RE LI MAN HOO

HCB 802/2018

[2020] HKCFI 1354

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 802 OF 2018

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J U D G M E N T

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1.  By a bankruptcy petition presented on 8 February 2018, FTLife Insurance Company Limited (formerly known as Ageas Insurance Company (Asia) Limited and Fortis Insurance Company (Asia) Limited (“Petitioner”) seeks a bankruptcy order against Mr Li Man Hoo (“Debtor”).

2.  The substantive hearing of the Petition was scheduled to be heard on 9 January 2019 but was adjourned by consent to 26 March 2020.  The adjourned hearing was further adjourned to this hearing due to the General Adjourned Period announced by the Judiciary.

A.   BACKGROUND

3.  The Petitioner engages in insurance business in Hong Kong.  On 23 June 2010, the Petitioner and the Debtor entered into, inter alia, the following agreements:  

(1)  the Agent’s Contract for Selling Long Term Insurance Business whereby the Debtor was engaged by the Petitioner as an agent for the purpose of soliciting application for insurance and such other business as the Petitioner may from time to time transact (“Contract”);

(2)  the Agreement whereby the Petitioner agreed to advance a HK$827,698 loan (“Loan”) and monthly financing advances (“MFA”) to the Debtor (“Loan Agreement”); and

(3)  the Side Agreement which governs the Debtor’s entitlement to receive Performance Bonus (“PB”) from the Petitioner (“Side Agreement”).

4.  Further, on 23 June 2010, the Debtor signed an Authorisation Letter for Agents’ Deferred Incentive Scheme (“Scheme”), which was copied to the Petitioner.

5.  The Loan Agreement provides, inter alia, as follows:

(1)  if the Debtor is entitled to any PB, the PB shall first be used by the Petitioner to repay the Outstanding Sum[1], and interest at prevailing prime rate quoted by HSBC (“Prime”) plus       1.5% p.a. shall be charged on the Outstanding Sum from 1 July 2013 (“Repayment Date”) until full repayment (clause 3.1(i)-(ii));

(2)  if the Debtor is not entitled to any PB, interest at Prime plus 1.5% p.a. shall be charged on the Loan from the draw down date, and the MFA from the date of demand until full repayment (clause 3.2);

(3)  if the Debtor is terminated for whatever reason, the Petitioner shall be entitled to demand repayment of the Outstanding Sum, which shall become immediately due and payable (clause 4.1(vi));

(4)  if the Debtor fails to pay any such amounts on demand, interest shall be charged on such balance at 7% p.a. or Prime plus 3% p.a. whichever is higher (clause 5.1);

(5)  “Any statement as to the aforesaid accounts, Outstanding Sum, [PB] and amounts issued by the [Petitioner] shall, in the absence of manifest error in computation, be final and conclusive and binding on the [Debtor]” (clause 5.3).

6.  It is common ground that by April 2014, the Loan was reduced to HK$769,883.09, while the total MFA advanced to the Debtor from July 2010 to June 2012 was HK$505,802.

7.  Under the Side Agreement, which became effective on 1 July 2010, the parties agreed, inter alia, that the Petitioner shall pay Target PB to the debtor if the Weighted Total Annualised First Year Commission (“AFYC”) produced by the Debtor during the Validation Period (from 1 July 2010 to 30 June 2013) reaches or exceeds the Validation Target (“Target”), where:

(1)  the Weighted Total AFYC shall be the aggregate of the total personal AFYC of  the Debtor and those of his 1^st, 2^nd and 3^rd Tier direct agents multiplied by the corresponding hierarchy factor (Section I, clause 2a);

(2)  for the first contract year (from 1 July 2010 to 30 June 2011), the Target PB and the Target is HK$1,379,497 and HK$919,665 respectively (Section I, clause 2b);

(3)  the Weighted Total AFYC in the Validation Period is lower than the Target but greater than 75% of the Target, the PB shall be calculated at: Target PB x Weight Total AFYC divided by Target (Section I, clause 2B); 

(4)  any PB payable to the Debtor shall first be used by the Petitioner to repay and offset the outstanding Loan and MFA and such other amounts owed by the Debtor to the Petitioner, and any balance after such repayment and setoff shall be payable by the Petitioner to the Debtor in the month immediately after the Validation Period (Section I, clause 3); and

(5)  “Any statement as to the aforesaid accounts, amounts, monies, AFYC or [PB] issued by the [Petitioner] shall, in the absence of manifest error in computation, be final and conclusive and binding on the [Debtor]” (Section II, clause 7).

8.  By letter dated 6 July 2017, the Petitioner gave notice to the Debtor to terminate all agreements with effect from 5 August 2017. This was followed by a letter dated 3 August 2017 whereby the Petitioner demanded the Debtor to repay HK$1,293,274.81, which comprised of (1) HK$769,883.09, being the outstanding amount of Loan; (2) HK$505,802, being the MFA; and (3) interest at Prime + 3% p.a. or 7% p.a. whichever is higher from 6 August 2017 until full repayment (“1^st Demand”).

9.  A few days later, on 8 August 2017, the Petitioner revised the 1^st Demand by deducting the renewal commission payable to the Debtor (HK$10,910.15), and required the Debtor to repay HK$1,282,364.66 plus interest at Prime + 3% p.a. or 7% p.a. whichever is higher from 6 August 2017 until full repayment (“2^nd Demand”). 

10.  No payment was made by the Debtor.  The Petitioner through its solicitors issued a statutory demand dated 1 December 2017 (“SD”), which was served on the Debtor on 18 December 2017.  In the SD, the Petitioner referred to the Contract, Loan Agreement, Side Agreement and the Authorisation Letter, the termination of these agreements and the 1^st and 2^nd Demands issued to the Debtor, and stated that the Debtor was indebted to the Petitioner in the sum of HK$1,653,815.14 (“Debt”), which comprised of:   

Details	HK$
Loan	769,883.09
MFA	505,802.00
LESS renewal commission	(10,910.15)
Sub-total as at 6/8/2017 ADD Interest on Loan at Prime + 1.5% p.a. (23/6/2010 to 5/8/2017) ADD Interest on Loan & MFA at Prime + 3% p.a.  (6/8/2017 to 1/12/2017) Total as at 1/12/2017	1,264,774.94 356,329.31 32,710.89 1,653,815.14

11.  In response, in his letter dated 6 January 2018 to the Petitioner’s solicitors, the Debtor denied “the claims made in the [SD]” and said that any attempts to advance those claims would be “vigorously contested”.

12.  Following the Debtor’s failure to comply with the SD, on 8 February 2018, the petition was presented.  In the petition, the Petitioner essentially repeated the contents of the SD and stated that the Debt is “for a liquidated sum payable immediately and the Debtor appears to be unable to pay it”.   

13.  On 6 April 2018 the Debtor, whilst acting in person, filed a notice of intention to oppose petition stating that he intends to show cause against the petition and to dispute the Debt on, inter alia, the grounds that (1) “the figure of the Debts (sic) is not correct”; and (2) PB is not repayable to the Petitioner after the 84^th contract month (“1^st Notice”). 

14.  On 7 May 2018, the Debtor’s solicitors filed another notice of intention to oppose petition (“2^nd Notice”), stating that the Debtor intends to show cause against the petition and dispute the Debt on the grounds that:

(1)  the Debtor achieved 91.88% of the Target during the Validation Period and hence was entitled to a PB of HK$1,267,502.54, which is not repayable to the Petitioner with effect from 5 August 2017 (i.e. after the 84^th contract month);

(2)  the Petitioner has not paid HK$103,811.91, being part of the PB to which the Debtor was entitled;

(3)  the Petitioner failed to set off HK$120,520.01 which had been deducted from the Debtor’s account maintained with Principal Trust Company (Asia) Limited (“PTC”) under the Scheme; and

(4)  the Petitioner failed to set off the commission which the Debtor was entitled to receive, the amount of which would be set out in his affirmation. 

B.   DISCUSSION

B1.   Applicable principles

15.  The relevant principles have been set out in Re Leung Cherng Jiunn, HCB 244/2014, unrep., 21 May 2015, at §§17-28 (“CFI”), affirmed in part and restated by the Court of Appeal in Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at §§8-10, 13-17, 20-27, per Kwan JA (“CA”) and may be summarised as follows:

(1)  Bankruptcy proceedings are summary in nature and are not meant to be used for the purpose of debt collection.  The jurisdiction to make a bankruptcy order will only be exercised in very clear cases.   If the Court is satisfied that there is a bona fide dispute on the debt, it will not usurp the function of a civil court and decide the disputes between the parties.   The usual practice of the Court is to dismiss the petition, leaving the petitioner to establish himself as a creditor by judgment to be obtained in the civil court (§17 CFI, citing Re Malcolm Westley Casselle, HCB 1698/2010, 8 March 2011, §23, per To J; Re Mak Kam Ling [2004] 4 HKC 202 at §§26 and 31, per A Cheung J (as he then was); §27(5) CA).  

(2)  The statutory demand is an important document.  It informs the debtor of the way in which the debt arose so that he would know what course he should take in the light of the information given.  It is “the straight and narrow gateway” through which a creditor must pass in order to establish the debtor’s apparent inability to pay the debt demanded in order for a bankruptcy petition to be presented (§24 CFI, §13 CA, citing TSB Bank plc v Platts (No 2) [1998] BPIR 284 at 288H-290A).

(3)  Whilst the statutory code affords the Court a degree of flexibility in dealing with an application to set aside a statutory demand for defects, this is not to be taken as a charter for slipshod in preparation of statutory demands.  The making of a bankruptcy order remains a serious step for the debtor, and the prescribed preliminaries in the statutory code are intended to afford protection to him.  If a statutory demand is defective, the Court will be alert to see whether those mistakes have caused or will cause any prejudice to the debtor.  Where the debt in issue was not a large sum, it could not be said the defect would have made no difference in that the debtor would not have paid anyway and no prejudice would have been suffered (§§15-16 CA, citing In re A Debtor (No 1 of 1987) [1989] 1 WLR 271 at 280D-E, per Nicholls LJ).

(4)  Rule 70 of the Bankruptcy Rules imposes the burden on a creditor to prove, at the hearing of the petition, any matters which the debtor has given notice that he intends to dispute (CFI §§26-27).

(5)  In opposing a petition, the debtor has to show a bona fide dispute on substantial grounds by sufficiently precise evidence which is believable, and must establish that he has a defence of substance, not just a fair probability of one (§27(1)-(4) CA; Re Soetrisno Farida [2019] HKCFI 2756, at §11, per Ng J). 

16.  Section 6(1) of the Bankruptcy Ordinance (Cap 6) (“Ordinance”) provides that a creditor’s petition must be in respect of one or more debts owed by the debtor.  Section 6(2) states:

“Subject to sections 6A to 6C, a creditor’s petition may be presented to the court in respect of a debt or debts if, but only if, at the time the petition is presented –

(a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds $10,000 or a prescribed amount;

(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured;

(c) the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay; and

(d) there is no outstanding application to set aside a statutory demand served under section 6A in respect of the debt or any of the debts.” (underlined added)

17.  Section 6A(1) of the Ordinance provides that “for the purpose 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 either” (a) a statutory demand in the prescribed form was served and the demand has been neither complied with nor set aside in accordance with the rules; or (b) execution in respect of the debt on a judgment or order of any court has been returned unsatisfied in whole or in part.

18.  Ms Sabrina Ho, counsel for the Petitioner, submits that where a debtor seeks to rely on a cross claim to oppose a petition, he has to show that the cross claim has substance and that the claims exceeds the amount of the petitioning debt (Re Shang Lili, HCB 5329/2014, unrep., 25 January 2016, at §§10, 24-26, per Ng J).  As a general principle I agree, but I do not think that this principle applies to the present case for 2 main reasons. 

(1)  In the SD, the Petitioner stated that upon termination of all the agreements, the Debtor was obliged to repay “all indebtedness or other sums owed or payable” by the Debtor to the Petitioner.  If and to the extent that the Petitioner was obliged to pay  certain amounts to the Debtor, such amounts ought to have been deducted from the sums owed by the Debtor.  The Petitioner was only entitled to demand the net amount due or payable by the Debtor. Indeed, this was what the Petitioner did when it give credit to the renewal commission payable to the Debtor in the SD. 

(2)  Specially, in the context of PB, there are provisions under the Loan Agreement and the Side Agreement which require the Petitioner to first deduct the PB from the Outstanding Sum.  

(3)  The Debtor has in the 1^st and 2^nd Notices made clear that he disputes the amount of the Debt.  By virtue of Rule 70, the burden is on the Petitioner to prove that the Debt was due and payable when the SD was issued. 

19.  Ms Ho contends that even if the Court considers that some of the cross claims raised by the Debtor have substance, so long as the Petitioner is able to show that the Debtor owes more than HK$10,000 to the Petitioner, that would be sufficient for the Court to make a bankruptcy order against the Debtor, relying on section 6(2)(a) of the Ordinance and Re Sy Chin Mong Stephen, HCB 5784/2013, unrep., 9 May 2014, at §§11, 12, 19-21, per Ng J which, in turn, referred to In re a Debtor (No 1 of 1987) [1989] 1 WLR 271).  I disagree. 

(1)  The contention ignores the fact that the requirements prescribed in section 6(2)(a) to (d) are cumulative.  It is for the Petitioner to demonstrate that the debt is for an amount in excess of the statutory requirement (sub-section (a)), and that the debtor is unable to pay the debt (sub-section (c)).

(2)  The submission is inconsistent with the principles discussed in §15(2)-(3) above. 

(3)  Re Sy Chin Mong Stephen does not support Ms Ho’s contention.  In that case, the principal claimed in the  statutory demand was HK$103 million (based on the terms of a settlement agreement between the petitioner and the debtor).  The learned Judge found that the only factual dispute was the market price of the 200 million odd shares in a listed company transferred by Mr Sy to the petitioner as partial repayment, which the parties agreed to value as at 31 August 2019 but on that date, the price fluctuated between HK$0.18 and HK$0.19 (§§16-18).  It was against this background that Ng J accepted the petitioner’s submission that if one calculated the outstanding amount in the way most favourable to Mr Sy (i.e. using HK$0.19), the outstanding principal alone would be HK$101 million, which was slightly smaller than the HK$103 million claimed in the statutory demand, and held that (a) “the difference is immaterial for the present purpose” (§19), (b) Mr Sy failed to raise a bona fide dispute to the bulk of the Debt i.e. HK$101 million odd as principal (plus interest) and (c) Mr Sy is unable to pay his debts (§20).

B2.   Bona fide dispute on the Debt

20.  The Debtor in the 1^st and 2^nd Notices and his affirmation disputes the Debt on the basis that the Petitioner has failed to set off the following amounts from the Debt:

(1)  HK$1,267,502.54, being the PB payable to him (“PB Claim”);

(2)  HK$120,520.01, being the amount deducted by PTC under the Scheme (“Scheme Claim”);

(3)  HK$543,239.03, being the commission he was entitled to receive (“Commission Claim”);

(4)  the commission attributable to the renewal of the insurance business obtained by him and his next tier agents and accrued after termination of the Contract (“Post Contract Commission Claim”); and

(5)  HK$249,458.03, being interest already paid to the Petitioner (“Interest Claim”).

21.  Ms Ho submits that the above claims do not amount to a bona fide dispute on substantial grounds of the Debt.  At the same time, Ms Ho puts forward different versions of the Debt in that:

(1)  in her Skeleton Argument dated 5 June 2020, she relies on an “Annex 3: Calculation of Debt as of 5 June 2020” in which the entire amount of the Scheme Claim was deducted from the principal as of 6 August 2017 and, after re-calculating interest, the amount due as at 5 June 2020 was HK$1,760,050.11; and

(2)  in her Supplemental Skeleton Argument dated 10 June 2020, she relies on an “Annex 4: Breakdown of the Debt as of 12 June 2020 taking out interest of HK$249,458.03” (i.e. Interest Claim) and, after re-calculating interest, the amount due as at 12 June 2020 was HK$1,512,342.85. 

22.  At the hearing, Ms Ho submits that Annex 4 is the “final version”.

23.  Despite the apparent acceptance of the Scheme Claim and the Interest Claim (which the Petitioner deducts for the purpose of the hearing but disputes the Debtor’s claim), no attempt has been made by the Petitioner to amend the Debt stated in the SD and the petition.  Ms Ho submits that no amendment is necessary.  So long as the bulk of the Debt is indisputable, that would be sufficient for the Court to make a bankruptcy order against the Debtor.  For the reasons stated in §19 above, I am unable to accept the submission. 

24.  In my judgment, the SD and the petition are defective as they both rely on the Debt, which the Petitioner accepts at the hearing to be incorrect.  The Scheme Claim and the Interest Claim is not immaterial, as they represent almost one-fourth of the Debt.  Nor is the defect a matter of mere technicality.  The Debtor was entitled to know what constituted the Debt and decided how to respond to the claim.  As stated by Nicholls LJ (as he then was) in In re A Debtor (No 1 of 1987) [1989] 1 WLR 271 at 280D-E (and approved by the CA in Re Leung Cherng Jiunn (§§15-16)) where, as here, the debt in issue was not a large sum, it could not be said the defect would have made no difference in that the debtor would not have paid anyway and no prejudice would have been suffered.  For this reason alone, I would dismiss the petition. 

25.  Even if, contrary to my view, the defect in the SD and the petition is not a matter which warrants the dismissal of the petition, for the reasons stated in §§26-32 below, I do not think that the Petitioner has discharged the burden of proving the matters which the Debtor has given notice to dispute, as required by Rule 70.

26.  In respect of the PB Claim, the Debtor contends that during the Validation Period, his Weighted Total AFYC was HK$845,002, which represented 91.88% of the Target.  As the Target PB was HK$1,379,497, he was entitled to receive pro-rated PB in the amount of HK$1,267,502.54.  For this purpose, the Debtor produced the notices dated 11 March 2014 and 29 January 2015 issued by the Inland Revenue Department for the years 2010/2011 to 2012/2013 to show the commission income received from the Petitioner during the period. 

27.  Ms Ho submits that the Debtor was not entitled to receive any PB, given that:

(1)  The Debtor’s entitlement to PB is governed by the Side Agreement, which contains a “conclusive evidence clause” (see §7(5) above).  Hence, in the absence of manifest or obvious error, the Petitioner’s calculation and the records are “final, conclusive and binding” on the Debtor, citing Heraeus Limited v Chan Yun Mui & anor [2018] HKCFI 2721 at §§59-77; North Shore Ventures Ltd v Anstead Holdings Inc & ors [2012] Ch 31 at §51.

(2)  According to the Petitioner’s calculation, as verified by its records, the Debtor’s Weighted Total AFYC during the Validation Period was HK$489,804, which was around 53% of the Target.  As the Debtor failed to reach 75% of the Target, he was not entitled to receive any PB.

(3)  The income relied upon by the Debtor was not the same as Weighted Total AFYC, and only the latter should be used to calculate PB. The Petitioner produced a summary (“Summary”) and the statements showing details of the Weighted Total AFYC for the years 2010 to 2013 in support. 

(4)  The Petitioner also produced the Commission Account Statements from March 2012 to June 2013, which set out all the income (including FYC), the MFA, the repayments made and the payments charged against the Debtor for each month (“Commission Statements”).  Ms Ho submits that each of these Commission Statements contained a “Balance Brought Forward” representing the amounts carried forward from the preceding month, and the amounts stated are indisputable, given that the Debtor also refers to the Commission Statements. 

28.  In response, Ms la Fontaine Chung, counsel for the Debtor, submits that the Petitioner’s records contained manifest errors and cannot be regarded as conclusive.  For this purpose, she identifies the discrepancies between the FYC stated in the Summary and those stated in the Commission Statements (where available) in Schedule 3 to her Reply.  It is clear from Schedule 3 that for the 16 months from March 2012 to June 2013, the Weighted Total FYC stated in the Summary was lower than the Weighted Total FYC stated in the Commission Statements by HK$31,474.64.  The Petitioner has not been able to explain the discrepancies.

29.  Ms Ho seeks to brush aside the discrepancies by submitting that even taking into account such discrepancies, the Weighted Total AFYC was still below 75% of the Target and, as such, no PB was payable to the Debtor.  The submission misses the point.  The existence of the discrepancies shows that the Petitioner’s calculation and the Statements cannot, on their face, be regarded as conclusive.  As the burden is on the Petitioner to prove any matter in dispute, its inability to explain the discrepancies shows that there is a bona fide dispute on the PB Claim.  

30.  As for the Commission Claim, the Debtor alleges that the Petitioner wrongfully withheld commission in the total amount of HK$543,239.03 for the period from July 2013 to August 2017 and failed to set off such commission from the Outstanding Sum.  He arrived at this amount based on the opening balance shown as at 1 July 2013 and the closing balance as at 13 August 2017 as shown in the Commission Statements, and subtracted the upfront repayments and finance interest[2] paid to the Petitioner during the period from July 2013 to June 2014.  

31.  Ms Ho submits that the Debtor’s calculation is wrong.  According to the Petitioner’s calculation and records (which include the Commission Statements, a table showing the calculation of commission and “GI O/S Premium Deduction” and another table listing the commission income, the repayments, the payments and various other adjustments), the Debtor was entitled to commission in the total amount of HK$552,582.34 for the period from July 2013 to July 2017, which was applied to pay off the Loan, the MFA and interest owed by the Debtor, leaving an outstanding amount of HK$1,013,837.90.  

32.  It is not the function of the Court hearing a bankruptcy petition to go into the detailed calculations and supporting documents adduced by the parties or to resolve their differences.  As the Petitioner needs to establish its entitlement to the Debt through a civil action, I will say no more on the merit of the Commission Claim and the Post Contract Commission Claim. 

C.   DISPOSITION

33.  For the reasons set out above, I consider that the Petitioner fails to prove the matters which the Debtor has given notice of his intention to dispute and that there is a bona fide dispute on the Debt. I dismiss the petition. 

34.  I make a costs order nisi that the costs of the petition be paid by the Petitioner to the Debtor, to be assessed by way of gross sum assessment.  The Debtor do submit a statement for gross sum assessment within 3 days of this Judgment and the Petitioner do provide its comments, if any, within 3 days thereafter.  The costs of the Official Receiver to be paid out of the deposit.