RE: KIM YOUNG SOON and EX PARTE: AAGAM EXPORTS (trading as a partnership) A Creditor

HCB 1620/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY NO. 1620 OF 1999

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REASONS FOR DECISION

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1. This is a creditor's petition based on a statutory demand dated 29 March 1999 for the sum of US$440,374.54. It was claimed in the statutory demand that the debt was the amount due and owing on 5 invoices issued between 26 April 1997 and 30 September 1997 for the purchase price of diamonds sold by the Petitioner to the debtor Madam Kim Young Soon ("Madam Kim"). The Petition dated 2 June 1999 was filed on 24 June 1999.

2. On 30 September 1999, Madam Kim filed a Notice of Intention to oppose the Petition stating that she does not owe any debt to the Petitioner and that the statutory demand had not been properly served on her or was liable to be set aside.

3. On 4 October 1999, she filed an affirmation setting out the reasons why she disputed the debt and claiming that the debt was owed by a Korean named Jung Cheol Wham ("Mr Jung") and that she was merely acting as Mr Jung's agent in all the dealings with the Petitioner, as the Petitioner well knew.

4. On 11 October 1999, Ribeiro J gave directions for the filing of further evidence by the parties and adjourned the further hearing of the Petition for further directions. The Official Receiver was excused from further attendance subject to further order. Subsequently, this Petition was set down for hearing for one day.

5. The point taken by Mr Horace Wong, counsel for Madam Kim, regarding the irregularity of service of the statutory demand was disposed of shortly after the hearing. After Mr Wong's attention was drawn to the case of Le Pichon J in Re Cheung Hoi Chu, Tang Ting Kwan, Tang Yiu Hong Eric and Tang Yiu Tsuen Eugene HCB 865, 866, 867 and 868/98, 24 December 1998 and after he was informed that as a result of that decision, there was introduced a system since February 1999 to address a lacuna in procedure in bankruptcy proceedings, Mr Wong decided to abandon his opposition to the Petition on the ground of irregularity of service of the statutory demand. The system that was introduced has not yet been made the subject of a Practice Direction but it should be well known to solicitors as it was the subject of a Law Society circular in February 1999. By that system, for all creditors' petitions based on failure to comply with statutory demands and in which the statutory demands were not served personally on the debtors, the Master in charge of the Bankruptcy List is required to check the affirmations of service of the process server to ensure that the requirements as to service under rule 46(2) of the Bankruptcy Rules have been complied with. Only if the Master is satisfied with the service of the statutory demand that leave would be given for the petition to be filed.

6. That leaves only one ground of Madam Kim in opposing the Petition, namely, whether there is a debt payable by Madam Kim to the Petitioner. It is common ground between the parties that in view of the evidence filed on both sides, there are a number of factual disputes to be resolved and that these factual disputes can only be resolved after hearing oral evidence because the credibility of witnesses is in issue.

7. It was submitted by Mr Wong that there being a genuine and substantial dispute of the debt, the dispute cannot properly be decided on the Petition and should be resolved by ordinary action. It followed that the Petition should be dismissed.

8. Mr Godfrey Lam, counsel for the Petitioner, submitted that even though there is a disputed debt, the court does have a discretion whether to determine the question of the disputed debt in the Petition instead of dismissing it. The course he urged upon me to take was to direct that the issue of whether there is a debt due from Madam Kim to the Petitioner be tried in the bankruptcy proceedings and for that purpose to give directions for the cross-examination of deponents.

9. I should mention that in his written submissions, Mr Lam had invited the court to stay the proceedings on the Petition under Section 9(5) of the Bankruptcy Ordinance, Cap. 6, for the disputed issue to be determined either in an action or in the bankruptcy proceedings. At the hearing of the Petition, Mr Lam informed me that he was instructed not to seek a stay of the proceedings under Section 9(5). Hence, the only alternatives I need consider are dismissal of the Petition and the course suggested by Mr Lam.

10. In support of his application, Mr Lam referred me to the Privy Council decision of Brinds Ltd & Ors v. Offshore Oil NL & Ors (1985) 63 ALR 94. That case was concerned with the winding-up of a company on a creditor's petition. Mr Lam submitted that the same principle would apply in bankruptcy proceedings. The judgment was delivered by Lord Brightman and he had said at p. 99 of the report as follows:

"It is a matter for the discretion of the judge whether a winding-up order should be made on a disputed debt, and it is also a matter of discretion whether he decides the substantive question of debt or no debt." (lines 32-34)

11. The Privy Council also agreed with the observations of Gibbs J in Re QBS Pty Ltd [1967] Qd R 218 at 225 which were as follows:

"It seems to me that in every case it becomes necessary for the court to exercise its discretion as to how far it will allow the question whether or not the dispute is bona fide to be explored. In some cases it may be very easy to decide this question on the petition and affidavits in reply. In other cases, however, it may be difficult to determine whether or not the dispute is bona fide without determining the merits of the dispute itself. In some such cases convenience may require that the court decide the question whether or not a debt exists, but in other such cases it may appear better to allow that question to be determined in other proceedings before the petition for winding-up is heard." (at p. 99, lines 35-45)

12. Mr Horace Wong apparently accepted that the court does have a discretion whether it should decide the substantive question of debt or no debt in the winding-up or bankruptcy proceedings. The differences between Mr Wong and Mr Lam are the circumstances in which that discretion should be exercised to determine the dispute in the bankruptcy proceedings and whether it is right and proper to exercise that discretion in favour of the Petitioner here. As stated by the Privy Council in Brinds, supra. at p. 99,

"The same line of reasoning was adopted by this Board in an appeal from New Zealand, Bateman Television Ltd v. Coleridge Finance Co. Ltd [1971] NZLR 929 at 932: '... the general rule is, no doubt, that no order will be made on a petition founded on such debts. But each case must depend upon its own circumstances and it is a question for the discretion of the judge; a discretion to be exercised judicially, which is not open to review unless it is shown to be exercised on some wrong principle, or that the judge relied on some fact irrelevant for the purpose, or omitted consideration of a relevant fact, or finally that he was wholly wrong." (line 46 to p. 100, line 3)

13. It must be recognised that Brinds is a case decided on very special facts. In that case, the company opposed the winding-up petition of a creditor on the grounds that the debt was disputed, that the company was not insolvent, and that the petition was not presented in good faith. Substantive affidavits were filed by the parties and there was extensive cross-examination on the affidavits. At the end of a 4-week hearing, the trial judge rejected the company's defences and made a winding-up order. Before the Full Court of the Supreme Court of Victoria, it was argued that the judge should have found that the right of the Petitioner to be repaid on demand was bona fide disputed by the company on substantial grounds and that the judge had misdirected himself in that he purported to determine the dispute of whether the debt was repayable on demand instead of confining himself to the question whether there was a bona fide dispute of the debt on substantial grounds. The Full Court rejected the company's contentions. On appeal to the Privy Council, the appeal was dismissed.

14. From the course of the hearing related above, it would be noted that the trial judge had heard substantial evidence from the witnesses who were extensively cross-examined. From start to finish, neither side had ever suggested to the trial judge that the Petition should be dismissed or stayed on the ground of disputed debts pending the bringing of appropriate proceedings at law to determine those matters. It was not until after the evidence was closed that counsel for the company submitted that the hearing should be confined to the genuineness of the dispute. Having heard all the evidence and as the question whether the debt was due and payable was "inextricably interwoven" with the questions of motive and bona fides of various persons against whom allegations of bad faith were made, the Full Court came to the view that it was "almost inevitable" that the trial judge should determine the question whether the debt was repayable on demand and he had no alternative but to proceed to determine the matter. Indeed, if the judge had dismissed or stayed the Petition in such circumstances, it would have been a wrongful exercise of his discretion.

15. This is a far cry from the present situation.

16. The other special feature to note about Brinds is that there was no dispute of the existence of the debt. What was disputed by the company was whether the debt was repayable on demand or only on 12 months' notice. That contention was not really open to the company in view of the terms of a moratorium agreement, wherein the company acknowledged that the debt was due on demand.

17. Again, that is very different from the situation that I am concerned with. The existence of the debt is disputed by Madam Kim. Essentially, the Petitioner relied on the fact that out of 47 occasions when diamonds were sold to Madam Kim as alleged by the Petitioner, Madam Kim had on 38 occasions signed the Petitioner's invoices in her own name without any qualification to show that she was acting as agent for Mr Jung or anyone else. All the invoices bore the printed words at the bottom "confirmed by buyer".

18. On the other hand, as pointed out by Mr Horace Wong, out of the five invoices upon which the Petition was based, two were actually signed by Mr Jung not Madam Kim. There was also one invoice (not part of the debt on which the Petition was based) signed by Madam Kim's husband Mr Au Ka Ho, Carl as follows: "Carl/Mr Jung (Boss)". This would seem to support Madam Kim's contention that she was acting on behalf of Mr Jung to the Petitioner's knowledge.

19. There was also the question of a deduction of 1.5% of the invoiced amount given to Madam Kim. The Petitioner claimed this was a discount given to her to increase her profit margin whereas Madam Kim said that this was a commission given to her by the Petitioner on every invoice which was settled by Mr Jung and that the latter had no objection to her receiving the money. It would appear from the ledgers disclosed by the Petitioner that those invoices that had been settled were paid in full. It was submitted by Mr Wong that this evidence would tend to support Madam Kim's case, namely, that she was an agent receiving a commission rather than the Petitioner's contention that she was a buyer who had been given a discount of the purchase price.

20. So how is the discretion of the court to be exercised and should I embark on a trial of the disputed debt in the bankruptcy proceedings? In my view, that discretion should be exercised in very special circumstances and I am not persuaded by Mr Godfrey Lam that special reasons are made out in the present case. I accept the submissions of Mr Wong that the starting premise is the modern and established practice of the insolvency courts that insolvency proceedings must not be brought on a disputed debt save in exceptional circumstances and that an insolvency court is not a proper forum for trying a disputed debt. I was referred to the decision of Megarry J in Re Lympne Investments Ltd [1972] 1 WLR 523 wherein it is stated as follows:

"A real dispute, turning to a substantial extent on disputed questions of fact which require viva voce evidence, and involving charges of fraud or near fraud, cannot properly be decided on petition. Nor is it right, or in accordance with the modern practice, to stand over the petition in order that the disputed issues may be resolved in other proceedings. That practice, I may say, seems to stem from Re London and Paris Banking Corporation (1875) LR 19 Eq 444. The Companies Court must not be used as a debt-collecting agency, nor as a means of bringing improper pressure to bear on a company. The effects on a company of the presentation of a winding-up petition against it are such that it would be wrong to allow the machinery designed for such petitions to be used as a means of resolving disputes which ought to be settled in ordinary litigation, or to be kept in suspense over the company's head while that litigation is fought out."

21. Similarly, in Mann v. Goldstein [1968] 1 WLR 1091, in granting an injunction to restrain the Defendants from taking steps in the prosecution of a petition to wind-up a company, Ungoed-Thomas J noted the "modern practice" to dismiss petitions founded on disputed debt and the refusal of the court to direct that such petitions be stood over until the debt was established by action. The learned judge further has this to say:

"For my part, I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor's petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds), since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding-up jurisdiction when the debt is disputed (that is, on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court." (at 1098H-1099B)

22. Mr Lam acknowledged that this is the practice in winding-up petitions and submitted that the practice does not apply or does not apply with equal force in bankruptcy proceedings. I fail to see why. The consequence and impact of a bankruptcy petition are no less prejudicial on an individual, see for instance Section 42 of the Bankruptcy Ordinance on the restrictions on dispositions of property. An individual debtor is entitled to the same protection from the court as in the case of a company. In dealing with bankruptcy petitions, the courts have adopted more or less the same approach, see, for stance the following extract in Muir Hunter on Personal Insolvency:

"The Bankruptcy Court which finds that the petition debt, however ostensibly 'liquidated', is genuinely disputed to the knowledge of the creditor, may categorise the petition as an abuse of process and dismiss it with costs." (para. 3-094)

23. Various matters were urged upon me by Mr Lam that I should exercise my discretion to determine the disputed debt in the bankruptcy proceedings. He stated that there was only one issue to be tried, namely, whether Madam Kim was acting in her own right or whether she was an agent of Mr Jung and that the Petitioner has a strong case. The legal issue may be simple, but to determine this legal issue, one would have to go into the history of the relationship between the parties since 1993, their dealings over a four-year period and there are a number of factual disputes to be resolved. As to the strength of the Petitioner's case, as I have stated above, I do not think documentary evidence is conclusive. There are sharp conflicts of evidence on material facts. Oral evidence would be vital in assessing the credibility of the witnesses.

24. Next, Mr Lam submitted that it was relevant to note that Madam Kim did not take any steps to apply to set aside the statutory demand if she had genuinely disputed the debt. I cannot see that as a relevant or significant factor in the circumstances here. The statutory demand was served on Madam Kim at a time when she was in Korea. She returned to Hong Kong about 10 days later and learned of it. Two days after her return, she applied for legal aid and about a month later a legal aid certificate was granted to her limited to obtaining counsel's advice on merits. A decision was taken by those advising her not to apply for an extension of time to make an application to set aside the statutory demand and instead it was decided that she should dispute the debt in the proceedings. She is entitled to do so and put the Petitioner to proof of the debt on the hearing of the Petition.

25. In the circumstances, I am unable to see any special circumstances to justify a departure from the established practice and as Mr Lam has not sought any stay of the bankruptcy proceedings on instructions,

I therefore dismiss the Petition with costs to the debtor Madam Kim. I further order that Madam Kim's own costs be taxed in accordance with the Legal Aid Regulations.