RE CHOI SIU LUI SHIRLEY

HCB 23639/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCYPROCEEDINGS NO. 23639 OF 2002

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J U D G M E N T

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1.  This was the hearing of a bankruptcy petition against Ms Choi Siu Lui Shirley (“the Debtor”).  The petition was presented on 15 November 2002 by the Bank of China (Hong Kong) Limited (“BOCHK”).  By an order of Master Hui dated 26 April 2004, Umbrella Finance Company Limited (“UFC”), was substituted for BOCHK as the petitioner.  According to the petition, the Debtor was indebted to BOCHK in the amount of some HK$22,412,632.52 together with further interest from 31 May 2002.

2.  This debt was said to arise from a guarantee dated 17 March 1997 (“the Guarantee”), executed by the Debtor in favour of Sin Hua Bank Limited, Hong Kong branch (“SHB”), by which the Debtor guaranteed the indebtedness to SHB of a British Virgin Islands company called Smart Dragon Investments Limited (“Smart Dragon”), up to a limit of HK$30,100,000.  This amount represented the amount of a fixed loan of HK$25,800,000 and an overdraft of HK$4,300,000 granted by SHB to Smart Dragon on about the same day, the whole of the funds advanced were used by Smart Dragon in the purchase of a property in Hong Kong at a price of HK$43,000,000.  Smart Dragon defaulted on these loans in the first part of 1999, and on 7 May 1999, solicitors acting for SHB wrote to the Debtor to inform her of Smart Dragon’s default and to demand payment of HK$30,100,000 pursuant to the Guarantee.  A further demand was made on 11 October 1999, but no payment was made.  The property was eventually sold by SHB as mortgagee, and on 14 June 2001 and 30 May 2002, SHB issued statutory demands against the Debtor.  Thereafter, the petition was presented.

3.  In 2001, a merger of various Hong Kong branches of a number of mainland Chinese banks took place.  The result of this merger, which was effected by the Bank of China (Hong Kong) Limited (Merger) Ordinance (Cap. 1167) was that BOCHK became the successor corporation to SHB.

4.  Prior to this, on 9 and 15 June 1999, SHB had entered into agreements for the sale and purchase of loans, whereby it transferred all of its interests in various non-performing loans and the security in respect of them (which included the loans to Smart Dragon and the Guarantee) to a company called Zhong Gang (Cayman) Company Limited (“Zhong Gang”).  By an assignment dated 23 December 2002, Zhong Gang sold on various loans and security (which were said to include the loan to Smart Dragon and the Guarantee) to UFC.  The latter assignment resulted in the substitution of BOCHK by UFC as petitioner.

5.  Mr Leung, appearing for the Debtor, contended that no bankruptcy order should be made.  He submitted that:-

(1)	UFC had no locus to petition for the bankruptcy of the Debtor, as (having acquired such rights as it might have against her by the assignments) it was not itself in a position to satisfy the provisions of section 6 and 6A of the Bankruptcy Ordinance (Cap. 6), in that, at the time of the presentation of the petition, the Debtor could not be said to have been unable to pay a debt owed by her to UFC.
(2)	The evidence adduced by UFC in relation to the assignments (which was supplemented shortly before and during the hearing by two affidavits of Chi Wei Choi) did not demonstrate sufficiently clearly that the Guarantee had been effectively assigned to UFC, and that the inconsistencies as to the amount said to be owing by the Debtor or Smart Dragon in the various assignments were such that the court could not safely conclude that she was in fact indebted to either BOCHK at the time of the petition, or UFC at the time of the hearing.
(3)	The assignments (whether to Zhong Gang or to UFC) were void as being champertous.
(4)	In any event, there was a bona fide dispute of substance in relation to the alleged debt, in that the Guarantee was not binding on the Debtor as it had been procured by undue influence exercised by her father, Mr Choi Sai Leung (“Mr Choi”), over her (there was also a suggestion that the Guarantee had been entered into as the result of a misrepresentation, but this argument was not pursued at the hearing).

6.  In the light of my conclusions as to the last of these issues, the other arguments put forward by Mr Leung will not arise for consideration.  I shall therefore deal first with the undue influence argument, and then deal very briefly with the other arguments advanced.

7.  The Debtor’s case as to undue influence is as follows.  She accepts that the signature on Guarantee is hers.  She says, however, that Smart Dragon is a company in which her father (and not herself) is beneficially interested, saying that Mr Choi told her this.  She says that Mr Choi was the major shareholder and chairman of a group of companies known as the Seapower Group, which consisted of three companies listed on the Stock Exchange of Hong Kong Limited, and their subsidiaries, and that on his instructions, she became a director of various companies in the group in about 1994, when she was 25 years old, and financially dependent on her employment with the group, which was controlled by her father.  According to the Debtor, Mr Choi also told her from time to time to assist him with his personal investments.

8.  She says that in March 1997, Mr Choi summoned her to his office and told her to sign a pile of documents which he said were related to the affairs of the Seapower Group.  A Mr Wong Wai Kuen (“Mr Wong”), an officer of SHB, and a Mr Ronald Lau (“Mr Lau”), a solicitor who acted for the Seapower Group, were also present.  She says that she signed the documents without reading them and left, the whole process lasting no more than a few minutes, and that during that time, neither Mr Wong nor Mr Lau explained any of the documents to her.  She says that Mr Wong was the main person at SHB with whom Mr Choi dealt in relation to banking facilities for the Seapower Group or for his own investments, and that he knew that she was Mr Choi’s daughter.  She says that she never had any contact with Mr Wong with regard to the proposed loan to Smart Dragon, or as to the Guarantee which she gave, prior to the signing of the documentation.

9.  The Debtor’s case is supported by a number of affirmations by Mr Choi, in which he largely confirms her account of events, although he says that Smart Dragon was beneficially owned by himself and a friend of his named Mr Henry Liauw, rather than by himself personally.  He says that he approached Mr Wong for financing for Smart Dragon’s purchase of the property, and told him that he and Mr Liauw were the beneficial owners of Smart Dragon.  However, he was told (either by Mr Wong or other officers of SHB) that owing to SHB’s exposure in respect of loans made to him, it would be difficult to advance further funds to him.  He says that it was suggested that the Debtor should act as guarantor instead, and that he then took steps to have her made a director of Smart Dragon, and instructed her to come and sign the various documents which she did in relation to the loan.  He confirms her description of the occasion on which the documents were signed.

10.  Her case is also supported in relation to the occasion on which the documents were signed by an affirmation from the solicitor, Mr Lau.  Mr Lau also says that he was involved in handling the purchase of the property by Smart Dragon, and that throughout the acquisition of the property he took instructions from Mr Choi, and not the Debtor.

11.  For the petitioner, affirmations were filed by Mr Wong and another bank officer, Mr Kwan Tze Kuen.  Both denied having suggested to Mr Choi that the Debtor should act as a guarantor in respect of any proposed loan to Smart Dragon.  Both gave evidence of other dealings with Mr Choi after the entry into of the Smart Dragon loan and associated documentation, by which SHB offered or advanced further facilities to other companies associated with Mr Choi on the strength of guarantees provided by him.  Mr Wong also denies that he was told by Mr Choi that Smart Dragon was beneficially owned by Mr Choi and Mr Liauw, saying that, on the contrary, he was told by Mr Choi that Smart Dragon was his daughter (the Debtor)’s company which she was using for the purpose of property investment.

12.  However, Mr Wong does not appear to take issue with the suggestion that he never contacted the Debtor in relation to the loan to Smart Dragon prior to the occasion on which she attended at her father’s office to sign various documents in relation to it.  Nor does he appear to dispute her description of what happened on that occasion.

13.  Mr Wong pointed out that SHB’s internal records were consistent with his having been told by Mr Choi that Smart Dragon was the Debtor’s company.  He also drew attention to the information which SHB had been able to obtain in relation to Smart Dragon shortly prior to the signing of the loan and guarantee documentation by the Debtor.  This included the fact that the Debtor was appointed as a director of Smart Dragon on about 7 March 1997, and that the Debtor and a Ms Liau Pui Yu (said by Mr Choi to be the sister of Mr Henry Liauw) were the only directors of Smart Dragon.  It also appears from the documentation signed that Ms Liau was described as the “sole member” of Smart Dragon, being the holder of the single bearer share that it had issued.  Mr Wong also pointed to the large number of documents signed by the Debtor in connection with the loan apart from the Guarantee, including copies of resolutions, minutes of director’s meetings, authorisation and facility letters and various banking documents on behalf of Smart Dragon, as an indication that the Debtor was in fact the beneficial owner of Smart Dragon.

14.  At the hearing, it was common ground that in order to resist the making of a bankruptcy order against her, it was for the Debtor to demonstrate the existence of a bona fide dispute of substance in relation to the debt relied upon by the Petitioner.

15.  The law relating to undue influence, and its impact on the position of third parties, has recently been considered by the Court of Final Appeal in Li Sau Ying v Bank of China (Hong Kong) Limited [2005] 1 HKLRD 106.  There, Lord Scott of Foscote NPJ stated that, in cases where the relationship between the parties was not one of the well established categories of relationship in which the court would presume that undue influence had been exerted unless evidence proving the contrary was adduced, the parties should avoid reference to presumptions and concentrate on whether the evidence justified the inference that the impugned transaction had been procured by undue influence (see paragraphs 30 and 34 of the judgment, at pp. 119J-120A and 121A-C).

16.  As for the situation where it is suggested that a party to a contract is affected by the fact that the other party’s apparent consent to entering into the contract has been procured improperly, by the exercise of undue influence by some third party, Lord Scott made it clear that the question was whether the party relying on the contract was put on inquiry, not about the existence of undue influence, but as to whether the other party understood the nature and effect of the transaction which he was entering into (see paragraph 37 of the judgment at p.122E-H).  He went on to say (at paragraph 41 of the judgment, p.123F):-

“In Royal Bank of Scotland Plc v Etridge (No. 2) [2001] UKHL 44, Lord Nicholls said that a bank would be “put on inquiry not only in a case where a wife was becoming a surety for her husband, or his company, but in every case in which the relationship between the surety/mortgagor and the principal debtor was “non-commercial” (see paras. 49 and 87).  It must be borne in mind, however, that the relationship between the surety and the principal debtor must be looked at with the eyes of the bank.  The bank would generally, but not always, know whether the surety was the wife of the principal debtor, its customer.  Some wives, however, do not take their husbands’ surnames and the concept of a “non-commercial” relationship is inherently imprecise.  It is certainly not necessary for a proposed mortgagee to make inquiries about the relationship between its principal debtor and the proposed surety/mortgagor before deciding on the steps it should take to satisfy itself that the surety understands the transaction he or she is entering into.  Nothing Lord Nicholls said in Royal Bank of Scotland Plc v Etridge (No. 2) suggests the contrary.  And for a bank/mortgagee to make inquiries of that character would in most cases be an unwarrantable impertinence.”

17.  It seems to me therefore, that whether or not a party relying on (in this case) a guarantee is put on inquiry in the sense explained above will depend to a large extent on what he or it knows about the relationship between the other party and the person or company for whose debts he stands surety.  Where he is aware that the relationship is one of those in which the law presumes, absent evidence to the contrary, that undue influence has been exercised, he will be affected by the exercise of undue influence unless he takes certain steps which the law requires.  That said, if he is not in fact aware of the relationship, it would not appear that he is obliged to enquire as to the nature of the relationship.

18.  In this case, it is not disputed that SHB was aware that the Debtor was Mr Choi’s daughter.  Ms Ismail, for the petitioner, submitted, however, that so far as SHB was concerned, the Debtor’s guarantee was given in relation to a company of which she was a director, and that the relationship between the Debtor and the party whose debts were being guaranteed was therefore a commercial one, which could not be regarded as one which would put SHB on inquiry as to whether or not the Debtor understood the consequences of the documents that she was signing.

19.  It seems to me, however, that in the context of this case, the relevant inquiry is whether or not there can be said to be a bona fide dispute of substance as to whether or not Mr Choi and not the Debtor was in fact the (or a) beneficial owner of Smart Dragon, and if so, whether or not SHB knew or are to be taken as having been aware of this.  If both of these matters proved ultimately to be the case, it seems to me that the Guarantee should be regarded as having been given by the Debtor for a company beneficially owned by her father, so that the transaction would be one in which undue influence is presumed, in the absence of evidence to the contrary, the relationship of parent and child being one those to which such a presumption applies.

20.  Ms Ismail submitted that there is no bona fide dispute of substance demonstrated in relation to these matters.  She made a number of points in support of this contention, which I consider below.

21.  She submitted that on the basis of the information available to SHB, the Debtor was a director of Smart Dragon, and that there was nothing to show that Mr Choi was in any way involved with Smart Dragon.  It was said that Mr Choi’s evidence of his having told Mr Wong of his (and Mr Liauw’s) beneficial interest in Smart Dragon and of his having been told that SHB was overexposed to him could not be relied on in the light of the evidence of other transactions subsequent to the Smart Dragon transaction by which SHB made available facilities to companies on the strength of Mr Choi’s guarantee, and indeed of the fact that a guarantee was taken from Mr Choi in respect of the overdraft portion of the facility provided to Smart Dragon.

22.  There is force in this submission.  However, I do not think that it is sufficient to overcome the other matters relied upon by Mr Leung for the Debtor.  It seems to me in particular that the uncontradicted evidence of the Debtor in relation to the absence of any discussion or negotiation between SHB and herself in relation to the facilities to be granted to Smart Dragon, the acceptance that all negotiations in relation to those facilities were conducted by Mr Choi on behalf of Smart Dragon, and the evidence of Mr Lau as to his having taken all instructions in relation to the purchase of the property for which the loan was advanced from Mr Choi do suggest that Mr Choi (whether solely or in conjunction with Mr Liauw) was beneficially interested in Smart Dragon.  It also seems to me that the failure on the part of SHB or its officers to have made any contact or to have had any negotiations with Ms Choi prior to the making of the loan and signing of the relevant documentation does make it at least arguable that SHB were aware of this.

23.  I do not accept that the failure on the part of SHB to have had any contact with the Debtor can be explained away simply on the basis that Mr Choi had a long and undisputed relationship with SHB, so that it was natural for him to make use of that relationship to obtain facilities for the benefit of the Debtor and her company.  While it might be natural for Mr Choi to have effected the necessary introduction in such a case, it does seem to me to be unusual that the Debtor, for whose benefit the loan to Smart Dragon was, on SHB’s case, being advanced, was not involved in the slightest extent in the negotiations or discussions for that loan.

24.  Although Ms Ismail criticised the evidence filed by the Debtor in relation to the beneficial ownership of Smart Dragon as having shifted ground, suggesting that there was a degree of inconsistency in such evidence as to whether the beneficial owner of Smart Dragon was Mr Choi alone, or Mr Choi in conjunction with Mr Liauw, I do not think that there is any significant inconsistency in this respect.

25.  As for the fact that the Debtor was a director of Smart Dragon, this was something that was relied upon by both sides.  Ms Ismail relied on it as an indication that the Debtor stood in a commercial relationship with Smart Dragon.  Mr Leung, however, submitted that the timing of the Debtor’s appointment as a director of Smart Dragon supported her case, in that it happened only shortly before the making of the loan, and thus was consistent with Mr Choi’s evidence that he caused the Debtor to become a director of Smart Dragon after commencing discussions with SHB about a loan to it.  Ms Ismail countered that there was nothing unusual about the use of special purpose companies for property ownership, and that in such cases, it would often be the case that formalities in relation to such companies would be dealt with relatively late in the day.  This factor seems to me to be neutral.  The fact that a person is a director of a company does not necessarily imply that he or she has any beneficial interest in it.  Further there is, I think, some substance to Mr Leung’s contentions in relation to this point.

26.  Much the same can be said of the fact that Mr Choi provided his own guarantee for part of Smart Dragon’s debts (namely, the HK$4.3 million overdraft facility).  I regard this too, as a largely neutral factor, as it could point either to a beneficial interest on the part of Mr Choi in Smart Dragon, or equally to the fact that he was simply providing support for his daughter’s investment (given that he was only providing a guarantee for part of the overall facilities).

27.  On the other hand, the Debtor’s uncontroverted evidence as to the circumstances in which she signed the Guarantee and other documentation relating to the loan also supports her case.  Although Ms Ismail pointed to the large number of documents signed by the Debtor as an indication that the case being put forward by her was not worthy of belief, I do not agree that this is so.  On the contrary, the fact that the Debtor signed all of the documents at a very short meeting, which she attended for only a matter of minutes, without any apparent discussion with the bank officer whose bank was, on its case, advancing a substantial loan to a company which was controlled by her is, to my mind, surprising.  This is the more so when coupled with the admitted lack of prior contact or discussion between SHB and the Debtor.  Taken together, these facts do raise, in my view, issues of substance as to whether or not Smart Dragon was beneficially owned by Mr Choi, and as to whether or not SHB knew this.

28.  The only direct evidence on the part of SHB as to the beneficial ownership of Smart Dragon consists of Mr Wong’s statements in his affirmations that he was told by Mr Choi that Smart Dragon was the Debtor’s company.  However, this is contradicted by Mr Choi himself, and is not consistent with the evidence of Mr Lau as to Mr Choi being the person from whom he took instructions in relation to the affairs of Smart Dragon.  This conflict of evidence is one which cannot simply be resolved by dismissing the evidence put forward by the Debtor as unbelievable, having regard to the matters which I have pointed out above.

29.  I am therefore of the view that the defence of undue influence exercised by Mr Choi over the Debtor is not one which can be said to be lacking in substance.  While it may be that the defence will not be made out at the end of the day, it is nonetheless of sufficient substance to render the use of the bankruptcy procedures against the Debtor inappropriate.

30.  Having regard to the conclusion to which I have come on this issue, it is not strictly necessary for me to deal with the other points raised by Mr Leung.  However, as these matters were canvassed in argument, I shall briefly state the views which I have formed as to them.

31.  As to UFC’s locus to be substituted as petitioner, and to pursue the petition against the Debtor, I would have accepted Ms Ismail’s submission that the requirements of sections 6 and 6A of the Bankruptcy Ordinance are satisfied in this case, in that section 6(1) does not on its terms apply to any particular point in time, and was satisfied at the time of presentation of the petition, since at that time BOCHK was the person to whom the Debtor was indebted, assuming the debt to have been enforceable.  This would be so because at the time of the presentation of the petition, notice of the assignment from SHB to Zhong Gang had not been given to the Debtor, and the agreement for the sale of the Smart Dragon debt and its associated security (i.e. the Guarantee) included provision for SHB (which remained the legal owner of the debt and rights under the Guarantee, the assignment being equitable only in the absence of notice to the Debtor) to continue to deal with the collection of the debt and enforcement of the Guarantee on behalf of Zhong Gang, and (subject to satisfactory proof that the debt and guarantee were assigned to UFC) it seems to me that at the time of UFC’s substitution as petitioner and thereafter, section 6(1) was satisfied in relation to UFC.  While section 6(2)(b) of the Bankruptcy Ordinance does refer to the time at which the petition is presented, it is satisfied because at that time, BOCHK was the creditor for the reasons explained above.  Similarly, when section 6(2)(c) is read in conjunction with section 6A(1)(a), these provisions are likewise satisfied because BOCHK was the entity to whom the debt was owed (absent any notice of the assignment to Zhong Gang having been given) at the time of both the statutory demands and presentation of the petition.  I also note that none of these points were taken at or immediately after the substitution of UFC as petitioner in place of BOCHK, and Mr Leung having made it clear that he did not seek to challenge the order for substitution (which the Debtor could have done, as that order was made ex parte), I do not think it is open to the Debtor to seek in effect to undo that order now.

32.  As for the question of whether the rights under the Guarantee were in fact assigned to UFC, I would have had some doubts as to whether or not this was the case until the production just before the beginning of the hearing of a confirmatory assignment to make it clear that this was intended.  Although the assignments from SHB to Zhong Gang would appear clearly to have included assignments in respect of both the Smart Dragon debt and the Guarantee, it is not clear from the assignment to UFC dated 23 December 2002 that the Guarantee had been assigned along with the debt, as the Smart Dragon debt was apparently classified in that assignment as having been assigned without the benefit of any security.  Although there was some confusion as to account numbers and the amount of the debt assigned, it seems to me that the evidence eventually adduced by UFC in the affidavits of Chi Wei Choi does explain that what was being assigned was the whole of the Smart Dragon debt and the rights under the Guarantee.  In the circumstances, although there was some scope for argument on these matters prior to the filing of this evidence, the matter was to my mind resolved by the evidence eventually put forward.

33.  Finally, so far as the argument that the assignments were void as being champertous is concerned, I am unable to accede to it.  It is clear that a debt is a form of property, which is capable of being bought or sold like any other piece of property.  The fact that a debt may not be one which can be said with certainty to be fully recoverable, so that a purchaser of it may only be willing to acquire it at a discount, to take into account the risk of non-recovery, or of having to incur the expense of litigation to achieve some measure of recovery, does not change this.  Having acquired ownership of a debt by assignment, it seems to me that the assignee is perfectly entitled to seek to recover it, and that there is nothing champertous in his seeking to do so.

34.  However, for the reasons which I have given in paragraphs 7 to 28 above, I am satisfied that the Debtor has demonstrated the existence of a bona fide dispute of substance in respect of the debt on which the petition is based, and that for that reason, the petition must fail.  I therefore dismiss the petition, and make an order nisi that the costs of the petition should be paid by the petitioner to the Debtor, to be taxed on the party and party basis if not agreed.