RE SIT HO YIN KINGSLEY

HCB 3370/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 3370 OF 2008

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Re: SIT HO YIN KINGSLEY                                                                   

Ex parte:  LEUNG CHI SHING, a Creditor

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J U D G M E N T

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1.  This bankruptcy petition was presented by Leung Chi Shing against Sit Ho Yin Kingsley on 25 April 2008.  It was based on a statutory demand dated 6 December 2007 served personally on the debtor on 18 December 2007.  The debt demanded was in the sum of $564,568.80.  It arose out of an agreement for the sale and purchase of shares (“the Agreement”) and an assignment of debt (“the Assignment”) both dated 28 September 2002.

2.  By the Agreement, which was made between the petitioner as vendor and the debtor as purchaser, in consideration of $3,000 payable by the debtor to the petitioner, the petitioner agreed to sell his 3,000 shares of $1 each in Space Gas Limited (“SG”) to the debtor.  SG was and is a gas supplier.  The debtor was and is a shareholder of SG.  It was a condition of the Agreement that the debtor should purchase from the petitioner a debt owed by SG to the petitioner in the sum of $3 million at the consideration of $1.5 million, payable by the debtor to the petitioner by monthly instalments in the manner as set out in a schedule to the Agreement.  It was stipulated in the payment schedule if there is default in any of the instalment payments, the whole outstanding sum of the consideration of $1.5 million should become immediately due and payable, with interest at the judgment rate on the whole outstanding amount.  The purchase of the debt was effected by the Assignment which was made between the petitioner as assignor, the debtor as assignee, and SG, by which the debt was assigned and transferred by the petitioner to the debtor.

3.  Pursuant to the payment schedule, the debtor had been discharging the obligation to pay the consideration of $1.5 million by monthly instalments since September 2002 until September 2007.  The total amount paid over the 5-year period was $928,500.

4.  On 7 September 2007, the petitioner’s solicitors wrote to the debtor stating that he had failed to deliver to the petitioner on or before 1 September 2007 six cheques for $22,500 each respectively dated the first day of 6 successive months from September 2007 to February 2008, and that he had failed to pay the sixty-first instalment of $22,500 by 1 September 2007.  Accordingly, the whole outstanding balance of the consideration being $571,500 became immediately due and payable, with interest at the judgment rate from 2 September 2007 to the date of payment.  The debtor was asked to make payment within 7 days, failing which legal proceedings would be instituted.

5.  The debtor replied by letter on 8 September 2007, enclosing a cheque for the sixty-first instalment of $22,500.  No further payment was made thereafter.

6.  The statutory demand issued on 6 December 2007 was for the outstanding amount of the consideration which became immediately due and payable, with interest at the judgment rate calculated up to the date of the demand, and giving credit to the sixty-first instalment received on 8 September 2007.  The amount owing as calculated by the petitioner’s solicitors was $564,568.80.

7.  Mr. Henry Lo for the petitioner emphasized the fact that instalment payments were made by the debtor over a 5-year period without any protest, and that was the case even in respect of the sixty-first instalment paid in September 2007.  He submitted that given this conduct on the debtor’s part, it is difficult to see how it could be contended that the debt on which the petition is founded could be said to be disputed bona fide on substantial grounds.

8.  The debtor’s position is that this petition should be stayed, until after the determination of two High Court actions No. 1653 of 2008 and 1696 of 2008.  The writs in both were issued in September 2008, with a general indorsement of claim, after several rounds of affidavits have already been filed in the bankruptcy proceedings.  In HCA No. 1653 of 2008, being the action brought by the debtor against the petitioner, he claims an order to set aside the Agreement, the Assignment and a deed of settlement (“the Deed of Settlement”) made also on 28 September 2002 between him, SG, the petitioner, and HPL Machtronic Company Limited (“HPL”), and damages.  The Deed of Settlement was entered into to compromise HCA No. 2670 of 2002 brought by the petitioner and HPL against SG, the debtor and Lau Wong Fat, who is the brother-in-law of the debtor, for unpaid loans of $2.2 million.  In the other action HCA No. 1696 of 2008, which was brought by SG against the petitioner, SG claims damages against the petitioner for breaches of fiduciary duty committed by the petitioner as a director between 25 May 1999 and 17 May 2001 and as a de facto director thereafter until 28 September 2002.

9.  The mere fact that two writs were issued belatedly against the petitioner does not help the debtor in the bankruptcy proceedings, unless it can be shown that the claims advanced in the High Court actions amounted to a bona fide dispute of the petitioning debt on substantial grounds.

10.  The debtor raised a number of grounds in his affirmations and written submissions to dispute the petitioning debt.  They are as follows:

(1)     The Agreement and Assignment should be set aside on the ground of economic duress in that he executed these documents under pressure of the petitioner who threatened to wind up SG and bankrupt the debtor if he should refuse to sign.

(2)     The Agreement and Assignment should be set aside on the ground of misrepresentation, in that the petitioner represented to him that the petitioner’s contacts of the regular clients of SG were only for the purpose of promoting SG’s business when that was not the case, as most of the established customers of SG were diverted to HPL, a company of the petitioner.

(3)     The Agreement and Assignment should be set aside in that the debtor was induced by the petitioner to execute these documents:

(a)     by the threats in (1) above;

(b)     by the promise that the petitioner would instruct his solicitors to discharge Lau Wong Fat from liability as a defendant in HCA No. 2670 of 2002; and

(c)     by the petitioner’s assurance that SG would be awarded contracts for the supply of gas from Hong Kong Aero Engine Services Limited (“HAESL”) and Hong Kong Aircraft Engineering Company Limited (“HAECL”), so the debtor would not need to worry about his ability to repay the debt incurred as a result of the Assignment.

(4)     The Agreement and Assignment should be set aside in that the debtor was misled by the petitioner, and was not aware at the time of execution of the same that the petitioner had caused SG to suffer very substantial loss which would have completely wiped out the debt of $3 million of SG to the petitioner.  The petitioner had acted in breach of his fiduciary duty to SG and had tried to steal the business of SG behind the debtor’s back in 2000 and 2001 and HAESL and HAECL had awarded their contracts to HPL instead of to SG.

(5)     The Agreement and Assignment should be set aside in that the debtor was trapped into accepting the Assignment by the petitioner’s concealment of a deed of settlement which was signed between the petitioner and Lau Wong Fat.

11.   In his oral submissions today, the debtor went on at some length about his allegation that a promise was made to him by the petitioner to induce him to enter into the Agreement and Assignment that Lau Wong Fat would be discharged from liability, and he claimed it was only in October 2007, when he received a letter of demand from the petitioner’s solicitors regarding his debt arising out of the Deed of Settlement (which was not the petitioning debt) which was copied to Lau Wong Fat, that he suspected Lau had not been discharged, contrary to the promise made to him.

12.  The debtor submitted as there are factual disputes raised in respect of each of the five grounds, and as these factual disputes should only be resolved at a full trial, this court should stay the bankruptcy petition until the disputes are fully ventilated in the two High Court actions commenced recently.

13.   As I see it, the various grounds relied on to set aside or avoid the Agreement and Assignment would not get off ground, so it is hardly necessary to go into the factual disputes raised by the debtor.  As submitted by Mr. Lo, it is far too late for the debtor to seek to avoid now the contracts he entered into in 2002.  Although a contract may be voidable for duress or misrepresentation, the right of avoidance must be exercised promptly in most situations.  Further, the power of avoidance may be extinguished by affirmation of the contract.

14.  I have no doubt in the present situation that the debtor’s conduct of making continuous payment over five years without protest or complaint would amount to an affirmation of the Agreement and the Assignment.

15.  Besides, for the reasons submitted by Mr. Lo, the five grounds raised by the debtor to avoid the Agreement and Assignment are full of holes.  I would just mention the notable ones.

16.  The alleged threat to wind up SG and to make the debtor bankrupt could not be regarded as illegitimate commercial pressure for the purpose of economic duress, even if such threat was made, which is denied by the petitioner.

17.  The debtor was separately represented by solicitors in the execution of the Agreement and Assignment and presumably was advised by his solicitors.

18.  The allegation of misrepresentation was vague and unparticularised.  The alleged involvement of the petitioner in the commercial activities of SG was inconsistent with an acknowledgement in the preamble to the Agreement signed by the debtor that as of September 2002, the debtor was the person “having the actual control of the operation and the day to day business of [SG] including its accounts” and the petitioner was “a dormant shareholder of [SG]”.

19.  The debtor must have known over the 5-year period in which he made instalment payments to the petitioner, that established customers of SG were diverted to HPL (assuming that allegation was upheld) and HAESL and HAECL had awarded their contracts to HPL (again assuming that allegation was correct; on the evidence, only HAESL had awarded a contract to HPL).  With that knowledge, he went on making payments to the petitioner and must be taken to have affirmed the Agreement and Assignment, assuming he had grounds to avoid them in the first place.

20.  The alleged promise to the debtor to discharge Lau Wong Fat, which is denied by the petitioner, is without merit.  Firstly, Lau was in fact discharged as a defendant in HCA No. 2670 of 2002 by a notice of discontinuance filed in that action on 30 September 2002, pursuant to the separate deed of settlement signed between the petitioner and Lau Wong Fat, and the debtor’s solicitors were duly notified of the notice of discontinuance.  Secondly, the deed of settlement with Lau was irrelevant to the Agreement and Assignment, as it was concerned with a different and separate matter litigated in HCA No. 2670 of 2002, being pre-existing loans of $2.2 million, as was the Deed of Settlement entered into by the debtor and SG with the petitioner and HPL.  Thirdly, it was expressly provided in the Deed of Settlement with the debtor and SG that the liabilities and obligations of the debtor and SG in respect of the pre-existing loans of $2.2 million should not be affected by any other agreement of whatsoever nature which the petitioner and/or HPL may enter into with the debtor or SG or any other parties.  Fourthly, it was also provided in the Agreement that the agreement supersedes any previous agreement between the parties in relation to the acquisition of shares in SG, so that would exclude any alleged promise made by the petitioner in respect of the discharge of liability of Lau.

21.  I hold that the debtor has failed to raise a bona fide dispute of the petitioning debt on substantial grounds.  I make a bankruptcy order against him.  The petitioning creditor’s costs are to be paid out of the debtor’s estate.