LB YS v. F LTD

HCSD 29/2022

[2023] HKCFI 570

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 29 OF 2022

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________________________

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DECISION ON COSTS

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1.  This is an unusual case. Despite the Respondent’s agreement to withdraw the statutory demands dated 27 June 2022 (together “SDs”)  served upon the 1^st and 2^nd Applicants (together “Applicants”), it did not agree to pay the costs occasioned by the application made by the Applicants to set aside the SDs (“Application”). As one would expect, the costs incurred by the Respondent in arguing on costs well exceed the amount of costs it would have to pay had it agreed to bear costs in the first place.

2.  Mr Wing So, counsel for the Respondent, argues that there should be no order as to costs for 3 reasons:

(1)  there is procedural irregularity in that the Applicants only filed one Application instead of 2 applications in respect of each of the SDs served on the 1^st and 2^nd Applicants;

(2)  the Applicants did not respond to the Respondent’s letter asking them to state the reasons for disputing the “Debt” (as defined in §6(4)  below)  the subject matter of the SDs; and

(3)  the Applicants failed to respond to the Respondent’s request for a breakdown of the costs incurred. 

3.  On the other hand, Mr Hugh Kam, counsel for the Applicants, contends that the Respondent should be ordered to pay costs on an indemnity basis because:

(1)  it was an abuse of process for the Respondent to have served the SDs on the Applicants when it knew that there was a bona fide dispute on substantial grounds in respect of the Debt and the Applicants have a serious counterclaim against the Respondent; and

(2)  the Respondent acted unreasonably in refusing to pay the costs of the Application and making baseless allegation against the Applicants’ solicitors. 

Background

4.  The Applicants are husband and wife and they both have very respectable jobs.  They purchased a property in the Mid-Levels (“Property”)  in July 2021 and wanted to turn it into a designer home of their choice.  The Respondent was recommended to the Applicants as a reputable interior designer and its clients included listed companies and public bodies in Hong Kong.

5.  The 1^st Applicant and the Respondent signed an agreement dated 20 May 2021 (“Agreement”)  which provides, inter alia, as follows:

(1)  the Respondent will provide design and build services which include “provision of design, coordination and liaison with Clients and Consultants, construction, and site supervision to the interior fitting-out works … until completion of the project” (clause 1);

(2)  the contract sum of HK$1.5 million is inclusive of all professional design fees and is “subject to the Client-approved scope of work and Client-approved design”.  The contract sum is to be paid in 5 stages at 5%, 5%, 40%, 40% and 10% respectively.  The last payment is payable “upon Completion and handover of site” (clause 3); and

(3)  “The defects warranty period for the captioned project shall be 12 months from the date of handover, unless otherwise agreed upon, and shall cover any defects in workmanship or materials” (clause 4.2).

6.  There is no dispute that:

(1)  the Respondent commenced renovation of the Property on 24 May 2021;

(2)  the parties subsequently agreed to increase the contract sum to HK$1,592,255;

(3)  the 1^st Applicant paid an aggregate sum of HK$1,350,000 under the 4 invoices issued by the Respondent and in each instance, the amount was paid within the next day; and

(4)  the last payment was made on 14 December 2021, leaving a balance of HK$242,255 (“Debt”).

7.  The Agreement does not state the date of completion.  The 1^st Applicant says that he told the Respondent that he hoped to be able to move into the Property before the end of March 2022 when the lease of the property where he resided expired.  During the renovation, the Respondent repeatedly confirmed that the works would be completed in mid to end January 2022 and eventually committed to handover the Property on 18 January 2022. 

8.  The 1^st Applicant says that the Debt was not due and payable at the time the SDs were served for 2 main reasons:

(1)  There was substantial delay in completion.  By the time the Applicants moved into the Property on 29 January 2022, there were over 30 outstanding items required to be completed or rectified.  Even after 20 full days of works carried out in the Property, by June 2022, the renovation was still not completed.  These works were highly disruptive as the Applicants had to take time off to supervise their work and the Property had to be disinfected every time the workers left. 

(2)  The works carried out by the Respondent were “seriously faulty”.  The 1^st Applicant goes to great length in describing the defects and exhibiting documents and photos in support of his assertions.  It suffices to say that the evidence shows that there were drainage problems in one of the bathrooms and the bedrooms, leakage problems in the other bathrooms, some of the parts installed fell off which injured the Applicants and their domestic helper, some items were wrongly installed and had to be re-installed and the warranty cards for the air conditioners installed in the Property were lost.

9.  On 2 June 2022, the Respondent issued a final invoice to the 1^st Applicant in the amount of the Debt.  This was followed by the Respondent’s message sent on 15 June 2022 requesting the 1^st Applicant to settle the “outstanding balance”. In response, the 1^st Applicant in his email dated 17 June 2022 set out details of the 10 outstanding works and stated that “until the works above are fully completed it wouldn’t be right for us to settle the final invoice” (“1^st Email”).

10.  There were further exchanges between the Respondent and the 1^st Applicant on 17 June 2022.  In short:

(1)  the Respondent said that “completion”, be it practical completion or substantial completion, had already taken place as the Applicants had moved into the Property for 6 months.  As such, the remaining amount should have been paid some months ago; and

(2)  the 1^st Applicant did not agree that completion should be equated with handover.  He considered that payment would only be due upon completion which had not happened as many items of works remained incomplete.

11.  On 20 June 2022, the Applicants sent another email to the Respondent (which runs to 5 pages in single-line spacing)  reiterating that final payment would only be due upon completion of works, and set out in even greater details the “more significant problems” of the Respondent’s works in 19 areas (“2^nd Email”).

12.  The Respondent retorted by issuing a “5-day demand letter for payment” requiring the Applicants to pay the Debt by 25 June 2022 failing which the debt would be transferred to a “collection’s agency” and if legal action is involved, the Applicants would have to pay costs and all accrued interest.

13.  By a third email sent to the Respondent on 23 June 2022, the Applicants informed the Respondent that several tiles had fallen off from the wall in the master bathroom (as shown in the photos)  and the 1^st Applicant was injured.  They urged the Respondent to discuss the matter internally and “consider this your last chance to reply and make amends before we consider escalating to the next step” (“3^rd Email”).

SDs and Application

14.  By letter dated 27 June 2022, Messrs. Reynolds Porter Chamberlain (“RPC”)  on behalf of the Respondent attempted to serve the SDs[1] on each of the 1^st and 2^nd Applicants.  In the SDs, the “Particulars of the Debt” are described as follows:

“1. This is a Statutory Demand for the sum due from the Debtor to the Creditor pursuant to the agreement between the Creditor, the [1^st and 2^nd Applicants] made under a Quotation for Design and Build Services (ref: Q21023B)  dated 17 May 2021, as revised by a Quotation Summary (ref: Q21023E)  dated 22 October 2021 (the “Agreement”), in respect of services and materials for the interior design and renovation performed by the Creditor at … Robinson Road, Hong Kong.

2.   The sum of HK$242,255 (the “Debt”), being incurred on 2 June 2022, is due from you to the Creditor pursuant to the [Agreement] and the invoice no.I-21023E-5 dated 2 June 2022 issued by the Creditor to the [1^st and 2^nd Applicants].

3.   The [1^st and 2^nd Applicants] are jointly and severally liable for the Debt, which remains unpaid to date.” 

15.  By another letter dated 30 June 2022, RPC invited the Applicants to accept service of the SDs on 8 July 2022 failing which they would serve the SDs on them by post and by advertisement in a newspaper circulating in Hong Kong. 

16.  The SDs were served on the Applicants on 15 July 2022. 

17.  On 2 August 2022, Messrs. Robertsons on behalf of the Applicants filed the Application to set aside the SDs relying on the affirmation made by the 1^st Applicant (“LB 1^st”)  and another affirmation made by the 2^nd Applicant which adopted LB 1^st as her evidence.  In LB 1^st, which contains 28 pages with 111 paragraphs and a further 68 exhibits which run to 339 pages, the 1^st Applicant set outs the facts relating to the dispute and considerable details on what he describes as defective works with supporting documents, photographs and a surveyors’ report on the problems caused by the works and quantification of some of the losses said to have been suffered by the Applicants. 

Withdrawal of SDs and correspondence on costs

18.  By letter dated 3 August 2022, this Court gave the following directions on the Application:

(1)  Each applicant should make an application to set aside the SD served upon him/her;

(2)  It appears from the supporting affirmations that the dispute is not one which is suitable for determination through bankruptcy proceedings.  The Respondent should indicate within the next 5 days whether it will withdraw the SDs and pay the costs of and occasioned by the Application to the Applicants, to be assessed by way of gross sum assessment; and

(3)  If the Respondent does not withdraw the SDs within the stated time, the stated directions on filing affirmations and substantive hearing will take effect.

19.  In RPC’s letters dated 8 August 2022, the Respondent stated that:

(1)  Robertsons were in a position of conflict and cannot act for the Applicants; and

(2)  The Application is liable to be dismissed given that (a)  there is procedural irregularity as only one Application is made to set aside the SDs; (b)  the Debt is clearly due and owing; and (c)  the Applicants’ counterclaim was “invented”.  They invited the Applicants to agree to their proposal that the Respondent do withdraw the SDs on a “no order as to costs” basis (“Proposal”).

20.  By letters dated 8 and 9 August 2022, Robertsons (1)  asked the Respondent to clarify the basis for claiming that they are in a position of conflict as they had not acted for the Respondent but for a different entity; (2)  stated that they would take steps to rectify the procedural issue if the Respondent refuses to withdraw the SDs; and (3)  rejected the Proposal.   

21.  In their letter dated 10 August 2022 to the court, RPC stated that without prejudice to the Respondent’s position that there is no genuine dispute on the Debt, it had formally withdrawn the SDs.  The Respondent does not agree to pay costs given that:

(1)  prior to personal service of the SDs on the Applicants, RPC specifically asked the Applicants to state whether they intend to dispute the Debt and the reasons therefor, but the Applicants proceeded to file the Application; and

(2)  the Application is “procedurally improper” and as such “is liable to be rejected”. 

22.  In their letter to the court dated 11 August 2022, which runs to 4 pages, Robertsons set out the reasons for rejecting the Proposal. 

23.  By letter dated 11 August 2022, this Court directed a hearing for the parties to argue on costs and reminded the Respondent that “if it fails in its opposition to pay costs, it is likely that the court will order the costs of the hearing against the Respondent on a higher scale”.

24.  In their “without prejudice save as to costs” letter dated 12 August 2022, RPC reiterated that there is no bona fide dispute on the Debt and the Application is irregular but requested the Applicants to provide (1)  the amount of costs incurred up to the withdrawal of the SDs (i.e. 10 August 2022); (2)  the estimated costs to be incurred in respect of the hearing; and (3)  a breakdown of costs in the form of a statement of costs, whereupon the Respondent will consider whether it is appropriate to resolve the issue of costs by agreement. 

25.  By letter dated 15 August 2022, Robertsons stated that in view of the Respondent’s stance that it should not be required to pay costs, there is no meaningful purpose for the Applicants to prepare a statement of costs; and the costs and disbursements incurred by the Applicants already exceed the Debt.

26.  In their letter dated 17 August 2022 RPC stated that (1)  they were prepared to consider resolving the issue of costs by mutual agreement; (2)  it was “wholly unreasonable” for the Applicants to have incurred costs which exceeded the Debt as they only need to demonstrate a genuine dispute over the Debt.  They repeated the requests for information on the Applicants’ costs. 

27.  By letter dated 18 August 2022, Robertsons stated that the Applicants are prepare to negotiate further on the amount of costs once the parties have filed a consent summons with an order that the Respondent do pay the costs of the Application to be assessed summarily.

28.  In their letter of 24 August 2022 RPC stated that the Respondent agrees in principle to summary assessment of costs but challenges Robertsons’ assertion that costs would be saved by vacating the hearing and repeated the requests for information on costs.  In response, Robertsons stated in their letter of 25 August 2022 that the Applicants do not want to waste further time and costs to negotiate until the Respondent agrees to an order that the Respondent do pay the costs of the Application to be assessed summarily.

29.  I set out the correspondence at length as I find it difficult to understand why the Respondent (and their solicitors)  saw fit to spend so much time and costs in arguing on costs when:

(1)  there is no valid ground for depriving the Applicants of the costs of the Application; and

(2)  the Respondent can object to the amount claimed by the Applicants or make a “Calderbank offer” to pay a specified sum as the costs of the Application. 

Discussion

30.  Sections 6, 6A-6C of the Bankruptcy Ordinance (Cap. 6)  (“BO”)  list a series of requirements relating to the petitioning creditor’s debt which must be complied with before a petition may be presented.  These include:

(1)  the debt must not be less than $10,000 (s.6(2)(a));

(2)  the debt is for a liquidated sum payable to the petitioning creditor either immediately or at some certain, future time and is unsecured (s.6(2)(b)).  For the debt to be a liquidated sum, “the process of quantification is already complete and there is an absence of any element of ‘penalty’ to be imposed over and above the actual loss sustained” (Fletcher, The Law of Insolvency, 5^th ed, §6-047).  Thus, “[a]ny debt, or claim of indebtedness, which requires or awaits some further act or proceeding, or the passage of a further period of time, in order to mature, or in order to reach a certain and fixed value, will be categorised as unliquidated, and as incapable of supporting a petition” (Muir Hunter on Personal Insolvency, 2022 ed., §3-308, p 3056);

(3)   if the debt in respect of which the petition is presented is secured, the petition contains a statement (a)  that the person having the right to enforce the security is willing to give up his security for the benefit of all the creditors if a bankruptcy order is made, or (b)  the petition is expressed not to be made in respect of the secured part of the debt and the estimated value of the security (s.6B(1));

(4)  the debt is one which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay (s.6(2)(c)).  Where the debt is payable immediately and is not a debt on a judgment, the petitioning creditor may establish “inability to pay debt” by either the debtor’s failure to comply with a statutory demand within 3 weeks of the service of the demand[2] (s.6A(1)(a)); and

(5)  there is no outstanding application to set aside a statutory demand served under s.6A in respect of the debt (s.6(2)(d)).

31.  Rule 48(5)  of the Bankruptcy Rules provides that the court may grant an application to set aside a statutory demand if:

“(a)  the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand;

(b)  the debt is disputed on grounds which appear to the court to be substantial;

(c)  it appears that the creditor holds some security in respect of the debt claimed by the demand, and either rule 44(5)  is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or

(d)  the court is satisfied, on other grounds, that the demand ought to be set aside”.

32.  The combined effect of the above provisions is that even if the debt is payable immediately and is unsecured, the court may set aside a statutory demand if the debt is disputed on substantial grounds, or that the debtor appears to have a counterclaim, set off or cross-demand which exceeds the debt or that there are other grounds which render it unjust for the statutory demand to give rise to the consequence that the debtor is regarded as unable to pay the debt in question (Re A Debtor (No 1 of 1987) [1989] 1 WLR 271, at 276). 

33.  The approach of the Bankruptcy court in dealing with an application to set aside a statutory demand or a bankruptcy petition is to consider the evidence filed by the parties to see whether the debtor has adduced sufficiently precise factual evidence to show that there is a bona fide dispute on substantial grounds in respect of the debt or that the debtor has a serious cross-claim against the petitioning creditor which exceeds the debt.  If the court is so satisfied, it would not usurp the function of a civil court and decide the dispute (Re Leung Cherng Jiunn[2016] 1 HKLRD 850 (CA), §27). 

34.  It has been said by the court, in the context of an application to restrain presentation of winding up petition where the debt is bona fide disputed on substantial grounds, that “it is an abuse of the process of the court to make  a statutory demand or present a winding-up petition based on a claim to which there is a triable defence” (Re Sinom (Hong Kong)  Ltd. [2009] 5 HKLRD 487, §11).  In my view, the same consideration applies to bankruptcy proceedings.  It would be an abuse of process for a creditor to serve a statutory demand on a debtor if it was aware that the debt the subject matter of the demand was subject to a bona fide dispute on substantial grounds or that the debtor had a serious cross-claim against the creditor for an amount which exceeds the debt.  Where the court finds that the creditor has abused the process, it would order the costs of the application to set aside a statutory demand on an indemnity basis (see for e.g., Cheung Man Kok v Fenn Kar Bak Lily, HCSD 25/2003, 11 December 2003, §23).

35.  Mr So submits that where a statutory demand or a petition to wind up a company is withdrawn or dismissed, it does not necessarily entail that  costs would follow the event.  One must still look at the circumstances of the case to determine who is at fault leading to the case moving forward (See e.g. Au-Yeung Ping Ki v Asian Outreach International Ltd, HCSD 6/2005, 3 June 2005; Frank Saul (Fashion)  Limited v HM Revenue & Customs [2012] EWHC 1603(Ch);Re Lanaghan Bros Ltd[1977] 1 All ER 265).  In these cases, the court had to consider whether to depart from the general principle that costs should follow the event when the creditors withdrew the statutory demands or petitions in question.  They do not support the proposition that the court must determine who is “at fault” whenever the demand or petition is withdrawn.   

36.  In my view, it is an abuse of process for the Respondent to have served the SDs on the Applicants for the following reasons.

37.  First, as stated in §§9 - 13 above, the Respondent was informed by the 1^st Applicant in the 1^st to 3^rd Emails that the Debt was not due and payable as the works under the Agreement had not been completed and  many defects had been identified.  Although the Respondent asserted that the term “completion” has the same meaning as “completion” in the surveyors’ guidelines, such assertion is not supported by the terms of the Agreement.  There is at least a serious issue to be tried that “completion” had not taken place such that the Debt was not due and payable at the time the SDs were served on the Applicants. 

38.  Second, in view of the many defects in the works done by the Respondent as particularised in the 1^st to 3^rd Emails and the fact that such defects fall within the warranty period under clause 4.2 of the Agreement, the 1^st Applicant has a serious counterclaim against the Respondent for at least damages breach of warranty obligation.  Given the extent of the defects identified, there is a cogent basis for the 1^st Applicant’s assertion that the counterclaim exceeds the Debt. 

39.  Third, the Respondent was fully aware of the no completion point and the counterclaim prior to serving the SDs on the Applicants.  It was an abuse of process for the Respondent to resort to the use of the SDs knowing that the dispute between the parties is not one which can be resolved through the bankruptcy proceedings.   

40.  Fourth, it is particularly abusive for the Respondent to have served the SD on the 2^nd Applicant who was not even a party to the Agreement.  This is corroborated by the fact that all the invoices were issued to the 1^st Applicant and he paid all the amounts due under such invoices.  When this Court asks Mr So to identify the basis for claiming the Debt against the 2^nd Applicant, his only response is that the 2^nd Applicant was involved in dealing with the Respondent during the renovation.  I am unable to see how the 2^nd Applicant’s involvement would make her become a party to the Agreement, which is the only basis for claiming the Debt against her in the SD.   

41.  Fifth, as the Respondent was aware, the Applicants had financial means to pay the Debt when it fell due given that they both occupied senior positions at their respective employers and they purchased the Property as their residence.  This reinforces my view that the Respondent has abused the process by using the SDs to force the Applicants to pay the Debt.   

42.  To reflect the disapproval of the court on the abusive nature of the SDs, it is appropriate to order the Respondent to pay the costs of the Application on an indemnity basis. I have considered whether to order costs on a party and party basis in view of the Respondent’s agreement to withdraw the SDs shortly after being invited by this Court to indicate its stance.  However, it is clear from the correspondence discussed in §§21-28 above that despite the concession, the Respondent refused to pay the costs of the Application.  As a result of such refusal, the Applicants have to incur further costs in debating the issue in correspondence and at the hearing. 

43.  I do not think any of the points raised by RPC or Mr So are grounds which may justify the court depriving the successful party (i.e. the Applicants)  of the costs of the Application given that:

(1)  the procedural irregularity is a point raised by this Court and can be rectified if and when it becomes necessary to do so.  This accords with s.124(1)  of the BO which provides that “no proceeding in bankruptcy shall be invalidated by any formal defect or by any irregularity unless the court is of the opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of the court”.  There is no suggestion that any injustice has been caused by the irregularity;

(2)  the suggestion that the Applicants failed to state the reasons for disputing the Debt when requested by the Respondent to do so is wholly devoid of merit.  As stated above, the 1^st Applicant has in the 1^st to 3^rd Emails provided detailed reasons as to why the Respondent was not entitled to demand payment of the Debt; and

(3)  the Applicants’ refusal to provide a breakdown of costs is not a ground for depriving the Applicants of their costs.  As stated in §29(2)  above, it was open to the Respondent to challenge the costs claimed by the Applicants or make a Calderbank offer to the Applicants but neither has been done by the Respondent. 

44.  It is appropriate to order the Respondent to pay the costs of the hearing on an indemnity basis for the following reasons:

(1)  the hearing is necessitated by the Respondent’s refusal to pay the costs of the Application when there was no proper basis to do so;

(2)  the Respondent was told in clear term that if it fails in its opposition to pay costs, it is likely that costs would be ordered on a higher scale; and

(3)  the hearing is a satellite litigation which does not resolve the dispute but only serves to waste further costs and the time of the court.

Level of costs

45.  In the statement of costs submitted to the court, the Applicants claim costs in the amount of $356,146 of which $162,000 is counsel’s fee.  It transpires at the hearing that although the solicitors claim 16 hours at $5,200/per hour in preparing the 2 affirmations filed, in fact both affirmations were drafted and settled by counsel.  Mr Kam seeks to justify the level of costs by saying that much time has been spent by him in drafting and settling the affirmations as the Applicants are very meticulous and had provided many rounds of comments and suggested changes on the drafts, which were reviewed and considered by the partner in charge of the case and by him when revising the affirmations. 

46.  In my view, the amount of costs claimed by the Applicants is excessive and disproportionate to the summary nature of the Application.  The legal representatives must know that the approach of the court is to see whether the Applicants have adduced sufficiently precise factual evidence to show that there is a bona fide dispute on substantial grounds in respect of the Debt and that they have a serious cross-claim against the Respondent.  It is unnecessary for the Applicants to set out the minute details of all the works which they say have not been completed or details of the counterclaim as the Bankruptcy court would not decide the dispute between the parties. 

47.  For these reasons, although I order the Respondent to pay the costs of the Application and of the hearing on an indemnity basis, I do not think it is right to allow the Applicants to recover all the costs incurred in preparing the affirmations which amounts to $172,000.  I consider that the Applicants are only entitled to recover $90,000 for preparing the affirmations.  The other items of costs claimed by the Applicants cannot be said to be excessive or unreasonably incurred and are assessed at $150,000.  The total assessed costs is $240,000.   

48.  I take this opportunity to remind the practitioners that it is unnecessary for the applicants to incur substantial costs in preparing a lengthy affirmation to set out in great details all the facts and evidence relevant to the dispute on the debt or the counterclaim as it is unnecessary for the applicant to do so.  In future, save where there are exceptional circumstances which justify the applicant incurring substantial time and costs in making an application to set aside a statutory demand, the Bankruptcy court would likely limit the amount of costs which may be recovered by the successful applicant to level which commensurates with the summary nature of the application.