RE LAU TSZ MING

HCB 4302/2018

[2019] HKCFI 170

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4302 OF 2018

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REASONS FOR JUDGMENT

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1.  This is a bankruptcy petition by Orient Securities (Hong Kong) Ltd (“the petitioner”) for a bankruptcy order against Lau Tsz Ming (“the debtor”) based on the debtor’s non-compliance with a statutory demand. At the conclusion of the hearing, a bankruptcy order was made against the debtor with indemnity costs in favour of the petitioner for the reasons set out below.

Background facts

2.  In October 2014, one SNG Allan (“Allan”) secured margin trading facilities under an agreement with the petitioner.  By mid-2017, Allan had difficulties meeting his margin calls.  The petitioner required Allan to provide a third-party personal guarantee.

3.  At Allan’s request, the debtor (who was a friend) agreed to and did provide a personal guarantee for Allan’s borrowings against the value of the stocks in his margin account.  On 28 June 2017, the debtor attended the petitioner’s office and signed the guarantee.

4.  Allan defaulted in November 2017.  Demand letters were sent to the debtor on 16 November 2017 and 9 January 2018 which the debtor did not receive.  The petition was filed on 27 July 2018 based on an unsatisfied statutory demand served by way of a newspaper advertisement on 20 April 2018.

5.  The debtor became aware of the bankruptcy petition upon receipt of a letter from the Official Receiver dated 6 August 2018.

6.  On 27 August 2018, the petitioner obtained a bankruptcy order against Allan who has lodged an appeal which is due to be heard on 6 June 2019.

The guarantee

7.  It is common ground that the debtor put his signature to the guarantee which was in Chinese.  It is not suggested that the debtor is illiterate.

8.  For present purposes, the relevant provisions may be summarised as follows:

(a)  the guarantee was “unconditional” and given in consideration of the petitioner making available to Allan securities trading facilities (“the facilities”) under an agreement between the petitioner and Allan dated 13 October 2014 (clause 1);

(b)  the debtor to be principal debtor for monies that may not be recoverable from Allan thereunder (clause 2);

(c)  the guarantee is a continuing security (clause 3);

(d)  the debtor to be deemed the primary debtor (clause 4);

(e)  the debtor has taken independent legal advice as to the effect of the guarantee (clause 9); and

(f)  the petitioner’s statement of indebtedness to be conclusive as to the amount owing (clause 10).

The debtor’s grounds of opposition

9.  It is the debtor’s case that certain representations were made to him prior to his signing the guarantee such that the petitioner is estopped from asserting otherwise.

10.  In the alternative, the debtor contends that the petition should be adjourned and/or stayed pending the outcome of Allan’s appeal on the court’s ruling on the estimated value of the shares held in Allan’s account (“the portfolio”).

(1)  The representations

11.  The debtor relies on three representations which Ms Chan, counsel for the debtor, formulated as follows:

“ (1) The debtor would be kept informed on the information about the margin loan in Allan’s account, if there is any issue and/or problem on the said margin loan, the petitioner would first notify the debtor and the petitioner and the debtor would discuss on how to handle and solve the margin loan issue and/or problem, instead of paying the debt of Allan whenever he was unable to do so. (‘the representations on notice and discussion’ or ‘the 1^st representation’);

(2) there was a maximum limit for the margin loan, namely HK$12,637,900 which is the market value of the stocks in Allan’s account at the material time (‘the representation on loan limit’ or ‘the 2^nd representation’); and

(3) the debtor would be given notice and his consent would be acquired before the petitioner changed the agreed margin loan limit (‘the representation on change to loan limit’ or ‘the 3^rd representation’).”

12.  The 1^st representation (on notice and discussion) replicates §7 of the debtor’s 1^st affirmation (“Lau 1^st”) while the 2^nd and 3^rd representations (on loan limit and change to loan limit) are said to arise from §9 of Lau 1^st and §13 of the debtor’s supplemental affirmation (“Lau 2^nd ”). 

(a)  The 1^st representation

13.  The purpose or sense of the 1^st representation is opaque.  The 1^st representation does not spell out the obligations of the debtor and the petitioner other than the petitioner’s obligation to “notify and discuss” with the debtor should an issue/problem arise over the margin loan.  What constitutes “an issue/problem”?  What if the parties fail to agree on how to resolve any such a problem?  What recourse is open to the petitioner?  If not,it begs the question of the point of the guarantee. It makes no commercial sense.

14.  Counsel for the debtor submitted that the 1^st representation has to be read in the context of §4 of Lau 1^st.  That reads:

“ In or about June 2017, Allan informed me that he would like to borrow money against the value of the stocks in his margin account in the petitioner and asked if I would be willing to be his guarantor in this regard. In view of the friendship between Allan and I, I gave him an affirmative answer.”

15.  It was said that what the debtor agreed to do was to provide a guarantee of an amount up to the value of the stocks in Allan’s portfolio and that paragraph is to be understood as an agreement by the debtor to ‘lend’ (as it were) an amount not exceeding the value of HK$12,637,900 by way of guarantee. 

16.  But that is not what §4 of Lau 1^st states.  The person from whom Allan wished to borrow money under the margin account could only mean the petitioner.  That is the only sensible reading of §4.

17.  In my view, the 1^st representation makes no commercial sense and renders the defence based on the 1^st representation unbelievable. 

(b)  The 2^nd and 3^rd representations (relating to loan limit)

18.  I turn to consider the remaining two representations concerning the alleged “loan limit”.  It is necessary to set out the evidence on which the debtor relies. §9 of Lau 1^st and §13 of Lau 2^nd respectively provide as follows:

“ 9. Upon receiving the monthly statement, [the debtor] specifically enquired if the outstanding amount stated therein was the upper limit for the margin loan. [The debtor] declared [himself] clearly that [he] would not agree to be the guarantor for Allan ifno maximum limit, namely the outstanding amount stated therein,was fixed for the margin loan. [The petitioner] confirmed to [the debtor] affirmatively and reassured [the debtor] that the petitioner would notify [the debtor] and acquire [his] consent before executing any changes to this agreed limit.”

“ 13. [The debtor] clarif[ies] that the upper limit [the petitioner] confirmed to [the debtor] and referred to in paragraph 9 of [Lau 1^st] was the total amount of HK$12,637,900 shown in the Portfolio Summary in page 2 of ‘LTM-2’.”

19.  The monthly statement shown in LTM-2 relates to the debtor’s account for the month of June 2017 as at 28 June 2017.  Fairly read,“the amount outstanding stated therein” could only be a reference to the negative balance shown in the debtor’s statement of about $45 million.  By no stretch of the imagination could the market value of the portfolio recorded in that statement be understood or construed as “the amount outstanding”.

20.  In any event, assuming (contrary to my view) that there was a ceiling to the guarantee amount, there is clear authority to the effect that so long as there is an undisputed portion of the debt, the statutory demand still stands and a bankruptcy petition can properly be presented unless the undisputed or indisputable portion of the debt has been paid: see Wong Mui Kuen Joanna HCB 1631/2014 (12 January 2015) at §8.  It is not suggested that the debtor has paid the petitioner the $12 million odd being the value of the portfolio as at the date of the guarantee.

(2)  Estoppel

21.  The debtor’s case is that:

(a)  the representations were made prior to his signing the guarantee;

(b)  he was asked to sign the guarantee merely to show his name, address and HKID number as guarantor so that Allan could obtain a margin loan from the petitioner; and

(c)  he did not read the guarantee and, instead, relied on the petitioner’s assurances that the representations were the terms of the guarantee.

22.  Mr Kok, counsel for the petitioner, cited three authorities relating to estoppel and oral promises. Lau Sun Kiu v Chan Suk GayCAMP 47/2017 (17 November 2017) concerns pre-contractual oral promises.  It is clear from judgment (at §25) that:

“ even if a case of estoppel could be run on the basis of the oral promises, it could only be promissory estoppel. The suspensory effect of such promissory estoppel could not survive the express agreements of the parties in the written term in the tenancy agreements signed and agreed by the respondent”.

23.  The other two cases (Lei Shing Hong Credit Ltd v Mei Kwan Engineering Co Ltd & Ors HCAJ 52/2009 (16 December 2009) at §10 and Standard Chartered Bank (Hong Kong) Ltd v Ma Lit Kin, Gary HCA 62/2006 (22 January 2007) at §§37 – 44) concern post-contractual oral promises.  Again, estoppel arising from non-contractual binding promises are suspensory or temporary at law.

24.  The debtor sought to distinguish the latter two cases on the basis that promises were made post-contract.  But as to the Lau Sun Kiu case which is directly on point, there was no ready answer.  It was submitted that when the debtor put his signature to the guarantee, he was “given to understand” that the guarantee was merely a document to show his name, address and HKID number (§11, Lau 1^st).  In other words, it would appear that the debtor is either submitting that the representations constituted all the terms of the contract or he is denying that the terms of the written guarantee were contractually binding.  

25.  The former is unsupported by authority and is contrary to the holding in Lau Sun Kiu case.  The latter flies in the face of the principles set out in Ming Shiu Chung & Ors v Ming Shiu Sum & Ors (2006) 9 HKCFAR 334 at §84.  They fall to be rejected.

(3)  Valuation of the portfolio

26.  Allan had opposed the bankruptcy proceedings against him by challenging the value ascribed by the petitioner to the portfolio held as security. The petitioner had ascribed a nil value to the portfolio as the shares of the two companies constituting the portfolio had been suspended from trading in 2015 and 2017 respectively.  Allan’s contention that the petitioner had wrongfully failed to realise the shares at the time of the Allan’s default or any time thereafter before the suspension of the shares from trading was rejected.  The judge also rejected Allan’s request for an opportunity to adduce expert evidence on industry practice and on the value of the portfolio and the only evidence before the court was the last trading price of the shares which gave the portfolio a value of only about $5 million. 

27.  Allan’s appeal is due to be heard in June 2019. It was submitted that since the appeal concerns the same shares the petition should be adjourned and/or stayed pending that appeal.

28.  In my view, unless the appeal is shown to have real prospects of success, it would serve no purpose to adjourn or stay this petition. As matters stand, no further evidence relating to the value of the portfolio has been filed for this hearing.  I see no prospects of the appeal succeeding.