XCHRX WONG FUNG FLORENCE v. THE HONGKONG CHINESE BANK, LTD.

HCSD 17/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO. 17 OF 1999

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REASONS FOR DECISION

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1. These are two applications under Rule 47 of the Bankruptcy Rules, to set aside statutory demands served on Mr Wong Ho Ming Kenneth and his sister Ms Wong Fung Florence, under the provisions of section 6A of the Bankruptcy Ordinance, Cap. 6. At the conclusion of the hearing on 5 April 2000 I dismissed both applications with costs to the creditor and I now give my reasons for so doing.

2. The statutory demands are both dated 26 October 1998 and were served on Mr Wong and Ms Wong on 5 March and 16 March 1999 respectively. Apart from the name of the debtor, the wording of both is identical, and claims a debt of a total of $4,413,271.95. They go on to state that a property in Tai Koo Shing is held as security with a value given for it as $3,900,000.00.

3. It is not in dispute that the debt arises out of a judgment debt of $5,256,572.21 which is also set out in the demand as required by rule 44(3)(a) of the Bankruptcy Rules, Cap. 6.

4. The evidence of Mr Chu Yee Lap, the senior manager of the creditor, The Hongkong Chinese Bank Limited, is that the judgment and the debt arose in the following circumstances. On or around 31 August 1993, Hundred Health Ltd (the company), of which Mr Wong is a director and shareholder, mortgaged the Tai Koo Shing property (the property) to the creditor to secure a loan of $3,200,000.00. Mr Wong and Ms Wong were both guarantors of the loan and interest thereon. In November 1995 the company defaulted on payments and the creditor commenced a mortgagee action against the company to recover the property and the outstanding indebtedness. However, a Miss Kwan Po Yee, who was occupying the property, joined the proceedings as 2nd defendant claiming to be beneficially entitled to the property which she said was purchased for her and her child by Mr Wong. This action is still proceeding.

5. In view of the unexpected claim by Miss Kwan and the inevitable difficulties in recovery of the property by the creditor, proceedings were commenced in December 1997 against the debtors herein as guarantors and judgment was entered against them on 4 May 1998, neither, it appears, resisting the judgment. Following the entry of judgment, Mr Wong made two payments of $500,000.00 to the creditor in June 1998, and a further sum of $500,000.00 was guaranteed by a deposit held by the creditor on behalf of a Kwok Oi Yin. Mr Wong then signed a Deed of Undertaking dated 10 August 1998 by which it was agreed that the deposit of Kwok Oi Yin should be applied to further reduce the debt, which then became $3,914,563.04, including interest accrued to that date, and further interest thereon at 2.5% above Hong Kong Prime Rate, and that this would be paid by Mr Wong by monthly instalments of $88,100.00, the first payment to be made on 1 August 1998. The deed further provided that, should Mr Wong make default in any payment or other obligations under the deed, the creditor would be at liberty to institute any legal proceedings against him, including, inter alia, bankruptcy proceedings against him and Ms Wong.

6. No monthly payments were made pursuant to the deed and the statutory demands herein were accordingly issued.

7. By their affidavits in support, the debtors seek to have the statutory demands set aside on four grounds: first, that the judgment was not opposed by the debtors on the creditor's promise that it would not be enforced until the security was realised; second, that the undertaking was signed under economic duress; third, that the amount of the debt is wrongly stated; and fourth that the value of the security held by the creditor is greater than the debt. I will deal with each of these in turn.

The judgment

8. Mr Wong says in his affidavit that in January 1998 he met with a Mr Peter Chan of the creditor and an agreement was reached that $500,000.00 of the debt would be guaranteed by the deposit of Kwok Oi Yin, that the balance would be discharged by the proceeds of sale of the property at the conclusion of the mortgage proceedings, and any further balance would be secured by a judgment in default in the action, although what is meant by this last is not easy to see. Although he does not say so, I assume that the import of this is, that until the property was sold and the proceeds applied to reduce the debt, the judgment would not be enforced against the debtors. He says that in pursuance of this agreement, and not otherwise, he did not defend the action, and the creditor is now estopped from trying to enforce it.

9. For a number of reasons I find the account of this agreement not credible. The principal reason that this action was taken against the debtors was that there was now some doubt as to whether the mortgage action would be successful in recovering the property, in the light of Miss Kwan's claim. Apart from the $500,000.00 pledged by Kwok Oi Yin, it may well turn out to be a worthless judgment unless it could be enforced against the debtors. Even accepting, as I do, the long business relationship between Mr Wong and the bank, it would not make commercial sense for a bank to enter into such an agreement and possibly deny itself the opportunity of recovering a substantial debt owed to it. Secondly, Mr Wong at no time specifies what, if any, his defence to that action was. He says in his affidavit that he intended to defend to dispute the actual amount owed, but does not give any information as to why the amount was disputed, and appears to agree with the figures claimed later when he says that he agreed the sum outstanding after deduction of the $1,500,000.00. There was accordingly no need for the bank to make any promise to obtain a judgment they would probably have been able to enter under Order 14 in any event.

10. Following shortly after the entry of judgment on 4 May 1998, the bank clearly indicated that it wanted to enforce the judgment, and on 22 May the debtors' solicitors wrote to propose terms upon which the judgment debt may be settled. This does not seem to be the behaviour of parties who have an agreement that no enforcement will take place. Following that letter, there was further considerable correspondence leading up to the signing of the deed, and in none of that correspondence is any agreement mentioned, both sides clearly accepting that there was a regular judgment that the bank was entitled to enforce, and concentrating solely on how it was to be paid.

11. I accordingly find that there was no agreement between Mr Wong and the bank and that the judgment was entered properly and unconditionally.

The Deed of Undertaking

12. Mr Wong claims that it was the threat of bankruptcy proceedings, and the consequent damage to the business of the firm of solicitors for whom he worked as office manager, which, he says, gave him no alternative but to sign the deed of undertaking. This was not, however, a case of an unfair contract being forced upon a party at a disadvantage. The creditor had a judgment which it was entitled to enforce. One method of doing so, which may be harsh, but cannot be criticized, is by way of bankruptcy proceedings. To make it clear that this will be done if the debt is not settled does not fall within the scope of economic duress. If it did, any agreement between parties to litigation as to the settlement of a judgment debt could be avoided on the same ground.

13. It is further pointed out by Mr Ng for the creditor that the negotiations for the deed were lengthy and carried out entirely by the parties' solicitors. This was not some agreement entered into hurriedly for some other purpose. It was carefully negotiated and the terms are detailed and specific. The suggestion by Mr Wong that he was thereby discharged from liability has no basis in fact, law, or, indeed, common sense.

The amount of the debt

14. It is admitted by Mr Wong that as at 22 October 1998 he owed the creditor the sum of $4,016,779.25 in principal and interest. The figure given by Mr Chu Yee Lap for the creditor is $4,074,294.62. The sum claimed in the statutory demand is $4,413,271.95. I have been given no explanation as to how the figure in the statutory demand was calculated, but it would appear that it has been overstated by at least $338,977.33, and the question now is whether that is a sufficient defect in the demand to warrant its setting aside.

15. For a defect in the demand to merit its setting aside, the defect must be such as to mislead the debtor, or so lacking in clarity as to confuse him. Here the Mr Wong was under no illusions as to the amount of the principal debt, and had agreed to it in the Deed of Undertaking. It may well be that the interest has been wrongly calculated in the demand, but it was always open to the debtors to pay the sum they claim is due and dispute the balance. An arithmetical miscalculation is not in my view a ground for setting aside a statutory demand where the overstatement of the debt is comparatively small in relation to the actual debt, and the major part of that debt is not disputed by the debtors. To be fair, Mr Cheng on behalf of the debtors, did not seek to argue this point, and I only deal with it as it was raised by Mr Wong in his affidavit.

The value of the security

16. The valuation given by the creditor for the property in the statutory demand is $3,900,000.00. I have had produced to me two valuations by surveyors appointed by the parties. That of the creditor prepared by Mr Lam Chat Wing gives the value as at 7 April 1999 as $4,350,000.00 on an open market basis and assuming an unencumbered title. The valuation produced on behalf of the debtors by Mr William C K Sham gave the value of $4,800,000.00 as at 3 April 2000 on the same basis.

17. In dealing with the form and content of the statutory demand, rule 44(5) of the Bankruptcy Rules deals with the matter of security as follows:

"(5) If the creditor holds any security in respect of the debt, the full amount of the debt shall be specified, but ?

(a) there shall in the statutory demand be specified the nature of the security, and the value which the creditor puts upon it as at the date of the demand; and

(b) the amount of which payment is claimed by the demand shall be the full amount of the debt, less the amount specified as the value of the security."

18. The value with which I am now concerned, therefore, is the value as at the date of the demand, and later valuations are of little use in determining whether that value was so inaccurate as to justify setting aside the demand. There were however two matters which arose in the evidence of the surveyors which do assist me. The first was the admission by both that a "forced sale", being a sale with a time limit, such as by a mortgagee, rather than a sale on the open market, would reduce the value by between 15% and 30%. Even taking the lower figure, that would reduce the creditor's surveyor's figure to less than $3,700,000.00 as at April 1999, and the debtors' to a little over $4,000,000.00 in April this year. On the authority of Platts v. Western Trust & Savings Ltd [1996] BPIR 339, it is clear that the correct basis of valuation of a security is on the "forced sale" basis. Further, the Mr Lam gave evidence that, in any event, he considered $3,900,000.00 as at October 1998 a fair valuation. In the light of the above I am bound to agree with him. Indeed, it may even be generous. There is accordingly nothing in this point either.

19. Before leaving the matter of the security I should deal with one further matter raised by Mr Ng, which is that the security need not be taken into account by the creditor in any event, as it is not security over property of the persons by whom the debt is owed. It is not in dispute that the property is not that of either of the debtors, but of the company, the original debtor, and as such cannot be a security for a third party. This was made clear by Le Pichon J, in Re Kwok Chok Yee Ex Parte: The Hongkong & Shanghai Banking Corporation Limited HCB 670 of 1999 where she said, at p. 2:

"'Secured creditor' is defined in section 2 of the Ordinance as meaning -

a person holding a mortgage, charge or lien on the property of the debtor or any part thereof, as a security for a debt due to him from the debtor.

For the purposes of this petition, the relevant debtor is the guarantor and not the Company. The properties in question that had been mortgaged to the Bank were properties that belonged to the Company and not the Debtor. The security provided is thus a third party security. After being referred to In re A Debtor (No. 310 of 1988)[1989] 1 WLR 452, counsel for the Debtor accepted that the debt founding this petition is not a secured debt."

20. Mr Cheng has sought to argue that Mr Wong, being in effect the only shareholder of the company, is in reality the owner of the property. However, I can see no justification to remove the corporate veil in a case such as this. The company is still a third party, whoever the shareholders are, and it is the company which is the owner. The creditor would have been, in my view, justified in regarding the debt from these debtors as unsecured, and declining to state the security in the demand.

21. In any event, even if Mr Wong could rely on the security, it would avail Ms Wong nothing, as she does not even have a beneficial interest in the property through a company or otherwise.

22. For these reasons I find no merit in the grounds put forward by the debtors. The applications were accordingly dismissed, and the creditor authorised to issue bankruptcy petitions after 20 April 2000.