demand, the absence of any need to make a finding as to the validity of the debt, I must answer the first two of these questions in the negative in which event the answer to the last question must be in the affirmative. In the circumstances, the application for subpoena must be refused.

Conclusion

14. Accordingly, the Applicant's application is dismissed. The parties have agreed that costs should be in the cause. I make a costs order to that effect.

Remarks: