LIM POR YEN v. LAM KUEN LEUNG

IN THE COURT OF APPEAL

1994, No. 87
(Civil)

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J U D G M E N T

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Litton, J.A.:

1. This is an appeal from the determination of a judge in bankruptcy proceedings.

2. The act of bankruptcy averred in the petition was failure to comply with the requirements of a bankruptcy notice, as provided for in Section 3(1)(g) of the Bankruptcy Ordinance.

3. The bankruptcy notice required the debtor to pay the sum of HK$4,634,191.84, being the balance of an amount due on a judgment obtained against the debtor Mr Lam in High Court Action No A9288 of 1992 on 28 January 1993. The judgment was in the sum of the HK$26,848,387.10, made up of a principal loan of $25m together with accrued interest. Hence, it was the petitioner's case that although much of the liability under the judgment had been discharged, there was a balance of $4,634,191.84 which the debtor had failed to pay.

4. The petition was verified by the petitioner Mr Lim's affirmation in accordance with Rule 56 of the Bankruptcy Rules and, eventually, the petition proceeded to a hearing. Under section 9(2) of the Bankruptcy Ordinance, the court hearing the petition had to be satisfied of three matters: proof of (1) the debt of the petitioning creditor, (2) the service of the petition and (3) the act of bankruptcy. This case focusses on the first of these considerations.

5. It may appear odd at first blush that, where the bankruptcy notice is founded upon a final judgment of the court, there can be any doubt concerning the proof of debt. Normally, where the whole of a judgment debt remains unsatisfied, the proof of debt is a mere formality; but where, as in this case, the creditor is relying upon the balance of a judgment debt unpaid, the matter may not be so straight-forward. There can, as in this case, be a genuine dispute as to whether any, and if so how much, of the debt remains undischarged. In these circumstances, what is a court on the hearing of a bankruptcy petition to do?

6. It is the creditor's case on this appeal that the judge, Mr Justice Patrick Chan, should have exercised his powers under section 9(5) of the Ordinance and embarked upon the trial of the question as to how much of the judgment debt remained undischarged, and erred in law in dismissing the petition in limine, on the basis of the affidavit evidence above. I have put the petitioner's case in this way because, as I understand it, he says that the remaining balance owed to him on the judgment debt is in fact not the sum stated in the bankruptcy notice, but a higher figure of HK$8,464,746.48 (with interest calculated up to 31 December 1993). As can be seen, this figure is nearly double that averred in the petition. Although the petitioner Mr Lim, in his affirmation of 13 December 1993, said that this larger sum was because "certain interest" was not included in the calculation (see para 21 of the affirmation) the discrepancies between the two sums claimed cannot be accounted for by the interest factor as averred. The larger sum was in fact arrived at upon a basis wholly different from the figure of $4.6m-odd stated in the petition.

7. Given this background counsel for the petitioner, almost inevitably, accepts that the judge could not have proceeded to make a receiving order and contends that there are "issues to be tried"; she says that the judge erred in dismissing the petition; instead, the judge should have stayed proceedings on the petition for such time as may be required for the trial of the issues.

Relationship between the parties

8. There were lengthy affirmations before the judge at the hearing of the petition. The relationship between the parties turned out to have been very complex, involving not only the two individuals themselves but also a number of private limited companies and a publicly-listed company Lai Sun Garment (International) Ltd. Moreover, it transpires that the loan of $25m, the foundation of the judgment debt, was not the only loan advanced by the petitioner to the debtor: there were at least two other loans, possibly three, together with one made by Lai Sun. The petitioner is Chairman and a substantial shareholder of Lai Sun. To add further complications to the picture, the loans, or some of them, were secured: although the mortgage instruments make no specific reference to the loans as such and merely recite the fact that the "borrower" had applied to the lender for "general credit facilities": the borrower and lender in each instance were not Mr Lim and Mr Lam, the parties before us, but companies closely associated with them. This immediately raises the question as to whether the determination of the "issues" as between the petitioner and the debtor in the bankruptcy proceedings would effectively dispose of all matters in dispute, without joining the limited companies as parties to the proceedings. And there are no procedures under the Bankruptcy Rules for such joinder, for obvious reasons.

Realization of securities

9. Of particular relevance is this point: it is common ground between the parties that from the disposal of the mortgaged properties, sums totalling HK$80.1m were yielded. The petitioner accepts that this sum is sufficient to discharge all liabilities incurred by the debtor of whatever nature If part of the proceeds had not been appropriated for the satisfaction of the Lai Sun debt, amounting to $15m plus interest.

The Lai Sun loan

10. It is the petitioner's case that the Lai Sun debt has been satisfied, and therefore the whole of the $80.1m was not available to pay off the debts owed to him personally. But the evidence in this regard is far from satisfactory. The petitioner being the Chairman of Lai Sun has access to its books. If it is his case, and that of Lai Sun, that part of the $80.1m has been appropriated to satisfy Lai Sun's debt, it is curious that positive proof to this effect has not been forthcoming. On the contrary, there is in fact an Order 14 application for summary judgment outstanding against the debtor, taken out by Lai Sun in High Court Action 9289/92, which has been adjourned indefinitely. It is therefore by no means clear that any part of the proceeds of sale of the mortgaged properties has been appropriated in satisfaction of the Lai Sun debt.

11. It is common ground between the parties that if the Lai Sun debt remains outstanding against the debtor, and none of the proceeds of sale has been appropriated to discharge that liability, then there would indeed have been enough money to wipe-off all the debts owed to the petitioner personally and the whole of the judgment debt of $4.6m-odd would have been satisfied. This accordingly became a central issue in the court below.

Trial of issue

12. As Miss Audrey Eu QC, counsel for the debtor, cogently asks: Assuming that the judge had ordered the trial of an issue as to how much of the judgment debt was outstanding in this case, how can any determination of that issue bind Lai Sun? A finding by the judge in the bankruptcy proceedings that part of the judgment debt is still outstanding because some of the $80.1m has been appropriated to satisfy Lai Sun's claim cannot, in any way, stop Lai Sun from prosecuting High Court Action A9289/92. Would the court not stultify itself if, later on, Lai Sun succeeded in obtaining judgment against Mr Lam for $15m plus interest? These seem to me to be strong arguments.

Solicitors' letter

13. Another point I would throw into the scales against the petitioner is this. Shortly after the bankruptcy notice was served on the debtor in July 1993 his solicitors asked the petitioner's solicitors for a detailed breakdown of the balance of HK$4,634,191.84. The reply dated 29 July 1993 was along these lines:

(i) The sale of one of the mortgaged properties realised $61.1m and, after paying off the prior claim of the China and South Sea Bank there was available the sum of $37,552,322.49;

(ii) The Lai Sun loan ($15m), the loan in this case ($25m) and another loan ($1,924,201.58) came to a total of $41,924,201.58, which means that there was a shortfall of $4,371,879.09;

(iii) Adding to the last figure the outstanding interest amounting to $262,312.75, this gave the sum of $4,634,191.84 which was the sum said to be the outstanding balance claimed in the petition.

14. What is stated above seems to me to be a total contradiction of the petitioner's case as averred in the petition. What is claimed in the petition is the outstanding balance due on one loan, that of $25m which, together with the outstanding interest thereon, made up the figure of $26,848,387.10, the judgment debt in this case. But, in their letter of 29 July 1993, the solicitors for the petitioner were saying that three loans had been taken into account in the calculation of the balance set out in the bankruptcy notice.

Conclusion

15. Once this point is reached, I am clearly of the view that there is no issue fit for investigation under the provisions of section 9(2) of the Bankruptcy Ordinance. It is true that section 99(1) of the Bankruptcy Ordinance applies the Rules of the Supreme Court to bankruptcy proceedings and the judge could have given such directions as regards pleadings, discovery and other interlocutory matters as would have enabled the issues as between the petitioner and the debtor to have been properly tried. The stumbling block, however, was the Lai Sun debt. Plainly, Lai Sun could not have been brought in as a party to the bankruptcy proceedings to enable a binding determination to be made as against Lai Sun. Moreover, the involvement of the private companies, and the roles they played in the provision of securities added further complications.

16. I am also persuaded that the judge was right to dismiss the petition for this reason: "the debt", the proof of which is required under section 9(2) of the Ordinance, is alleged to be $4.6m-odd; the petitioner now clearly accepts that the figure is wrong and requires a radical re-calculation; what the product of that exercise might finally be is at present not clear. If it be the petitioner's case that there is still a balance outstanding in relation to the judgment debt, nothing prevents the petitioner from serving a fresh bankruptcy notice. If the debtor does not apply to set the notice aside pursuant to r46 of the Bankruptcy Rules, the petitioner can of course present a fresh petition. His rights are not, in any way, prejudiced by the dismissal of the petition in this case.

17. For the reasons given above I would dismiss this appeal, and make an order nisi that the petitioner should pay the costs of this appeal.

Nazareth, J.A.:

18. I agree.

Barnett, J.:

19. For the reasons given by my Lord, Litton, J.A., I agree that this appeal must be dismissed.