RE TAM KWOK HUNG JOHNSON

HCB 5483/2023

[2024] HKCFI 1573

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 5483 OF 2023

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REASONS FOR JUDGMENT

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1.  At the hearing of the petition presented on 20 September 2023[1] by Mr Chan Siu Fai, the petitioner (“Petitioner”), against Mr Tam Kwok Hung Johnson (譚國雄) (“Debtor”), I made a usual bankruptcy order against the Debtor. These are the reasons for my judgment.

Background

2.  By a loan agreement dated 7 July 2018 (“Loan Agreement”) the Petitioner agreed to advance a loan in the amount of HK$2,200,000 (“Loan”) to the Debtor, which was guaranteed by his wife pursuant to a deed of guarantee dated 7 July 2018. The Loan was advanced to the Debtor by a cheque dated 7 July 2018 issued by the Petitioner.

3.  Under the Loan Agreement, the Debtor agreed to repay the Loan by no more than 36 instalments.

4.  According to the Debtor, he used the Loan to acquire a property in Enna Boulevard Riva, Yuen Long (“Property”). As at 24 October 2023, the Property remained registered in the Debtor’s name.

5.  In breach of the Loan Agreement, the Debtor only repaid an aggregate amount of HK$359,854.40. As at 6 July 2022, the Debtor still owed HK$2,382,747.51 of which HK$461,463.62 was interest.

6.  By letter dated 6 September 2022, the Petitioner demanded the Debtor (and his wife) to repay the amount due under the Loan Agreement but no payment was made by the Debtor or his wife.

7.  On 3 October 2022, the Petitioner commenced DCCJ 3841/2022 against the Debtor and his wife for the amount due (HK$2,382,747.51) together with interest.

8.  The Debtor did not defend the action. On 3 February 2023, the Petitioner obtained a default judgment requiring the Debtor to pay HK$2,382,747.51 together with interest on HK$1,921,283.89 at 7% per annum from 7 July 2022 to 3 February 2023 and, thereafter, at judgment rate together with costs at HK$7,130 (“Judgment Debt”).

9.  The Debtor did not pay the Judgment Debt. Nor has he applied to set aside the judgment.

10.  By a statutory demand served on the Debtor on 3 August 2023, the Debtor was required to pay the Judgment Debt within 21 days thereof (“SD”).

Discussion

11.  The Debtor did not comply with the SD and was deemed unable to pay his debts by virtue of s.6A(1)(a) of the Bankruptcy Ordinance (Cap. 6).

12.  The burden is on the Debtor to show that there is a bona fide dispute on substantial grounds in respect of the Judgment Debt by adducing sufficiently precise evidence which is believable, and must establish that he has a defence of substance, not just a fair probability of one (Re Leung Cherng Jiunn [2016] 1 HKLRD 850, §27). For this purpose, it is not sufficient for the Debtor to merely raise “a cloud of objections on affidavits” (Artech Development Ltd v Posismo Ltd [2018] HKCFI 344, §10(4)).

13.  Where, as here the debt is based on a judgment, the court will treat the judgment as prima facie evidence that the debtor is indebted to the creditor. Although the bankruptcy court may in an appropriate case “go behind” the judgment, it would only do so where the judgment is obtained by “fraud”, “collusion” or that there is a “miscarriage of justice” which impinges on the validity of the judgment (Re Tam Mei Kam, CACV 87/2012, 8 May 2013).

14.  Until 19 April 2024, the Debtor acted in person. He filed his 1^st and 2^nd affirmations in opposition to the petition on 28 March 2024 and 15 April 2024 respectively. This was followed by a notice of intention to oppose the petition filed on 22 April 2024.

15.  In his 1^st affirmation, the Debtor asserts that he reached a settlement agreement with the Petitioner in May 2023 whereby he agreed to pay the Judgment Debt by instalments with (1) HK$238,274 payable in May 2023; (2) HK$10,000 payable per month from 1 May 2023 to 30 April 2024; (3) HK$20,000 payable per month from 1 May 2024 to 30 April 2025; (4) HK$42,623 payable per month from 1 May 2025 to 30 April 2030; and (5) HK$7,812.74 payable on 30 May 2030 (“Settlement Agreement”). Pursuant to the Settlement Agreement, during the 7 months from 25 September 2023 to March 2024, he paid an aggregate amount of HK$77,000 to the Petitioner. He undertook to pay a further sum of HK$161,274 to the Petitioner before 30 June 2024.

16.  However, in his 2^nd affirmation, the Debtor no longer says that the Settlement Agreement was reached in May 2023. Instead, he says the following:

(1) The Petitioner was his acquaintance for 28 years.

(2) The Debtor set up a company called IWT Limited (“IWT”) which engaged in facial recognition technology business.

(3) In early 2018, the Debtor held over 80% shareholding in IWT which worth HK$88 million (on the basis that an investor had injected HK$13.3 million in return for 15% shareholding in IWT). He sold 9.9% shareholding in IWT to the Petitioner at a discounted price. In addition, he borrowed the Loan[2] for the purpose of purchasing the Property and transferred 1,250,053 shares in IWT to the Petitioner (“Shares”) as security for the Loan. At that time, the Petitioner was confident that IWT would attract new investors and its value would increase a few times whereupon the Petitioner would sell 50% of his shares for profits and waive the Loan (i.e. by applying the profits as repayment of the Loan).

(4) However, IWT expanded too quickly. By early 2019, IWT began to encounter cashflow problem. The financial position continued to deteriorate in 2019 but the investors refused to inject new capital into IWT.

(5) In November 2019, the Petitioner together with Mr Warton Chieng Wai-Ting, proposed to acquire all the business and intellectual property right held by IWT for HK$1 and use another company, IWT Global Limited (“IWT Global”), to carry on the business; and the Petitioner would advance HK$1 million to meet the ongoing expenses of IWT Global. The Petitioner through his son, Mr Chan Yik Lun, became a shareholder of IWT Global holding 25% of its shareholding. The Debtor agreed with this restructuring arrangement.

(6) By 2023, the Petitioner had received repayment of HK$500,000 from IWT Global, and only HK$500,000 remained unpaid. In effect, the Petitioner was able to obtain 25% shareholding in IWT Global, which held invaluable intellectual property right, at HK$500,000.

(7) From 2020 to 2023, the business of IWT Global reached the lowest point with very low revenue. In November 2022, the Debtor was dismissed and ceased to have any income, but he remained liable for 80% of the debt (around HK$900,000) owed by IWT under a guarantee he had provided to the bank. The Debtor had no alternative but to sell the Property and applied the proceeds to repay the bank and to provide for the family. He had no means to repay the Loan.

(8) In May 2023, the Petitioner’s solicitors prepared the (unsigned) Settlement Agreement the terms of which were agreeable to the Debtor. Clause 7 of the Settlement Agreement provides that upon full payment of the settlement sum, the Petitioner shall procure his son to transfer all his shares in IWT Global to the Debtor at HK$1.

(9) However, the Debtor was unable to pay the 1^st instalment (HK$238,274) stipulated in the (unsigned) Settlement Agreement. It was only until September 2023 that the Debtor found a job and began to pay HK$11,000 per month to the Petitioner. By March 2024, he paid an aggregate sum of HK$77,000 to the Petitioner.

(10) On 1 March 2024, the Petitioner through his secretary requested the Debtor to pay the amount due within 3 months whereupon the Petitioner would discontinue the petition. After obtaining her confirmation that the Debtor could repay HK$164,000 within 3 months, he continued to pay HK$11,000 per month to the Petitioner.

(11) By 10 April 2024, the Debtor borrowed some RMB from his relatives equivalent to HK$153,000 and informed the Petitioner that he would bring the RMB to Hong Kong and pay HK$153,000 to the Petitioner within the next few days and sign the (unsigned) Settlement Agreement.

(12) On 10 April 2024, the Petitioner orally agreed that if the Debtor provided a cashier order for HK$153,000 by 15 April 2024, a new settlement agreement would be signed based on the terms of the (unsigned) Settlement Agreement with the dates of 1^st instalment changed (“Oral Agreement”).

(13) However, when the Debtor called the Petitioner’s solicitors on 12 April 2024, he was told that the Petitioner required him to repay the Loan then due (i.e. HK$2,578,052.97).

(14) According to the Debtor’s understanding, the performance of IWT Global had improved as a major customer had paid for the new services developed by the Debtor before his departure. He believed that IWT Global will be able to generate profit of HK$2 million, and if 50% of the profit is to be paid as dividend, he will receive HK$125,000. IWT Global worths around HK$10 million and the 25% shareholding held by the Petitioner’s son worth HK$2.5 million. On this basis, the Debtor considers that the Petitioner is a secured creditor, and he did not fail to pay the first instalment due under the (unsigned) Settlement Agreement.

(15) The Debtor regarded the Loan was an investment in IWT and IWT Global but the Petitioner wanted to obtain repayment of the Loan instead of converting the Loan into equity. The Debtor was willing to repay the Loan and re-acquire the 25% shareholding in IWT Global and was willing to repay the Loan by instalments albeit he was late in making the first instalment.

17.  As the Debtor has not applied to set aside the judgment or the SD, it is not necessary for the court to go behind the judgment or to consider the grounds raised by the Debtor in opposition to the petition.

18.  In any event, I do not think any of the grounds raised by the Debtor constitutes a bona fide dispute on substantial ground in respect of the Judgment Debt.

19.  First, the suggestion that the Loan is a secured loan is wholly without merit:

(1) The Debtor has not produced any documents in support of his assertion that the Shares were transferred to the Petitioner as security for the Loan.

(2) To the contrary, it is clear from the Loan Agreement produced by the Petitioner that there was no reference to any security having been or would be provided by the Debtor to the Petitioner.

(3) As the Petitioner points out, the Shares were only transferred to the Petitioner about a year after the Loan had been advanced, and the transfer had nothing to do with the Loan.

(4) The Petitioner also produced a Settlement Agreement and Release dated 1 June 2018 entered into between the Debtor and the Petitioner, which shows that the Debtor agreed to transfer the Shares to the Petitioner in consideration of the Petitioner waiving his right to recover another loan of HK$800,000 then owed by the Debtor.

20.  Second, the so-called Settlement Agreement relied upon by the Debtor in his 1^st affirmation is admittedly not a binding agreement as it was never signed by either party. On the Debtor’s own case, he did not perform the terms of the Settlement Agreement as he failed to pay the 1^st instalment of HK$238,274 due and payable in May 2023.

21.  Third, the alleged Oral Agreement is untenable given that:

(1) Other than the bare assertion of the Debtor, no document whatsoever has been adduced by the Debtor in support of the allegation that the Petitioner had agreed on 10 April 2024 to allow the Debtor to settle the Judgment Debt in the manner alleged by the Debtor.

(2) The fact that the Oral Agreement did not exist is consistent with (a) the Petitioner’s solicitors reply on 12 April 2024 which made clear that the Debtor was required to pay the full amount of the Judgment Debt; (b) the fact that the Debtor did not allude to the existence of such Oral Agreement in his 1^st affirmation where he only referred to the (unsigned) Settlement Agreement and asked for time to pay the Judgment Debt; and (c) the fact that the Debtor admittedly did not pay the 1^st instalment payable under the Oral Agreement.

(3) The Oral Agreement is at the highest an incomplete agreement as the parties did not agree on the dates for payment of the remaining instalments.

22.  Lastly, the fact that the Petitioner’s son holds 25% shareholding in IWT Global is wholly irrelevant to the Debtor’s liability to pay the Judgment Debt:

(1) According to the annual return of IWT Global made up to 25 October 2023, the Debtor was not a shareholder or director. Thus, even if IWT Global has been profitable, the Debtor will not be able to receive any payment from IWT Global.

(2) The Petitioner confirms that he does not have any legal or beneficial interest in IWT Global, and his son’s shareholding in IWT Global has nothing to do with him or the Debtor.

23.  As the Debtor is unable to pay the Judgment Debt, which remains binding on him, it is appropriate to make a bankruptcy order against him. Even if it is necessary to consider the grounds of opposition raised by the Debtor in his affirmations, for the reasons stated in §§15-22 above, I do not think that he has raised any bona fide dispute on substantial grounds in respect of the Judgment Debt.