YUE CHUN SHAN v. PINEMILL CO. LTD.

HCSD 27/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

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REASONS FOR DECISION

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1. This is an application by Yue Chun Shan ("the Applicant") to set aside a statutory demand issued by Pinemill Co Ltd ("the Respondent").

Background

2. It is common ground that the Respondent had supplied gasoil to a company by the name of Weihong Petroleum Co Ltd ("the Company"), of which the Applicant was a 25% shareholder and a director. The rest of the shares in the Company were held by Weihong (Holdings) Co Ltd, a company apparently controlled by a Lai Hong Sun ("Lai").

3. Default judgment in the sum of US$2,520,975.31 was obtained by the Respondent against the Company in A5206/97 (to which the Applicant had not been made a party) in July 1997. On the basis of that judgment, the Company was wound-up unopposed in March 1998.

Statutory demand

4. The statutory demand was dated 14 August 2001 and was served on the Applicant by advertising on 11 October 2001. The debt was described as follows:

"Sum due to the Creditor form [sic] the Debtor pursuant to and [sic] agreement or guarantee in writing dated 18 November 1996 in the principal sum of US$500,000".

The debt was said to have been incurred on 18 November 1996.

The document in question

5. The document dated 18 November 1996 is a note in Chinese, which is as follows:

"关于威宏石油有限公司拖欠松滙有限公司柴油貨款共七个航次总額為美金6,520,975.31以及因拖欠貨款所產生的利息（利息數參見每半个月松滙有限公司提交威宏石油有限公司的欠款報表），黎康新先生及余峻山先生同意，由黎康新即時开出300万美金信用証給松?有限公司（如系远期信用証，貼水費用由黎先生負責），余峻山先生負責归还美金50万元。

其__拖欠款項及利息，由90年11月18日起計三周內，待會計師結清威宏石油有限公司資產負債后，由黎康新先生及余峻山先生負責归还"。

The translation adopted by both parties is as follows:

("Concerning the debt in the sum of US$6,520,975.31 for the seven shipments owed by [the Company] to [the Respondent] and the interest accrued thereon (the interest is calculated as at the Debit Note sent by [the Respondent] to [the Company] on a half-monthly basis), [Lai] and [the Applicant] agree that [Lai] shall issue immediately a Letter of Credit in the sum of US$3,000,000 to [the Respondent] (if in the terms of a Deferred Payment Letter of Credit, the interest discount to be paid by [Lai]), and [the Applicant] shall be responsible for the repayment of the sum of US$500,000.

The remaining debt and the interest will be repaid by [Lai] and [the Applicant] after the accountant ascertains the assets and liabilities of [the Company] within three months commencing from 18 November 1996").

6. The Respondent's case, according to its counsel's submissions, is that this was a guarantee by the Applicant to pay US$500,000 out of the US$6,520,975.31 owing by the Company to the Respondent as at the date of the note.

Application to set aside statutory demand

7. The Applicant has applied to set aside this statutory demand, pursuant to r.48(5)(b) Bankruptcy Rules on the ground that the debt is disputed on substantial grounds, and pursuant to r.48(5)(b) Bankruptcy Rules "on other grounds". It is common ground that the same principles governing a creditor's petition for the winding-up of a company are to apply to r.48(5)(a).

8. A number of allegations have been made by the Applicant, including allegations that he had been persuaded by Lai to sign the document in question. He has also alleged collusion between Lai and the Respondent, and he has attacked the bona fides of the Respondent in issuing the statutory demand.

9. It is not necessary to deal with those allegations. At the end of the hearing, it was clear to me that the Applicant had a substantial ground for disputing the debt and I set aside the statutory demand. My reasons appear below.

Reasons for setting aside the statutory demand

10. It is clear from the document in question that an amount of US$6,520,975.31 was said to be owing by the Company to the Respondent. In the 1st paragraph, Lai and the Applicant agreed to pay respectively US$3,000,000 and US$500,000 towards the debt of US$6,520,975.31. The 2nd paragraph then goes on to refer to "the remaining debt", which presumably means the balance of the debt of US$6,520,975.31 after payment of the total sum of US$3,500,000.

11. It is the Respondent's case that the Applicant is liable under the 1st paragraph, hence the reference in the statutory demand to the sum of US$500,000.

12. However, there are substantial grounds for the argument that the sums referred to in the 1st paragraph have been paid, and hence any liability of the Applicant thereunder has been discharged.

13. The Respondent accepts that of the sum of US$6,520,975.31 referred to in the document in question, US$4,000,000 was paid subsequently. This can be seen from a comparison of the Respondent's own statements dated 31 October 1996 and 30 April 1997.

14. The latter statement shows that a total of US$4,000,000 was paid in 3 payments on 30 December 1996, 28 February 1997 and 5 March 1997, thereby reducing the sum owed by the Company from US$6,520,975.31 (the sum referred to in the 1st paragraph of the document in question) to US$2,520,975.31 (the sum referred to in the Statement of Claim in A5206/97).

15. The payment of US$4,000,000 covered, and indeed exceeded, the sums of US$3,000,000 and US$500,000 referred to in the 1st paragraph of the document in question. There is therefore substantial ground for the Applicant's argument that his alleged liability under the 1st paragraph of the document in question has been discharged.

16. Counsel for the Respondent submitted that the sum of US$4,000,000 could have been paid in the ordinary course of business, not connected with discharge of the liabilities under the document in question. However, in the Respondent's own statements, the sum of US$4,000,000 was applied towards payment of the sum owing under the seven shipments and that was the debt allegedly guaranteed by the Applicant.

17. The Respondent also submitted that the Applicant's allegation that his discharge was confirmed by the Respondent's Yu Chung Wai on 7 January 1997 could not be true because as at that date, there was only partial payment (amounting to US$2,000,000). However, it is at least arguable that payment was by deferred letter of credit as that had been a mode of payment referred to in the 1st paragraph of the document in question.

18. In the circumstances, I considered that there was a substantial ground for disputing the debt, quite apart from all the other submissions made on behalf of the Applicant, such that the statutory demand should be set aside.

19. As a matter of completeness, I would record that I ordered that the costs follow the event, in other words, that the Applicant's costs be borne by the Respondent, which by its counsel agreed to $70,000 by way of a gross sum order.