RE YIP KIM PO

HCB 4531/2021

[2022] HKCFI 1912

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4531 OF 2021

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J U D G M E N T

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1.  There is before the court a petition presented by AIG Insurance Hong Kong Limited (formerly known as American International Underwriters Limited)  (“Petitioner”)  seeking a bankruptcy order against Mr Yip Kim Po (“Debtor”). There is also a summons dated 15 September 2021 issued by the Debtor for a stay of the petition pending determination of his appeal against the decision of DHCJ Le Pichon dated 22 June 2021 (“Decision”)  dismissing his application to set aside the statutory demand served upon him on 19 December 2019 (“SD”).

2.  At the hearing, Mr Thomas Wong, counsel for the Debtor, (rightly)  does not pursue the stay application, which I consider to be wholly without merit and should be dismissed. 

Factual Background

3.  The following facts are not in dispute. 

4.  The Debtor was a director of Ocean Grand Holdings Limited and Ocean Grand Chemical Holdings Limited (“Company")  which are the holders of a director and officer liability indemnity policy (“D&O Policy”).

5.  Pursuant to the D&O Policy, the Petitioner advanced legal costs to the Debtor to defend his charges in 2 criminal proceedings commenced against him in the District Court.  On 16 September 2010, the Debtor was convicted for offences involving dishonesty and fraudulent conduct.  

6.  On 7 March 2013, the Court of Appeal dismissed the Debtor’s appeal.  On 20 March 2014, the Debtor’s application for leave to appeal was dismissed by the Appeal Committee of the Court of Final Appeal.   

7.  On 6 February 2015, the Petitioner’s solicitors provided particulars of the defence costs in the amount of $18,731,794.66 (“Debt”)  and demanded the Debtor to pay the same pursuant to clauses 3.1 and 5.6 of the D&O Policy.  No payment was made by the Debtor.

8.  On 19 December 2019, the Petitioner served the SD on the Debtor by way of advertisement requiring the Debtor to pay the Debt. 

9.  On 6 January 2020, the Debtor filed an application to set aside the SD in HCSD 1/2020 (“Application”).  The parties filed evidence in respect of the Application and advanced their full arguments at the hearing on 27 May 2021:

(1)  The Debtor contended that the cause of action to recover the Debt had accrued on 16 September 2010 (being the date of his conviction)  and, therefore, the Petitioner’s claim was statute barred. 

(2)  The Petitioner contended that the cause of action only accrued after the appeal process was exhausted on 20 March 2014, and by the time the SD was served on the Debtor, the limitation period had not expired.

(3)  The rival contentions turn on the construction of the terms of the D&O Policy.  In the Decision, DHCJ Le Pichon held that the Debtor’s construction of the D&O Policy was not arguable and dismissed the Application with costs.

10.  On 16 July 2021, the Debtor filed a Notice of Appeal in CACV 351/2021 to appeal against the dismissal of the Application.

11.  By order dated 23 July 2021, the Judge authorised the Petitioner to present a bankruptcy petition against the Debtor pursuant to r.48(7)  of the Bankruptcy Rules (Cap. 6A)  (“BR”).  The petition was presented on 9 August 2021.  This was met with a stay summons filed by the Debtor on 15 September 2021. 

12.  On 26 October 2021, the Judge dismissed another application made by the Debtor on 27 July 2021 for a stay of the costs order made on 22 June 2021 whereby he was ordered to pay HK$213,000 to the Petitioner as its costs of the Application.

13.  In the Judgment handed down on 25 March 2022, the Court of Appeal allowed the Petitioner’s application for security for costs of the appeal and ordered the Debtor to pay HK$300,000 as security for the Petitioner’s costs of the appeal.  In the Judgment, the Court of Appeal observed (at §5)  that there is little merit in the appeal:

“Second and more importantly, contrary to the applicant’s contention, there is little merit in the appeal. The Judge had applied the principles of contractual interpretation set out in Eminent correctly and her analysis in rejecting the applicant’s interpretation is sound. In arguing that the Judge had erred, counsel for the applicant in substance regurgitated the same arguments below, which does not really assist. He also sought to rely on some American cases on what he said to be ‘an almost identical phrase deployed in exactly the same context’, without, however, explaining why they were not cited to the Judge and more cogently, elaborating on how they supported the applicant’s case.”

Discussion

14.  Mr Wong contends that bankruptcy petition is an “action” under s.4(1)(a)  of the Limitation Ordinance (Cap. 347)  (“LO”)  and since the petition was presented on 9 August 2021, more than 6 years after the Debt had accrued, it was clearly time-barred and should be dismissed.

15.  On the other hand, Mr James Man, counsel for the Petitioner, submits that there is no valid ground in opposition to the petition given that:

(1)  the new argument that the petition was time-barred[1] could have been but was not raised by the Debtor in the Application.  The Decision gives rise to a determination binding upon the Debtor and precludes him from raising the same issue at the hearing of the petition; and

(2)  upon proper construction of the LO, time should run from the date of service of the statutory demand.  The SD was served on the Debtor within time.

16.  I shall deal with the following issues in turn:

(1)  Whether the Debtor is precluded from arguing that at the time the petition was presented, the Debt was already time-barred (Res judicata point); and

(2)  Whether the petition is an “action” for the purpose of s.4(1)  of the LO  (Limitation point).

Res judicata point

17.  The general principles are not in dispute and have been  stated in Re GW Electronics Company Ltd [2021] HKCFI 1869, §§22-25:

“22. A res judicata may be a cause of action estoppel or an issue estoppel (Spencer Bower and Handley: Res Judicata, 5^th ed, §1.05). The relevant principle has been explained in Spencer Bower and Handley, §1.01, as follows:

‘A res judicata is a decision pronounced by a judicial or other tribunal with jurisdiction over the cause of action and the parties, which disposes once and for all of the fundamental matters decided, so that, except on appeal, they cannot be re-litigated between persons bound by the judgment. A judgment in personam binds the parties and their privies, and because this is so basic it will generally be assumed in what follows. A judgment in rem is binding on the so-called world, party, privy or otherwise.’

23. To set up res judicata as an estoppel, the following essential elements must be established:

(1)  the decision, whether domestic or foreign, was judicial in the relevant sense;

(2)  it was in fact pronounced;

(3)  the tribunal had jurisdiction over the parties and the subject matter;

(4)  the decision was: (a)  final; (b)  on the merits;

(5)  it determined a question raised in the later litigation; and

(6)  the parties are the same or their privies, or the earlier decision was in rem (Spencer Bower and Handley, §1.02).

24. As regards issue estoppel, the principle was explained by Dixon J in Blair v Curran (1939)  62 CLR 464, 531-533:

‘A judicial determination directly involving an issue of fact or of law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion … the distinction between res judicata and issue-estoppel is that in the first the very right or cause of action claimed or put in suit has in the former proceedings passed into judgment, so that it is merged and has no longer an independent existence, while in the second, for the purpose of some other claim or cause of action, a state of fact or law is alleged or denied the existence of which is … necessarily decided by the prior judgment, decree or order.’

25. Similarly, in Spencer Bower and Handley, §8.01, the learned author explains issue estoppel in this way:

‘A decision will create an issue estoppel if it determined an issue in a cause of action as an essential step in the reasoning. Issue estoppel applies to fundamental issues determined in an earlier proceedings which formed the basis of the judgment …’ (underlined added)

18.  The UK Supreme Court recently reviewed the earlier authorities on issue estoppel and explained how it works in Test Claimants in the Franked Investment Income Group Litigation and others v. Commissioners for Her Majesty’s Revenue and Customs [2021] 1 All ER 1001, §68 (per Lord Reed and Lord Hodge):

“Lord Sumption in Virgin Atlantic Airways (above), para [21], explained Lord Keith’s judgment in Arnold (above)  in relation to issue estoppel. In the case of that estoppel it was in principle possible to challenge a previous decision on an issue not only by taking a new point which could not reasonably have been taken in the earlier proceedings but also (in contrast to cause of action estoppel)  ‘to reargue in materially altered circumstances an old point which had previously been rejected’. In para [22] he stated that Arnold was authority for the following proposition:

‘(3)  Except in special circumstances where this would cause injustice, issue estoppel bars the raising in subsequent proceedings of points which (i)  were not raised in the earlier proceedings or (ii)  were raised but unsuccessfully. If the relevant point was not raised, the bar will usually be absolute if it could with reasonable diligence and should in all the circumstances have been raised.’” (underlined add)

19.  In the same judgment, the UK Supreme Court stressed that issue estoppel overlaps with the rules or concepts of res judicata and abuse of process, all of which serve the common purpose of supporting good administration of justice:

“Res judicata, estoppel and abuse of process support the same legal policies, namely that ‘there should be finality in litigation and that a party should not be twice vexed in the same matter’: Johnson v. Gore Wood & Co [2002] 2 AC 1, p 31, per Lord Bingham of Cornhill. Lord Bingham went on to state: “This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole.” (§59).

“Res judicata is a rule of substantive law, while abuse of process is a concept which informs the exercise of the court’s procedural powers … [T]hey are distinct although overlapping legal principles with the common underlying purpose of limiting abusive and duplicative litigation.” (§74).

20.  The principles on res judicata and issue estoppel apply to bankruptcy proceedings.  In Chan Yuk Lun v Chan Ying Chit[2015] 1 HKLRD 501, §§9-13, Godfrey Lam J (as he then was)  held that a determination on an application to set aside a statutory demand is a “final” determination on the issues between the parties and the principle of res judicata applies to bar the parties from raising the same issue at the hearing of the petition:  

“9. However, it has been held by Susan Kwan J (as she then was)  in the (strangely unreported)  case of Re Choy Wai Bor (unrep., HCB 8565/2001, [2002] HKEC 650)  (28 May 2002)  at [30] that the court’s decision of refusing to set aside a statutory demand gives rise to a determination that, by virtue of the principle of res judicata, precludes the debtor from raising the same issue on the hearing of the bankruptcy petition, at any rate where there has been no change of circumstances.

….

13. Looking at the substance of the matter, such an order refusing to set aside a statutory demand, coupled with the operation of the principle of res judicata, has the effect of a final determination of specific issues as between the parties …” (underlined added)

21.  There is a further principle in bankruptcy law which has been described as the “Turner principle” or the public policy principle. The principle may be summarised as follows:

(1)  Where a debtor brought an application to set aside a statutory demand, that application being part of the bankruptcy process, is the proper forum for the parties to raise all their arguments against the petition debt (Turner v Royal Bank of Scotland [2000] BPIR 683, §§47, 49, per Chadwick LJ; Atherton v Ogunlende [2003] BPIR 21, at 27, per Neuberger LJ). 

(2)  It would be an abuse of the bankruptcy court’s practice if the debtor is allowed to run an argument which could and should have been run at the application to set aside a statutory demand (Harvey v Dunbar Assets plc [2017] EWCA Civ 60, §§51, 58, per Henderson LJ).  It would also be a waste of court’s time and the parties’ money and would defeat the obvious purpose of the statutory scheme if a debtor can at the hearing of the petition ask the court to go into the question which has already been determined in the application to set aside the statutory demand (Turner, §49).

(3)  If the debtor wishes to run new arguments at the hearing of the petition which were not run at the application to set aside the statutory demand, the court would inquire why those arguments were not run at the time when they could, and should, have been raised (Coulter v Chief Constable of Dorset Police (No 2) [2006] BPIR 10, §§20-22, per Chadwick LJ; Harvey §48).

(4)  The court requires exceptional circumstances before it would allow the debtor to raise the same arguments at the petition stage (Atherton v Ogunlende, at 27).

22.  Mr Man submits that the Debtor is precluded from arguing that the Debt was time-barred by reason of res judicata and, in any event, the Debtor has not identified any exceptional circumstances as to why he should be allowed to challenge the Debt at the hearing of the petition.   

23.  Mr Wong does not dispute the principles.  He acknowledges that there is public interest in requiring a debtor to raise all the arguments at the application for setting aside the statutory demand but submits that it was reasonable for the Debtor not to have raised the Limitation point given that at the time the Application was issued, the 6-year limitation period had not expired. 

24.  In my view, the Debtor should not be allowed to raise the Limitation point at the hearing of the petition for the following reasons.

25.  First, the Debtor made the Application to set aside the SD on the ground that the Petitioner’s cause of action to recover the Debt was time-barred.  In respect of the Application, the parties had filed evidence and advanced substantive arguments all of which were considered by the Judge at the hearing on 27 May 2021.  In dismissing the Application the Judge decided as a necessary step in her reasoning that the Petitioner’s claim for the Debt was not time-barred and could be relied on by the Petitioner in the SD.  The Debtor is bound by the court’s determination on the issue and is precluded from arguing that the Petitioner’s claim for the Debt was time-barred. 

26.  Second, the fact that the Limitation point was not raised at the Application gives rise to an issue estoppel against the Debtor and the bar is absolute (Test Claimants, §68).  On Mr Wong’s argument, the 6-year limitation period applicable to the petition expired on 20 March 2020, more than 14 months before the Application was heard by the Judge.  Plainly, the Debtor could with reasonable diligence have raised the Limitation point as a ground for setting aside the SD but did not do so.  It is no answer to say that when the Application was filed on 6 January 2020, the 6-year limitation period had not expired or that the affirmation filed in support of the Application did not include such ground, as it was open to the Debtor to raise the Limitation point by seeking leave to file a further affirmation in support of the Application[2] or informing the Petitioner in advance of the hearing that such point would be raised at the hearing of the Application.  

27.  Third, I do not think that the Debtor should be allowed to run the Limitation point at the hearing of the petition, having decided to challenge the Debt by way of the Application.  As the Debtor (and those advising him)  must be aware, once the Application was filed, the Petitioner was deprived of the right to present a bankruptcy petition against the Debtor until the Application is dismissed.  This is the combined effect of s.6(2)(d)  and s.6A of the Bankruptcy Ordinance (Cap. 6)  (“BO”)  and r.47(3)  and r.48 of the BR.  It is an abuse of the bankruptcy court’s process for the Debtor to seek to set aside the SD by raising one ground in the Application and, in the meantime, benefit from not having to face a bankruptcy petition and the running of time for limitation purpose[3], and when that application failed, asks the Court to entertain a further argument that the Petitioner’s claim for the Debt was time-barred by the time the petition was presented.  If the Debtor were allowed to do so, he would in effect be able to benefit from his own wrong in withholding the Limitation point while allowing the limitation period applicable to the Debt and the petition continue to run to the prejudice of the Petitioner. 

28.  For the above reasons, I do not think that it is open to the Debtor to raise the Limitation point or, indeed, any argument against the Petitioner’s claim for Debt at the hearing of the petition.  The Petitioner is entitled to rely on the Debtor’s failure to comply with the SD for the purpose of proving his inability to pay debts as required by s.6(2)  of the BO. 

29.  It is unnecessary to consider counsel’s arguments on the Limitation point.  Nevertheless, I will deal with the point briefly.

Limitation point

30.  Mr Wong’s submissions may be summarised as follows:

(1)  Under s.4(1)(a)  of the LO, an “action” founded on simple contract shall not be brought 6 years after the date on which the cause of action accrued.

(2)  It is settled law that bankruptcy and winding-up petitions constitute “actions” within the meaning of the LO (Re Li Man Hoo (A Debtor) [2013] 4 HKLRD 247, §§10-30, per Barma JA).

(3)  It is also well established that statutory demands are not “actions”.  Reliance is placed on:

(a)  Schaw Miller and Bailey: Personal Insolvency: Law and Practice, 5^th ed, §8.82 where the learned editor states that “A statutory demand is not issued by the court and has been described as an extra-judicial document and a non-legal process[4].  To serve a statutory demand is not to bring an action.”

(b)  Re a Debtor (No 88 of 1991) [1993] Ch 286 where Sir Donald Nicholls VC said, at 291G-292B:

“… although ‘action’ is to be construed liberally I cannot accept that it is wide enough to embrace a non-legal process such as a statutory demand. A statutory demand is one of the statutorily prescribed prerequisites to obtaining remedies afforded to creditors by a bankruptcy order. The demand is not issued by a court. It does have legal consequences for a debtor, and it is for this reason that the legislation provides a court process which debtors can invoke in order to have the demand set aside. Despite this framework, Parliament cannot be taken to have intended that making a demand was within the scope of the prohibition on commencing actions. The phrase ‘no action shall be brought’ is too specific a reference to legal process for that to be a tenable construction. Further, in the context of statutory demands I see no compelling need to give a more extended meaning to the word ‘action’.” (underlined added)

(c)  In Liu Yongliang v Bank of China Ltd, Dongguan Branch[2021] HKCA 1048, §§36, 46, Lam VP referred to Re a Debtor (No 88 of 1991) and observed that the proposition that statutory demand is not a legal process is “well supported by the authorities cited”.

(4)  Since the petition was presented on 9 August 2021, more than 6 years after the Debt had accrued (in March 2014), the petition was clearly time-barred.

31.  Mr Man submits that the court should adopt a purposive approach in construing s.4(1)(a)  of the LO, having regard to the underlying policy of the limitation statute, as described by Mummery LJ in Ridgeway Motors (Isleworth)  Ltd v ALTS Ltd [2005] 1 WLR 2871, §30:

“The courts have expressed at least three differing reasons supporting the existence of statutes of limitation, namely (1)  that long dormant claims have more of cruelty than justice in them; (2)  that a defendant might have lost the evidence to disprove a stale claim; and (3)  that persons with good causes of action should pursue them with reasonable diligence.”

32.  Mr Man argues that in the context of bankruptcy proceedings, an “action” under s.4(1)(a)  of the LO includes a statutory demand for the following reasons:

(1)  Section 2(1)  of the LO defines “action” as “includes any proceeding in a court of law”, unless the context otherwise requires.  This indicates that the word is to be interpreted flexibly and by reference to the context of the relevant Ordinance. 

(2)  A statutory demand may be regarded as a “proceeding” in proper context. See e.g.  James Estate Wines Pty Ltd v Widelink (Australia)  Pty Ltd (2003)  47 ACSR 72, §23,per Austin J (referring to Mala Pty Ltd v Johnson (1995)  13 ACLC 100,§102-3)  where a statutory demand was regarded as a proceeding for the purpose of considering whether there was abuse of process. 

(3)  In the present case, the SD was served within 6 years from the date of accrual of the Debt on 20 March 2014.  If “action” only covers the petition but not the SD, it would have the absurd consequence that the Debtor could apply to set aside the SD served on him within time, hoping that by the time the Application is resolved, it would be out of time for the Petitioner to present the petition.

(4)  The limitation statute encourages litigants to pursue their causes of action with reasonable diligence.  In the context of bankruptcy, such objective is fulfilled by the service of a statutory demand which is the pre-requisite to kick-start the bankruptcy process.  If the statutory demand is disputed, the creditor cannot present a petition until the set aside application is determined in his favour.  The time required to determine the set aside application is beyond the control of the creditor. 

(5)  The legislature cannot be taken to have intended that a debtor with no bona fide defence can escape bankruptcy by issuing an application to set aside the statutory demand (served on him within time), and dragging on the matter beyond the 6 years’ limitation period.

33.  Mr Man contends that the above construction of s.4(1)(a)  of the LO is supported by Re Li Man Hoo.  In that case:

(1)  The judgment debt arose on 12 February 1999 (§3). The limitation period for “action … brought upon any judgment” is 12 years (s.4(4)  of the LO).

(2)  The creditor only issued the statutory demand on 29 April 2011 (§4)  – which was already out of time.  The petition when presented on 22 September 2011 (§3)  was also out of time.

(3)  It was in this context that Barma JA said (§34):

“It follows that, for the reasons which I have given, the debt on which the petitions were based had become statute-barred prior to the presentation of the petitions (and for that matter, the service of the statutory demands preceding them), and that the petitions must therefore fail.”

(4)  If “action” under s.4(4)  of the LO covers the bankruptcy petition only but not the statutory demand, it would not have been necessary for Barma JA to mention that the debt had become statute-barred prior to the service of the statutory demand preceding the petition.

34.  The authorities cited by Mr Wong show that the court has in the context of various statutes held that the service of a statutory demand on a debtor is not an “action” for the purpose of s.4(1)(a)  of the LO.  In the context of bankruptcy proceeding, service of a statutory demand is a prerequisite to obtaining a bankruptcy order where a creditor relies on the presumption of inability pay debts (ss.6(2)(c)  and 6A(1)(a)  of the BO).  Upon being served with a statutory demand, the debtor has a right under r.47 of the BR to apply for an order to set aside the statutory demand within 18 days from the date of service of such demand.  Once the application is filed, it will automatically (1)  suspend the running of time for compliance with the statutory demand (r.48(2)  of BR); and (2)  suspend the right of the creditor to present a petition until the court dismisses the application and makes an order authorising the debtor to present a bankruptcy petition (s.6(2)(d)  of the BO and r.48(7)  of BR).  These provisions and rules were introduced by the Bankruptcy (Amendment)  Ordinance 1996 and the Bankruptcy (Amendment)  Rules 1998 both came into force on 1 April 1998. 

35.  In my view, in construing the word “action” under of s.4(1)(a)  of the LO, one has to have regard to the following matters:

(1)  the purpose of the LO;

(2)  the nature of the bankruptcy proceeding, which gives a statutory right to a creditor to seek a bankruptcy order against a debtor who is unable to pay his debts; and

(3)  the statutory regime governing the commencement of bankruptcy proceedings, which has since 1998 been changed from a single-stage process with a creditor having the right to present a bankruptcy petition based on an “act of bankruptcy”[5] to a 2-stage process where a creditor has to first serve a statutory demand, and it is only if the debtor does not apply to set aside a statutory demand within the stipulated period or if an application is filed, the court dismisses the application and makes an order under r.48(7)  of the BR that the creditor may rely on the debtor’s failure to comply with the statutory demand and present a bankruptcy petition against such debtor.   

36.  Having regard to the above matters, I consider that “action” under s.4(1)(a)  of the LO in the context of bankruptcy is wide enough to cover the 2-stage process described in §35(3)  above.  While it is correct that a statutory demand is not issued by a court, it is an essential step in the 2-stage process before a creditor can present a bankruptcy petition against a debtor.  There is no reason why such statutory demand would fall outside the meaning of an “action” under s.4(1)(a)  of the LO which is to prevent the bringing of a stale action after the expiry of the relevant limitation period. 

37.  I do not consider the passage in In re A Debtor (291G-292B)  cited by Mr Wong assists his argument.  The passage was part of Sir Donald Nicholls VC’s reasoning for holding that the phrase “no action shall be brought” under s.69(1)  of the Solicitors Act 1974 “is referring to a legal process and uses lawyers’ language” (291D), and that “Parliament cannot be taken to have intended that making a demand was within the scope of the prohibition on commencing actions.  The phrase ‘no action shall be brought’ is too specific a reference to legal process for that to be a tenable construction” (291H-292A).  It is not an authority where the court held that for the purpose of the limitation statute, the bringing of an “action” does not include service of a statutory demand.   

Disposition and costs

38.  For the above reasons, I reject the 2 points advanced by the Debtor in opposition to the petition.  I make the following order:

(1)  the Debtor’s Summons dated 15 September 2021 be dismissed with costs to be paid by the Debtor to the Petitioner, to be taxed if not agreed; and

(2)  there be a usual bankruptcy order against the Debtor.