RE: CHAN KA KEUNG and EX PARTE: QUINWAY CO. LTD A Creditor

HCB 1033/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 1033 OF 1999

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REASONS FOR JUDGMENT

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1. The Petitioner was the landlord of the premises known shop as No. 7A , Ground Floor, Bank of America Tower, No. 12 Harcourt Road, Central, Hong Kong ("the Property") which was let to Silverhand Limited ("Silverhand") by a tenancy agreement dated 21 April 1997. The duration of the lease was for three years and it was to expire on 20 April 2000. It was provided in the tenancy agreement that the Property was to be used for a Japanese restaurant trading under the name of "Nanbantei". The debtors, Madam Man Ching Yi Wendy and Mr Chan Ka Keung, are husband and wife. They are the directors and shareholders of Silverhand and they had executed a personal guarantee in favour of the Petitioner dated 21 April 1997 to guarantee the rent payable by Silverhand.

2. Silverhand failed to pay rent punctually from about April 1998, according to Mr Chan's first affirmation. The Petitioner commenced an action against Silverhand in the High Court for arrears of rent and other relief. This action was not defended by Silverhand. Final and interlocutory judgment was obtained on 19 June 1998 under which Silverhand was ordered to deliver up vacant possession to the Petitioner; to pay the arrears of rent at HK$362,495.30; to pay mesne profits at the rate of HK$158,000.00 per month, management fees and air-conditioning charges at HK$14,877.65 per month and rates from June/July 1998 until the delivery of vacant possession; and to pay damages to the Petitioner to be assessed with costs to be taxed.

3. Vacant possession was not delivered up by Silverhand until it returned the keys of the Property to the Petitioner on 11 January 1999.

4. A statutory demand dated 13 February 1999 was issued by the Petitioner's solicitors and served on Madam Man and Mr Chan on 12 March 1999 and 8 April 1999 respectively. As the statutory demand was not complied with, a petition for bankruptcy was presented against Madam Man on 4 May 1999 and a similar petition against Mr Chan on 28 May 1999. The debt as stated in the statutory demands and the petitions is in the total sum of HK$674,762.64, being the balance of the judgment debt due to the Petitioner from Silverhand under the High Court Action and for which the debtors are liable under the personal guarantee they had executed in the Petitioner's favour. The debt is made up of the following items:

(1) HK$474,000.00 being mesne profits from 1 July 1998 to 30 September 1998;

(2) HK$28,000.00 being the balance of mesne profits from 1 November 1998 to 30 November 1998;

(3) HK$48,000.00 being the balance of mesne profits from 1 December 1998 to 31 December 1998;

(4) HK$56,064.52 being mesne profits from 1 January 1999 to 11 January 1999;

(5) HK$49,912.12 being management fee and air-conditioning charges from 1 July 1998 to 30 September 1998 and from 1 January 1999 to 11 January 1999; and

(6) HK$18,786.00 being rates from 1 July 1998 to 30 September 1998 and from 1 January 1999 to 11 January 1999.

5. The debtors appeared by Mr Sammy Ho at the hearing. Although it was stated in Mr Chan's first affirmation that the debtors disputed the amount of rent in arrears for July to September 1998 and from 1 to 11 January 1999 and the arrears of difference in rental for November and December 1998, these matters were not challenged by Mr Ho at the hearing. I am satisfied on the evidence that insofar as the amount of the debt is concerned, the Petitioner has established that the amount set out in the statutory demands and the Petitions are due and owing from the debtors. I should also mention that the Petitioner is not a secured creditor. Mr Ho did not seek to rely on the rental deposit paid by Silverhand under the tenancy agreement to advance an argument that the Petitioner should be regarded as a secured creditor and I am satisfied that that is not the case insofar as these debtors are concerned.

6. The only ground relied on by the debtors to oppose the petition is that there was an agreement between themselves and the Petitioner under which (1) the Petitioner had agreed not to proceed with any legal action against the debtors in respect of the guarantee if the debtors should arrange to have the general restaurant licence for the Property and the liquor licence to be transferred to the Petitioner or its nominee; and (2) the Petitioner would not take action against Silverhand under the tenancy agreement and allow Silverhand to terminate the tenancy agreement if the debtors would arrange for Silverhand to vacate the Property and leave behind all the furniture, fixtures, restaurant and kitchen equipment installed in the Property for the use of the Petitioner or the new tenant.

7. The debtors alleged that as they had complied with their obligations under this agreement, they should not be liable under the guarantee. The Petitioner disputed that the alleged agreement was entered into. Although there is a dispute of fact as to the debtors' liability, I am of the view that the dispute is within a narrow ambit and that it could and should be resolved in these proceedings. Only one witness was called on each side and they were cross-examined on their affirmations and their testimony in court. At the conclusion of the hearing, I am not satisfied that the debtors have established the alleged agreement on the balance of probabilities. I have therefore made a bankruptcy order against each of the debtors. The reasons for my finding of fact against the debtors appear below.

8. It would be convenient to set out first Mr Chan's account of the alleged agreement. This was not entered into by Mr Chan personally and it came about in an indirect way. According to Mr Chan, the negotiations were conducted by Dr Lam Hau Man on behalf of the debtors with Dr Chan Kwok Keung, who controlled the Petitioner, and the agreement was reached in the terms as I have described above. Dr Lam informed Mr Chan of the terms as agreed and Mr Chan contacted Miss Carol Tsang Wai Yi, who was the responsible officer in the Petitioner for dealing with the tenancy of the Property. Miss Tsang confirmed the terms which Mr Chan related to her. In Mr Chan's first affirmation, he gave November 1997 as the time when the agreement was reached between Dr Lam and Dr Chan. In his evidence in court, he changed the date to October 1998.

9. Mr Chan arranged for the general restaurant licence to be transferred to the Petitioner and it was confirmed by a letter of the Urban Services Department dated 8 December 1998 that the transfer was carried out with effect from 14 October 1998. The debtors had also carried out the other obligation of the agreement in that when Silverhand vacated the Property on 11 January 1999, they left behind all the furniture, fittings, and equipment. Mr Chan claimed that the two licences with the furniture, fittings and equipment he left behind would be worth not less than HK$1 million. He had performed his part of the bargain and had transferred all that he had to the Petitioner. He pointed out that the new tenant of the Property, which had signed a tenancy agreement with the Petitioner in March 1999, has been using the Property to operate a Japanese restaurant similar to the old restaurant and that he had noticed some of the fittings and equipment he left behind are still being used by the new tenant. Mr Chan asserted that it was the Petitioner who had acted in breach of the agreement in seeking to enforce the guarantee against him and his wife.

10. Mr Chan did not call Dr Lam to give evidence. Nor did the Petitioner call Dr Chan, although Dr Chan has filed an information in these proceedings, which cannot be relied on as Dr Chan did not attend court for cross-examination.

11. The evidence adduced by Miss Tsang for the Petitioner in this respect may be summarised as follows.

12. She denied that she had ever confirmed to Mr Chan the terms of the agreement as alleged. She produced a fax dated 30 September 1998 to Mr Chan in which she referred to her telephone conversation with Mr Chan the same day and set out the terms of the agreement arrived at and they were as follows.

13. To suspend the legal action against Silverhand, Mr Chan was required to fulfil three conditions:

(1) he was to pay all outstanding rent, management fees and rates amounting to HK$535,372.95 with interest to the Petitioner within two months, i.e. on or before 30 November 1998;

(2) he was to pay a reduced monthly rent of HK$130,000.00 and management fees of HK$14,877.65 to the Petitioner by 3 October 1998 for the month of October 1998; and

(3) he was to undertake to transfer the general restaurant licence and the liquor licence to the Petitioner on or before 17 October 1998.

14. To release enforcement of the personal guarantee, Mr Chan was required to fulfil the following conditions:

(a) conditions (1), (2) and (3) must be satisfied;

(b) he and Silverhand were to ensure smooth transition and deliver up possession of the Property to the new tenant when one was found, or upon notice from the Petitioner to do so; and

(c) he and Silverhand were to pay rent up to the date of handing over the Property to the new tenant.

15. According to Miss Tsang, the general restaurant licence was transferred to the Petitioner pursuant to this agreement. However, Mr Chan had failed to pay HK$535,372.95 to the Petitioner on or before 30 November 1998 (i.e. condition (1)) as agreed. There was also no compliance with condition (c) in that Silverhand continued to occupy the Property in November and December 1998 and that only HK$130,000.00 was paid as rent for November 1998 and HK$110,000.00 was paid as rent for December 1998, not the full amount of HK$158,000.00 per month. As the debtors had failed to comply with the terms of the agreement in making payment, the Petitioner was entitled to insist on performance of their obligations under the guarantee. Miss Tsang also stated that the debtors had left behind equipment, furniture and fittings in the Property when they vacated it on 11 January 1999, but this was not at the request of the Petitioner. She referred to a note of Mr Chan to her dated 11 January 1999 in which Mr Chan only mentioned returning the two keys and nothing was said about the equipment, furniture and fixtures. Hence, the Petitioner instructed its solicitors to write to Silverhand to clarify the position regarding the goods and chattels left behind. In a letter dated 21 January 1999 from the solicitors to Silverhand, it was pointed out that Silverhand had not removed the goods and chattels upon vacating the premises. A telephone conversation between Mr Chan and Miss Tsang on 11 January 1999 was referred to and Mr Chan indicated his "abandonment" of the goods and chattels and "proposal to surrender the same" to the Petitioner. The solicitors therefore wrote to confirm such "abandonment and surrender." No reply was received to this letter of the Petitioner's solicitors.

16. I am inclined to accept the evidence of Miss Tsang. Her evidence is borne out by the documents she produced, in particular, her fax to Mr Chan dated 30 September 1998, Mr Chan's note to her dated 11 January 1999 and the letter of the Petitioner's solicitors dated 21 January 1999. Mr Chan's evidence cannot be reconciled with these documents. Mr Chan admitted that he did receive the fax dated 30 September 1998 but claimed he did not receive it on the same date and that it was received within one or two weeks later. Be that as it may, the terms of the agreement as set out in the fax did not accord with the terms of the agreement he alleged was made as conveyed to him by Dr Lam and also confirmed by Miss Tsang. The fax was written in English but it was in simple terms. I am inclined to think that Mr Chan had understood this fax. In any event, he did not say in his evidence he did not understand it. Mr Chan did not produce any document showing that he had responded to this fax, which according to him did not set out correctly the terms of the alleged agreement.

17. I also find it difficult to accept that if the furniture, fittings and equipment were left in the Property pursuant to the alleged agreement, Mr Chan would have failed to mention this at all in his note to Miss Tsang dated 11 January 1999 and that he had failed to respond to the letter of the Petitioner's solicitors dated 21 January 1999 in which it was stated that he had indicated his "abandonment" of the goods and chattels. If the equipment and fittings were indeed as valuable as alleged by Mr Chan, all the more so he should have mentioned them in his note or responded to the letter of the Petitioner's solicitors stating that he had left them in the Property at the request of the Petitioner and in fulfilment of his obligation under the alleged agreement.

18. There are other aspects of Mr Chan's evidence I find unsatisfactory. In his affirmation, he asserted that Silverhand was not required to pay rent for July to September 1998 because the rent for these three months was settled by way of setting off the rental deposit held by the Petitioner. In cross-examination, he was asked about the alleged set-off. Initially, he said the set-off was at the request of Silverhand. When he was asked if the Petitioner had agreed to this request, he said he believed the Petitioner had agreed because the Petitioner allowed Silverhand to continue to carry on business in the Property. When it was put to him that Silverhand had no right to set-off the deposit, he disagreed with that suggestion. I am of the view that Mr Chan was evasive on this matter.

19. Mr Chan also contradicted what he had said in his affirmation in another aspect. It was alleged in his affirmation that for November and December 1998, it was agreed between the Petitioner and Silverhand that the Petitioner would accept a rent of lesser amount and accordingly Silverhand paid HK$130,000.00 for the rent in November 1998 and HK$110,000.00 for the rent in December 1998. In his testimony, he said he could recall only one month's rent was reduced and he had no recollection for the reduction of rent for November and December 1998.

20. I am unable to accept Mr Chan's evidence that there was an agreement not to enforce the personal guarantee against him and his wife in the terms as Mr Chan has alleged. I find that the agreement arrived at between the parties was as set out in the fax dated 30 September 1998. It is not in dispute that Mr Chan had failed to make the payments as required. Accordingly, the Petitioner was and is entitled to insist on strict performance under the guarantee. As for the argument advanced by Mr Ho that the debtors had carried out part of the bargain in causing the general restaurant licence to be transferred to the Petitioner, I cannot see how that could assist the debtors as they had only carried out part of the obligations they were required to fulful to obtain a release from their obligation under the personal guarantee. Whether the Petitioner had gained a benefit from the furniture, fittings and equipment left behind by the debtors in the property is not relevant, as I find that this was not done at the Petitioner's request nor pursuant to any agreement arrived at between the parties.

21. As I have found against the debtors on this dispute as to fact, I am satisfied that they have failed to raise a bona fide dispute of the debt on substantial grounds, nor is there any genuine cross claim against the Petitioner. I have therefore made a bankruptcy order against each of the debtors with costs to the Petitioner.