RE FOOK HAU TRADING CO

HCB 7100/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCYPROCEEDINGS NO. 7100 OF 2006

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J U D G M E N T

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Introduction

1.  This is a bankruptcy petition presented against a firm.  I am concerned with basically 2 issues.  The first is whether on the proper construction of the Bankruptcy Ordinance and Bankruptcy Rules, a statutory demand which grounds a petition for a bankruptcy order against a firm must be served on all partners of the firm, or whether it is sufficient to serve on one or more of its partners.  If I find the former to be the case, the second question arises, and that is whether, on the facts, the statutory demand has been properly served on one of the partners, Mr Tsang Moon Kau (“TMK”).

The Facts

2.  Fook Hau Trading Company is the firm name of a partnership.  There are four partners, namely TMK, Tsang Poa Kau, Chang Hoi Kau and Chang In Seong.  It has a business registration in which the nature of business was described as import/export/manufacturing/investment.  The principal place of business was stated as Rooms 1302-7, Sands Building, Hankow Road, Kowloon, Hong Kong (“the Office Address”) TMK was the managing partner.  His residential address was given as Flat B, 11^th Floor, 130 Argyle Street, Kowloon (“the Residential Address).

3.  The facts regarding the steps taken by the petitioning creditor in regard to the service of the statutory demand are not in dispute.  I set them out below.

4.  On 8 June 2006, a process server (“Mr Lau”) left a copy of the statutory demand at the Office Address.  He was also able to serve the statutory demand personally on 3 of the partners, namely Tsang Poa Kau, Chang Hoi Kau and Chang In Seong.  On the same day, Mr Lau attempted to serve the statutory demand on TMK at the Residential Address, but was told by a person claiming to be TMK’s son that TMK was in the Mainland and it was not known when he would be back to Hong Kong.  He subsequently visited the Office Address again and noted on a notice displayed outside the premises that the firm had moved to a new address at Room 1901, Ginza Plaza, 2a Sai Yeung Choi Street South, Mongkok, Kowloon (“the new Office Address”).

5.  On 19 July 2006, the petitioner’s solicitors sent appointment letters, together with a copy of the statutory demand, by registered and ordinary post at the Office address, the Residential Address and the new Office Address in order to fix an appointment with TMK when personal service of the statutory demand could be effected.  Mr Lau attended the Office Address on 26 July 2006 at 11:00 a.m. and on 28 July 2006 at 3:00 pm in accordance with the appointment letters and on both occasions found the address to be deserted.  On 1 August and 3 August 2006, Mr Lau attended the Residential Address in accordance with the appointments letters, but no one answered.  He was informed by the caretaker that TMK had moved out.  On 2 August and 4 August 2006, the process server attended the new Office Address in accordance with the appointment letters.  The place was occupied by I-Business Service Ltd, the staff of which told Mr Lau that there was no TMK at that address. 

6.  On 8 August 2006, Mr Hickin, a partner of the petitioning creditor’s solicitors, received a telephone call from a person who introduced himself as Mr H K Chang (“Mr Chang”).  Mr Chang did not tell Mr Hickin of his connection with TMK, but said that he, i.e. Mr Chang, had received the letter to TMK which included the statutory demand.  He said he intended to pass the letter on to TMK who was currently in the Mainland and have TMK sign and return the letter to the plaintiff’s solicitors in order to confirm receipt. 

7.  On 9 August 2006, an advertisement put up by the plaintiff appeared in a Chinese newspaper in Hong Kong giving notice of the statutory demand.

8.  It is not in dispute that the statutory demand came to the notice of TMK on 14 August 2006. This is, however, less than 3 weeks from the date of presentation of the petition. TMK received the document from the said Mr Chang and signed upon the same to acknowledge receipt.  His signed copy was sent to the plaintiff’s solicitors, who received it on 17 August 2006. 

9.  The petition was presented on 31 August 2006.  It was dated 4 July 2006.  The petition averred that the firm was indebted to the petitioning creditor in the sum of HK$9,254,263.87 together with interest; and that the

“

Debtor appears to be unable to pay the debt since 3 weeks have now elapsed since service on 8 June 2006 of a statutory demand in the prescribed form requiring the Debtor to pay the debt outstanding as at 7th June 2006.  Additionally on 8th June 2006, a statutory demand in the prescribed form in respect of the abovementioned debt was personally served on Tsang Poa Kau, Chang Hoi Kau and Chang In Seong, partners of the Debtor.”

10.  There were altogether 3 affirmations/affidavits filed together with the Petition on 31 August 2006.  Mr Lau made an affirmation in which he deposed to the service on 8 June 2006.  He did not make any reference to the appointment letters or his attendance pursuant thereto.  Mr Hickin made an affidavit deposing to his conversation with Mr Chang (spelt in his affidavit as “Cheung”).  He did not know at the time that TMK did not receive the statutory demand until 14August 2006.  The 3^rd affirmation related to the service of the petition and did not touch on the question of service of the statutory demand.  Evidence as to the appointment letters and the placing of the advertisement was given in affirmations filed only after the presentation of the petition.

11.  It will be seen from the above that the petitioning creditor was able to effect personal service of the statutory demand on 3 of the 4 partners of the firm.  This was the basis upon which the petitioner’s solicitor put forward the Certificate of Personal Service of Statutory Demands, and indeed, upon which the petition was based.  The question is whether this is sufficient service under the law.  I shall deal with that question first. 

Does service on the firm require service on all partners of the firm?

12.  One would expect the answer to the first question to be simple.  Unfortunately, this is not so.  The Ordinance and the Rules are silent on how service of a statutory demand on a partnership should be effected.  Both counsel inform the Court that there is no case law on the subject either. 

13.  In the absence of authorities, I start from first principles.  The first point to note is that a firm does not have a separate legal entity from its constituent members.  Rules of Court may make express provisions to allow the use of firm name as a convenient shorthand when they are suing, or are being sued in respect of rights and liabilities of the firm: Order 81 rule 1.  They may also provide for the manner of service of process.  Thus, Order 81 rule 3 provides that where partners are sued in the name of a firm, the writ may be served “on any one or more of the partners” or “at the principal place of business of the partnership within the jurisdiction, on any person having at the time of service the control or management of the partnership business there.” There are also specific rules dealing with enforcement of a judgment against the firm: Order 81 rule 5.  However, the existence of these rules does not alter the basic position that a partnership is in law an association of persons.  The fact that there are express rules rather reinforces the position that in the absence of the rules, a firm has no more status than its constituent members. 

14.  The second point is that bankruptcy laws are wholly the creation of statutes, see Re Potts, ex parte Taylor [1893] 1 QB 648 at 657, Re Tung Wan Hoi Kee Products Factory, ex parte the Official Receiver [1972] HKLR 66, 68.  The question of the proper mode of service on a firm must therefore be one of construction of the Ordinance and the Rules. 

15.  Before examining the relevant provisions now found in our Ordinance and Rules, it is relevant to note the history of the rules regarding service in bankruptcy.  Ms Tsui drew my attention to rule 279 of the English Bankruptcy Rules 1915 which provided:

“

Any notice or petition for which personal service is necessary shall be deemed to be duly served on all the members of a firm if it is served at the principal place of business of the firm in England, on any one of the partners, or upon any person having at the time of service the control or management of the partnership business there.”

(See Williams’ Law and Practice in Bankruptcy, 16^th ed. (1949) p. 660.)

16.  The Bankruptcy Rules introduced in Hong Kong in 1933 contained rule 59 which provided:

“	A creditor’s petition may be served in the same manner as a writ of summons.”

17.  In those days, bankruptcy was a 2-stage process.  There had to be an act of bankruptcy before the making of a receiving order, which can then be followed by an order of adjudication.  A bankruptcy notice had to be served if the petitioning creditor wished to rely on one of the grounds for establishing an act of bankruptcy.  Rule 48 provided that a bankruptcy notice shall be served and service thereof shall be proved in the like manner as was prescribed for service of a creditor’s petition.  Since the rules of Court at the time permitted a writ to be served on a firm by service in the manner no different from that prescribed under rule 279 of the English Bankruptcy Rules, the position in Hong Kong and in England with regard to service of a bankruptcy notice on a firm would appear to have been the same.

18.  In June 1987, the Bankruptcy (Amendment)(No. 2) Rules 1987 (LN 194 of 1987) repealed rule 59 and replaced it with a rule which provided:

“	(1)	Service of a creditor’s petition shall be effected by the creditor or his solicitor, or a person in their employment, delivering a sealed copy of the petition to the debtor.
	(2)	If the court is satisfied by affidavit or other evidence on oath that prompt personal service cannot be effected because the debtor is evading service of the petition or any other legal process, or for any other cause, it may order substituted service to be effected in such manner as it thinks fit.
	(3)	Where an order under paragraph (2) has been carried out, the petition shall be deemed to have been duly served on the debtor.”

19.  The Explanatory Note in LN 194 of 1987 stated:

“

Rule 59 of the Bankruptcy rules prescribes that creditor’s petition may be served in the same manner as a writ of summons.  This makes postal service possible.  These rules amend rule 59 by providing that the petition shall be served by way of personal service, or, if the debtor evades service, by way of substituted service.”

20.  With this background, I can now turn to the current provisions in the statute.

21.  Section 7 of the Ordinance provides:

“	(1)	The following provisions shall have effect in the case of a firm carrying on business in Hong Kong –
			…
		(b)	it shall be sufficient that a bankruptcy order against the firm be made in the firm name, without mentioning the names of the partners, and such bankruptcy order shall affect the joint and separate property of all the partners;
		(c)	the right of a creditor to present a bankruptcy petition against the firm, and the jurisdiction of the court to make a bankruptcy order against the firm, shall not be affected by the fact, if it is so, that all or any of the partners of the firm are not resident or domiciled in Hong Kong.
	(2)	The provisions of this section shall, so far as the nature of the case will permit, apply to any person carrying on business in Hong Kong in a name or style other than his own name.
	(3)	A creditor may present a petition for a bankruptcy order against a firm in the same way as he may present such a petition against a debtor provided that the conditions set out in sections 4(1)(c)(ii), 5, 6, 6A and 6B are met in respect of the firm.”

22.  Section 4(1)(c)(ii) provides that a bankruptcy petition shall not be presented to the court unless at any time in the period of 3 years ending with that day, the debtor has carried on business in Hong Kong.  In the case of a petition against the firm, section 7(1)(c) expressly allows a petition to be presented even where all or any of the partners are not resident or domiciled in Hong Kong, thus ousting the rule enshrined in section 4(1)(c)(i) of the Ordinance.

23.  Section 5 sets out some preliminary conditions which are not relevant here.  Section 6 sets out the grounds of the creditor’s petition.  One of the permitted grounds (in section 6(2)(c)), which is the ground relied on in this petition, is that the debtor appears to be unable to pay the debt.  Section 6A provides that for the purposes of section 6(2)(c), the debtor appears to be unable to pay a debt if, but only if, the debt is payable immediately and (as far as this case is concerned):

“

the petitioning creditor to whom the debt is owed has served on the debtor a demand (known as “the statutory demand”) in the prescribed form requiring him to pay the debt or to secure or compound for it to the satisfaction of the creditor, at least 3 weeks have elapsed since the demand was served and the demand has been neither complied with nor set aside in accordance with the rules.”

24.  Requirements as to service are to be found in rules 46 and 49. Rule 46 provides:

“	(1)	Rule 49 has effect as regards service of the statutory demand, and proof of that service by affidavit to be filed with a bankruptcy petition.
	(2)	The creditor shall do all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected.
	(3)	Where the statutory demand is for payment of a sum due under a judgment or order of any court and the creditor knows, or believes with reasonable cause –
		(a)	that the debtor has absconded or is keeping out of the way with a view to avoiding service; and
		(b)	there is no real prospect of the sum due being recovered by execution or other process,
		the demand may be advertised in one or more newspapers; and the time limited for compliance with the demand runs from the date of the advertisement’s appearance or (as the case may be) its first appearance.”

25.  Rule 49 makes very elaborate provisions on the form and contents of an affidavit proving service of the statutory demand.  The following are relevant:

“	(1)	Where under section 6A of the Ordinance the petition must have been preceded by a statutory demand, there must be filed in court, with the petition, an affidavit proving service of the demand.
		…
	(3)	Subject to paragraph (4), if the statutory demand has been served personally on the debtor, the affidavit must be made by the person who effected that service.
	(4)	If service of the statutory demand (however effected) has been acknowledged in writing either by the debtor himself, or by some person stating himself in the acknowledgement to be authorized to accept service on the debtor’s behalf, the affidavit must be made either by the creditor or by a person acting on his behalf, and the acknowledgement of service must be exhibited to the affidavit.
	(5)	If neither paragraph (3) nor (4) applies, the affidavit must be made by a person having direct personal knowledge of the means adopted for serving the statutory demand and must –
		(a)	give particulars of the steps which have been taken with a view to serving the demand personally;
		(b)	stating the means whereby (those steps having been ineffective) it was sought to bring the demand to the debtor’s attention; and
		(c)	specify a date by which, to the best of the knowledge information and belief of the person making the affidavit, the demand will have come to the debtor’s attention.
	(6)	The steps of which particulars are given for the purposes of paragraph 5(a) must be such as would have sufficed to justify an order for substituted service of a petition.
	(7)	If the affidavit specifies a date for the purposes of compliance with paragraph (5)(c), then unless the court otherwise orders, that date is deemed for the purposes of these rules to have been the date on which the statutory demand was served on the debtor…”

26.  On behalf of the petitioner, Mr Stock relies on section 7 and in particular on sub-section (3).  That sub-section provides that if the conditions in sections 4(1)(c), 5, 6, 6A and 6B are satisfied, a petition against the firm can be presented in the same way as a petition against a debtor.  As I understand the submissions, it is said that this means that a petition against the firm can be effectively served by serving one of the partners.  He submits that there would be little point in having section 7 if a petition against a firm has to be served as if it were a petition against all the partners individually.

27.  Ms Tsui’s submission is that in the absence of an express provision in the bankruptcy rules, service of a statutory demand on a firm which comprises of several individuals requires service on each of those individuals.  She submits that the court has always recognized that a bankruptcy order is a very serious order and insisted upon strict adherence to the rules: see Re Li Wang HCB 15846 of 2003 (30 June 2004, A Cheung J) paragraph 4 and Re Cheung Hoi Chu HCB 865 of 1998 (24 December 1998 Le Pichon J) p. 10.

28.  Mr Stock’s answer to the last point is that to say that the court requires the rules to be construed strictly begs the question of what the rules are.  I see the logic in that submission but I think in the present case when one seeks to identify what are the rules as to service, it is difficult to find a sufficient intention manifested in section 7(3) to support Mr Stock’s contention.  In my view, that section only permits the bringing of a bankruptcy petition against a firm and spells out the conditions which are required for the bringing of such a petition and also the consequences of a bankruptcy order made against the firm.  I do not agree that there would be little point in having section 7 if it is not to be construed in the manner suggested.  Significantly, section 7(1)(b) makes it clear that a bankruptcy order against a firm would affect not only the separate property of the partners, but also the joint property of the firm.  Sub-section (3) is important in laying down the conditions which must be satisfied (and inferentially those which need not be satisfied) for a creditor to present a petition against a firm.  Even if one were to adopt a construction of section 7(3), and in particular the words, “in the same way as he may present a petition against a debtor” as being wide enough to embrace the concept of service, it would only mean that the manner of service as prescribed in rule 46 should apply.  It does not have the effect of deeming service on a partner of the firm to be service on the firm.

29.  The rule as to service which one finds in rule 46 is that there has to be personal service unless it is not reasonably practicable to do so.  This was the result of a deliberate change effected since 1987.  The removal of the rule that permitted postal service also had the effect of abolishing the rule which permitted service on the firm by simply leaving the notice at the firm’s principal place of business.  There has never been a provision in our rules (such as rule 279 of the English Bankruptcy Rule 1915) which permits service of a notice on one of the partners of the firm as effective service on the firm.  A bankruptcy order has serious consequences on an individual.  A bankruptcy order against a firm has effect not only on the joint property of the firm, but also on the separate property of each of its members: see section 7(1)(b).  As noted by Le Pichon J (as she then was) in Re Cheung Hoi Chu HCB 865/1998 (quoting from Fletcher on the Law of Insolvency), the act of service is procedurally one of the most vital steps of all, and the court will scrutinize its execution and the attending circumstances, with the utmost strictness.  That being the case, one should be slow to infer an intention on the part of the legislature or the rule making body of allowing a bankruptcy order to be made against a firm when one or more of the partners has not been served with the statutory demand.  I agree with Ms Tsui that such a rule has to be specifically provided for. 

30.  Both counsel made submissions on the provisions of Order 81 and what, if any, guide one can find from those provisions.  Order 81 rule 3 is the rule on service of writ.  Order 81 rule 5 deals with enforcing judgment or order against a firm.  These apply to civil proceedings by writ and have no application to the service of a statutory demand.  Taking into account the history as well as the present state of the Bankruptcy Rules, I do not think it would be wise to derive too much assistance from a regime which was clearly not intended to be applicable.  Certainly, they cannot be applied by analogy.

31.  In the result, I accept Ms Tsui’s submission that on a proper construction of the relevant provisions, service on only some of the partners of the firm does not suffice as service on the firm.

Has TMK been properly served?

32.  I turn to the second question. Although the petitioning creditor has not been successful in serving the statutory demand on TMK personally, that does not necessarily mean that it has failed to serve TMK properly.  Rule 46 does not require personal service in every case.  If personal service is not practicable in the circumstances, the petitioning creditor would have discharged its duty under rule 46 by doing all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention.  Whether a petitioning creditor has done so must depend on the facts.

33.  In this case, the petitioning creditor has attempted to serve TMK at his last known office address and his last known residential address in Hong Kong.  It has also left appointment letters at those addresses.  These are all reasonable steps to take.  However, it is not sufficient merely to show that what has been done is reasonable.  What rule 46 requires is that the creditor must demonstrate that it has done all that is reasonable in the circumstances.  When the petitioning creditor made the attempts to serve TMK, it received information that TMK was in the Mainland.  There is no evidence before the Court as to whether the petitioning creditor made any inquiry to ascertain either an address, a telephone number, a fax number or any other means of communicating the statutory demand to TMK in the Mainland.  Whilst Mr Hickin was told by Mr Chang that he intended to pass the letter on to TMK who was currently in the Mainland and have TMK sign and return the letter to the petitioner’s solicitors in order to confirm receipt, the petitioning creditor did not wait until the lapse of 3 week from the date of TMK’s receipt before presenting the petition.  Instead, the petition was solely based on the service of the petition on the other 3 partners.  At the hearing of the petition, the petitioning creditor sought to rely on the placing of the advertisement on 9 August as service on TMK.  Ms Tsui objected to the reliance on this fact on two basis (1) that rule 49 requires the affidavit of service to be filed together with the petition and this was done in relation to the placing of the advertisement and (2) the petition which was presented was founded solely on the statutory demand served on the other 3 partners; with no reference being made to the advertisement.  Mr Stock responded to the point by seeking to invoke rule 203 (a rule which permits the Court to waive non-compliance with any of the rules) and by seeking leave to amend the petition.

34.  It seems to me, however, that reliance on the advertisement on 9 August is misplaced.  All the information obtained by the petition up to and including 8 August was that TMK was in the Mainland.  I fail to see how placing an advertisement with a local newspaper can advance the petitioner’s position.   

35.  Paragraph 1.1 of the Practice Direction on Bankruptcy and Winding-up Proceedings requires the direction to be observed in relation to the service of statutory demands and the filing of bankruptcy petitions. Paragraphs 2.1 to 2.3 of the Direction provide:

“	2.1	The creditor is under an obligation to do all that is reasonable to bring the statutory demand to the debtor’s attention and, if practicable, to cause personal service to be effected.  If the debtor is represented by a solicitor, an attempt should be made to arrange an appointment for personal service through such solicitor.  Rule 49(4) of the Bankruptcy Rules enables a solicitor to accept service of a statutory demand on behalf of his client.
	2.2	Practitioners are reminded that a statutory demand is not a document issued by the Court.  Leave to service out of jurisdiction and leave to effect service by way of substituted service are not, therefore required.  A creditor wishing to service a statutory demand outside the jurisdiction in a foreign country must adopt the procedure prescribed by the Rules of the High Court in Order 11 Rule 6.
	2.3	When a statutory demand is to be served outside the jurisdiction, the time limits of 21 days and 18 days respectively referred to in the demand must be amended by adding 21 days to each of these time limits wherever they appeared.
	…”

36.  In the present case, the petitioning creditor made no attempt to serve TMK in the Mainland.  Nor has it waited for the lapse of the requisite period from the date when TMK acknowledged receipt of the statutory demand before serving the petition.  In all the circumstances, I am not satisfied that the petitioning creditor has done all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention 3 weeks before the date of presentation of the petition.  That being my view, it is unnecessary for me to consider the further point of whether the petitioning creditor should be allowed to rely on the steps taken in serving TMK when those steps have not been set out in the petition or in the supporting affidavits filed with the petition.  I only note that the petitioning creditor faces considerable difficulty in relying on rule 203 having regard to the decisions of the Court in Re Cheung Hoi Chu HCB 865/1998 and in Re Li Wai Man HCB 211 of 1999.

37.  The petitioning creditor asked the Court, as a last resort, to make an order only against the firm and the other three partners.  I do not see how the Court can do this.  Since, on my finding, the firm has not been properly served, I do not see how I can properly make a bankruptcy order against the firm.  Nor can I see how I can treat the petition as if it were 3 separate petitions, one against each of the partners who have been successfully served.

38.  In the circumstances, I would dismiss this petition and would make an order nisi that the respondents shall have the costs of the petition.

39.  I would like to thank both counsel for their able assistance.