CHAN WS AND ANOTHER v. CC Bank

CACV 59/2021

[2022] HKCA 1037

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 59 OF 2021

(ON APPEAL FROM HCSD NO 22 OF 2018)

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J U D G M E N T

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Hon Au JA (giving the Judgment of the Court):

A.  INTRODUCTION

1.  By a Notice of Appeal dated 16 February 2021, the respondent appeals against the Decision of Linda Chan J (“the Judge”)  dated 18 January 2021 (“the Decision”), in which the Judge ordered that the two statutory demands dated 15 June 2018 (“SDs”)  issued and served on the 1^st and 2^nd applicants respectively be set aside by reason of the over-statement of the debt therein.

2.  The Judge also dismissed the respondent’s summons dated 4 January 2019 (“the Strike-out Summons”)[1] to strike out such part of the 1^st applicant’s application to set aside the SDs (“the Application”)[2] which was purportedly issued also on behalf of the 2^nd applicant at a time when the 1^st applicant apparently had no authority to do so.  She therefore ordered the respondent to pay the 1^st and 2^nd applicants’ costs of the Strike-out Summons.  Although the respondent did not pursue the Strike-out Summons before the Judge for the reasons explained below, it nonetheless sought costs of the Strike-out Summons, and now appeals against the costs order made by the Judge.

3.  This is the respondent’s appeal against the Decision.

B.  BACKGROUND

4.  The factual background of this case has been set out at [12] - [24] of the Decision.  It can also be gleaned from the affirmations of the parties herein together with the exhibits thereto.

5.  In summary:

(1)  The 1^st and 2^nd applicants (together, “the Debtors”)  are husband and wife and were the directors and shareholders of Dynasty Management Limited (“the Company”), a company through which they took out loan facilities from the respondent under a General Agreement[3] which the Debtors jointly and severally guaranteed by executing a Continuing Guarantee (“the Guarantee”).[4]

(2)  In March 2016, the respondent and the Company agreed to restructure the indebtedness in accordance with the terms set out in a letter dated 14 March 2016 (“the Restructuring Agreement”)[5], pursuant to which a new loan in the amount of $7,030,022.05 was formed to capture all the indebtedness due to the respondent and granted to the Company at an interest rate of HKD Prime + 2% per annum (ie, 7.25%).

(3)  In return, the Restructuring Agreement provided that: (a)  the new loan together with interest accrued thereon would be repayable by 48 monthly instalments of annually increasing amounts; (b)  if the Company fails to repay any of the instalments on the due date, the remaining amount of the entire indebtedness will become due and payable immediately; and (c)  the terms of the Restructuring Agreement were “without prejudice to, and shall not be construed as a waiver of any other rights or remedies which [the respondent] may have, including the overriding right of repayment on demand”.

(4)  Although the Company initially paid the instalments due up to December 2016,[6] it was discovered that another creditor had commenced legal proceedings in HCA 3343/2016 against, among others, the Company on 19 December 2016.  The respondent therefore exercised its right on 13 January 2017 to demand full repayment of the entire indebtedness within seven days.[7]

(5)  This resulted in two without prejudice meetings held between the parties on 7 and 14 February 2017 at which the 1^st applicant, acting on behalf of the Company, proposed a new and accelerated repayment schedule by way of 11 instalments (“the Accelerated Repayment Schedule”).  The respondent accepted it on 21 February 2017 by an email in which it was expressly stated in the last paragraph that “all [the respondent’s] unfettered rights are reserved”.[8]

(6)  However, the Company only made partial repayments for the first six months (up to August 2017)  and defaulted on the rest of the repayments under the Accelerated Repayment Schedule.[9]

(7)  The parties then held another without prejudice meeting in September 2017 (“the WP Meeting”)  at which the 1^st applicant offered to cause Easy-Luck (HK)  Limited, a company wholly owned by the Debtors, to mortgage its property known as Apartment B-1 (with Garden Area)  on No 45 Island Road (“the Property”)  to the respondent, in return for the respondent agreeing to hold off any legal action for the time being.[10] At the time the Property had already been mortgaged to, among others, The Bank of East Asia, Limited (“BEA”), which has since exercised its power to sell the Property to recover the indebtedness owed to it, after which no surplus remained for any subsequent mortgagee.

(8)  As no further repayments were made by the Company thereafter, the respondent issued the SDs against the Debtors on 15 June 2018.

(9)  There is no dispute that the debt stated in the SDs (ie, $7,057,746.73)  was overstated.[11] The breakdown of the debt shown on the SDs was as follows: (a)  principal: $5,380,022.05 + (b)  accrued interest: $1,665,724.68 + (c) legal fee $12,000.

(10)   Relevantly, on 11 July 2018, the Debtors (through their then solicitors)  requested for a breakdown of the debts claimed in the SDs.  On 8 August 2018, the respondent through its solicitors provided the Debtors with a schedule of the breakdown of the outstanding indebtedness owed by the Company up to 18 July 2018.[12]

(11)   On 4 January 2019, the respondent clarified by affirmation that the debt was over-stated in the SDs due to clerical mistake in calculating the accrued interest, and that the correct amount as at 5 June 2018 (the date up to which the outstanding indebtedness was calculated in the SDs)  was $6,369,546.11, comprising of: (a)  principal: $5,380,022.05 + (b)  accrued interest: $977,524.06 + (c)  legal fee: $12,000.[13]

6.  On 24 July 2018, the 1^st applicant took out the Application purportedly “on his own behalf and on the behalf of [the 2^nd applicant]”.[14]  In his supporting affirmation, he stated that he was duly authorised by his wife, the 2^nd applicant, to make the affirmation to set aside the demand served on her.[15]

7.  On 4 January 2019, the respondent issued the Strike-out Summons to strike out the name of the applicant and “prayer for relief” sought on behalf of the 2^nd applicant on the grounds that it discloses no reasonable cause of action and/or is an abuse of the court’s process because (a)  the 1^st applicant had no locus standi to take out the Application on behalf of the 2^nd applicant, and (b)  relief was purportedly sought on behalf of the 2^nd applicant who was not a party to the Application and who had not authorised the 1^st applicant to take out the Application on her behalf.[16]

8.  It would appear that this prompted the 2^nd applicant to file an affirmation on 18 January 2019 confirming that she had authorised the 1^st applicant to take out the Application on her behalf, and adopting the grounds set out in the 1^st applicant’s affirmation.[17]

9.  As the respondent did not cease to pursue the Strike-out Summons, on 25 October 2019, the 2^nd applicant took out a separate application in her own name to set aside the demand served upon her.[18]  In her supporting affirmation, she deposed to the fact that she had authorised the 1^st applicant to make the Application on her behalf, and adopted the grounds set out in the 1^st applicant’s affirmation.

10.  Following that, on 12 November 2019, the 1^st applicant sought leave to amend the Application to remove the reference to the 2^nd applicant.[19]

11.  In view of these developments, the respondent did not pursue the Strike-out Summons at the hearing before the Judge, but sought costs of the Strike-out Summons in the amount of $26,775.50.

C.  THE DECISION

12.  The Judge dealt with the Strike-out Summons first. Although the respondent did not pursue the application, the Judge held that the Strike-out Summons was misconceived, pointless and unnecessary, and dismissed it with costs to the Debtors (see [9] - [10] of the Decision).  In gist, her reasons were that:

(1)  The Strike-out Summons was misconceived in that it was issued under Order 15, rule 6 and Order 18, rule 19 of the Rules of the High Court (“RHC”)  which are inapplicable to bankruptcy proceedings such as an application to set aside a statutory demand (see [3] - [6] of the Decision).

(2)  It was also a pointless and unnecessary application as it was based on a technical point which would not invalidate the Application unless the court is of the opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of the court: section 124(1)  of the Bankruptcy Ordinance, Cap 6 (“the BO”)  (see [7] - [8] of the Decision).

13.  The Judge therefore made a cost order nisi that the costs of and occasioned by the Strike-out Summons be paid by the respondent to the Debtors assessed at $600.

14.  On the merits of the Application, the Judge held that it was incumbent upon the respondent to amend the SDs or issue fresh demands with the correct amount and particulars of the debt.  This is because she considered that a creditor who knew full well that the debt set out in the demand has been over-stated would not be able to state and confirm, as required by section 6A(1)(a)  of the BO when he presents a petition relying upon the unsatisfied demand, that the debtor has failed to satisfy the demand served on the debtor (see [41] of the Decision).

15.  The Judge then referred to the principle applied in Re Ip Pui Man Nina [2011] 3 HKLRD 299 and Re Kwok Chok Yee [2000] 2 HKC 543 that an over-statement of the indebtedness in the statutory demand will not automatically entitle the debtor to have the demand set aside, and that the relevant question is whether injustice would be caused to the debtor by allowing the particular demand to stand.  However, she held that this principle only applies when the Court considers whether a bankruptcy order should be made against the debtors at the hearing of the petition, in circumstances where the debtor has not applied to set aside the demand (see [43] - [44] of the Decision).

16.  As she found that the over-statement was of a significant amount and no attempt had been made by the respondent to correct it, she set aside the SDs under rule 48(5)(b)  and (d)  of the Bankruptcy Rules, Cap 6A (“the BR”)  on the grounds that (a)  there is a valid dispute on the amount of the debt and (b)  the SDs, which contained an over-statement of the debt, cannot be relied upon by the respondent in the petition against the Debtors, and it was unreasonable for the respondent to continue to pursue the SDs (see [45] - [46] of the Decision).

17.  The Debtors had also raised three other grounds in support of the Application.  They contended that:

(1)  the respondent was estopped from demanding immediate repayment of the debt by reason of:

(a)  an alleged promise made by Percy Chan of the respondent at the WP Meeting; and/or

(b)  the Debtors’ reliance upon the Restructuring Agreement, pursuant to which the Company repaid $1.65 million; and

(2)  the respondent holds security in respect of the debt.

The Judge rejected all of these grounds for the reasons she gave at [33] - [39] of the Decision.  As there is no cross-appeal by the Debtors in respect of those grounds, it is unnecessary to say anything more about them.

18.  As for the costs of the Application, the Judge made a costs order nisi that there be no order as to costs as between the Debtors and the respondent to reflect the fact that while the Debtors succeeded in setting aside the SDs, they failed in most of the grounds advanced in support of the Application (see [47] of the Decision).

D.  THIS APPEAL

D1.   Grounds of appeal

19.  The respondent raised four grounds of appeal:

(1)  First, it says that the Judge erred in setting aside the SDs due to the over-statement of the debt, and ought to have held, applying Re Ip Pui Man (supra)  at [73] - [76] and Re Kwok Chok Yee (supra)  at 548G-I, that whilst the SDs over-stated the debt, no injustice would be caused to the Debtors in allowing the SDs to stand.

(2)  Secondly, it says that the Judge erred in law by holding that the principle in Re Ip Pui Man and Re Kwok Chok Yee is not concerned with an application to set aside a statutory demand, but only applies to situations where the Court is considering whether a bankruptcy order should be made against debtors at the hearing of the petition in circumstances where the debtor has not applied to set aside the demand.

(3)  Thirdly, it says that the Judge ought to have held that the debt was not disputed on substantial grounds in view of the respondent’s subsequent clarification of the over-statement and provision of the correct amount of the debt together with a breakdown.

(4)  Fourthly, in relation to the costs of the Strike-out Summons, it says that the Judge erred in ruling that it was misconceived or that there was no proper basis to issue that application.

20.  Ms Tiffany Chan (who appeared on behalf of the respondent both at the hearing below and on appeal)  developed these grounds in her Skeleton Submissions.

21.  Although the Debtors filed their skeleton submissions on 11 August 2021, they merely submitted that they agreed with the Decision made by the Judge.  At the hearing, the 1^st applicant (who appeared in person)  was granted leave to also represent the 2^nd applicant as there was some medical proof provided to us that the 2^nd applicant was unable to attend in person and had authorised the 1^st applicant to represent her at the hearing.  In his oral submissions, the 1^st applicant again reiterated his agreement with the Judge’s reasons in the Decision, and emphasised that the respondent ought to have stated an accurate figure of the debt in the SDs or amended them upon discovering the over-statement.

D2.   Grounds 1 - 3 – Whether the Judge was wrong to set aside the SDs

22.  In our view, the first three grounds of appeal could be considered together.

23.  It is well settled that an over-statement of the indebtedness in the statutory demand will not automatically entitle the debtor to have the demand set aside.  The relevant question is whether injustice would be caused to the debtor by allowing the particular demand to stand: see Re Kwok Chok Yee (supra)  at 548G-H per Le Pichon J, citing Re a Debtor (No 1 of 1987) [1989] 1 WLR 271 at 276 and 279.

24.  Ms Chan drew our attention to a long line of authorities in which this principle was applied: see Winterthur Life Insurance Company v Au Oi Fong Susana (unreported, HCB 1178/1999, 28 November 2000)  per Chu J (as she then was); Re Ip Pui Man Nina (supra)  at [75] per Au J (as he then was); Li Wo Hing v Raiffeisen Bank International AG (Beijing Branch) (unreported, HCSD 19/2014, 10 July 2014)  at [29] per To J; and Re Lo Kwai Ying Louisa (unreported, HCB 3145/2015, 27 July 2016)  at [47] - [49] per Lok J.

25.  In Re Ip Pui Man Nina, although it was found that the relevant debt was arguably overstated in the demand (due to questions of limitation in respect of accrued interest and the inclusion of other indebtedness extraneous to the mortgage loan), the Court went on to consider whether injustice would be caused to the debtor, and held that it would not. In so finding, the Court had regard to the fact that there was no evidence that the debtor would have been in a position or prepared to pay and settle the debt had it been correctly stated, and that the principal sum of the mortgage loan undisputedly due was well in excess of the statutory minimum of $10,000 prescribed under the BO.

26.  In Winterthur and Re Lo Kwai Ying Louisa, the learned judges also took into account the negligible amount of the over-statement as compared to the size of the debt in finding that no injustice was caused to the debtors as a result of the over-statement.

27.  Although the Judge did not doubt the correctness of this principle, she sought to distinguish it as applying only when the Court considers whether a bankruptcy order should be made at the hearing of the petition, in circumstances where the debtor has not applied to set aside the demand.  With respect, we disagree with the Judge and could see no proper basis for such a distinction to be drawn.  More importantly, the principle was in fact derived from the English Court of Appeal decision in Re Debtor (No 1 of 1987) [1989] 1 WLR 271, which specifically concerned an application to set aside a statutory demand.

28.  The material facts of that case are relatively straightforward.  The Royal Bank of Scotland served a statutory demand on the debtor in which the amount of the outstanding debt had been calculated incorrectly.  The debtor applied to have the statutory demand set aside on, inter alia, that ground. In refusing to set aside the statutory demand, Nicholls LJ held (at p.279C-H):

“… in my view it by no means follows from the existence of those defects that this statutory demand ought to be set aside. The court will exercise its discretion on whether or not to set aside a statutory demand, having regard to all the circumstances. That must require the court to have regard to all the circumstances as they are at the time of the hearing before the court. There may be cases where the terms of the statutory demand are so confusing or misleading that, having regard to all the circumstances, justice requires that the demand should not be allowed to stand. There will be other cases where, despite such defects in the contents of the statutory demand, those defects have not prejudiced and will not prejudice the debtor in any way, and to set aside the demand in such a case would serve no useful purpose. For example, a debtor may be wholly unable to pay a debt which is immediately payable, either out of his own resources, or with financial assistance from others. In such a case the only practical consequence of setting aside a statutory demand would be that the creditor would promptly serve a revised statutory demand, which also and inevitably would not be complied with. In such a case the need for a further statutory demand would serve only to increase costs. Such a course would not be in the interests of anyone.

In the present case the amount stated was wrong, but in my view the mere over-statement of the amount of the debt in a statutory demand is not, by itself and without more, a ground for setting aside a statutory demand. ...In the present case there is no evidence that the error as to the amount due, or the misleading features of the calculation, have resulted or will result in the debtor being prejudiced in any way. There is, for example, no evidence that had the correct amount been stated in the statutory demand, the debtor would have taken steps to satisfy the demand, or that he has been deprived of this or any other opportunity by his perplexity, either as to the precise amount of the debt due, or as to anything else contained in the demand…”

29.  His Lordship concluded (at p.280B-C)  that:

“In these circumstances I am in no doubt that, despite the mistakes in this statutory demand and the use strictly of the incorrect form, and despite the debtor not being aware of the precise amount of the debt when the demand was served on him, justice does not require that this statutory demand should be set aside. I can see no injustice in the consequences which flow from non-compliance with a statutory demand being permitted to flow in this case, despite the existence of those features.”

30.  That approach has been followed in subsequent English cases, such as Re Debtor (No 490/SD/1991) [1992] 1 WLR 507 and Re Debtor (No 657/SD/1991) [1993] BCLC 180.

31.  It is also consistent with section 124(1)  of the BO, which provides that:

“No proceeding in bankruptcy shall be invalidated by any formal defect or by any irregularity unless the court is of the opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of the court.”

32.  Accordingly, we are of the view that the principle as stated and applied in Re Ip Pui Man Nina and Re Kwok Chok Yee is applicable to the present case.  In this respect, we note that although the Judge held otherwise, she did proceed to state that an over-statement of the indebtedness will not automatically entitle the debtor to have the demand set aside, it was a factor which the Court will take into account in considering whether to set aside the demand.  She nonetheless decided to set aside the SDs as the over-statement was of a significant amount and no attempt had been made by the respondent to amend or correct it (see [45] of the Decision).

33.  It is well established that an appellate court will not lightly interfere with a judge’s exercise of discretion, and will only do so if it can be demonstrated that the judge has proceeded on wrong principles or the exercise of discretion has been plainly wrong.  If the grounds for reviewing the exercise of discretion do not exist, this Court should not exercise any discretion itself or otherwise usurp the function of the judge[20].

34.  Although the Judge had apparently exercised her discretion, we have found that she had erred or misdirected herself on the principles governing the exercise of that discretion, in that she specifically failed to consider whether injustice would be caused to the Debtors if the SDs were allowed to stand.  A proper exercise of the discretion would at least have required the Judge to consider, amongst other things, whether there was any evidence that the Debtors could and would have repaid the indebtedness even if it were correctly stated in the SDs, especially in the light of the respondent’s subsequent clarification of the correct amount due.  As none of these circumstances were taken into account by the Judge, we consider that there is sufficient and proper ground for this Court to interfere with the Judge’s exercise of discretion, and to exercise the discretion afresh.

35.  In our view, it is material that the letter of 8 August 2018, which was sent specifically pursuant to the Debtors’ request for a breakdown of the debt, had provided the correct amount of the indebtedness then outstanding.  The over-statement of the debt in the SDs by clerical mistake was also subsequently clarified in the 1^st affirmation of Lam Wing Kin Alex filed on behalf of the respondent on 4 January 2019 (at paragraphs 24 - 25).[21]  Despite these, there was no evidence to suggest that the Debtors would have been in a position or would have been prepared to pay or settle the correct amount of debt even if it had been correctly stated in the SDs.  Moreover, the correct amount of the debt was in any event well in excess of the statutory minimum of $10,000 prescribed under the BO.

36.  In the premises, we do not see how any injustice would be caused to the Debtors even if the SDs were allowed to stand.  We therefore find that the Judge was wrong to set aside the SDs solely on the basis that the debt was over-stated, and would allow the appeal.

D3.   Ground 4 – The costs of the Strike-out Summons

37.  As mentioned above, although the Strike-out Summons was not pursued by the respondent in view of the subsequent developments mentioned in [8] - [10] above, the Judge dismissed it on the grounds that it was misconceived, pointless and unnecessary, and ordered the respondent to pay the Debtors’ costs of the Strike-out Summons.

38.  Ms Chan submitted that the Judge did not (at least not expressly)  consider exercising her inherent jurisdiction to strike out the Application.  However, that does not seem to be the crux of the matter.  Rather than failing to consider exercising the inherent jurisdiction to strike out proceedings, it would appear that the Judge’s decision was based upon her view that the Strike-out Summons only raised a technical point that did not warrant any striking out.

39.  In our view, what the Judge had failed to appreciate was that the Strike-out Summons raised a substantive matter as to the 1^st applicant’s locus standi to take out the Application on behalf of the 2^nd applicant.  It was not a mere technical point.

40.  In Re Leung Chung Hang Sixtus [2020] HKCA 893, the Court of Appeal was faced with a summons issued by one Doris Leung for setting aside a bankruptcy petition against Mr Leung Chung Hang Sixtus (“Mr Leung”). There was no evidence that she was authorised by Mr Leung to act on his behalf in court proceedings, nor was she a qualified lawyer who could legally represent Mr Leung.  This Court therefore dismissed the summons as an abuse of process.

41.  As a matter of principle, we are satisfied that issuing proceedings or interlocutory applications without locus standi or proper authority is prima facie an abuse of process.  The respondent’s decision to take out the Strike-out Summons at a time when there was nothing but an assertion in the 1^st applicant’s affirmation that he was authorised by the 2^nd applicant to take out the Application also on her behalf, was therefore justified.

42.  However, after the 2^nd applicant filed her affirmation on 18 January 2019 confirming the 1^st applicant’s authority, we are of the view that the defect as to the lack of authority was “cured”, such that it was no longer reasonable to continue pursuing the Strike-out Summons, except perhaps in relation to costs.

43.  In the circumstances, we are of the view that the respondent should only be entitled to its costs up to 18 January 2019, viz the date of the 2^nd applicant’s filing of her affirmation confirming the 1^st respondent’s authority to take out the Application also on her behalf.

E.  Disposition

44.  For all these reasons, the appeal is allowed and the Judge’s orders are set aside.  As there are no other grounds to set aside the SDs, we would also dismiss the Application, and authorise the respondent to present bankruptcy petitions against each of the Debtors forthwith pursuant to rule 48(7)  of the BR.

F.  Costs[22]

45.  As for the costs of the appeal, there is no reason why costs should not follow the event.  We therefore order the Debtors to pay the respondent’s costs of the appeal (including all costs reserved), to be taxed if not agreed.

46.  In respect of the costs of the Strike-out Summons, we order the Debtors to pay the respondent’s costs up to 18 January 2019.  We have been provided with a copy of the Statement of Costs for Summary Assessment supplied to the Judge below seeking costs in the amount of $26,775.50.  Adopting a broad-brush approach, and having regard to the fact that the Strike-out Summons raised only a straightforward matter and some of the works included in the Statement of Costs involved works that had been done under the Application[23] or incurred after 18 January[24], such costs are summarily assessed at $13,000.

47.  As for the costs of the Application, although the respondent ought to have succeeded below, it is fair to say that much of the dispute could have been avoided had the respondent applied to amend the SDs to correct the amount of the debt stated.  No reason was provided as to why the respondent could not or should not have done so despite it became aware of the mistake quite early on.  In the premises, we regard it just and fair in all the circumstances[25] to order the Debtors to pay only 75% of the respondent’s costs of the Application, to be taxed if not agreed.