Re: CHOI CHI KWUN (Judgment Debtor) and Ex-Parte: OVERSEAS UNION BANK LTD. (Judgment Creditor)

HCB 517/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 517 OF 2000

____________

______________________________________

REASONS FOR JUDGMENT

______________________________________

1. This is a petition presented by a judgment creditor based on a statutory demand dated 6 December 1999 in respect of the unsecured part of the judgment debt in the sum of HK$25,568,910.71. The judgment debt was in the sum of HK$72,691,788.29 and interest thereon calculated up to the date of the statutory demand was HK$1,377,122.42. The Petitioner held security in the form of two mortgaged properties being a property in Magazine Gap Road and a duplex apartment in Shatin. The estimated value of the security placed by the Petitioner on the mortgaged properties, as stated in the statutory demand and in the Petition was HK$48,500,000.00. As stated earlier, the Petition was made in respect of the unsecured part of the debt.

2. At the hearing on 2 May 2000, the Debtor sought an adjournment to give him an opportunity to obtain a valuation of the two mortgaged properties to challenge the estimate of the value of the security made by the Petitioner which was based on the valuation provided by the Petitioner's surveyors. I adjourned the hearing to 5 May 2000 to hear submissions as to the extent and circumstances under which a debtor may challenge the estimate of the security placed by the Petitioner in a petition for the unsecured balance of a debt. On 5 May 2000, I provided to the parties a copy of the transcript obtained from Lexis of the case of Platts v. Western Trust & Savings Ltd [1996] BPIR 339, which was relied on by counsel for the Debtor in his written submissions that the Court would allow the Debtor to challenge the valuation of the security on the hearing of a petition. Having heard submissions from both sides and from the Official Receiver, I refused to exercise my discretion to give an opportunity to the Debtor to adduce evidence from a surveyor to challenge the Petitioner's valuation and made a bankruptcy order on the Petition. I now give reasons for my judgment.

3. The Petitioner's counsel, Mr Samuel Chan, relied on Re Button [1905] 1 KB 602 for the proposition that provided that the valuation of the security given by the Petitioner was a genuine estimate and not a sham, it was the practice of the bankruptcy court not to inquire into the question of the correctness of that estimate, even though the result of such an inquiry might be to show that the unsecured balance of the debt was not sufficient to support the petition, see also "The Law of Insolvency" by I.F. Fletcher, 2nd ed, p. 108. As stated by Vaughan Williams LJ in Re Button, supra, at 605, the relevant provision in the bankruptcy at that time provided that it was the duty of the creditor to make an estimate of the security and the purpose of the provision was to avoid the necessity of an inquiry as to whether such an estimate was right. He further stated that there would be an effective sanction against the creditor making a fictitious estimate and undervaluing the security as the creditor's own estimate of the value of his security was thereafter binding upon him throughout the remaining stages of the bankruptcy and he could not take any benefit in the administration in bankruptcy except on the basis of the estimate that he had given. In the present case, there was no suggestion from the Debtor that the Petitioner's valuation was not genuine or was merely a sham.

4. Mr Clemence Yeung, counsel for the Debtor, did not dispute the collateral rule in Re Button that a petitioning creditor would be bound by his own estimate of the value of his security throughout the remaining stages of the bankruptcy. He submitted that the proposition in Re Button that the court would not inquire into the correctness of the estimate given by the petitioning creditor provided that it was genuine would no longer hold good or should not be regarded as settled practice and applied in full rigour having regard to the changes in bankruptcy legislation and the observations of the English Court of Appeal in Platts v. Western Trust & Savings Limited, supra.

5. Platts was concerned with an application to set aside a statutory demand on the ground that the creditor's valuation of the security was far too low and that the creditor was in truth fully secured. Valuation reports were put in by both sides when the matter came on for hearing but the District Judge refused an application by the debtor for leave to adduce oral evidence by the debtor's surveyor and did not permit the debtor to cross-examine the creditor's surveyor. Before the Court of Appeal, the debtor submitted that the District Judge should have allowed him the opportunity of satisfying the court that the value of the security had equalled or exceeded the full amount of the debt at the stage of the application to set aside the statutory demand because it was at least doubtful whether the Court would be willing to go behind the creditor's estimate on the hearing of the petition in view of Re Button. This argument was rejected by Sir Christopher Slade, who delivered the judgment of the court and with whose judgment the other members (Butler-Sloss and Nourse LLJ) concurred. Sir Christopher Slade had this to say in his judgment:

" The decision in In Re Button, however, was given against an entirely different statutory background from that which is now embodied in the Act of 1986. In 1905, when the decision was given, the concept of a 'statutory demand' had not yet been introduced. The step which set the bankruptcy process in motion was the making of a receiving order. This had the effect of freezing the debtor's assets and would be followed by a statutory meeting of creditors which would decide whether a bankruptcy should ensue or whether some arrangement should be made with the debtor. The procedure for the making of receiving orders has now been abolished under the new bankruptcy code. I agree with the words of Nicholls LJ in In Re a Debtor (No. 1 of 1987) [1989] 2 All ER 46, [1989] 1 WLR 271 at p 276 of the latter report:

'I do not think that on this the new bankruptcy code simply incorporates and adopts the same approach as the old code. The new code has made many changes in the law of bankruptcy, and the court's task, with regard to the new code, must be to construe the new statutory provisions in accordance with the ordinary canons of interpretation, unfettered by previous authorities.'

In my judgment, the decision in In Re Button, which concerned the question whether or not under the old code a receiving order had been properly made, is no authority for the proposition that the court which hears a petition under the new code is precluded from hearing and determining on proper evidence a submission made by the debtor that the creditor is fully secured. [Counsel for the debtor] has been able to adduce no other authority either in the Act or the Rules or in any decided case to support such a proposition; and indeed I for my part would be astonished if it were correct....

It appears to me that Rules 7.5.1 and 7.5.7 of the 1986 Rules would give the court which heard the petition ample power, if it saw fit, to determine the value of the security on proper evidence from both sides, in a case where the debtor satisfied it that there were substantial grounds for thinking that the petitioning creditor might be fully secured."

6. Sir Christopher Slade dismissed the debtor's appeal against the District Judge's refusal to allow the debtor to adduce oral evidence as the court has a discretion in Rule 6.5(3) of the Insolvency Rules 1986 (the local equivalent is Rule 48(4) of the Bankruptcy Rules) to dismiss an application to set aside a statutory demand on the incomplete evidence before it and on the available evidence before the District Judge, the evidence adduced by the debtor did not give "very solid grounds" for supposing that the security held by the lenders might well exceed the value of the debt.

7. In my view, the practice of the bankruptcy court which was derived from Re Button of not inquiring into the correctness of the petitioning creditor's estimate provided that it was genuine should not be applied inflexibly having regard to the changes in bankruptcy legislation and in the light of the observations in Platts. Having said that, I do not think the present case is an appropriate one to grant an adjournment to allow the Debtor an opportunity of obtaining a valuation report from his surveyor. My reasons are as follows.

8. Firstly, the unsecured part of the debt is very substantial, over HK$25 million. For the Debtor to successfully oppose the petition, I would need to be satisfied that there was at least a real issue as to whether, after giving proper credit for the value of the security, the Debtor was indebted to the Petitioner at all. In other words, the Petitioner had undervalued the two mortgaged properties by something in the region of HK$25 million. The Petitioner's estimate was based on the valuation given by professional surveyors who had provided the "forced sale value" as well as the "open market value" in respect of each of the two properties. Even allowing that there might be differences between surveyors on the valuation of properties, I consider it extremely remote that the Debtor could have demonstrated by credible evidence that the Petitioner's surveyors had undervalued the two properties by HK$25 million.

9. I should also point out that the estimate put on the value of the security in the statutory demand and the Petition was on the basis of the open market value given by the Petitioner's surveyors and not the forced sale value which would be less favourable to the Debtor, notwithstanding that the correct basis for giving an estimate of the value of the security should be that of a forced sale, according to Platts.

10. Secondly, the Debtor had not in his affirmation advanced any basis to impugn the valuation of the Petitioner's surveyors. All that he stated in his affirmation was that he "[took] exception to" to the Petitioner's valuation and he simply could not accept that the value of the two mortgaged properties amounted to only HK$48.5 million. He had given no indication at all as to what he perceived might be the range of difference between the Petitioner's valuation and the valuation of his own surveyors.

11. Lastly, as submitted by Mrs Christine Sit who appeared for the Official Receiver, the Debtor did have ample opportunity to adduce evidence to challenge the Petitioner's valuation if he had really wished to do so. The statutory demand and the Petition were sent by post and left at, inter alia, an address in Kwai Chung which was the Debtor's address according to his Affirmation dated 29 April 2000 on various dates in December 1999, February 2000 and March 2000. The attempts at personal service were unsuccessful and eventually the Petitioner obtained an order for substituted service of the Petition on 7 April 2000 by post on, inter alia, the Debtor's Kwai Chung address and by advertisement. The Debtor claimed in his Affirmation that the Petition only came to his attention on or about 16 April 2000. No explanation was provided as to why he had not received the statutory demand or the Petition sent to his Kwai Chung address before April 2000. Be that as it may, when the matter first came up for hearing before Master B Kwan on 19 April 2000, the Debtor was legally represented and sought an adjournment for three weeks for negotiations. There was no indication given to the Court or to the Petitioner's solicitors that the Debtor was minded to challenge the Petitioner's valuation of the security. The Master allowed an adjournment for one week only and gave leave to the Debtor to file evidence in opposition within 7 days. At the adjourned hearing before the Master on 26 April 2000, no affirmation was filed by the Debtor pursuant to the court order. The Debtor's Affirmation was served late on the Petitioner's solicitors on 29 April 2000 and it was filed out of time after I granted leave on 2 May 2000. As I have pointed out earlier, the Debtor's Affirmation simply provided no adequate or solid basis for challenging the Petitioner's valuation.

12. In all the circumstances, I do not think it would be appropriate to give further opportunity to the Debtor to file evidence to challenge the Petitioner's valuation in the absence of any realistic basis that the Petitioner's valuation of the security might be successfully impugned. I am satisfied the unsecured part of the judgment debt had been proved and I make a bankruptcy order in pursuance of the Petition.