HCSD 8/2023
[2024] HKCFI 424
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
APPLICATION TO SET ASIDE A STATUTORY DEMAND
NO. 8 OF 2023
____________________
BETWEEN
LKF
Applicant
and
ZTISL
Respondent
____________________
Before:
Deputy High Court Judge H. Au-Yeung in Chambers (Not Open to Public)
Date of Hearing:
31 January 2024
Date of Decision:
31 January 2024
_________________
DECISION
_________________
THE SETTING ASIDE APPLICATION
1. This is the applicant’s application filed on 1 March 2023 (“the Application” ) to set aside the statutory demand dated 17 January 2023[1] issued by the respondent (“the Statutory Demand” ).
THE UNDISPUTED / INDISPUTABLE BACKGROUND
2. The respondent is a securities brokerage firm licensed by the Hong Kong Securities and Future Commission to carry on Type 1 (Dealing in Securities) and Type 4 (Advising on Securities) regulated activities.
3. The respondent offers, among other things, margin facilities to its customers and/or account holders for the purpose of securities trading.
4. The respondent has a pool of account executives who introduce clients to open securities accounts with the respondent and are responsible for managing such accounts.
5. On around 10 March 2021, the applicant signed an agreement known as “經紀合作協議” (“the 1st Agreement” ), pursuant to which the applicant became one of the respondent’s account executives on 22 March 2021.
6. On 15 April 2021, the applicant signed 2 transfer forms of the respondent (“the Transfer Forms” ), pursuant to which a number of accounts originally handled by a Mr XXX XXXX XXX (another account executive engaged by the respondent) were transferred to him. Among those accounts, one was owned by a client known as Ms XXXX XXXXX (“Ms Chan” ) and another one was owned by Ms XX XXX XXX (“Ms Lo” ). Both of them opened accounts with the respondent in December 2019.
7. On 31 July 2021, the 1st Agreement was terminated.
8. On 6 August 2021, the applicant and the respondent entered into an Account Executive Cooperation Agreement (“the 2nd Agreement” ), which took effect retrospectively on 1 August 2021.
9. The 2nd Agreement provided, among other things, that:
Clause 2.1
After each client of Party B opens an account with Party A, Party B and his/her client shall be jointly liable for any liability incurred by such client of Party B (including without limitation any debt, service fee and interest owed to Party A). For the avoidance of doubt, if any client of Party B fails to pay any sum demanded by Party A, Party B shall immediately pay such sum on demand.[2]
Clause 13.1
In consideration of Party A entering into this Agreement and performing this Agreement, Party B guarantees to discharge on demand by Party A from time to time any liability of Party B’s clients.
Clause 13.2
In consideration of Party A entering into this Agreement and performing this Agreement, Party B also agrees as an additional and independent obligation that, if any liability of Party B’s clients are not recoverable from Party B under the guarantee above for any reason, Party B will be liable to Party A as a principal debtor by way of indemnity for the same amount as that for which Party B would have been liable had those liabilities of Party B’s clients been so recoverable and Party B will discharge that liabilities on demand by Party A from time to time.
10. On 6 January 2022, the respondent made margin calls on Ms Chan and Ms Lo, for the sum of $893,733 and $1,286,155.43 respectively, which the said clients did not satisfy at all.
11. The respondent served the Statutory Demand on the applicant to demand repayment of $1,905,352.38, being the outstanding amount of debts owed by Ms Chan and Ms Lo (which was partly set-off by the amount of commission payable by the respondent to the applicant).
THE APPLICANT’S GROUNDS OF SETTING ASIDE
12. The applicant relied on 3 grounds in this application:
(1) Firstly, it was argued that the 2nd Agreement is invalid and/or unenforceable because it was an unconscionable bargain (“the Unconscionable Bargain Ground” );
(2) Secondly, it was said that the 2nd Agreement is voidable because duress was exerted on the applicant when the 2nd Agreement was signed (“the Duress Ground” );
(3) Thirdly, it was stated that Ms Chan and Ms Lo were not the applicant’s clients, but in-house clients of the respondent. Pursuant to the terms of the 2nd Agreement, the applicant was only jointly and severally liable in relation to debts owed by clients whom the applicant introduced to open accounts with the respondent, but not clients whom he took up from the respondent’s former account executives (“the In-House Clients Ground” ).
13. I will consider these grounds in turn below. However, before I do that, I should set out the relevant legal principles.
THE LEGAL PRINCIPLES
14. Rule 48(5)(b) of the Bankruptcy Rules (Cap.6A, Laws of Hong Kong) provides that the court may grant the application to set aside statutory demand if the debt is disputed on grounds which appear to the court to be substantial.
15. The principles applicable to such a rule have been summarised by Linda Chan J in DCKD & Another v JPWL [2022] HKCFI 1059 as follows:
“22. The burden is on the Applicants to satisfy the Court that there are valid grounds to set aside the [statutory demands].
23. When considering an application to set aside, the Court is only undertaking a limited exercise and will only be concerned with whether the creditor is able to pursue bankruptcy proceedings founded on the statutory demand (Budge v AF Budge (Contractors) Ltd [1997] BPIR 366, 372A-D, per Peter Gibson LJ). As Kwan J (as she then was) explained in Re Choy Wai Bor, HCB 8565/2001, 28 May 2002, §22:
‘[T]he mechanism to set aside a statutory demand is intended to be a filtering process to protect the debtor against a petition being presented based on a statutory demand that is demonstrably unjustified.’
24. For the purpose of demonstrating that the debt is disputed on substantial grounds within rule 48(5)(b), the Applicants must establish by sufficiently precise factual evidence which is believable that they have a defence of substance, not just a fair probability of one (Chan Ping Lam Waymond v Noble Art Ltd , CACV 270/2012, 30 September 2013, §8, per Fok JA (as he then was)). The Court will consider the case being put forward with a reasonably critical eye, testing the case against the other background facts and circumstances (Lai Kar Yee v The Prudential Assurance Company Limited , CACV 233/2014, 9 June 2017, §12, per Barma JA).”
16. It is also well established that the burden that the applicant bears in an application of this nature is higher than that of a defendant opposing an Order 14 application. In Ling Wai Hoi v Jetland Global Investments Ltd [2022] HKCA 1457 , Chu JA (as she then was) explained at [58] that:
“[…] while the test for setting aside a statutory demand under rule 48(5)(b) bears some analogy to that which would apply in application for summary judgment under Order 14 rule 3 of the RHC, the two tests are not identical. Similar to an Order 14 application, it is not enough for an applicant seeking to set aside a statutory demand merely to assert the existence of a dispute or the existence of a counterclaim, set-off or cross-claim. The court has to assess whether the evidence adduced by the applicant is believable in the sense of being capable of belief. But, in contrast to an Order 14 application where the defendant needs only establish a fair probability of a defence, rule 48(5)(b) expressly requires that a substantial defence, meaning a defence of substance, has to be shown by the applicant. Accordingly, the burden that the applicant bears is higher than that of a defendant opposing an Order 14 application.”
DISCUSSION
The Unconscionable Bargain Ground
17. The 3 essential elements of unconscionable bargain are:
(1) serious disadvantage of the exploitee;
(2) terms of bargain being oppressive; and
(3) morally culpable conduct of the exploiter.
(Lo Wo v Cheung Chan Ka [2000] 2 HKLRD 370 at 381B-382F)
18. As far as the first essential element is concerned, it is well recognised that it is impossible to describe definitely all the situations where the equitable jurisdiction may be invoked: Commercial Bank of Australia v. Amadio per Mason J at p.561 and per Deane J at p.474. Fullagar J in Blomley v. Ryan
“The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other.”
19. In Alec Lobb (Garages) Ltd v. Total Oil Great Britain Ltd
“It is probably not possible to reconcile all the authorities, some of which are of great antiquity, on this head of equitable relief, which came into greater prominence with the repeal of the usury laws in the 19th century. But if the cases are examined, it will be seen that three elements have almost invariably been present before the court has interfered. First, one party has been at a serious disadvantage to the other, whether through poverty, or ignorance, or lack of advice, or otherwise, so that circumstances existed of which unfair advantage could be taken : see for example, Blomley v Ryan (1954) 99 CLR 362, where, to the knowledge of one party, the other was by reason of his intoxication in no condition to negotiate intelligently […]” (at 94H-95B)
20. In the present case, Ms Kong for the applicant argued that:
“[The applicant] was at a serious disadvantage. Unlike [the 1st Agreement], [the 2nd Agreement] was drafted in Chinese and English, with the latter prevails according to Clause 20 therein. There was no suggestion that [the applicant] received much education and was fluent in English. Further, [the applicant] was not given any opportunity or time to consider the terms of [the 2nd Agreement]. He did not have the benefit of legal advice. Without legal assistance, he was unable to assess what is in his best interest and what is there to protect his own rights.
Even worse, [the respondent] threatened to terminate the working relationship with [the applicant]. [The applicant] was not given a chance to negotiate and [the 2nd Agreement] had to be returned to [the respondent] immediately after he was given the finalised version at [the respondent]’s office.”[3]
21. With greatest respect to Ms Kong, the above submission was totally without basis. One only needs to refer to paragraph 6(a) of the applicant’s Affirmation to understand why that is so. The said paragraph 6(a) reads:
“I joined the alleged Creditor on 22 March 2021 pursuant to the Chinese 經紀合作協議 dated 10 March 2021 (‘Chinese 經紀合作協議’). On 1 August 2021, I was instructed to sign another 經紀合作協議 (‘new 經紀合作協議’) that superseded the Chinese 經紀合作協議. The alleged Creditor did not explain to me as to the reason why I was asked to sign the new 經紀合作協議 on 1 August 2021. However, the alleged Creditor threatened to terminate my working relationship with them if I refused to sign the new 經紀合作協議 on 1 August 2021
22. It can be seen that the applicant has adduced absolutely no evidence on his alleged serious disadvantage.
23. If it is the applicant’s case that he did not receive much education or that he was not good in English, it is for him to give evidence in this regard. It is misconceived for Ms Kong to argue that “there was no suggestion that [the applicant] received much education and was fluent in English”.
24. In fact, the 2nd Agreement was printed in both Chinese and English. It is thus hopeless for the applicant to allege that he could not understand what were written therein. Although it is provided by Clause 20 of the 2nd Agreement that English shall prevail if the Chinese version conflicts with the English version, there is no allegation that the meanings of the two versions differ.
25. Neither has the applicant given any evidence that “he was unable to assess what is in his best interest and what is there to protect his own rights” without legal advice. Ms Kong simply cannot give evidence from the Bar Table.
26. The applicant has also failed to give sufficiently precise factual evidence, in that while he alleged that he was not given sufficient time to read the 2nd Agreement, he did not specify how much time had been given. Further, while he said he was not given any chance to negotiate the terms of the 2nd Agreement, he did not say whether he had made any request to negotiate at all.
27. The applicant’s allegation that the respondent threatened to terminate his working relationship with the respondent if he refused to sign the 2nd Agreement on 1 August 2021 is also contradicted by the copy of the 2nd Agreement that the applicant produced, which shows that the applicant executed the same on 6 August 2021 rather than on 1 August 2021.
28. For the above reasons, the applicant has simply failed to establish an arguable case (not to mention substantial ground) on the 1st essential element of unconscionable bargain. The Unconscionable Bargain Ground is therefore rejected.
The Duress Ground
29. The legal principles on duress have been summarised by DHCJ William Wong SC in Re Li Xiaoming [2019] HKCFI 2782 [4] as follows:
“25. First, there are two elements in the wrong of duress. First, pressure amounting to compulsion of the will of the victim. Second, the illegitimacy of the pressure. The legitimacy of the pressure must be examined from two aspects. First, the nature of the pressure and second, the nature of the demand which the pressure is applied to support. (See Universe Tankships v International Transport Workers Federation [1983] 1 AC 366 at 400 – 401 per Lord Scarman.)
26. Secondly, duress of the person is a threat to the life, health or liberty of an individual to induce the person threatened to enter into a contract or to make a payment. An unlawful detention or an illegitimate threat to imprisonment can constitute duress, even though there is no threat to life or limb. (See Enonchong, Duress, Undue Influence and Unconscionable Dealing (3rd ed) at §§5-002 to 5-003.)
27. Thirdly, in the case of duress of the person, the complainant only needs to prove that the pressure was a reason why he entered into the contract and the court will conclude that the illegitimate pressure induced the contract unless there is evidence that the illegitimate pressure in fact contributed nothing to the decision to enter the contract. It follows that it is unnecessary for the complainant in the case of threats to the person to demonstrate that he had no practical alternative but to enter into the challenged contract. (See Duress, Undue Influence and Unconscionable Dealing at §§4-003 to 4-024.)
28. Fourthly, the legal principles in relation to economic duress are succinctly summarised by Mr Justice G Lam in Zebra Industries (Orogenesis Nova) Ltd v Wah Tong Paper Products Group Ltd [2016] 1 HKC 213 at 234 – 237 as follows:
(1) Economic pressure may be sufficient to amount to duress, provided at least that the economic pressure may be characterised as illegitimate and has constituted a significant cause inducing the plaintiff to enter into the relevant contract;
(2) Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed;
(3) In determining whether there has been illegitimate pressure, the court takes into account a range of factors. These include whether there has been an actual or threatened breach of contract; whether the person allegedly exerting the pressure has acted in good or bad faith; whether the victim had any realistic practical alternative but to submit to the pressure; whether the victim protested at the time; and whether he affirmed and sought to rely on the contract.”
30. In Re Dai Yumin [2022] HKCFI 950 , having referred to the above-mentioned legal principles, Au-Yeung J added:
“107. The Court must be careful in distinguishing aggressive (yet legitimate) commercial activities from “illegitimate pressure” involving unconscionable or unlawful conduct. It is the illegitimacy of the suggested pressure that would amount to economic duress. See Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439, §§154 (CA); DBS Bank (Hong Kong) Ltd v Young & Fortune Limited , HCMP 1838/2014, 15 January 2016, §19, Au-Yeung J.
108. […]
109. Factors that the Court will take into account to determine whether there has been duress includes:
(1) Whether the complainant had access to independent advice: Pao On v Lau Yiu Long [1980] AC 614, 635D; Re Li Xiaoming , §46.
(2) Whether the alleged victim of duress had time to consider the document in question and made complaint: Nilesh Murli Sajnani v Yohan Simonian , HCA 1355/2014, 12 October 2015, §§94 & 102.
(3) Whether the complainant took steps to avoid the contract: Pao On v Lau Yiu Long , 635D.
110. Since a contract entered into under duress is voidable, not void, a party who has entered into a contract under duress has a choice to either avoid or to affirm the contract. If that party voluntarily acts under it with full knowledge of all the circumstances, he may be held bound on the ground of ratification. Or if, after escaping from the duress, he takes no steps to set aside the transaction, he may be found to have affirmed it . For there to be affirmation, there needs to be an unequivocal act. See Mir v Mir [2013] 4 HKC 213, §§59-60.”
31. Ms Kong submitted that there are at least triable issues as to whether the applicant signed the 2nd Agreement under duress which renders the document voidable. She relied on the following matters in support of the above argument:
(1) The applicant was not given any explanation as to why he had to sign the 2nd Agreement despite the existence of the 1st Agreement;
(2) The respondent threatened to terminate the working relationship if the applicant refused to sign the 2nd Agreement within the day, which is illegitimate;
(3) The respondent did not allow sufficient time for the applicant to read the 2nd Agreement;
(4) The respondent did not allow the applicant any chance to negotiate the terms of the 2nd Agreement;
(5) The applicant was required to return the signed 2nd Agreement with his signature, immediately after he was given the finalised version of the 2nd Agreement at the respondent’s office;
(6) The duress was a threat to the liberty of the applicant, which is unlawful;
(7) The threat to terminate the working relationship amounted to economic duress because, pursuant to Clause 5(1) of the 1st Agreement, the applicant “would be entitled to a commission of 65-70% of the income”[5] ;
(8) The pressure was illegitimate because it trumps the free will of the applicant to decide whether to enter into the 2nd Agreement, and was made out of bad faith.
32. I have dealt with some of the above matters in the previous section of this Decision and I will not repeat the same here.
33. Insofar as there is any suggestion that there was any threat to the liberty of the applicant which caused him to sign the 2nd Agreement, I regret to say that there is simply no evidence in support of such a serious allegation.
34. Ms Kong then submitted that the respondent’s pressure was illegitimate. However, taking the applicant’s case to the highest, it can only be said that if he refused to enter into the 2nd Agreement, the respondent would terminate the 1st Agreement, which the respondent was entitled to do so pursuant to Clause 10 thereof by giving him one month’s notice (it was not st Agreement by terminating it with immediate effect in the event he refused to enter into the 2nd Agreement).
35. Furthermore, there is no evidence on, for example, whether the respondent has acted in good or bad faith; whether the applicant had any realistic practical alternative but to submit to the alleged pressure; whether the applicant protested at the time, etc.
36. Even if the applicant had indeed entered into the 2nd Agreement under economic duress, which I do not accept, it is undisputed that he had earned commission from the respondent between August 2021 and January 2022 pursuant to the 2nd Agreement. He had therefore affirmed the 2nd Agreement.
37. I have not lost sight of the requirement that such affirmation has to be under the circumstances where the applicant had full knowledge of the terms of the 2nd Agreement at the material time. On this matter, the applicant was vague as to whether he had been given a copy of the 2nd Agreement. It seems that he was[6] . Furthermore, he has also been able to exhibit a copy of the 2nd Agreement in support of the present application. In any event, since he has the burden to adduce sufficiently precise factual evidence in support, in the circumstances where he did not say unequivocally that he did not know the terms of the 2nd Agreement, it should be assumed otherwise.
38. For the above reasons, the Duress Ground has no merits and should be rejected.
The In-House Clients Ground
39. Under this Ground, Ms Kong argued that:
(1) Ms Chan and Ms Lo were not the applicant’s clients, and that the applicant had no control over the instructions. The applicant could only act according to the respondent’s instructions;
(2) Clause 2.1 of the 2nd Agreement does not cover those clients whom the applicant took up from the respondent’s former account executive, because those clients did not open new securities accounts;
(3) The accuracy and veracity of the trading records of Ms Chan and Ms Lo are subject to verification;
(4) The calculations produced by the respondent fail to show whether the applicant did receive a monthly commission of 65-70% pursuant to the 2nd Agreement;
(5) There is no information as to whether the respondent had made any margin call or arrange forced liquidation in time to mitigate its loss in the accounts of Ms Chan and Ms Lo.
40. These arguments have no merits:
(1) It is indisputable that Ms Chan and Ms Lo have been transferred to become the applicant’s clients by virtue of the Transfer Forms;
(2) Although Ms Chan and Ms Lo did not open accounts with the respondent under the introduction of the applicant, that would not affect the applicant’s liability under Clause 2.1 of the 2nd Agreement which provided that:
“[…] For the avoidance of doubt, if any client of [the applicant] fails to pay any sum demanded by [the respondent], [the applicant] shall immediately pay such sum on demand.”
(3) In any event, there is no doubt that Clauses 13.1 and 13.2 are applicable no matter whether the clients concerned had opened accounts with the respondent under the introduction of the applicant;
(4) Ms Kong’s challenges against the respondent’s trading records and calculations are futile, as these matters were not even raised in the applicant’s Affirmation;
(5) Ms Kong’s query as to whether the respondent had made any margin calls on Ms Chan and Ms Lo is not understood, for the respondent has adduced evidence to show that it did make such calls.
41. The In-House Clients Ground is therefore rejected.
DISPOSITION
42. For the above reasons, the applicant’s application to set aside the Statutory Demand is dismissed.
43. The respondent is hereby authorised to present a bankruptcy petition against the applicant on or after 8 February 2024.
COSTS
44. Costs should follow the event.
45. I therefore order that the applicant shall bear the respondent’s costs of the Application. Such costs be summarily assessed on indemnity basis[7] pursuant to Order 62 rule 9A(1)(a) of the Rules of the High Court at $96,920, and shall be paid on or before 28 February 2024.
UPLOADING OF THIS DECISION
46. By consent, I direct that this Decision may be uploaded to the Judiciary website pursuant to paragraph 2 of Practice Direction 25.2.
( H. Au-Yeung )
Ms Charlotte Kong, instructed by K. B. Chau & Co., for the applicant
Mr Cedric Yeung, instructed by Long An & Lam LLP, for the respondent
[1] The respondent did not dispute that the Statutory Demand was only served on the applicant on 15 February 2023
[2] “Party A” and “Party B” mean the respondent and the applicant respectively in the 2nd Agreement
[3] Paragraphs 12 and 13 of the applicant’s skeleton submissions
[4] Upheld on appeal: [2021] HKCA 779 , at [34]
[5] Paragraph 29 of the applicant’s skeleton submissions
[6] See paragraph 6(a) of his Affirmation, in which he said he was given the finalized version of the 2nd Agreement.
[7] Pursuant to Clause 14.2 of the 2nd Agreement