RE: LAM NGAI FUNG TONY and EX PARTE: CHANG TIN DUK VICTOR

HCB 4641/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY
NO. 4641 OF 2001

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J U D G M E N T

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Introduction:

1. This is a bankruptcy petition by the judgment creditor against the judgment debtor. Judgment in the amount of $14.7 million was entered against the Debtor on 10 April 2001. All statutory requirements for the petition have been complied with. The Debtor accepts the judgment and admits that he has not paid the judgment debt. He resists the petition on the basis that he had four lucrative projects in the pipeline. If given time for negotiation, these projects will materialise and will generate income to allow him to pay the debt by instalments. Furthermore, his parents are also willing to repay about $8 million for him by instalments.

Public Offer of Warren Health Technologies Limited:

2. The Debtor says he is the holder of more than 80% shares of Warren Capital Group Limited ("WCG"), which holds 70% shares of Warren Health Technologies Limited ("WHT"). Since August 2000, he has been negotiating for the initial public offer of WHT. The Executive Director and the Project Manager of International Network Capital Limited expressed interests in handling the floatation for him. But for this petition, he expects the listing would take place in January 2002. He believes he could raise $50 million with the public offer. He says unless the petition is disposed of his application for listing will not be approved by the Hong Kong Stock Exchange.

3. His tentative time-table for the listing has now been put off for almost four months. Even if everything proceeds smoothly, it would not be another six months before listing will take place. However, more importantly, there is no information as to the value of the WHT shares, the price they will be offered and whether the offer price would be acceptable to the market. He does not provide information as to how the listing would enable him to obtain $50 million. One would have thought the listing would result in increase in the value of his WCG shares and he would have to sell his WCG shares to realise the $50 million. But there is no evidence of his share holding in WCG and whether those shares are unencumbered. There is a total lack of evidence to substantiate this project. There is no assurance that someone will finance the expenses for the floatation. His project is nothing but a paper exercise.

Sale of 10% of WHT to Oriental Union:

4. The Debtor says that in December 2000, Oriental Union was interested in acquiring 10% of the issued capital in WHT from WCG for $17.85 million, but the acquisition failed. He now says Oriental Union will acquire the shares but at a reduced price of $5.35 million and he would be able to pay the Petitioner $3 million if the transaction is materialised. There is a total absence of evidence, let alone credible evidence, as to whether the acquisition will proceed. As in the case relating to the public offer of WHT shares, evidence as to how he could appropriate the $3 million from WCG to his own use is missing. The so called project is nothing but what the Debtor hopes to be able to achieve in some indefinite time in the future.

Father's shares in a Toronto-based software company:

5. The Debtor produced share certificates in respect of his father's holding in 759,607 shares in a Toronto-based software company, Internet Gaming Software Solutions Limited ("IGSS") which he says his father would be prepared to transfer unconditionally to the Petitioner as security. His father's shareholding is about 1.7% of the issued capital of IGSS. He produced a valuation report from American Business Appraisers giving IGSS a valuation in the amount of US$190 million as at 31 July 2000. He says a company listed in NASDAQ is interested in acquiring more than 50% of the shares of IGSS. He says the acquisition will be materialised in a few weeks and the value of the IGSS shares will improve significantly and the shares may be realised by the Petitioner to pay off his debt.

6. The Debtor accepts that the valuation of IGSS would have to be revised downwards by 50% in view of the current market condition. 1.7% of 50% of US$190 million would be more or less sufficient to cover the debt. However, the valuation by American Business Appraisers is based on historical financial statements and forecasts. But none of those documents have been verified or annexed to the report. There is no evidence that his father's 759,607 shares represent 1.7% of the issued capital of IGSS either. There is no up to date valuation supported by verified financial statements. There is no evidence that the takeover negotiation will come to realisation in three weeks. This project is just a castle in the air. It is not unreasonable for the Petitioner to turn down the offer of these shares as a viable security.

Licensing right to Lippo Group:

7. The Debtor produced a draft Memorandum of Understanding to be entered into between Lippo Group and an unidentified owner of an intellectual property right in a holographic television product. He also produced a second draft Memorandum of Understanding to be signed between Lippo Group and Max Tech Limited offering Max Tech Limited a commission of $2 million upon signing of the final partnership agreement for the holographic television product between Lippo Group and the unidentified owner of the product. The Debtor says the two memoranda of understanding will be signed on 12 December 2001. He says he is the major shareholder of Max Tech Limited and upon receipt of the $2 million by Max Tech Limited, he will pay it over to the Petitioner as the first instalment.

8. The draft memoranda were produced at the hearing. The identity of the intended purchaser is unknown nor is there any evidence from Lippo Group about the transaction. There is no evidence of the Debtor's shareholding in Max Tech Limited and how he could utilise the funds belonging to Max Tech Limited to discharge his personal debt. $2 million is a small proportion of the judgment debt. Apart from this $2 million, there is no real prospect of any further repayment shown. It is not unreasonable for the Petitioner to refuse the offer.

Assistance from family:

9. Lastly, in despair, the Debtor says that his parents had sold their interests in a hotel in China and would be able to provide four quarterly payments of about 2.2 to 2.4 million yuan in Reminbei, about $2 million, after Christmas. He says emotionally that he did not wish to rely on his parent's help and hence had not prepared the necessary documentation. He had been given time to prepare his affirmation in opposition to the petition. It is his duty to satisfy the court as to his ability to pay the debt. In the absence of evidence that the funds are available from his parents and that his parents will apply those funds for the purpose of paying his debt, his assertion is just a bald assertion, only to be rejected.

Ability to pay debt:

10. The judgment debt is a liquidated sum payable immediately. This judgment debt is accepted by the Debtor. There is no dispute that a statutory demand has been served personally on him, that more than three weeks have lapsed since the demand was served and the demand has neither been complied with nor set aside. In the circumstances, the Debtor appears to be unable to pay his debt. The debt has not been paid or secured or compounded for. Prima facie, a bankruptcy order may be made against him.

11. The Debtor argues that he would be able to pay his debt or offer instalment terms if given time for his four projects to come to fruition. The issue is whether I can be satisfied that the Debtor is nevertheless able to pay all his debts or that he has made an offer to secure or compound for a debt and the offer has been unreasonably refused.

12. In Re Philipp and Lion Far East Ltd (CWU No. 130 of 1991), Jones J cited with approval the following passage from page 859 of Pennington's Company Law, 5th edition:

"It seems that a company is unable to pay its debts if it cannot pay them as they fall due out of cash or readily realisable assets in its hands, and it is immaterial in applying this test that it could pay them over a lengthy period by steady realisation of all its assets. ..... Additionally, a company is unable to pay its debts if it has no reasonable prospect of paying all of them, both accrued and prospective, by a steady realisation of all its assets, and in applying this test it will be immaterial that the company can pay its accrued debts out of its liquid resources. ..... No regard must be paid to the profits which the company might earn or to any further liabilities which it might incur under fresh contracts if it continues to carry on its business during the period of realisation."

13. I think the above test is equally applicable to bankruptcy proceedings in relation to the question as to whether a debtor is able to pay his debt when it falls due. The test is whether he can pay it out of cash or readily realisable assets in his hands. No regard may be given to future contingencies, because those events may or may not happen. Similarly, no regard may be given to future income because such income may or may not be available. Such future income is not cash or readily realisable assets in his hands. Of course, regard may be had to such future income as part of the total circumstances to be considered as to whether the Debtor's offer to secure or compound for a debt has been unreasonably refused by the Petitioner.

14. I have analysed these projects. Except possibly for the Lippo Group project, none of them have any air of reality in them. They are all paper exercises and unsupported by credible documentary evidence. As for the Lippo Group project, credible documentary evidence is also lacking. Even if the transaction were to be completed, there is nothing to suggest that the Debtor can lay his hands on the $2 million and there is nothing to suggest that he will thereafter have income to repay the balance of his debt. The income from this project as a source of funds to pay the debt is questionable. Thus, these four projects are unreal and are nothing more than the Debtor's expectation of what he hopes to be able to achieve in some contingencies which may or may not happen. In fact not even a monetary value could be attached to any of the projects. His assertion of assistance from his parents, even if such assistance were forthcoming, is not cash or realisable asset in his hands, and in any event is insufficient to cover the debt. I am not satisfied from these four projects and his bald assertion of assistance from his parents that the Debtor is able to pay his debt.

The offer to secure the debt:

15. Thus, what the Debtor is able to offer is a security comprising of his father's shares in IGSS worth about $12 million; the prospect of payment of $2 million on 12 December 2001, provided the Lippo Group project is materialised; and sometime after Christmas another four quarterly payments of $2 million. There is no reliable valuation as to IGSS shares which are not freely marketable. The takeover of IGSS is just a contingency and the prospect of a takeover is unsupported by any documentary evidence. Even if the shares were transferred to the Petitioner, the Petitioner could have no control over the operation of IGSS which operates in Toronto. The shares are of no value to the Petitioner. The offer of family assistance is nothing but a bald assertion. Even if the Lippo Group project could materialise in about three weeks, the Debtor could only pay off $2 million and there is no evidence how the balance of the debt could be repaid from this project. The offer is rejected by the Petitioner and in my view not unreasonably due to the lack of certainty in his projects, while his assertion of family assistance remained a bald assertion only.

Discretion to dismiss or to stay:

16. Lastly, I shall turn to consider whether I should exercise my discretion not to make a bankruptcy order and to dismiss the petition or to order a stay of the proceedings. I would dismiss the petition if it is established that the petition is an abuse of the process of the court, as when the bankruptcy proceedings are not used for the purpose for which such proceedings are designed but are used for some ulterior or collateral purpose unrelated to the lawful purpose of seeking to obtain a dividend in the bankruptcy. I would also stay the proceedings if satisfied that making the order would be unfair in all the circumstances and justice would be better served by staying the proceedings to give the debtor a chance to pay his debt. A stay would be granted if the court can be satisfied on credible evidence that the Debtor will imminently have access to assets which will enable him to pay his debt and the petitioner will not be prejudiced by a stay of proceedings thereby. Thus, if I could be satisfied that fruition is imminent and that the Petitioner and the Debtor would both benefit if the Debtor be given more time to allow him to harvest his crop and pay his debt, I would have exercised my discretion to order a stay of proceedings. But given the total lack of credible evidence that the four projects are realistic, that I am unable to assess the chance of these projects proceeding to fruition and the benefit these projects could bring to the Debtor, I do not think I should order a stay.

Conclusion:

17. Accordingly, I make the bankruptcy order against the Debtor with costs, including the costs of the last adjournment to enable him to file the affirmation in opposition and the costs of the hearing before the master.