RE TO YUK FUNG

CACV 523/2020

[2021] HKCA 995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 523 OF 2020

(ON APPEAL FROM HCB NO 6667 OF 2019)

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REASONS FOR JUDGMENT
AND DECISION ON COSTS

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Hon Cheung JA:

1.  I agree with the Reasons for Judgment of Yuen JA and her decision on costs.

Hon Yuen JA:

2.1.  This is the appeal of Madam To Yuk Fung (“the bankrupt”)  from the Judgment of G Lam J (as he then was)  (“the judge”)  in which a Bankruptcy Order was made against her on 25 August 2020 (“the Judgment”).  At the conclusion of the hearing, the appeal was dismissed with costs to the petitioner with certificate for two counsel. 

2.2.  The petitioner had also indicated in written submissions that it would apply for directions that the bankrupt and her solicitors provide the name and address of any person who had funded the appeal so that the funder can be joined as a party for the purposes of costs only.  We reserved our decision on this application, which is dealt with below.

Background

3.  The detailed background can be found in the Judgment, but the essential facts may be summarized as follows. 

The Loan Agreement

4.1.  On 30 September 2013, the bankrupt signed a Loan Agreement in Chinese (“the Agreement”)  with the petitioner, then a licensed money lender[1], for a loan of $20,859,000.  In the Memorandum of the Agreement, it was stated that the venue of negotiation and execution of the Agreement was a unit on the 21^st floor of West Tower, Shun Tak Centre[2].

4.2.  The Agreement was initialed by the bankrupt on each page.  It is not disputed that the bankrupt is an experienced businesswoman, who had been a director of a listed company in Hong Kong[3].

4.3.  The Agreement stated that the interest rate for the first $17,375,000 shall be 12% p.a, and that for the remaining $3,484,000 shall be 24% p.a, and that “the interest of the month shall be paid on the 30^th day of each month”.  According to the affirmation of Mr Ng Kwok Wai (“KW Ng”)[4], the petitioner’s Loan Officer, he informed the bankrupt that the total monthly interest payable was $243,180[5].

4.4.  The Agreement stated under “loan due date” that “the term of the Loan shall be half a year after the withdrawal of any amount of the Loan by the Borrower, which means 31 March 2014". 

5.  In KW Ng’s affirmation[6], he said the bankrupt gave him instructions to divide the loan principal into two sums to be transferred by cheque to two companies, viz the sum of $17,375,000 to Million Wealth Capital Investment Ltd and the sum of $3,484,000 to Success Source Investments Ltd.  He drew two cheques in favour of these companies on 2 October 2013 (1 October 2013 being a public holiday).  The cheque for the larger sum was cleared and paid on 2 October 2013, and the other was cleared and paid on 3 October 2013.

Bankrupt’s payments to petitioner

6.1.  On 28 October 2013, the bankrupt paid the petitioner $243,180 (the same figure as the monthly interest under the Agreement as miscalculated by KW Ng).

6.2.  The same exact sum of $243,180 was paid by the bankrupt to the petitioner on 7 further occasions[7], the last date being 2 July 2014.  These sums totaled $1,945,440.

6.3.  From 8 July 2014, the bankrupt paid the petitioner increased sums on a total of 16 occasions (11 sums of $500,000 each from 8 July 2014 to 15 May 2015, and 5 sums of $250,000 each from 24 July 2015 to 30 September 2015)[8].  These sums totaled $6,750,000. 

7.  In other words, from 28 October 2013 to 30 September 2015, the bankrupt paid the petitioner a total of $8,695,440.  

Letter before action

8.1.  On 4 September 2015, the petitioner’s solicitors sent a letter before action to the bankrupt.

8.2.  On 10 September 2015, the bankrupt paid the petitioner a sum of $250,000.

8.3.  On 11 September 2015, the bankrupt’s solicitors wrote a letter to the petitioner’s solicitors headed “Demand for outstanding payment of loan”, saying that she was out of town, and that on her return, she would meet with the petitioner to discuss the above matter.  The bankrupt’s solicitors asked the petitioner’s solicitors to withhold taking any action pending the meeting to resolve the above matter.  However, no meeting took place.

9.  It would be noted from the list of payments at §6(9)  of the Judgment that the bankrupt made two further payments of $250,000 each to the petitioner after that letter.

Statutory Demand   

10.  On 5 October 2015, the petitioner issued a statutory demand (“SD”)  which was served on the bankrupt on 20 October 2015.  The sum demanded was for the principal of $17,419,681.94 and interest of $28,183.86.  

11.1.  This was followed by some correspondence between the parties’ solicitors in 2016. The letter dated 19 March 2016 from the bankrupt’s solicitors will be discussed later in this Judgment[9].

11.2.  It is notable that even though the bankrupt’s solicitors asked whether the petitioner was prepared to withdraw the SD, the bankrupt never applied to set it aside.

Petition

12.  On 30 October 2019, some 3 years later, the petition was presented.

The bankrupt’s affirmation

13.1.  The bankrupt filed an affirmation in opposition[10] in which she alleged the following.

(1)  The Agreement was never intended to have legal effect.  She signed it because on 19 September 2013, she had entered into an agreement with a third party (“the Nuku deal”)[11] for which she needed funds.  She had business dealings since 2011 with KW Ng’s brother KF Ng[12], who told her:

(a)  he would raise funds for her for the Nuku deal;

(b)  the Agreement would be used to enable him to raise funds from “his boss” and other investors as it “could indicate what interest rate would be agreed by [the bankrupt] as borrower”[13]; and

(c)  the Agreement could not be enforced against her if she did not drawdown money under it.

However, KF Ng never raised any funds for her, so she “had a very hard time to fulfill [her] obligation”[14] in the Nuku deal, which resulted in demands from the third party’s solicitors in March and June 2014.

(2)  She did not drawdown any funds pursuant to the Agreement[15].

(3)  She sought to explain her payments totaling $8,695,440 to the petitioner as follows.

(a)  The previous year, on 24 May 2012, she had borrowed $5 million from KF Ng in an interest-free loan without a repayment time-line.  On the day of the Agreement, he demanded immediate repayment[16].

(b)  Also in the middle of the previous year (2012), she had transferred an interest in a project called the KD Project to KF Ng for $15 million.  At the end of 2014 (ie after the Agreement), he wanted her to buy-back the interest at the same price.  Although they had never come to any agreement on the matter[17], and she did not have sufficient cash to do so, “due to [her] relationship with him and goodwill, [she] started paying down payments/deposits of the buying back value of the KD Project to KF Ng, on irregular basis from February 2015". 

13.2.  In other words, she claimed in her affirmation that of the total sum of HK$8,695,440 she paid the petitioner,

-  $5 million was for repayment of the loan from KF Ng, and

-  $3,695,440 was for “down payments/deposits” for the buy-back from KF Ng of his interest in the KD Project (“KD Project buy-back”).

14.1.  It would however be noted that in their letter dated 19 March 2016, her solicitors never mentioned that she had signed the Agreement so that KF Ng could raise funds to help her in the Nuku deal.  Instead, the following was alleged:

-  “... on 30 September 2013 [KF Ng] brought our client to his office at Unit 3302, 33^rd Floor, West Tower, Shun Tak Centre, Hong Kong.  Under his duress, our client was forced to sign a loan agreement in favour of [the petitioner]”

and they demanded an answer “whether [the petitioner] is prepared to ... release and discharge our client from the Loan Agreement”.  (Emphasis added).

14.2.  Further, there was no mention of the KD Project buy-back.  Instead, it was alleged that there had been excess payment:

-  “From 28 October 2013 to 30 September 2015, our client paid a total sum of HK$8,695,440 to [the petitioner] in satisfaction of the loan lent by [KF Ng] under the disguise of the Loan Agreement.  The sum of HK$8,695,440 is far in excess of the sum of HK$5,000,000 lent by [KF Ng] to our client”.  (Emphasis added).

The bankrupt’s case before the judge 

15.1.  The allegation of duress was not pursued before the judge.  The bankrupt’s case was as follows[18]:

-  the Agreement was not intended to have any effect, and in fact she did not drawdown any money on it;

-  the Agreement was unenforceable for breach of s.7(1)(b)  Moneylenders Ordinance Cap.163 as she alleged that the Agreement was signed at KF Ng’s office on the 33^rd Floor.  The petitioner’s licenced place of business was on the 21^st Floor of the same building. Section 7(1)(b)  provides:

“7(1). No person shall carry on business as a moneylender – ...

(b)  at any place other than the premises specified in such licence ...”.

15.2.  It is noted that counsel then appearing for the bankrupt[19] did not refer in his submissions to any delay between the SD and the presentation of the petition, nor did he refer the judge to s.5(3)  Bankruptcy Ordinance Cap. 6 which provides:

“The court has a general power, if it appears to it appropriate to do so on the grounds that there has been a contravention of rules or for any other reason, to dismiss a bankruptcy petition or to stay such a petition, and, where it stays such a petition, it may do so on such terms and conditions as it thinks fit”. (Emphasis added).

The judge’s Judgment

16.  The judge rejected the bankrupt’s allegations that:

(a)  the Agreement was not intended to have effect;

(b)  she did not drawdown any money; and

(c)  she had other reasons for making the payments, viz.

-  repayment of the $5 million loan from KF Ng, and

-  down payment/deposits for the KD Project buy-back.

17.  The judge set out a number of reasons for rejecting those allegations, including the following most cogent points. 

Allegation (a)

18.  The judge’s reasons for rejecting allegation (a)  included the point that if both parties were of one mind that the Agreement was not to be of any effect, and would be deployed by KF Ng to help raise funds for the bankrupt, there would be no question of “duress” or her being “forced” to sign it, and yet that was what she alleged in her solicitors’ letter of 19 March 2016[20].  Further, the bankrupt was an experienced businesswoman, and yet she was not prudent enough to take steps to demand the return of the Agreement when KF Ng did not raise any funds for her[21].  

Allegation (b)

19.  The judge’s reasons for rejecting allegation (b)  included the point that the “two cheques drawn and paid [were] for precisely the two sums under the Loan Agreement” (emphasis added)[22].

Allegation (c)

20.1.  The judge’s reasons for rejecting allegation (c)  included the following.  First, regarding the alleged $5 million loan from KF Ng,

-  there was not a “single piece of written record (eg a cheque or deposit slip or mobile phone text message)” evidencing the alleged $5 million loan from KF Ng[23];

-  the bankrupt could not explain why a $5million loan would be repaid in instalments in the odd sum of $243,180, whereas it tied in precisely with the monthly interest under the Agreement as miscalculated by KW Ng[24];

-  if there was a loan of $5 million, by 23 December 2014, the outstanding balance would have been only $54,560, and yet the next payment the bankrupt made (in February 2015)  was of $500,000[25].

20.2.  Secondly, regarding the alleged $3,695,440 down payments/deposits for the KD Project buy-back,

-  “there is not a single document” to support this assertion[26];

-  there was no explanation or accounting record for the payment of $500,000 in February 2015 to indicate the allocation between the two alleged different purposes for the payment (ie partly for the balance of the $5million loan, and partly for payment of the KD Project buy-back)[27];

-  it did not make sense that even though the bankrupt had paid $3,695,440 to KF Ng (more than 20% of the alleged $15 million buy-back price), there has been no transfer of any part of his interest in the KD Project to her, and there is no evidence that the bankrupt has raised any challenge to his keeping the down payments as well as his interest[28];

-  the judge noted the complete absence of any reference to the KD Project buy-back in the bankrupt’s solicitors’ letter of 19 March 2016[29].

20.3.  The judge also rejected the MLO argument, from which there is no appeal. 

Appeal

21.  There are two main grounds of appeal:

(1)  the debt is bona fide disputed on substantial grounds as there was no drawdown under the Agreement;

(2)  the judge had failed to consider the “unfairness and prejudice” caused in permitting the petitioner to rely on a “stale” SD.

Discussion

22.1.  It is well-established that a bankruptcy order is made in the exercise of discretion, and an appellate court would not interfere unless the appellant shows that there has been an error of law, or a misapprehension of material facts, or that the judge has failed to take relevant matters into consideration, or that he has taken into consideration irrelevant matters, or that the decision is “plainly wrong” in the sense in which that term is understood at law.

22.2.  It is also not disputed that in bankruptcy proceedings, the debtor is required to adduce evidence to satisfy the court that there is some basis to doubt the validity of the debt upon which the SD is based[30].  

Ground (1)

23.1.  In his submissions, leading counsel for the bankrupt[31] submitted that the “single most important (if not the only)  issue” was whether there had been any drawdown.

23.2.  In this respect he submitted that the Judgment has “unduly focused on the shortcomings in [the bankrupt]’s case, while overlooking glaring inexplicable peculiarities and inconsistencies in [the petitioner’s] case”.  The petitioner has “left vague” when and how the drawdown instructions were given by the bankrupt, and one would expect the petitioner to demand some confirmation in writing from the bankrupt that the loan should be made to the two companies in question, and that there would be a written receipt.

23.3.  It was also submitted that the bankrupt’s payments were not made on dates as per the Agreement, that it would have been “unusual” for a money lender not to complain about late repayments, and that there was no written demand from the petitioner until five months after the maturity date.

24.1.  With respect, these submissions do not come close to a valid challenge to the cogent reasons given by the judge[32] in finding that there had been a drawdown of the loan.  In particular, the sums paid to the two companies (which were not evenly split and in odd figures)  were precisely the two sums specified in the Agreement, printed on a page which had been initialed by the bankrupt. 

24.2.  Moreover, the first 8 repayments made by the bankrupt (commencing towards the end of the month of the Agreement)  were of precisely the odd figure of $243,180 (which corresponds with the interest under the Agreement according to the miscalculation by KW Ng).  The bankrupt has simply not been able to explain how (on her case)  she had randomly chosen to pay that odd figure (see §37 of her affirmation), not once, but eight times, when she was repaying the alleged $5 million loan from KF Ng. 

24.3.  Having first accepted that there was nothing in the bankrupt’s affirmation to say that KF Ng had asked her to pay that particular figure, Mr Wong then argued that the clarity of the relevant passage in §37 would be reduced if one reads it together with §39.  These passages are as follows:

“37. I started making repayment of the 5m Loan in October 2013 to the petitioner’s account per KF Ng’s instructions. Since there was no timeline of the repayment given by KF Ng, I made my repayments on irregular basis (both the repayment amounts and time)  per my cash flow situation. ...” (Emphasis added).

“39. From 28^th October 2013, I started making repayment on an irregular basis with the amount ranging from HK$243,180.00 to HK$500,000 to KF Ng with the petitioner as payee per the instruction of KF Ng”.

With respect, the clarity of the words in §37 emphasized above is not affected by the words in §39, which only repeated the bankrupt’s earlier allegation that “KF Ng told me to deposit my repayment to the Petitioner’s account since he used to make use of the Petitioner’s account to receive money on his behalf”[33].

25.  Further, in light of the convincing reasons summarized in §§18-20 above for the rejection of the bankrupt’s case of the $5 million loan and the KD Project buy-back, the court is left with no explanation why the bankrupt would have paid the petitioner $8,695,440.  These payments are clearly supportive of the fact that the Agreement was intended to be of effect, and that there had been a drawdown.  The matters raised on appeal summarized in §§23.2-23.3 above are peripheral and speculative, and pale into insignificance when set against those reasons.

26.  There is nothing in Ground (1)  and it must be rejected.

Ground (2)

27.  As for Ground (2), the first thing of note is that this was never raised before the judge.  This is clear from the written submissions of the then counsel for the bankrupt.

28.1.  This is not a pure issue of law which can be raised for the first time on appeal. 

28.2.  First, the Hong Kong bankruptcy legislation (unlike r.612(7)  of the UK Insolvency Rules[34])  contains no statutory guideline for the time before which the petition must be presented after service of the SD. 

28.3.  Secondly, the UK rule does not in any event prohibit the presentation of the petition. The comments of the learned editors of Muir Hunter on Personal Insolvency on this rule are as follows:

“7-267. This [rule] is presumably designed to give the court some control over the use of the bankruptcy process, and to prevent creditors relying on ‘stale’ statutory demands: ... In such cases, the debtor’s financial position may have subsequently altered, and it might be unfair to allow a petition to be presented against him; alternatively, there may have been lengthy negotiations for payment or compromise of the debt between the creditor and the debtor, and the creditor may wish not simply to obtain a bankruptcy order, but to put further pressure on the debtor to pay or compromise the debt.

7-268. However, the rules do not in fact provide any express sanction to penalise ‘the late presentation of the petition’, and r.6.10(3)  appears to require the court to seal the copies of the petition as presented to it; ... Further, s .266(3)[35] does empower the court to dismiss a petition, or to stay proceedings on it, where there has been a contravention of the Rules ‘or for any other reason’. There is no Rule requiring a petition to be presented within four months, but the staleness of the demand on which it is founded might be regarded by the court as falling within ‘any other reason’. No similar sanction is applied to a petition based not upon a statutory demand but upon an unsatisfied execution”. (Emphasis added).

28.4.  As shown in the case of Dunbar Assets plc v Fowler[36], the court would consider if any prejudice has been suffered by the debtor by reason of the lapse of time between the statutory demand and the petition.

29.1.  As noted above, under s.5(3)  of the Bankruptcy Ordinance, the court has power to dismiss the petition “for any other reason”, and it is conceivable that there may be a situation where so much time has elapsed between the service of the SD and the presentation of the petition and where the delay has caused such prejudice to the debtor[37], that the court would exercise its power under this section to dismiss the petition. 

29.2.  However, no such evidence has been adduced by the bankrupt in the present case at all. All she said in her affirmation was that when her solicitors were asked if they had instructions to accept service of the petition on her behalf, “I was very surprised that the petitioner and KF Ng had resumed their groundless action against me despite my clear stance as expressed in the Reply 19/3/2016”.  This, coupled with the fact that her former counsel had not referred to the time lapse, or s.5(3), makes it clear that the bankrupt should not be allowed to make this submission for the first time on appeal.

29.3.  When faced with the court’s observations recorded in §§27 and 28.1 above, Mr Wong quite rightly decided not to pursue this ground.  

30.  For the above reasons, the appeal must be dismissed.

Costs

31.  There was no dispute that costs should follow the event, and the bankrupt should pay the petitioner’s costs. 

32.  As for the petitioner’s application for directions that the bankrupt and her solicitors provide the name and address of any person who had funded the appeal so that the funder can be joined as a party for the purposes of costs only, leading counsel for the petitioner[38] was unable to refer the court to any evidence of the existence of such a funder, save to rely on the mere fact of bankruptcy and that leading counsel has been instructed.  However, I am not persuaded that is sufficient evidence, and the existence of a funder is based on pure speculation.  Accordingly, the application is declined.

Hon Barma JA:

33.  I agree with the Reasons for Judgment of Yuen JA and her decision on costs.