RE CHU THOMAS YAN CHUEN

HCB17626/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 17626 OF 2003

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BETWEEN

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REASONS FOR JUDGMENT

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1. This is a bankruptcy petition taken out by Best Profit International Enterprise Limited ("Best Profit") against Mr Thomas Chu Yan Chuen ("Mr Chu"). On 9 July 2004, after hearing the parties, I allowed the petition and made a bankruptcy order against Mr Chu. These are my reasons.

2. The circumstances giving rise to the debt in question may be summarised as follows.

The Personal Loan

3. Mr Chu and Jerry Yip ("Mr Yip") of Messrs J. Chan, Yip, So & Partners are friends. In 2001, Mr Chu was in need of financial assistance. On 26 April 2001, through the introduction of Mr Yip, he met with Mr Teddy Chan ("Mr Chan") of Digital World Finance Limited ("Digital World"), who agreed to arrange Digital World to advance to Mr Chu a personal loan of HK$2 million. By a loan agreement dated 27 April 2001 ("the Personal Loan"), Digital World advanced HK$2 million to Mr Chu personally. Subsequently, Mr Chu repaid HK$1 million on 29 August 2001 and the balance of HK$1 million plus interest of HK$1,070,013.70 on 3 September 2001. In short, Mr Chu had already repaid the Personal Loan in full.

The 2001 Guarantee

4. In June 2001, Mr Chu sought further financial assistance from Mr Chan. In the end, by a loan agreement dated 28 June 2001, Digital World advanced a loan of HK$2 million to Supply Chain Services Limited ("SCS"), a company owned by Mr Chu, to be repayable on or before 15 October 2001 ("the SCS Loan"). The SCS Loan was guaranteed by a personal guarantee of Mr Chu of the same date ("the 2001 Guarantee").

5. SCS subsequently defaulted in making repayment of the principal sum on or before 15 October 2001. On 15 December 2001, it paid interest on the principal but had ceased to make any payment further. The SCS Loan has been outstanding at all material times up to date. Mr Chu has not performed his obligation under the 2001 Guarantee either.

Other credit facilities

6. Between late August 2001 and early October 2001, Digital World granted credit further facilities to SCS. As a result, SCS became indebted to Best Victory Trading Limited ("Best Victory"), a subsidiary of Digital World, in the sum of some HK$7.55 million ("the BV Facilities"). The BV Facilities were guaranteed by Mr Chu personally as well. SCS subsequently defaulted and Mr Chu did not honour his obligation as guarantee.

Assignment to Digital World

7. By a deed of assignment dated 18 March 2002, Best Victory assigned to Digital World absolutely all interest in and right to the repayment of the aforesaid indebtedness of HK$7.55 million odd under the BV Facilities. Notice of assignment was duly served on SCS.

Repayment schedule

8. On 12 June 2002, Digital World and Best Victory respectively served a statutory demand on the SCS Loan and the BV Facilities. The parties then embarked on negotiations.

9. As a result, on 24 June 2002, the following documents were executed :

(1) A deed of debts rescheduling between SCS and Digital World whereby SCS's indebtedness under the SCS Loan and the BV Facilities totalling some HK$9.6 million was rescheduled on the security of a floating charge over SCS's undertaking, property and assets ("the Deed of Rescheduling").

(2) A deed of charge whereby Mr Chu purported to charge some 25 million shares in SCS and to assign loans that might have been advanced to him by SCS as security for the discharge of the obligations arising under the aforesaid deed of debts rescheduling.

(3) A deed of personal guarantee by Mr Chu ("2002 Guarantee").

(4) A deed of corporate guarantee by SCS.

Despite the rescheduling, SCS subsequently defaulted to make any payment under the Deed of Rescheduling. So did Mr Chu under the 2002 Guarantee.

Assignment to Best World

10. By assignment dated 21 January 2003, Digital World assigned to Best Profit absolutely all right, title, interest and benefit in the SCS Loan, the 2001 Guarantee, and Deed of Rescheduling, the 2002 Guarantee and the documents executed at the same time on 24 June 2002.

HSCD4/2003

11. On 24 January 2003, Best Profit served a statutory demand on Mr Chu, seeking repayment of the amount due under the 2002 Guarantee.

12. On 10 October 2003, Mr Chu took out an application to set aside the statutory demand. That resulted in HCSD4/2003. In support of his application, Mr Chu had filed a total of three affirmations ("the SD Affirmations" collectively). He disputed the validity of the 2002 Guarantee on a number of grounds, including misrepresentation and failure to render advice on the part of Mr Yip. In the course of attacking the 2002 Guarantee, Mr Chu referred to the 2001 Guarantee and confirmed that it was valid and binding on him : see paragraphs 16 and 26 of his 3rd affirmation filed on 11 June 2003.

13. By order dated 28 June 2004, Mr Chu was given leave to discontinue the proceedings in HCSD4/2003.

The present proceedings

14. The subject matter of the present proceedings is the debt under the 2001 Guarantee.

15. On 20 August 2003, Best Profit served the requisite statutory demand on Mr Chu. Mr Chu did not satisfy the demand or apply to set it aside within the time prescribed by rule 47 of the Bankruptcy Rules.

16. Accordingly, on 29 September 2003, the present petition was issued.

17. Opposing the petition, Mr Chu filed an affirmation, which he called the 4th affirmation, on 6 January 2004. He relied on the matters alluded to in the SD Affirmations.

No bona fide dispute

18. It is trite law that it is incumbent upon Mr Chu to demonstrate a bona fide dispute on substantive grounds regarding the debt under the 2001 Guarantee, failing which, a bankruptcy order will be made against him. Having considered the evidence and heard Mr Chu carefully, I am of the view that he has failed in this burden miserably. I will explain why below.

19. Mr Chu admitted before me that the SCS Loan is still subsisting. Given his unequivocal admission in the 3rd affirmation of the SD Affirmations that the 2001 Guarantee was valid and binding on him, his liability thereunder is beyond any doubt.

20. However, Mr Chu denied liability by first relying on the matters raised in the SD Affirmations, which he adopted in his 4th affirmation. It is not necessary to go into those matters in detail. The short answer to this point is that all the complaints that Mr Chu had made in the SD Affirmations are only referable to the 2002 Guarantee and the other documentation executed in June 2002, and not the 2001 Guarantee.

21. Recognising the hurdle that he had to surmount, Mr Chu, in the course of his oral submissions, raised for the first time in these proceedings that he had confused the Personal Loan, which he had fully repaid, and the 2001 Guarantee. For they were of the same amount, namely, HK$2 million. Hence he has all along believed that he had already discharged the 2001 Guarantee in full. The 2001 Guarantee is in fact also tainted by the matters referred to in his 4th affirmation. I am unable to accept this assertion. Mr Chu is no doubt an experienced businessman. I find it astonishing that he could have mixed up the Personal Loan and the 2001 Guarantee as alleged. In my view, it is nothing but a recent fabrication.

22. In any event, his assertion does not stand up to a closer scrutiny of the evidence. From the contemporaneous documentation, which is unchallenged, including emails exchanged between Mr Chu and Mr Yip at the time when the SCS Loan and the 2001 Guarantee were prepared, the following points emerged:

(1) On 21 June 2001, Mr Chu asked Mr Yip to approach Mr Chan for further financial assistance.

(2) On 22 June 2001, Mr Chu submitted to Mr Yip a copy of the relevant documentation in support of SCS's urgent need for short term finance.

(3) After Mr Chan had agreed to provide further finance, Mr Chu on 26 June 2001 requested Mr Yip to draw up the loan documentation. Mr Yip refused to take instructions from or act for Mr Chu or SCS. He made it clear to Mr Chu that his firm would only represent the lender and would decline instructions altogether if Mr Chu objected to such representation. Mr Chu then acknowledged Mr Yip's representation and told Mr Yip that he and SCS would engage a separate lawyer to review the documents.

(4) On 27 June 2001, Mr Yip sent Mr Chu and SCS a draft loan and guarantee and of the ancillary papers for their comments.

(5) On 28 June 2001, Mr Chu and SCS executed and returned to Mr Yip a full set of the loan documentation, including the 2001 Guarantee and a cheque for HK$2 million post-dated 15 October 2001 payable to Digital World.

23. The above undisputed evidence clearly contradicts Mr Chu's allegation that the 2001 Guarantee is tainted by the matters referred to in his 4th affirmation including misrepresentation as alleged.

24. Further, as noted above, on 15 December 2001, SCS paid interest on the SCS Loan up to that date. There was no complaint whatsoever against the documentation concerning the SCS Loan and the 2001 Guarantee. If they were indeed tainted by the matters as alleged, I see no reason why SCS would continue to pay interest up to 15 December 2001, thereby confirming the validity of the loan by conduct. Mr Chu has offered no explanation why that was the case.

Conclusion

25. For the above reasons, I find that Mr Chu's defence is wholly unmeritorious. I therefore make a bankruptcy order against him with costs.