WONG WAI LIN LANA v. HEUNG WAH WING AND OTHERS

CACV 1066/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 1066 OF 2000

(ON APPEAL FROM HCSD 27 OF 2000)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1 This is an appeal from the order dated 12 October 2000 of Deputy Judge Kwan (as she then was) setting aside the statutory demand dated 20 May 2000 served on the applicant by the respondents. The appeal was allowed for reasons to be given in writing later. My reasons for allowing the appeal appear below.

Background facts

2 The debt underlying the statutory demand arose out of a consent order dated 28 February 2000 in respect of legal costs of a consolidated action (HCA8731/93 and HCA11746/96). In the judgment dated 3 June 1998, the applicant was ordered to pay the respondents' costs. The amount payable under the consent order was $650,000. The statutory demand was served on 2 June 2000 and the applicant applied to set it aside on the ground that she had a cross claim against one of the creditors, namely Heung Wah-wing in HCA5083 of 1992 for a sum of $500,000 ("the 1992 action"). Shortly after the date of the statutory demand, the applicant made a payment which reduced her indebtedness to the respondents to exactly half a million dollars.

3 In her application to set aside the statutory demand, the applicant had relied on paragraphs (a) and (d) of Rule 48(5) of the Bankruptcy Rules which provide as follows:

"(5) The court may grant the application 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;

...

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

Before the deputy judge, however, the applicant relied solely on paragraph (a).

4 The deputy judge decided the application on the basis that a genuine and serious cross claim existed which equalled or exceeded the amount of the petition debt thereby triggering the discretion vested in the court under Rule 48(5). Much of the judgment was thus taken up by a consideration of the nature of the consolidated action and the 1992 action brought against Mr Heung alone which I outline below.

5 The applicant was the owner of two adjoining properties in Marina Cove referred to throughout as E2 and E3, each consisting of a house and garden. She sold and assigned E2 to the 3rd respondent. In September 1993, the applicant sued the 3rd respondent for trespass. The dispute centred around the ownership of a strip of land which was part of either E2 or E3. In May 1994, the applicant amended her statement of claim to add the 1st respondent on the basis that he had possession of E2 and trespassed on E3.

6 On 27 May 1994, the 1st and 2nd respondents became the owners of E2 by an assignment from the 3rd respondent and on 15 October 1996, the applicant commenced the second action against the 1st and 2nd respondents. The two actions were consolidated and on 3 June 1998, Findlay J found that the piece of land in dispute belonged to the respondents and therefore dismissed the applicant's claim. The applicant was also ordered to pay the respondents' costs.

7 So far as the 1992 action is concerned, it is based on an agreement between the applicant and the 1st respondent evidenced by a written memorandum dated 20 February 1992. It referred to a Sale and Purchase Agreement of the same date between the applicant as vendor and the 1st respondent as purchaser in respect of E2 pursuant to which the parties agreed that HK$500,000 would be paid by the 1st respondent to the applicant "upon completion as price for all the existing fixtures, fittings and furniture in the said property." Notwithstanding the description of the 1st respondent in the memorandum as "purchaser" under the Sale and Purchase Agreement, it would appear that he was acting as agent for the 3rd respondent in entering into the provisional agreement: E2 was conveyed to the 3rd respondent and not the 1st respondent. That much is clear from the judgment of Findlay J in the consolidated action.

8 The 1992 action is a dispute between the applicant and the 1st respondent only. Particulars of the items agreed to be sold are set out in a list attached to the applicant's statement filed in the 1992 action and it is to be noted that they include many items that can only be regarded as part and parcel of the property itself such as "turfed garden", "small roof garden", "built-in cabinets and shelves", "tiles" in the kitchen and bathroom, "built-in lighting and wiring", "wooden floors in teak" and "staircase", hardly the subject matter of a sale separately from and independently of the property. The applicant is seeking payment under the agreement and the defence raised is that the subject matter of the agreement was never delivered: indeed it is alleged that everything that was not embedded in the fabric of the house had been removed before completion took place.

9 The deputy judge felt unable to say that there was really no substance in the applicant's claim or that the evidence she was to give in the action for the cross claim was totally incredible. She then went on to consider whether special circumstances existed which would warrant the exercise of the court's discretion against the applicant. Whilst noting an inexplicable delay of 5 years on the part of the applicant in pursuing the action which was commenced almost 9 years ago, she took account of the fact that the action was likely to come up for trial fairly soon. On 20 September 2000, the listing judge had directed that the action be set down within 42 days. She therefore concluded that there were no special circumstances which justified the exercise of the court's discretion against the applicant and set aside the statutory demand.

Rule 48(5)(a)

10 It is the respondents' contention that the deputy judge erred in law inasmuch as the facts do not come within paragraph (a) of Rule 48(5) so that there is no question of the court's jurisdiction under that rule having been engaged. This point was made in the respondents' counsel's submissions in the court below but was not addressed in the judgment.

11 The point raised in this appeal is really one of law and concerns the proper construction of Rule 48(5)(a) namely, where a debt is owed to A, B and C jointly, whether for the purposes of paragraph (a), it is sufficient if the debtor's claim is a personal one against A only.

12 If the right asserted by the debtor is one of set-off, it is common ground that mutuality is required. This means that the demands must be between the same parties and in the same interest. The following passage from Wood, English and International Set-off para 20-34 sets out the position succinctly:

"Where partners or other creditors own a debt jointly as to the beneficial title and one of the partners or one of the joint creditors individually owes a claim to the debtor, there is no set-off mutuality between the claims. Hence there is no set off if the partners or the joint creditors claim the joint debt, or if the debtor claims the individual debt from one of the partners or one of the joint creditors. If a set-off were allowed, the interest of each creditor in the joint claim would have been used to pay the individual liability of one of the joint claimants..."

As there is no mutuality on the facts of this case to support a right of set-off, paragraph (a) would not apply.

13 As I understand it, counsel for the applicant submitted that because the present case did not involve a right of set-off but only a cross claim which the applicant has against the 1st respondent, mutuality is not an essential ingredient. He relied on In Re Bayoil SA [1999] 1 WLR 147 which was a case that concerned a winding-up petition based on an undisputed debt but the company had a genuine and serious cross claim against the petitioner which it had been unable to litigate and which exceeded the amount of the petitioner's debt. The court held that in the absence of special circumstances it would exercise its discretion to dismiss or stay the petition. The other cases also relied on, namely, In Re Portman Provincial Cinemas Limited (Note) [1999] 1 WLR 157 and In Re L.H.F. Wools Limited [1970] Ch. 27 do not add anything to the decision In Re Bayoil. For my part, I do not see how these cases assist the applicant since in each of them, the parties involved were the same: in other words, there was mutuality. The question now under consideration did not therefore arise in those cases. On any view, they cannot be regarded as authority for the proposition that mutuality is not an essential ingredient.

14 Counsel for the applicant also referred to the case of Brickland v. Newsome (1808) 1 Camp. 474 for the proposition that where a single debt is owed to two or more creditors jointly a bankruptcy petition can be brought in respect of the debt only if all the joint creditors join in the petition. Again, it is difficult to see how this proposition assists the applicant's case. The reason why one of two joint creditors cannot petition is because the debt owed to them jointly is not the sole property of any one of the joint creditors.

15 As a matter of construction, paragraph (a) of Rule 48(5) must contemplate that the counterclaim, set-off or cross demand in question be against the petitioning creditor since the fact that the debtor appears to have a counterclaim, set-off or cross demand against someone else would be entirely irrelevant. This is reinforced by the phrase "equals or exceeds the amount of the debt". The significance of this is that if the amount of the counterclaim, set-off or cross demand equals or exceeds the amount of the debt, then in the event of the counterclaim etc., succeeding, the debt supporting the petition would be extinguished. Indeed, the injustice of not setting aside the statutory demand where the debt is capable of being extinguished by the counterclaim, set-off or cross claim is apparent and, undoubtedly, is the rationale underlying the provision. Certainly, extinguishment of the debt requires that there be mutuality. Whilst a characteristic of the legal right of set-off, it is not the preserve of the right of set-off. In my judgment, mutuality is an essential ingredient of paragraph (a) and it makes no difference that what the debtor appears to have is a counterclaim, or cross demand rather than a set-off.

16 For these reasons, I agree with counsel for the respondents that the deputy judge erred in law in proceeding on the basis that the facts before her fell within paragraph (a) of Rule 48(5). It follows that the discretion contained in that rule was never triggered and the order made must be set aside.

Rule 48(5)(d)

17 Finally, I need only mention briefly that during the hearing, counsel for the applicant sought to invoke paragraph (d) of Rule 48(5) despite the absence of a respondent's notice. That submission was subsequently withdrawn and for good reason: aspects of the subject matter of this claim made it problematic; in addition, there was the staleness of the claim and doubts as to the applicant's good faith in pursuing her claim given the fact that the deputy judge's belief that matters were moving forward in the 1992 action has not been borne out by subsequent events. Notwithstanding the directions of the listing judge given on 20 September 2000 and contrary to the deputy judge's belief, the applicant has failed to take further steps in the action, whether to file further witness statements in response to those filed on behalf of the 1st respondent on 10 October 2000 or to set the matter down for hearing. In those circumstances, it is difficult to see how paragraph (d) could have been successfully invoked.

Hon Keith JA:

18 My reasons for allowing this appeal are the same as those given by Le Pichon JA. I only wish to add that I construe rule 48(5)(a) of the Bankruptcy Rules as requiring the "counterclaim, set-off or cross demand" upon which the judgment debtor relies to be one which the debtor has against all the judgment creditors in respect of the debt to which the statutory demand relates. Statutory provisions should be construed, if possible, so as to avoid anomalies and unintended and surprising results. It would be very surprising if it had been intended that the judgment creditors against whom the debtor does not have a counterclaim, set-off or cross demand would be deprived of their right to rely on their statutory demand simply because the debtor appears to have a counterclaim, set-off or cross demand against another judgment creditor.

Hon Rogers VP:

19 I agree with the judgment of Le Pichon JA.