INTERNATIONAL BANK OF ASIA LTD., A CREDITOR, EX PARTE

HCB 865, 866, 867 and 868/98

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H E A D N O T E

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Service of statutory demands - Bankruptcy Rules 46 and 49 - service on debtor by leaving the demand at the reception of the registered office of the company of which the debtor was a director up to the day prior to such purported service and by insertion in the letter box of the residence of the debtor - whether sufficient for the purposes of Bankruptcy Rule 49(5) or (6)

Bankruptcy Rule 49(9) - discretion of court to decline to file the petition - when triggered - need for procedure to be introduced for the vetting of petitions before they are filed

Irregular service - whether irregularity may be waived under Bankruptcy Rule 203

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY NOS.HCB 865, 866, 867 AND 868 OF 1998

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HCB 865/98

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(HEARD TOGETHER)

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J U D G M E N T

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1. This is a hearing to determine a preliminary issue which arises out of four statutory demands made and bankruptcy petitions presented by the International Bank of Asia Ltd. ("the Petitioner") against Cheung Hoi-chu, Tang Ting-kan, Tang Yiu-hong, Eric and Tang Yiu-chuen, Eugene (collectively "the Debtors"). The 1st and 2nd Debtors are respectively the mother and father of the 3rd and 4th Debtors. The 2nd, 3rd and 4th Debtors, but not the 1st Debtor were until 22 July 1998, directors of German Kitchen (China) Ltd. ("the Company").

2. The debt alleged to be due to the Petitioner by each of the Debtors arises out of personal guarantees dated 24 September 1997 and 3 June 1998 provided by them in respect of the indebtedness of the Company which was the principal debtor. The amount of indebtedness stated in the statutory demands dated 6 July 1998 for each of the Debtors is approximately US$5.15 million and HK$293,000, aggregating to just over HK$40 million. By 25 August 1998, the date of the Petitions, it had increased to US$5.223 million and HK$302,000, aggregating to just over HK$41 million. As at 1 December 1998, the indebtedness was reduced to HK$2.8 million and on 4 December 1998 and leave was granted for the Petitions to be amended to reflect this change.

3. The Company was owned as to 60% by German Kitchen (HK) Ltd. ("GKHK") of which the 2nd Debtor was a co-founder and as to 40%, indirectly, by Shortridge Limited ("Shortridge"), a subsidiary of China International Trust and Investment Corporation ("CITIC"). The Company was itself a subsidiary of GKC Holdings Limited, a company listed on the Stock Exchange of Hong Kong. As at the date of the statutory demands, the Petitioner had not taken steps to recover payment of the indebtedness from the principal debtor. Nor would it appear that any steps had been taken to recover the indebtedness from Shortridge, effectively GKHK's partner, which had provided a letter of comfort to the Petitioner. For reasons not readily apparent, the Petitioner sought repayment only from the Debtors under personal guarantees.

4. Steps were eventually taken against Shortridge and a settlement of an intended action by the Petitioner was reached shortly before this hearing under which Shortridge agreed to pay $39 million of the Company's indebtedness upon the assignment of the Petitioner's rights against the Debtors. This accounted for the amendment to the Petition referred to above. The Petitioner took no steps to wind up the Company. Rather, it transpires that more than three months after the date the Petitioner took steps against the Debtors and three months after the 2nd, 3rd and 4th Debtors resigned from the Company, by notice dated 21 October 1998, it went into voluntary liquidation pursuant to section 228A of Cap.32. because of its inability to continue its business.

The preliminary issue

5. The preliminary issue for determination concerns service on the Debtors. There are two sub-issues since the question of service arises in relation to the statutory demands and the bankruptcy petitions. I will first deal with the statutory demands.

A. Service of the statutory demands

6. According to the affirmations of service filed by Nirvair Singh, the relevant statutory demand was served on each of the Debtors in the following manner. On Monday, 27 July 1998, an envelope containing the statutory demand with a covering letter was delivered to each of the Debtors by Mr Singh by leaving the same at the reception of the Company situate on the 21st Floor of Tai Yau Building, 181 Johnston Road, Wanchai during office hours. Mr Singh also delivered to each of the Debtors another envelope containing (a copy of) the statutory demand with a covering letter by depositing the same in the letter box situate on the ground floor lobby of the building where the relevant Debtor resided.

Statutory requirements

7. The requirements as to service of the statutory demand are set out in rule 46. For present purposes, the relevant provisions read :

"46. Requirements as to service

(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.

......"

The material parts of rule 49 are :

"49. Proof of service of statutory 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 acknowledgment 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 acknowledgment 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) state 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.

...

(9) The court may decline to file the petition if not satisfied that the creditor has discharged the obligation imposed on him by rule 46(2)."

8. Here, there was no personal service on the relevant Debtors, nor is it the case where there has been an acknowledgement in writing within para.(4) of rule 49. So neither paragraphs (3) or (4) can assist. When one turns to the relevant affirmation of service, it is plain that it falls far short of the requirements of paragraphs (5) or (6) of rule 49 : there was simply no attempt to take steps with a view to serving the demands personally or to bring them to the notice of the Debtors. That being the case, the discretion vested in the court by rule 49 "to decline to file the petition" was plainly triggered.

9. The attempt at effecting service can only be described as "sloppy". Such irregularity should neither be tolerated nor encouraged. It is imperative that this fact be brought home to petitioners generally and their legal advisers.

10. So why were the four Petitions "allowed" to be filed? It would appear that no opportunity arose for paragraph (9) of rule 49 to be considered because, upon enquiry, it transpires that there is no procedure in place for the vetting of petitions before they are filed. When the new rules were introduced, the need to have the petitions "vetted" as regards service to enable the court to consider whether or not the discretion has been trigged and, if so, whether it should be exercised, appears to have been overlooked. That is a lacuna that needs to be addressed urgently. There is little point in having provisions such as paragraph (9) of rule 49 if, in practice, there is no procedure to enable it to be given effect.

"Irregularity" of service

11. At the hearing, counsel for the Petitioner eventually conceded, correctly in my view, that service of the statutory demands was "irregular". Nevertheless counsel for the Petitioner submitted that the court has power under rule 203 to cure any irregularity in service which ought to be exercised. Reference was made to In re A Debtor (No.1 of 1987) [1989] 1 WLR 271, a case where the statutory demand was made on the wrong form and the amount of money still outstanding had been calculated incorrectly. At page 276G-277B, Nicholls LJ (as he then was) observed as follows :

" Mr Ley, for the debtor, submitted that the test to be applied by the court in determining whether a statutory demand ought to be set aside is the objective one, of whether the demand is calculated to perplex, formerly applied on applications to set aside bankruptcy notices.

I am unable to accept this. I do not think that on this the new bankruptcy code simply incorporates and adopts the same approach as the old code. The new code has made many changes in the law of bankruptcy, and the court's task, with regard to the new code, must be to construe the new statutory provisions in accordance with the ordinary canons of construction, unfettered by previous authorities. Those authorities, on the setting aside of bankruptcy notices, were concerned with a different scheme, in that the operation of a bankruptcy notice was not, in all respects, the same as the effect of the new statutory demand. For example, unlike bankruptcy notices, the statutory demand can be relied upon only by the creditor serving it.

I am fortified in this approach to the new bankruptcy code, by certain observations made by Vinelott J., who has a particularly intimate acquaintance with the new bankruptcy scheme. In In re A debtor (No.190 of 1987), The Times, 21 May 1988, Vinelott J. was concerned with an application to set aside a statutory demand in which the date of a guarantee had been mis-stated. In upholding the registrar's refusal to set aside the statutory demand, the judge made observations to the effect that one of the purposes of the new legislation was to avoid the technicalities which grew up around the bankruptcy law when framed as penal proceedings, and that it would be unfortunate if the new provisions were to become enmeshed in the technical objections which disfigured the old law."

(and at page 278C-D)

" Nevertheless, applying the approach which I have indicated above as the correct approach to these statutory provisions, in my view it by no means follows from the existence of those defects that this statutory demand ought to be set aside. The court will exercise its discretion on whether or not to set aside a statutory demand, having regard to all the circumstances. That must require the court to have regard to all the circumstances as they are at the time of the hearing before the court. There may be cases where the terms of the statutory demand are so confusing or misleading that, having regard to all the circumstances, justice requires that the demand should not be allowed to stand. There will be other cases where, despite such defects in the contents of the statutory demand, those defects have not prejudiced and will not prejudice the debtor in any way, and to set aside the demand in such a case would serve no useful purpose...."

The first point to note is that this authority has nothing to do with irregular service. Incorrectly stating the amount or using the wrong form is an entirely different matter.

Waiver

12. For the Petitioner, it was submitted that the irregularity ought to be waived under rule 203 because-

(i) the Debtors do not deny receiving the demands;

(ii) the objective of service, which is "...primarily to bring to the attention of the person to be served the fact that he is being sued..." (per Russell LJ in White v. Western [1968] 2 QB 647 at 658C) has, in fact, been achieved;

(iii) no prejudice has been visited upon the Debtors; and

(iv) the justice of the case favours the exercise of the discretion because, inter alia, the Debtors no longer deny indebtedness.

Rule 203 reads :

"203 Non-compliance with rules

Non-compliance with any of these rules, or with any rule of practice for the time being in force, shall not render any proceeding void unless the court so directs, but such proceeding may be set aside, either wholly or in part, as irregular, or amended or otherwise dealt with in such manner and upon such terms as the court may think fit."

Alternatively, it was submitted that by failing to apply to set aside the statutory demands and, instead, opposing the Petitions, the Debtors had waived any defective service and should be treated as acknowledging service. Counsel for the Petitioner relied on Boyle v. Sacker (1888) 39 Ch 249 and MacFoy v. United Africa Co. Ltd. [1962] AC 152 at 160 when it was held :

"...suppose that the other side waived the flaw in the proceedings or took some fresh step after knowledge of it. Could he afterwards, in justice, complain of the flaw?...Clearly not."

It was also submitted that any irregularity would not render the demands void but only voidable. MacFoy (supra) at 160-161.

13. The Petitioner's case comes to this : so long as the statutory demand does come to the notice of the Debtors (and it matters not how this came about), that is sufficient.

14. If this submission is correct, one wonders why the rules go to such elaborate lengths specifying requirements as to service as well as to what is required by way of proof of service. I do not agree that rules as to service can be flouted with impunity so long as by some lucky happenstance the statutory demand at some point falls into the hands of the debtor. In my judgment, requirements as to and proof of service must be strictly adhered to because of the importance of establishing with certainty the period within which a debtor has to comply with the statutory demand. Non-compliance gives rise to consequences which go far beyond those that would flow from any ordinary action. As stated in Fletcher on the Law of Insolvency, 1996 Edn. at 129,

"Procedurally, the act of service is one of the most vital steps of all, and the court will scrutinize its execution, and the attending circumstances, with the utmost strictness."

This observation made in the context of the service of petitions applies with equal force to the service of statutory demands. So also the observations of Sir Wilfrid Greene MR in Re a Debtor (441 of 1938) [1939] 1 Ch 251 when considering whether an inference ought to be drawn that the contents of documents in a sealed envelope actually came to the knowledge of the debtor from the fact that (1) the envelope was opened and (2) it was addressed to the debtor :

"...It would be intolerable, and would lead to the gravest injustice, if a litigant who was desirous of bringing his opponent before the Court by proper process could satisfy the requirements of the law as to service by proving facts such as those and asking the Court thereon to draw an inference as to the crucial fact having happened, the crucial fact being the coming of the document into the hand of the person to be served in such manner that the nature of it is brought to his mind. Unless it comes to his hand in that way, and that is established beyond any possibility of doubt, it seems to me that the Court would be departing from the most salutary view of these matters if it indulged in inferences based on evidence which might be quite strong for other purposes but which, for a purpose such as this, in my judgment ought not to be drawn."

15. On the facts of this case, I have little hesitation in concluding that it would have been entirely appropriate for the court to have exercised its discretion under rule 49(9) and declined to file the Petitions. It is difficult to conceive of facts more fitting for the exercise of that discretion. Had the discretion been exercised, no question of any order on the Petitions would now be before the court.

B. Service of the Petitions

16. The affirmations of service of Cheng Wai Man show that an envelope containing a sealed copy of the Petition with a covering letter was again left at the reception for each of the Debtors on Tuesday 25 August 1998 during office hours and that another envelope was put in the letter box situate in the ground floor lobby of the blocks of flats in which the relevant Debtor resided after having in each case rung the door bell which was unanswered.

17. Rule 59(1) provides :

"59 Service

(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. (See Form 14)

..........."

Plainly service of the Petitions was also 'irregular'. Moreover, the evidence is that after 22 July, the 2nd, 3rd and 4th Debtors ceased to go to the Company's office; that the 1st Debtor never was a director of the Company; that the 1st and 2nd Debtors left Hong Kong on 20 August for the United States and are not expected to return till the end of the year. At the time the Petitioner sought to serve the Petitions on the Debtors, they knew that the 2nd, 3rd and 4th Debtors were no longer directors of the Company.

18. Exactly how the Debtors came to learn of either the statutory demands and the Petitions is a matter of dispute. For present purposes, suffice to say that it is unnecessary for the Court to inquire into and determine what actually happened.

Exercise of the court's discretion

19. As noted above, the irregularity in service of the statutory demands was such that the court ought to have declined the filing of the Petitions. Such irregularity was not redeemed but compounded by the equally unsatisfactory and wholly unacceptable manner in which the Petitioner sought to effect service of the Petitions. In these circumstances, I have little hesitation in concluding that the Petitioner must start afresh. Accordingly the statutory demands (and if necessary) the Petitions are to be set aside and I so order.

20. The Debtors are entitled to an order nisi that the costs of and incidental to this hearing be borne by the Petitioner.