WAH TAT FOUNDATION & ENGINEERING LTD v. KAM KIN BUN

HCSD5/2003

& HCSD6/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND NO.5 OF 2003

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J U D G M E N T

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Background

1. I have before me today two applications to set aside two statutory demands respectively. The applicants are Mr Kam Kin Bun ("Mr Kam") in HCSD No.5 of 2003 and Mr Yip Shiu Ching ("Mr Yip") in HCSD No.6 of 2003.

2. In or about June 1988, Mr Kam, Mr Yip and Mr Ng Li Chin ("Mr Ng") formed a partnership business known as Wah Tat Engineering Company ("the Firm"). At about the same time, they, together with a Mr Kung Chun Fai ("Mr Kung"), formed a limited company known as Wah Tat Foundation & Engineering Limited, the creditor in these proceedings ("the Creditor"). Initially, the three of them were shareholders and directors of the Creditor. But in about March 2002, Mr Kam sold his shares to Mr Ng at the nominal price of HK$1 and then ceased to be a shareholder and director of the Creditor. The Firm was dissolved on 22 January 2003.

3. On 30 October 2002, the Creditor commenced HCA No.4126 of 2002 against the Firm, claiming for the repayment of a loan in the sum of $627,937.88 advanced by the Creditor to the Firm to enable the latter to carry out certain construction works in Fo Tan Road, Shatin. On 22 December 2002, the Creditor obtained a default judgment against the Firm on that sum with interest and costs ("the Default Judgment"). Relying on the Default Judgment, the Creditor issued two statutory demands, both dated 20 January 2003, against Mr Kam and Mr Yip respectively. Those demands were served on them on 10 February 2003. They now apply to set aside the demands under Rule 48(5)(a), (b) and (d) of the Bankruptcy Rules. I will consider each of these grounds in turn.

Rule 48(5)(a)

4. Rule 48(5)(a) provides that the court may grant an application to set aside if the debtor appears to have a counterclaim, set-off or cross-demand which equals existing amount of the debt or debts specified in the statutory demand. Mr Kam and Mr Yip contend that they both have a cross-demand against the Creditor within in the meaning of the Rule. Mr Kam's case runs like this. At all material times, the 2,000,000 shares of the Creditor were held among the shareholders as follows :

(a) 1,020,000 shares by Mr Ng;

(b) 600,000 shares by Mr Kam;

(c) 100,000 shares by Mr Kung; and

(d) 280,000 shares by Mr Yip.

Mr Kam alleges that on 11 January 2002, he was forced to sell all his shares to Mr Ng for HK$1 and to resign from the directorship of the Creditor. In the event, Mr Ng held 81% of the issued shares of the Creditor. Mr Tse, counsel for both Mr Kam and Mr Yip, argues that Mr Kam has a potential cross-demand against the Creditor, as well as Mr Ng, in relation to the share of his shares to Mr Ng.

5. I fail to see how Mr Kam could possibly have a claim against the Creditor arising from the disposition of his shares to another shareholder, Mr Ng. Mr Tse has been unable to cite any authority to make good his submission. At the end, he dropped this ground.

6. Mr Yip's case, in summary, is this. On 13 February 2003, he commenced winding-up proceedings, HCCW No.176 of 2003, against the Creditor and Mr Ng, claiming for winding-up order of the Creditor or, alternatively, a buying-out order that Mr Ng to buy all his shares at HK$5 per share. The gist of his complaint in the petition is that Mr Ng, the controlling shareholder and director of the Creditor, had conducted its affairs in a manner which was unfairly prejudicial to Mr Yip and had thereby destroyed any mutual trust between Mr Ng and Mr Yip. Mr Tse argues that the background and parties involved in HCA No.4126 of 2002 and HCCW No.176 of 2003 are virtually the same and that there is obviously a valid cross-demand against the Creditor.

7. The Default Judgment is based on moneys advanced by the Creditor to the Firm between July 2000 and February 2002. In the winding-up petition, the loan does not form part of the complaint against the Creditor or Mr Ng. In fact, it was not even mentioned in the petition at all. And, more importantly, under Rule 48(5)(a), the court may set aside the statutory demand if it does appear to have a counterclaim, set-off or cross-demand which equals or exceeds the amount of the debt as specified in the demand. The cross-demand has to be a monetary demand. But in the winding-up petition, Mr Yip asked for a winding-up order against the Creditor. He does not raise any monetary claim against it. In the circumstances, he does not have a cross-demand against the Creditor that falls within the meaning of Rule 48(5)(a). I am unable to accept Mr Tse's submissions that Mr Yip has expressly reserved the right to ask the court to order the Creditor to buy his shares by virtue of the very general prayer in paragraph 3 of the petition.

Rule 48(5)(b)

8. I next turn to Rule 48(5)(b), which reads :

"The court may grant the application if the debt is disputed on grounds which appear to the court to be substantial."

The Default Judgment is a regular judgment. Initially, there was a complaint regarding service of the writ in question. According to the second affirmation of Mr Francis Kong, solicitor acting for the Creditor, the writ was served at the principal place of the firm on Mr Ng, one of the partners of the firm. With that piece of evidence, there is no doubt that service of the writ was made pursuant to Order 81, rule 3 of the Rules of the High Court and the judgment obtained is a regular judgment.

9. Mr Kam and Mr Yip complain that they have no knowledge of the writ. That is, in my view, immaterial. They say that they have a defence. In brief, they deny that they have any knowledge of the alleged loan. They allege that the firm was at the material times controlled by Mr Ng. It is trite, and it is accepted by Mr Tse in the course of his submissions, that whether the statutory demand is based on a judgment, the court will not at this stage go behind the judgment and inquire into the validity of the debt nor, as a general rule, to await the result of an application to set aside the judgment. See Re Maidwell exparte Duff WFM Motors Property Ltd [1993] 3 HKLRD 325, and Re Damnercharnwanit [2000] 1 HKC 579.

10. Mr Tse argues that the court should go into the merits of the defence because of the circumstances of this case. In essence, he submits that the Creditor and the Firm were in control of Mr Ng who had caused the Default Judgment to be entered without the knowledge of Mr Kam and Mr Yip. Mr Ng was therefore in breach of his fiduciary duty towards them as partners of the Firm. In their affirmations, both Mr Kam and Mr Yip went on to complain that the Default Judgment was obtained by fraud. In my view, the burden rests squarely on Mr Kam and Mr Yip to satisfy me with cogent evidence that the Default Judgment was obtained in the circumstances as alleged by them. On the evidence before me, I am not so satisfied. Accordingly, I am unable to accept Mr Tse's submission.

Rule 48(5)(d)

11. I finally come to Rule 48(5)(d). It provides that the court may grant the application if the court is satisfied on other grounds that the demand ought to be set aside. Under this particular paragraph, the court has a residual discretion. The approach can be found in Re A Debtor [1999] 1 WLR 271, in particular, at page 276. Nicholls LJ (as he then was) said :

"When therefore the rules provide for the court to have a residual discretion to set aside a statutory demand, the circumstances which normally will be required before a court can be satisfied the statutory demand ought to be set aside are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court's intervention is called for to prevent that injustice."

12. The approach was followed by another division of the English Court of Appeal in Birch v. A F Birch Construction Limited in Receivership and Liquidation [1997] BPIR 366. Peter Gibson LJ said at page 371 :

"The language of paragraph (d) does not, on its face, lend any support for the construction limiting the application of that paragraph to the two instances referred to by Jacob J. Indeed, it is quite impossible, I would have thought, to foresee all the circumstances which may arise and which may justify the appropriate allocation of that subparagraph. But consistently with the views expressed by Nicholls LJ, it is appropriate when considering whether to set aside a statutory demand under that paragraph to consider the consequences if one does set it aside. There is no point in setting aside a statutory demand for defects in a statutory demand which are not so substantial as to leave the debtor truly perplexed by its contents.

Similarly, in my view, there is no point in setting aside a statutory demand and requiring a creditor to litigate his claim that he is owed money by the debtor. If it cannot be foreseen that there will be any ground on which the creditor would be denied his claim were the matter to be litigated, that would only be to increase costs to no purpose whatever.

It also has to be borne in mind when exercising the statutory discretion that an application to set aside comes at another stage in proceedings for bankruptcy. At the hearing of the petition, it must be established to the satisfaction of the court hearing the petition that the statutory conditions for making an adjudication are satisfied and evidence that comes to light after the petition to set aside can, in my view, properly be relied on without there being any degree of some sort of estoppel."

13. Peter Gibson LJ then went on to say :

"The real question, it seems to me, in this case is whether Mr Birch can show a substantial reason compared with the sort of reason one sees in paragraphs (a), (b) and (c) of rule 6154 why the demand out to be set aside."

14. Mr Tse's submissions in this regard are basically the same as the one advanced in support of his submission under Rule 48(5)(b), which I have already rejected. He further submits that leave must be first obtained before the statutory demand could be issued. In this regard, he relies on Order 81, rule 5 of the Rules of the High Court. The relevant paragraph is paragraph 4 of that rule :

"Where a party who has obtained a judgment or order against a firm claims that the person is liable to satisfy the judgment or order as being a member of the firm and the foregoing provisions of this rule do not apply in relation to that person, that party may apply to the court for leave to issue execution against that person. The application to be made by summons which must be served personally on that person."

15. Mr Tse submits that no leave has been obtained by the Creditor to issue the further demand. Hence, the demand must be set aside. With respect, his reading of the rule is wrong. Taking out a statutory demand and hence commencing bankruptcy proceedings is not a form of execution of the judgment. The distinction can be clearly seen in section 6A of the Bankruptcy Ordinance. That section prescribes two conditions whereby the creditor proves that the debtor appears to be unable to pay a debt. The two scenarios are, firstly, service of the statutory demand and the failure to comply with the demand within three weeks, and the fact that the demand has not been satisfied in accordance with the rules; and secondly, execution in respect of the debt on the judgment has been returned unsatisfied in whole or in part.

16. Mr Tse also relies on Hong Kong Civil Procedure 2002, Volume 1, para.81/5/13 where it is said that a bankruptcy notice may be issued against the firm founded upon the judgment against it in the firm's name and the receiving order made against the firm but all the members of the firm must have been served with the writ of summons. But a creditor cannot issue a bankruptcy notice against a partner without obtaining leave to issue execution under Order 81, rule 5(4) unless each party is liable to execution under Order 81, rule 5(2). The cases cited in support of the propositions were all decided under the previous statutory regime of the bankruptcy laws. In April 1996, Hong Kong introduced the present regime in the Bankruptcy Ordinance whereby the formal requirement of acts of bankruptcy to be committed before commencement of bankruptcy proceedings had been removed. The cases do not have any bearing here. It will appear that if the creditor relies on section 6A(1)(b), then the complaint made by Mr Tse will be valid. But the creditor is relying on section 6A(1)(a). Accordingly, I see no substance in Mr Tse's submissions in this regard.

17. There is a further point. The Default Judgment is a regular judgment. The creditor is quite entitled in its own right to proceed with the bankruptcy proceedings against Mr Kam and Mr Yip. In my view, it will not be right to deter the case from proceeding to petition, mainly because Mr Ng, the majority shareholder of the Creditor, might have some other disputes with Mr Yip, another shareholder, and Mr Kam, who is not even a shareholder.

18. For the above reasons, I would dismiss the application to set aside the demands.

[Submissions on costs]

19. Costs should follow the event. I will order costs against Mr Kam and Mr Yip, to be paid forthwith, and to be taxed if not agreed.