BRIGHT ISLANDS CORPORATION v. JOACHIM CHAO

CACV 682/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 682 OF 2000

(ON APPEAL FROM HCB 549 OF 2000)

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J U D G M E N T

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Hon Mayo VP and Chung J:

1. The petitioner is appealing from a decision of Le Pichon J (as she then was) who acceded to an application made by Chao Sze-bang (Chao) to strike out the Bankruptcy Petition which had been lodged by the petitioner.

2. Chao died on 17 February 2001. His son Chao Joachim (the respondent) now represents his estate.

3. It appears to be common ground that as a consequence of the provisions contained in section 103 of the Bankruptcy Ordinance Cap. 6 the bankruptcy proceedings are still "alive" and that this appeal can properly be proceeded with.

4. The background facts have been most helpfully and succinctly summarized by Mr Scott SC who represents the petitioner.

5. The background to this dispute is two agreements and associated security documents for the construction, sale and purchase for a total consideration of about US$29.7 million of an oil-tanker designated Hull No. PC440-2 by a Chinese shipyard.

6. The petitioner as a financier entered into a ship building agreement with the yard and at the same time arranged in terms of a back to back agreement to sell the ship to Finex Shipping Limited (Finex), Chao's company. Chao guaranteed the obligations of Finex to the petitioner.

7. Finex only ever paid the first 10% deposit, but has defaulted on the payment of the 90% balance of about US$27 million, despite the completion of the vessel and its launch in March 1999.

8. Finex entered into discussions in September 1999 in an attempt to sell the vessel with the benefit of a charter but Finex never made any attempt to tender the outstanding purchase price to enable it to take delivery. In the end Chao acknowledged that he was unable to find a buyer for the vessel and Finex failed to pay the 90% balance remaining due. The charter with Oetker was cancelled and the vessel was sold in a falling market for what was claimed to be the best price that could be obtained; US$21.25 million including broker's commission.

9. There was therefore a shortfall of about US$7 million between the sale price obtained and the price which Finex (guaranteed by Chao) had originally agreed to pay. Nissho Iwai an associated company of the petitioner settled the shipyard's claim by payment of US$6 million.

10. The petitioner claims that Chao is liable as guarantor to make good the deficiency between the purchase price Finex agreed to pay for the vessel and the resale price of the vessel.

11. The statutory demand which was served on Chao was in the sum of US$6,305,772.88 which was made up of:

1. shortfall on sale of vessel	US$6,000,000.00
2. loss of commission	US$$270,000.00
3. legal fees	US$35,772.88

12. The petition was founded on this.

13. The issues which had to be determined by the Judge were whether the claim which was being made by the petitioner was a liquidated claim and whether there is a substantial dispute in the matter.

14. For the reasons she gave the Judge was satisfied that the claims which were being made by the petitioner were liquidated claims.

15. It was however her finding that there was a substantial dispute which led to her making the order to set aside the petition.

16. The Judge considered in some detail how the claim for the shortfall was made out by the petitioner.

17. The figure of approximately US$7 million referred to earlier in the judgment was calculated by subtracting the net proceeds of sale of the vessel of US$20,825,000.00 from the total claim made by the petitioner of US$27,790,710.00.

18. This was made up as follows:

	Item	Amount (US$)
1.	unpaid 2nd instalment	2,970,400
2.	unpaid 3rd instalment	2,970,400
3.	unpaid 4th instalment	20,792,800
4.	interest on 2nd and 3rd instalments (up to 28/9/99)	456,790
5.	extra cost in building	100,000
6.	interest on unpaid contract price (28/9/99 to 14/12/99)	391,920
7.	maintenance (including insurance)	94,000
8.	quay fees	9,400
9.	dry docking	55,000
10.	fees for functional sea trial	50,000
		27,890,710

19. The Judge was satisfied that there was a substantial dispute concerning the allegation which had been made that the vessel had been sold at an under-valuation.

20. The way this arose was that Chao made an allegation in his second affirmation that Nissho Iwai had interfered with Macpherson Marine Ltd who were endeavouring to market the vessel for sale and that as a result of this interested potential purchasers had not proceeded with negotiations to purchase it.

21. The source of information relied upon by Chao was a report made by Mr Greig Macpherson, the Managing Director of the Company.

22. Mr Macpherson described how Nissho Iwai's intervention had had a detrimental effect upon his marketing efforts.

23. Mr Scott submitted that the Judge had wholly misconceived the situation. She had proceeded upon the basis that Finex had had a right to "resell" the vessel. They had no such right. They had not complied with the terms of the ship sale agreement or paid for the vessel and accordingly could have had no title to sell it.

24. Over and above this all of the available evidence indicated that Chao's claim in relation to the alleged interference was spurious and without merit.

25. Even on Chao's own evidence the value of the vessel had been greatly diminished as a result of the Oetker charter party not being proceeded with. The reason for this was that it was a 5-year charter party the terms of which had been negotiated in a much more favourable market.

26. Chao had not attempted to lay any of the blame for the charter party being cancelled on Nissho Iwai. However as a result of the cancellation the value of the vessel had immediately fallen significantly. Chao himself accepted that following the cancellation of the charter party the value of the vessel was not more than US$23 million.

27. Prior to the shipyard exercising its power of sale under the agreement between itself and the petitioner it had written to Finex and Chao in these terms:

"Dated: November 12, 1999

FINEX SHIPPING LIMITED (the 'Buyer')
SUNGROWN FOUNDATION VADUZ (the 'Foundation')
Mr. Frank S.B. Chao (the 'Personal Guarantor')

Dear Sirs,

I refer to a letter dated October 18, 1999, sent by our company to the Buyer, the Foundation and the Personal Guarantor.

Pursuant to Sub-Article 5(a) of Article XI of the Ship Sales Contract dated October 16, 1997, we hereby notify you that M.T. 'ST JACOBI' (Dalian Shipyard's Hull No. PC440-2) is under firm negotiation with a certain buyer on outright basis and will be sold at around US$21.0 million with delivery within December, 1999.

Please let us know by return if you have outright buyer(s) who can purchase the Vessel at higher price with prompt delivery.

Best regards
Bright Islands Corporation
Sd. by: Shinobu Kawato
title: President"

28. This letter had never been replied to. Nor had Finex or Chao ever put forward any other potential purchasers who might be able to match the purchase price referred to.

29. The complaint made by Chao had only surfaced many months later.

30. It was also significant to note that the allegations made in Macpherson's report were based upon hearsay and would not be admissible as evidence in any court.

31. Over and above this even if the evidence had been admissible it is by no means clear that even if the allegations proved to be well founded that this would have made any difference.

32. As stated earlier Finex had no title to the vessel. They could only have resold the vessel if the sale could have been concluded in time for the purchase price of the vessel to have been available to enable Finex to meet its contractual obligations to the petitioner.

33. In the circumstances it would have been perfectly understandable that Nissho Iwai themselves may have sounded out the market for the sale of the vessel thus indicating that the sale of the vessel was a "distress" sale.

34. It was not contended by counsel for the respondent at the appeal hearing (nor can it properly be contended) that Nissho Iwai was under a duty not to sound out the market for the sale of the vessel or not to disclose the intended sale was in the nature of a "distress" sale.

35. Further, insofar as Chao alleges that Nissho Iwai's "interference" with Chao's intended sale is relevant to the petitioner's alleged duty to mitigate, (as will be set out below) the Judge has correctly found that the petitioner's claims were liquidated claims. The alleged duty to mitigate therefore did not arise. Further, in the circumstances of this case, it was reasonable for Nissho Iwai to have sounded out the market and, in the absence of evidence suggesting mala fide on Nissho Iwai's part, no valid complaint has been established by Chao regarding such conduct.

36. For all of these reasons it cannot be said that there was any substantial dispute between the parties on this issue.

37. It is now necessary to consider the more difficult questions as to whether the claim being made by the petitioner is a liquidated claim of such a nature that this bankruptcy petition can proceed.

38. Mr Scott referred us to a passage at p. 96 in Fletcher - The Law of Insolvency 1990 which is of some assistance. Here the author of the work states:

"The requirement that the debt be a liquidated sum is one of considerable significance, and was originally established by the common law of bankruptcy long before becoming part of the express statutory provisions. It is therefore vital to appreciate which species of claim can be classified as 'liquidated', and which cannot, since this quality is so central to the concept of a good petitioning creditor's debt. The decisive hallmark of a liquidated claim is that the process of quantification is already complete, and there is an absence of any element of 'penalty' to be imposed over and above the actual loss sustained. Thus, claims in tort are of their very nature unliquidated until judgment has actually been given, or until a binding settlement has been concluded between the parties, because until then the process of quantification of damages remains unfinished, albeit the plaintiff may furnish an indication of a sum of damages which he believes to be appropriate. Claims in contract, on the other hand, are generally liquidated in nature at all stages, but if the sum included an element which is held to be 'penal', this will render the claim an unliquidated one. Likewise if the true quantum of loss directly and naturally resulting from a breach of contract or a breach of covenant cannot be immediately and definitely established, the claim must be considered as unliquidated for the time being."

39. Mr Scott submitted that this was an accurate statement of the law. The essential requirement was whether it was possible to arithmetically calculate the amount due and owing. Le Pichon J had held this to be the case in Re Kwok Chok-yee (unreported) being HCB 670/1999.

40. Mr Scott argued that what was necessary was to have regard to the overall situation and in particular business efficacy. In this connection he called in aid the observations made by Roskill LJ at p. 506 of Hyundai v Pournaras (1978) 2 Lloyd's Law Reports 502:

"Founding himself upon that passage, Mr Thomas submits that the letter of guarantee which I have read is indistinguishable from cl. (XIII) in that case and that, therefore, all that this letter of guarantee did was to bind the guarantor to ensure the performance by the buyer of the buyer's obligations. He invited us to look at the first limb, as he called it, of the guarantee-

'.... the undersigned hereby irrevocably and unconditionally guarantees the payment in accordance with the terms of the contract of all sums due or to become due by the buyer to you under the contract.'

Mr Thomas says that that language is indistinguishable from the language of the clause in the Lep Air Services case. He accepts that if one looks in isolation at the next 2½ lines they are somewhat against his contention. The words are-

'.... and in case the buyer is in default of any such payment the undersigned will forthwith make the payment in default on behalf of the buyer.'

But he says one must look at that second limb as subsidiary to the first limb, and if the first limb, on its true construction, is within Lord Reid's second category, then there cannot be a change of meaning merely because of the addition of the second limb to the first.

To my mind, the right way of construing this document is not to break it down into a first and second limb but to construe it as a whole against what in a recent case in the House of Lords Lord Wilberforce called 'the factual matrix of the background'. The factual matrix of the background is, to my mind, plain and not susceptible of any controversy. The respondents are a yard dealing with two shipowning companies registered in Liberia, to them foreigners. I find it perfectly natural, in those circumstances, that that yard should wish to have a guarantee of payment from someone other than the persons with whom they are contracting for the construction of these four ships, the more so because these four ships were in the place of two earlier ships which the buyers had not wished to have built. It seems natural, when one looks at this as a matter of business, that in those circumstances the respondents should want the financial protection of people against whom liability could be enforced in the event of non-payment by the buyers on the due dates. It seems to me, with great respect to the argument of Mr Thomas, that to give this guarantee the limited construction for which he contends would be flying in the face of the obvious commercial purpose of this document, one of a group of documents entered into in connection with these shipbuilding contracts. One has two references to 'payment'. One has, as the learned Judge said, the express reference in the case of default to the guarantor 'making the payment forthwith'; it seems, putting the matter shortly, that the commercial purport and obvious intent and true construction of this document is such that the contrary, as in effect the Judge said, is not really arguable. The true meaning is that if the buyer does not pay in time - in the case of the first instalment within seven days of the export licence, and in the case of the second instalment on the due date - the guarantor will pay. Therefore, to my mind, the learned Judge was absolutely right in the view which he took, and if that were the only point in the case I would unhesitatingly dismiss the appeals."

41. The terms of the performance guarantee which had been executed by Chao were clear and unambiguous. They were in these terms:

"Date: 15th October, 1997

To: Bright Islands Corporation, Liberia

c/o Nissho Iwai Corporation

Ship Section 2 of Marine Department

405, Akasaka 2-chome, Tokyo

Japan

PERFORMANCE GUARANTEE (Dalian Hull No. PC440-2)

Dear Sirs,

In consideration of your execution of (i) a Ship Sales Contract (such contract as originally executed or as the same may from time to time be amended, the 'Ship Sales Contract') dated 16th October, 1997 with FINEX SHIPPING LIMITED (the 'BUYER') relative to the construction and purchase of a 44,000 Metric Tons Deadweight Product/Crude Oil Tanker having SHIPYARD's Hull No.PC440-2 (the 'VESSEL') and (ii) an agreement (such agreement as originally executed or as the same may from time to time be amended, the 'Agreement') dated 16th October, 1997 with the Buyer (the Ship Sales Contract and the Agreement, collectively called the 'Contract'), I hereby absolutely, unconditionally and irrevocably guarantee:

(1) the due and punctual payment by the BUYER in accordance with the terms and provisions of the Contract of any and all sums which are now or at any time hereafter payable by the BUYER under or in respect of the Contract in accordance with terms and conditions thereof including (without limitation) all claims or moneys due and to become due to you thereunder and all claims for damages in respect of any breach by the BUYER of the Contract (the 'Contract Liabilities'); and

(2) the due and punctual performance of all obligations of the BUYER under and in respect of the Contract other than the Contract Liabilities (the 'Contract Obligations').

If the BUYER fails to make payment of any of the Contract Liabilities when and as the same shall become due and payable I hereby covenant that I will pay to you upon demand the amount equal to any sum or sums in respect of which the BUYER shall not have made payment, and will indemnify you against all losses, damages, costs or expenses suffered or incurred by you in consequence of the BUYER's failure to perform or comply with the Contract Obligations.

The guarantee contained in this letter will not be discharged or affected by:

1. any granting of time or other indulgence or modification, transfer, extension, renewal, acceptance, forbearance or release in respect of any Contract Liabilities or Contract Obligations; or

2. any corporate reorganization, reconstruction, amalgamation, dissolution, merger, acquisition of or by or other alteration in the corporate existence or structure of the BUYER: or

3. any other act or omission to act of any kind by you or any other person or any other circumstance whatsoever which might constitute a legal or equitable discharge of me.

It being my intention that the guarantee set out herein shall be irrevocable, absolute and unconditional in any and all circumstances.

The guarantee herein contained shall remain in full force and effect until final performance in full of all Contract Liabilities and performance in full of all Contract Obligations whatsoever in accordance with the terms and provisions of the Contract notwithstanding the insolvency or liquidation of the BUYER or any other event whatsoever.

I hereby irrevocably waive acceptance of this guarantee, diligence, presentment, discussion, demand, protest and notice of any kind whatsoever and confirm that this guarantee may be enforced by you as often as the need may arise.

I hereby also irrevocably waive my right of being informed by either the BUYER or your company and/or any other company/person on any modification or amendment on Specifications and/or drawing or on any alteration or modification on any terms and conditions of the Contract, and any such modification or amendment or alteration, if there is any, as if I, as the guarantor, had been informed.

Until the whole of the Contract Liabilities shall have been paid in full and the Contract Obligations fully performed, I shall not by paying off any sum recoverable hereunder or under the Contract or by any other means or on any other grounds claim any set-off or counterclaim against the BUYER in respect of any liability to the BUYER or be entitled to the benefit of any other security which you may now or hereafter hold for any part of the Contract Liabilities or the Contract Obligations nor shall I have any other right of surety discharging its liability, and I will not without your prior written consent prove in the insolvency, winding-up or liquidation of the BUYER in competition with you and will give you the benefit of any proof to which I may be entitled and all moneys received in respect thereof.

Any certificate by you of the amount due from the BUYER in respect of the Contract Liabilities shall in the absence of manifest error be conclusive and binding upon me.

I shall not be entitled to any rights of remedies, legal or equitable, of a surety as regard any of the indebtedness, obligations or liabilities of ourselves under or pursuant to this Guarantee.

I confirm that all necessary consents, permits and approvals applicable to this guarantee, if any, have been granted.

This guarantee shall be in addition to and not in substitution for any other rights which you may have under or by virtue of the Contract or any collateral or security securing the BUYER's indebtedness and may be enforced without requiring you first having recourse to any such rights and without requiring you to take any steps or proceedings against the BUYER

This guarantee shall be governed by the laws of England and I hereby irrevocably submit to the non-exclusive jurisdiction of the English Court and appoint Marine Agency Limited, Bilbao House, 36/38 New Board Street, London EC2M INH, England, as my agent to accept service of proceedings in such courts.

Yours faithfully,

Sd. Frank Chao

I hereby certify that Mr. Frank Sze-Bang Chao, who is 63 of age, has signed this performance guarantee in my presence.

Sd. So Fuk Ching
Notary Public, Hong Kong.
William Sin & So
15 Oct 1997"

42. It was of course Mr Scott's case that the claim which was being made by the petitioner was in relation to the payment obligations rather than those relating to the indemnity.

43. It was common ground that Finex had been in breach of the terms of the ship sale agreement and that relevant notices had been served upon them in relation to the default. Finex breached the ship sale agreement by failing to pay the instalment payments as and when they became due and payable. Mr Ambrose Ho SC for the respondent argued that in relation to the 4th (and final) instalment, the payment obligation was concurrent with the petitioner's obligation to deliver the vessel. Since the vessel was in fact not delivered to Chao, his payment obligation has not arisen yet. With respect, Mr Ho's argument ignores two things:

(1) a notice was duly given by the petitioner to Finex pursuant to the terms of the ship sale agreement informing Finex that the vessel was ready for delivery. Finex did not respond to such notice;

(2) the terms of the ship sale agreement relating to the method of payment provided (among other things) that payment of the 4th (and final) instalment should be made by Finex at least 3 business days before the scheduled day of delivery.

44. As indicated earlier in this judgment the shipyard had sold the vessel and Nissho Iwai had settled the claim on its guarantee with the shipyard for US$6 million.

45. Mr Scott pointed out that his clients owed no fiduciary obligations to Finex or Chao and that all that was necessary for the petitioner was to take reasonable action to mitigate the loss they had suffered. The vessel had been sold timeously by the shipyard and there was no substantial dispute concerning the sale. In these circumstances the claim could be arithmetically calculated in such a manner that the claim which was being made could be properly characterised as a liquidated claim.

46. Mr Ho did not accept that the claim was a liquidated claim.

47. In this connection he placed particular reliance upon a passage from the judgment of Maule J at p. 25 of Ex parte Broadhurst (1852) 32 LJ Ch (NS) 21 which he claimed adopted the reasoning in the judgment Ex parte Charles (1811) 14 East 197:

"It cannot be treated at law as a specific sum of money to be received, for the right to receive would be co-extensive only with the damage sustained; and this cannot be so made the subject of computation as to be a fit ground for a petitioning creditor's debt. ... In the present case there might not be a sufficient damage to constitute the debt; or, even suppose that damage to the amount of 100l. was shewn, still it does not follow that the money could have been recovered, as anything to be recovered must be in the shape of damage, and such damage is not of a character to amount to a petitioning creditor's debt. I am of the opinion that the question whether this bankruptcy, founded as it is upon the sufficiency of the petitioning creditor's debt so constituted, can be supported, ought to be answered in the negative."

48. Mr Ho also called in aid the passage at 27-008 of the 28th Edition of Chitty on Contracts (Volume 1) where there is a discussion on the distinction between claims for payment of an agreed sum and claims for damages and the differentiation between liquidated and unliquidated damages codimented upon in 27-009.

49. Adopting this analysis of the law Mr Ho submitted that in essence the claim which was being made by the petitioner was a common law claim for damages rather than a claim for a specific sum under the ship sale agreement.

50. Mr Ho took us through the relevant articles in this agreement.

51. The main point made by him was that as the agreement was drafted the 4th instalment only became payable when the vessel was delivered to Finex. As the vessel had never been delivered to Finex the 4th instalment had not become payable.

52. In the normal course of events it is necessary for goods to be delivered to a purchaser before the price of the goods becomes payable under the agreement. All of this was indicative of the fact that any claim which the petitioner may have would be a claim for damages in common law.

53. The agreement spelt out the rights available to the parties. The right of sale of the vessel in the event of default was exercisable by the petitioner.

54. This right had not been exercised. What had happened was that the shipyard had exercised its right of sale under its agreement with the petitioner.

55. So far as the performance guarantee was concerned it was apparent from the terms of the document that what was contemplated was a breach of the contractual terms of the ship sale agreement rather than any general common law claim.

56. Mr Ho submitted that the observations made by Roskill LJ in Hyundai had no application to the present case as in that case the claim had been made in respect of outstanding instalments and there had been no question of delivery of the vessels having been effected.

57. Although the 4th instalment became payable on the delivery of the vessel to Finex it is common ground that the vessel was ready for delivery at the relevant time. It is also apposite to note the observations made by Roskill LJ in his judgment immediately following the passage already cited:

"The second point was somewhat different from the first. Mr Thomas invited us to assume that the view which I have just expressed is right, contrary to his main submission. Then he submitted that that liability under that guarantee presupposed that there remained a liability under the building contracts and that once the building contracts came to an end - as it is agreed they did on Oct. 21, 1976 - the liability to pay the instalments under the guarantees ceased and were replaced by a claim not for debt but for damages.

In that connection reliance was placed upon a passage in the speech of Lord Diplock at p. 350 of the Lep Air Services case to which I have already referred. Lord Diplock was there discussing the nature of an accepted repudiation of a contract. He said:

'Generally speaking, the rescission of the contract puts an end to the primary obligations of the party not in default to perform any of his contractual promises which he has not already performed by the time of the rescission. It deprives him of any right as against the other party to continue to perform them. It does not give rise to any secondary obligation in substitution for a primary obligation which has come to an end. The primary obligation of the party in default to perform any of the promises made by him and remaining unperformed likewise comes to an end as does his right to continue to perform them,. But for his primary obligations there is substituted by operation of law a secondary obligation to pay to the other party a sum of money to compensate him for the loss he has sustained as a result of the failure to perform the primary obligations. This secondary obligation is just as much an obligation arising from the contract as are the primary obligations that it replaces.'

Mr Thomas, relying on that passage, submitted that whatever the position might have been before Oct. 21, 1976, once the repudiation took effect on that date and the building contracts were at an end, there ceased to be any liability to pay the instalments under the contracts and, therefore, there ceased to be any collateral obligations to pay those instalments under the guarantee. With respect to that argument, Lord Diplock in that passage was not dealing with a case where before the date of the acceptance of repudiation there had been an accrued right to the payment of a debt. That is the position here. I put to Mr Thomas during the argument this example: suppose one had had a contract for the sale of goods by instalments, the instalments to be delivered and paid for on May 1, June 1, July 1, Aug. 1, and so on. The first delivery was made on May 1 and the buyer, in breach of his obligations, took delivery but did not pay. Before June 1 he repudiated and the seller accepted that action as a repudiation of the entirety of the contract still remaining to be performed. If Mr Thomas's argument be right, the seller's accrued claim for the price of the goods delivered on May 1 would, by some process of law which I confess I do not understand, be suddenly converted to a claim for damages, again I know not of what kind, and he would lose the benefit of the accrued right to payment because, due to the subsequent default of the buyer, he chose to accept the buyer's conduct as repudiation. With respect to Mr Thomas, that quotation from Lord Diplock does not support this argument, which seems to me to be wrong both on principle and on authority. To my mind, the fact that these contracts came to an end on Oct. 21, 1976, did not free the buyers from their respective obligations to pay the various instalments, liability for which had already accrued, and accordingly on the construction which I believe to be the right construction, the guarantors' several liabilities for those instalments under the respective guarantees remained wholly unaffected. The second argument therefore also fails."

58. What is apparent from this passage is that an obligation to pay instalments which have already accrued is not extinguished when a agreement comes to an end. Rather than supporting the arguments being advanced by Mr Ho this passage would tend to support the submissions being made by Mr Scott.

59. At this point it is necessary to consider the main issue which arises on this appeal namely whether the claim being made by the petitioner is a liquidated claim.

60. The definition in Fletcher earlier cited in this judgment is in our view an accurate statement of the law. The two 19th Century cases relied upon by Mr Ho are of very limited assistance. Circumstances prevailing at the time when the judgments were delivered were very different.

61. Considerable assistance is derived from the observations made by Roskill LJ in Hyundai that what is required is a pragmatic approach to the problem. Here it is possible to arithmetically calculate the amount which is payable to the petitioner and there is no substantial dispute in relation to this.

62. The submissions made by Mr Ho to the effect that simply because the claim which is being made by the petitioner is not being made entirely pursuant to the terms of the agreement is not decisive of the issue. The fact that the vessel was sold by the shipyard does not make the claim an unliquidated one. What is necessary is to consider whether the claim can be arithmetically calculated.

63. Also if the performance guarantee is read carefully it is clear that the rights of the petitioner are not circumscribed in the manner contended for by Mr Ho.

64. Mr Ho accepted that if the main submissions he was advancing were not accepted the claim for the loss of commission would logically follow the same principles as those obtaining for the non-payment of the instalments.

65. For the reasons which have been given we are of the view that the claims now being advanced in the statutory demand are liquidated claims. This being the case we consider that this appeal is allowed and the Judge's order should be set aside and an order nisi should be made that the petitioner should have the costs both before us and in the court below. This appeal is only concerned with whether there should be an order striking out the petition, it is not entirely appropriate for this court to decide whether a bankruptcy order should be made. However, to avoid any doubt and in view of the above matters, the petitioner should be at liberty to restore the petition for hearing in the bankruptcy court.

Hon Cheung JA:

66. I agree with the decision and reasons of Mayo VP and Chung J. I would like to add the following observation.

Nature of the application

67. This is an appeal by the Petitioner ("Bright Islands") against the striking out of its petition by the debtor ("Mr Chao") on the ground that the peitition was an abuse of the process of the court. Although it was a striking out application pursuant to Order 18 Rule 19 of the Rules of the High Court (applicable to bankruptcy proceedings by reason of section 99(1) of the Bankruptcy Ordinance ("the Ordinance")), both parties had in effect treated the application as a determination on whether there was a bona fide dispute on the existence of a debt. This is apparent from the approach taken by the parties in this appeal. They argued the matter as if it was an appeal from a dismissal of the petition. At the end of the submissions, Mr. Scott S.C., counsel for Bright Islands even invited this court to pronounce a verdict on the petition and declare Mr. Chao bankrupt.

68. This approach is also consistent with what Rogers J. (as he then was) said in Re ICS Computer Distribution Ltd., (formerly known as Cheflink Ltd.) [1996] 1 HKLR 181 :

"The procedure of winding up a company for "insolvency" by petition is a summary one. The test which the court applies is whether the debt is bona fide disputed on substantial grounds. These are words which appear time after time in the cases. As a matter of practice, and not it may be noted as a matter of law, where the court is satisfied that this criteria is satisfied the Companies Court should not embark on a trial to determine the issue of the validity of the debt. The petition is therefore dismissed or "taken off the file" unless there are unusual circumstances about the case or the issues involved can be disposed of very simply. In that event the Companies Court may determine the dispute itself or the petition may be stayed and left on file pending determination.

As a matter of practice there does not appear to be any difference in approach between the determination of the validity of a defence to a petition and an application to strike out a petition. Frequently, the 2 are heard and decided at the same time without distinction being drawn."

69. Although this was said in the context of a striking out application of a company's winding up petition, this approach is applicable to a bankruptcy petition as well as shown in cases such as Leung Hoi [2000] 1 HKC 276. Further, although in this case the striking out application was dealt with separately from the petition itself, this does not distract the real nature of the application.

Facts

70. It is not necessary to go into the details of the facts in this case. It is sufficient to note that Bright Islands had entered into a contract ("the Ship Building Contract") with a shipyard ("the shipyard") in the Mainland, China to buy a vessel. Nissho Iwai Corporation ("Nissho Iwai"), the parent company of Bright Islands, guaranteed the shipyard the payment and performance by Bright Islands of this contract.

71. Bright Islands entered into a contract ("the Ship Sales Contract") with Finex Shipping Limited ("Finex") to sell the vessel to Finex. Mr. Chao, the beneficial owner of Finex, guaranteed the payment and performance by Finex.

72. Finex was to pay the contract sum of US$29,704,000.00 by four instalments. It managed only to pay one instalment and failed to pay the other three instalments or take delivery of the vessel.

73. Bright Islands by a notice dated 18 October 1999 informed Finex and Mr. Chao that, pursuant to Clause 4 of Article XI of the Ship Sales Contract, it had cancelled that contract. It also intended to sell the vessel pursuant to Clause 5 of Article XI.

74. Bright Islands was unable to fulfill its own obligations to the shipyard. The vessel was eventually sold, not by Bright Islands, but by the shipyard on 19 November 1999 for a net sum of US$20,825,000.00. The shipyard then claimed against Bright Islands and Nissho Iwai for the deficiency between the contract price together with costs and interest under the Ship Building Contract and the resale price of the vessel amounting to US$7,065,710.86 on 28 December 1999. Nissho Iwai settled the claim for US$6 million.

75. Bright Islands then claimed against Finex and Mr. Chao. The terms of the Ship Building Contract and Ship Sales Contract are identical. What Bright Islands stood to gain from this back to back arrangement is a commission of US$300,000.00 payable by the shipyard under a separate commission agreement.

The statutory demand

76. Under the statutory demand issued to Mr. Chao, the debt is US$6,305,772.88, made up as follows :

1) Shortfall on sale of the vessel totalling US$7,065,710.86 but limited to US$6,000,000.00;

2) US$270,000.00 being loss of commission on cancellation of the Ship Building Contract and the Ship Sales Contract; and

3) $35,872.88 being legal fees.

The shortfall

77. The shortfall of US$7,065,710.86 was particularised in a letter dated 7 January 2000 from Bright Islands to Mr. Chao. Without going into details, it is made up as follows :

1) unpaid contract price of US$26,733,600.00 (i.e. the 2nd, 3rd and 4th instalments) together with interests in delayed payment of the 2nd and 3rd instalments and extra costs in building, making a total of US$27,290,390.55;

2) other sums such as interest on unpaid contract price, maintenance, quay fees, dry docking, fees for functional sea trial, making a total of US$20,825,000.00;

3) from these two sums, a credit of US$20,825,000 was given for the proceeds of sale of the vessel.

78. The ultimate shortfall is confined to US$6,000,000.00 because Nissho Iwai's settlement with the shipyard was for that sum.

Debt of a liquidated sum

79. Mr. Ho S.C., counsel for Mr. Chao, now based his case on striking out almost exclusively on this ground : the bankruptcy court has no jurisdiction to deal with the matter because the petition is based not on a debt in that the claim is not a liquidated sum. Despite his extremely persuasive arguments, I am not satisfied that there is a substantial dispute on this point which requires the petition to be struck out.

80. The requirement that a bankruptcy petition can only be based on a debt in the form of a liquidated sum is clearly provided by s. 6(1) and s. 6(2)(b) of the Ordinance.

81. The distinction of a liquidated sum and damages is likewise well established :

"A debt is a definite sum of the performance of a specified obligation by the other party or upon the occurrence of some specified event or condition; damages may be claimed from a party who has broken his contractual obligation in some way other than failure to pay such a debt.

The term liquidated damages is applied where the damages have been agreed and fixed by the parties (in respect of which the law has developed criteria for their validity), or fixed by statute as in the case of damages against parties to a dishonoured bill of exchange. Unliquidated damages is the term applied where the damages are at large and are to be assessed by a jury or by a judge sitting as a jury; the rules as to remoteness of damage are the main criteria for such damages."

See Chitty on Contracts 28 Ed. Vol. 1 Paras. 27-008 and 27-009. Para. 6/2/4 of the Hong Kong Civil Procedure further states that :

"A liquidated demand is in the nature of a debt, i.e. a specific sum of money due and payable under or by virtue of a contract. Its amount must either be already ascertained or capable of being ascertained as a mere matter of arithmetic. If the ascertainment of a sum of money, even though it be specified or named as a definite figure, requires investigation beyond mere calculation, then the sum is not a "debt or liquidated demand", but constitutes "damages".

The words "debt or liquidated demand" do not extend to unliquidated damages, whether in tort or in contract, even though the amount of such damages be named at a definite figure (Knight v. Abbott (1883) 10 Q.B.D. 11). A claim for a stated sum of money paid to the defendant for a consideration which has failed is a recognised form of liquidated demand."

82. The difficulty in this case is applying these well known principles to the claim under the statutory demand.

Bright Islands' case

83. Mr. Scott submitted that the sums claimed are liquidated sums. After Bright Islands cancelled the Ship Sales Contract, it became entitled to exercise its remedies under common law and under that contract specifically against Finex, including an express right to sell the vessel without being answerable for any loss and damage and set off the proceeds against the sums definite payable by Finex. Finex remained liable for any deficiency between the amounts payable by it and the sale of the vessel. Not having paid the deficiency, Finex failed to discharge a contract liability and remains in breach. Accordingly, Bright Islands is entitled to demand payment of the deficiency from Mr. Chao under the guarantee.

Article XI

84. Under Clause 5(a) of Article XI of the Ship Sales Contract, Bright Islands may, after cancelling or rescinding the contract, sell the vessel "without being answerable for any loss of damage occasioned to [Finex]." In the case of a sale of completed vessel, the proceeds of sale received by Bright Islands will apply first to payment of the expenses of the sale and second to payment of all unpaid instalments and interest : Clause 5(b). There is another provision for applying the proceeds of sale of a vessel in its incomplete state. Clause 5(d) further provides that the excess of the proceeds of sale after it had been applied in accordance with the earlier provisions is to be returned to Finex. In case of deficiency, Finex "shall promptly pay the deficiency to [Bright Islands] upon request" : Clause 5(e).

85. It is clear that in order to rely on Clause 5, Bright Islands must be the one who had sold the vessel and received the proceeds of sale. This is what the clause provides. If this happens, the claim for deficiency by Bright Islands may well be in the nature of a liquidated claim because it is payable under the contract. The amount is capable of being ascertained as a mere matter of arithmetic. However, in this case Bright Islands did not sell the vessel and did not receive the proceeds of sale. It therefore cannot rely on Clause 5 to claim the deficiency from Finex. This is not a technical point.

Common Law

86. If Bright Islands cannot rely on Clause 5 in order to constitute the claim as a liquidated claim, then whether its common law remedy will constitute the claim in the form of a liquidated claim will depend on whether it is based on the price or damages for non-acceptance by Finex. It is fair to say that the present claim does give the impression that it is one based on damages. It is confusing to refer to a claim on deficiency under the common law claim. It is helpful to remind oneself of the principles set out in Benjamin's Sale of Goods 5th Ed. Para. 16-054 ：

"Where the property in the goods has not passed to the buyer, the seller's normal remedy in most circumstances is an action for damages : for damages for non-acceptance under section 50(1), [of the Sale of Goods Act] for consequential losses or expenses under section 54, or for losses or expenses under section 37. Section 50(1) provides that : "Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-acceptance." This subsection is wide enough to cover non-acceptance when the property has already passed to the buyer, in which case it allows damages for non-acceptance as an alternative remedy to a claim for the price. But the advantages of suing for the price as a debt clearly outweigh those of suing for unliquidated damages for non-acceptance. If, however, there is some doubt as to whether the property in the goods has passed to the buyer, the seller who sues for the price when the buyer has not taken delivery of the goods runs the risk that the court may hold that property had not passed to the buyer : in this event, it follows that the seller's only remedy is a claim for damages for non-acceptance, and that the seller would be expected to mitigate his loss (e.g. by reselling) as from the date when the buyer should have accepted the goods. So long as the seller is claiming the price, he must hold the goods available for delivery to the buyer when the buyer pays the price, but his failure to resell may lead to a reduction in his damages if it is later held that he was not entitled to the price. If the seller resells when he is entitled to do so, he is treated as having terminated the contract so that his only claim against the buyer is for damages. If he attempts to resell, this may be taken as an acceptance of the buyer's repudiation of his obligations under the contract, in which case the seller is also relegated to his claim in damages."

Claim for unpaid instalments

87. However, in this case, Bright Islands is clearly entitled to the 2nd, 3rd and 4th instalments of the price of the vessel. The terms of payment were provided for in Clause 3 of Article II. Specifically, the 4th instalment was to pay upon delivery of the vessel. Bright Islands had, by a notice dated 30 September 1999, informed Finex that it had received notice from the shipyard to pay the unpaid balance of the contract price and take delivery of the vessel immediately. It then made a similar request to Finex. The failure by Finex to comply with the request constituted default under Clause 1 (a), (b) and (c) of Article XI. The default enabled Bright Islands to rescind the contract under Clause 4(b)(i) of Article XI.

88. Under Clause 4(b)(iii) the default to pay the 2nd and 3rd instalments also enabled it to "demand, recover and exercise" its rights under the guarantee signed by Mr. Chao. This is "without prejudice to its right to recover from [Finex] all instalments due and payable before/on delivery of the VESSEL together with all interests, costs and/or expenses by applying the proceeds to be obtained from sale of the VESSEL pursuant to the provisions set out below and in accordance with the provisions set out in this Contract."

89. While Bright Islands cannot rely on the provisions relating to the sale of the vessel or the proceeds of sale referred to in Clause 5, clearly by virtue of the above clause it is entitled to recover the unpaid instalments.

90. In Hyundai Heavy Industries Co. Ltd v. Papadopoulos and Others [1980] 1 WLR 1129, the House of Lords held that save in the case of sales of land and goods and where there has been a total failure of consideration, it was the law prior to the decision in Lep Air Services Ltd. v. Rolloswin Investments Ltd. [1973] A.C. 331 that cancellation or rescission of a contract in consequence of repudiation did not affect accrued rights to the payment of instalments of the contract price unless the contract provided that it was to do so : per Viscount Dilhorne at page 1136. He further held that Lep Air Services had not affected the law because the observation in that case about instalments not becoming payable after the contract was brought to an end by acceptance of repudiation, was in respect of future instalments and not instalments where right to payment had already accrued. (See also the observation of Roskill L.J. on the same point in another case concerning the same parties in [1978] 2 Lloyd's L.R. 503)

Substance of the claim

91. If the nature of the claim is in substance the unpaid instalments of US$26,733,600.00 with a credit being given to the proceeds of sale of US$20,825,000 leaving a balance of US$5,908,600.00, would this turn the claim into an unliquidated debt?

92. The first point to note is that this is not the claim contained in the statutory demand. It included other claims. But as pointed out in In re A Debtor (No. 1 of 1987) [1989] 1 WLR 271 (a case referred to In re A Debtor (No. 64 of 1992) [1994] 1 WLR 264) :

"deficiencies in the form and contents of a statutory demand, even including errors involving the overstatement of the debtor's indebtedness to the creditor, will not automatically entitle the debtor to have the demand set aside. The question in every case is whether, on the facts, injustice would be caused to the debtor by allowing the particular demand to stand."

93. I do not think that the failure to state the exact claim will automatically entitle Mr. Chao to strike out the petition because there remains to be a substantial indebtedness by Mr. Chao based on the above claim. After all, the claim for the unpaid instalments is at the core of Bright Islands' claim. This is shown in the particulars of the claim on the shortfall.

94. If in substance the debt is based on the unpaid instalments, then it cannot be said there is a bona fide dispute on substantial grounds on the validity of the debt. The unpaid instalment are clearly liquidated sums provided by the contract.

95. In re A debtor (No. 64 of 1992), a debtor was liable to the creditor under a mortgage. The creditor issued a statutory demand claiming a sum based on the debt under the mortgage less the estimated value of a security held by the creditor. It was held by Colin Rimer Q.C., sitting as a Deputy High Court Judge in England, that the claim remained to be a liquidated sum. This approach was followed in Hong Kong in Re Kwok Chok Yee (HCB No. 670 of 1999).

96. The English case was, of course, concerned with Rule 6.1(5) of the Insolvency Rules (a similar provision is in s. 6B of the Ordinance) which recognized that it is competent for a secured creditor to place a value on its security and to serve a statutory demand of the total debt less such value. But in my view this issue will not necessarily restrict the application of that case in respect of credit being given to a debt which is obviously in the form of a liquidated claim. As Colin Rimer Q.C. observed the statutory demand may be set aside if there is credible evidence that the credited amount is grossly undervalued, but this is not because the debt claimed is not a liquidated claim but rather, given the true value of the credit, the debtor is not truly indebted at all.

Undervalue and sabotage

97. As to the contentions by Mr. Chao that the sale was at a gross undervalue and Nissho Iwai had sabotaged his attempt to find a purchaser for the vessel, these had not been raised by him at all at the time he was notified by Bright Islands in November 1999 of the intended sale of the vessel at US$21 million or after he received the demand for payment in January 2000. These allegation only surfaced in his second affidavit of 7 June 2000. The allegation of sabotage was couched in vague terms. It was obviously in the interest of Nissho Iwai to obtain a high price in the sale so as to minimize its loss.

98. It is important to bear in mind that the actual sale of the vessel was without the benefit of the charterparty. This reduced the value of the vessel. It was due to Finex's failure to pay for the instalments and take delivery of the vessel that rendered it unable to fulfill the contract with the charterer. Further, even based on Mr. Chao's own estimate of the value of the vessel at the time of sale at the maximum of US$23.5 million, there is still a substantial indebtedness of US$3,233,600.00 after deducting the estimated value from the unpaid instalments of US$26,733,600.00. A bankruptcy order can still be made on this basis, as Peter Gibson L.J. observed in TSB Bank plc v. Platts [1998] 2 BCLC 1 :

"We cannot see why the bankruptcy court, if there was material before it enabling it to do so, should not evaluate the maximum which the debtor could recover under the cross-claim; and if the net sum after deducting that maximum value of the cross-claim from the debt was ￡750 or more we do not see why it should not be able to make a bankruptcy order."

99. I do not regard these allegations to be so substantial as to merit the striking out of the petition. The burden was on Mr. Chao and he had failed to discharge the burden.

Nature of Mr. Chao's liability

100. Under the Guarantee, Mr. Chao "absolutely, unconditionally and irrevocably guarantee :

(1) the due and punctual payment by [Finex] in accordance with the terms and provisions of the [Ship Sales] Contract of any and all sums which are now or at any time hereafter payable by the [Finex] under or in respect of the [Ship Sales] Contract in accordance with terms and conditions thereof including (without limitation) all claims or moneys due and to become due to you thereunder and all claims for damages in respect of any breach by [Finex] of the [Ship Sales] Contract (the "Contract Liabilities") and

(2) the due and punctual performance of all obligations of [Finex] under and in respect of the [Ship Sales] Contract other than the Contract Liabilities (the "Contract Obligations").

If [Finex] fails to make payment of any of the Contract Liabilities when and as the same shall become due and payable I hereby covenant that I will pay to you upon demand the amount equal to any sum or sums in respect of which [Finex] shall not have made payment, and will indemnify you against all losses, damages, costs or expenses suffered or incurred by you in consequence of [Finex's] failure to perform or comply with the Contract Obligations."

101. It is clear from its terms that there is a distinction between Mr. Chao's payment obligation which is described as the "contract liability" and performance obligation which is described as the "contract obligation". In the first of the Hyundai cases, Roskill L.J. in the Court of Appeal held that the guarantee should be construed as a whole and not break into different limbs; the commercial purpose of the document was to ensure payment by the guarantor if the buyer did not pay the instalments on their due dates.

102. Accepting this to be the proper approach, the issue in this appeal remains to be whether the debts are liquidated sums or not. If they are not, the conclusive evidence clause in the guarantee will not turn them into liquidated claims. This, however, is not a matter that needs to be dwelled upon in view of my decision.

Conclusion

103. I will also allow the appeal.

Hon Mayo VP:

104. The appeal is allowed and the costs order proposed above is made.