RE XIAO ZHIYONG

HCB 873/2017

[2018] HKCFI 522

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 873 OF 2017

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J U D G M E N T

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Introduction

1.  There is before this court an Amended Bankruptcy Petition dated 31 July 2017 (“Petition”) presented by the Petitioner against Mr Xiao Zhiyong (“Mr Xiao”). The Petition is based on the non-compliance with a statutory demand dated 18 November 2016 (“statutory demand”) for the sum of around HK$15 million (“Debt”) said to have been personally served on Mr Xiao.

2.  The Debt arose out of the indebtedness of Max Lucky Group Limited (“Company”) of which Mr Xiao is the sole shareholder and director.  In February 2015, the Company opened a corporate securities account (“Account”) with the Petitioner and obtained a margin loan of around HK$66 million.  The Company’s liabilities were secured by a Deed of Guarantee and Indemnity executed by Mr Xiao in favour of the Petitioner as well as shares in a listed company viz Bolina Holding Co Limited (“Bolina”) deposited into the Account.

3.  From about March 2016, the Petitioner started to make margin calls on the Account which were not met and, between September and November 2016, sold all the Bolina shares so deposited in the stock market.  As of 14 November 2016, an account balance of about HK$14.89 million remained due from the Company to the Petitioner.  The Debt was based on the account balance plus interest thereon.

4.  On the Petitioner’s case, the statutory demand was served personally on Mr Xiao on 18 November 2016 at around 5:07pm when he was in the Petitioner’s office on 35/F, Cosco Tower, Sheung Wan, Hong Kong.  Mr Xiao disputes this and claims the statutory demand had never been properly served on him and hence the Petition, predicated on non-compliance with the statutory demand, should be dismissed.

5.  As confirmed by Mr Hui at the hearing, the only issue in this case is whether the statutory demand has been validly served on Mr Xiao by way of personal service on 18 November 2016.

6.  Since the resolution of that issue requires the court to resolve a distinctly acute factual dispute, the parties filed a consent summons for an order that the three deponents to the affirmations filed herein viz Mr Cheng Chi Shun (“Mr Cheng”), Mr Cheung Cho Shing Joseph (“Mr Cheung”) and Mr Xiao do attend the substantive hearing of the Petition to be cross-examined on the issue of service of the statutory demand, and an order was so made.

The Parties’ factual cases on service

7.  In gist, the Petitioner’s case is that Mr Cheng, a legal assistant employed by the Petitioner’s solicitors, served the statutory demand on Mr Xiao on 18 November 2016 during a brief encounter with him at the Petitioner’s office.  Mr Cheng was told by his superior, Ms Leung Shun Ting Christy (“Ms Leung”) that Mr Xiao was going to have a meeting that afternoon with Mr Cheung, Deputy Head of Global Market of the Petitioner.  He was specifically instructed by Ms Leung to personally serve the statutory demand on Mr Xiao when the meeting was over.

8.  Details of what happened, according to Mr Cheng’s 5^th affirmation and his oral testimony, were these:

(1)   Mr Cheng arrived at the Petitioner’s office at around 5pm and was received by the receptionist.  He knew Mr Xiao was having a meeting with Mr Cheung and so he waited for Mr Xiao on a sofa at the reception area.

(2)  At around 5:07pm, the meeting between Mr Xiao and Mr Cheung was over.  He received a Whatsapp message from Mr Cheung telling him he could carry out the service of the statutory demand on Mr Xiao.

(3)  Mr Xiao came out of the conference room, followed by Mr Cheung walking behind him.  Mr Xiao walked towards the entrance of the office intending to leave.

(4)  Mr Cheng walked up to Mr Xiao in order to serve the statutory demand.  When he handed over the statutory demand to Mr Xiao, he said to him in Cantonese “肖智勇先生，呢喥有份法律文件俾你”[1]. Mr Xiao took the statutory demand, had a look at it and asked Mr Cheng in Putonghua “什麼？”[2]

(5)  In response, Mr Cheng told Mr Xiao in Cantonese “係statutory demand”[3].

(6)  Upon hearing this, Mr Xiao appeared quite upset.  He threw the statutory demand on the floor and angrily walked out of the Petitioner’s office.

(7)  The whole incident took about 15 seconds.

9.  Mr Cheung saw what happened.  In his affirmation as well as in court, he confirmed that Mr Cheng’s description of the incident accorded with his recollection of what happened.

10.  Mr Xiao’s version of the event, on the other hand, was this:

(1)  On 18 November 2016, Mr Xiao had a “tense” conference with Mr Cheung at the Petitioner’s office.

(2)  When Mr Xiao left the meeting with frustration and walked towards the main entrance, he noticed that a person who appeared to him to be a junior staff of the Petitioner stood near the main entrance.  That person was holding some documents in his hand.

(3)  As that person tried to approach Mr Xiao, Mr Xiao thought he would not allow him to leave.  He was a bit concerned and shouted loudly at him in Putonghua “你幹什麼？”[4].

(4)  Upon being shouted at, the person was surprised.  He looked startled and afraid.  He was taken aback and stopped approaching Mr Xiao.

(5)  Mr Xiao then left the Petitioner’s office through the main entrance.

(6)  Throughout the whole incident, the person remained silent and did not say anything to Mr Xiao.

11.  There is no dispute the person in question was Mr Cheng.  There is also no dispute that Mr Cheung was walking behind Mr Xiao after the meeting was over and saw what happened.

The Law

12.  Proper service of the statutory demand is a prerequisite for the commencement of bankruptcy proceedings under s 6A of the Bankruptcy Ordinance, Cap 6.  The requirements as to service of the statutory demand must be strictly adhered to.  Failure to serve the statutory demand is an extremely serious matter.  It is not just a formal defect or irregularity — it renders defective the petition founded on the demand.  It is immaterial that the debt is apparently not in dispute.

Re Lam Chik Sing, ex parte Hong Kong Chinese Textile Mills Association [2009] 2 HKLRD 107 at [15] and [17] per Kwan J (as she then was).

13.  Under RHC O 65 r 2, personal service of a document is effected by leaving a copy of the document with the person to be served.

14.  In Kenneth Allison Ltd v A.E. Limehouse & Co [1992] 2 AC 105 at 124C-D, Lord Goff observed:

“Personal service means what it says. Prima facie, the process server must hand the relevant document to the person upon whom it has to be served. The only concession to practicality is that, if that person will not accept the document, the process server may tell him what the document contains and leave it with him or near him”.

15.  In Dynasty Line Ltd v Sukamto Sia [2009] 4 HKLRD 454, Cheung JA further elaborated on the requirements for personal service as follows:

“20. In terms of personal service, the process server must hand the relevant document to the person upon whom he has to serve. If that person will not accept the document, the only concession to practicality is for the server to tell him what the document contains and leave it with or near him: see Kenneth Allison Ltd and others v. A. E. Limehouse and Co. (a firm) [1992] 2 AC 105 per Lord Goff of Chieveley.

21. In terms of ‘leaving’, once the intended recipient (assuming him to have the required knowledge of its nature) has been given a sufficient degree of possession of the document to enable him to exercise dominion over it for any period of time however brief, the document has been left with him in the sense intended by the rule: see Nottingham Building Society v. Peter Bennett and Co. (a firm), decision of the English Court of Appeal dated 14 February 1997 per Waite LJ.

…

What has to be said by the server

24. The only substantive argument on this issue is whether Mr. Sze was required to inform the 1^st defendant that the package consisted of a writ or whether it was sufficient for him to say that the package consisted of court documents. While I accept that it was not difficult for Mr. Sze to inform the first defendant that the package consisted of a writ, my view is that it was sufficient for him to inform the first defendant that the package consisted of court documents.

25. I agree with the view expressed by Hoffmann LJ (as he then was) in Walters v. Whitelock (unrep, English Court of Appeal, 19 August 1994) that a practical approach must be adopted. It is sufficient to bring to the attention to the person being served that it is a legal document which requires his attention. The purpose of the requirement that he be told is that he should not be able to say that he ignored the document on the grounds that it was simply junk mail or something which did not necessarily require his attention at all.

26. I do not accept that this approach is confined to situations where the person to be served was already engaged in legal proceedings with the other party and previously had been served with legal documents by the other party. In my view so long as the person to be served knew that he was being served with court documents which required his attention, it was sufficient to constitute valid service provided the other conditions were fulfilled as well.” (emphasis added)

16.  In Re Chen Cheryl Deanna unrep, HCB 3082/2016, 9 March 2017, at [14], G Lam J cited with approval the following summary of the relevant requirements for personal service:

(1)  The process server should first satisfy himself that he has found the correct person on whom a copy of the writ is to be served.

(2)  He should then hand to or leave with that person a copy of the writ.

(3)  If that person will not take the copy, it is not necessary to leave it in his actual corporeal possession.

(4)  It is sufficient for the process server to inform the person to be served of the nature of the document and throw it down in his presence in such a case.

(5)  It is also sufficient for the process server to inform the defendant that the package to be served on him contained “court documents” without necessarily specifying that it is a “writ”.

(6)  It is however not sufficient for the process server to hand to the defendant the copy writ in an envelope without informing him that it is a copy writ/court document.

Deliberation

17.  Before this court deliberates on the credibility of the two main witnesses, Mr Cheng and Mr Xiao, it is expedient to state a bit more of their personal background.

18.  Mr Cheng joined the Petitioner’s solicitors firm as legal assistant in October 2016.  Prior to that, he had already worked as a legal assistant for over 15 years.  In particular, he was employed by White & Case from 2007 to 2013 during which time a solicitor by the name Dave Lau taught him how to effect personal service of documents.  Mr Cheng told this court that, as a legal assistant, he would probably be instructed to effect personal service of documents a few times a year.

19.  Mr Xiao was the chairman and CEO of Bolina when it was listed on the Main Board of the Hong Kong Stock Exchange in 2012.  He resigned as chairman, executive director and CEO in February 2017.  The residential address that he provided to the Petitioner when the Company opened the Account was in Fujian, PRC.  But the Company had an office in Hong Kong in Sino Plaza, Causeway Bay, which was also the Hong Kong office of Bolina.  While he was chairman and CEO of Bolina, he came to Hong Kong from time to time to attend to its business, although the frequency of such visits was irregular, sometimes once in every 3 months, sometimes 2 or 3 times a month.  Mr Xiao is obviously Putonghua speaking.  He says he does not understand Cantonese and his understanding of English is limited to “Good morning” and “How are you”.  When he encountered English documents, he relied on his secretary to explain to him what they were about.

20.  Importantly, Mr Xiao had previously been served with a statutory demand on 25 July 2016 by the respondent in HCSD 46/2016 viz Asia Equity Value Ltd.  The demand was in respect of debts due under a personal guarantee for the sum of HK$46.7 million and he applied to set it aside on 12 August 2016: Xiao Zhiyong v Asia Equity Value Ltd unrep, HCSD 46/2016, 14 July 2017, Au-Yeung J.  As can be seen from the judgment, Mr Xiao was legally represented.  That means Mr Xiao must have consulted his lawyers about the statutory demand that he was served with, most likely before he made his application.  The significance of this will become apparent later in this judgment.

21.  This court has considered the affirmations and oral testimony of Mr Cheng, Mr Xiao (as well as Mr Cheung), and assessed them against the known and undisputed surrounding circumstances of this case.  This court has in particular considered the inherent probabilities of the parties’ respective cases and assessed the witnesses’ credibility accordingly.  Obviously, this court has also made use of the opportunity to observe the demeanour of the witnesses while they testified in court in assessing their credibility.

22.  This court does not find Mr Xiao a truthful witness and rejects his depiction of what happened on 18 November 2016 as wholly incredible.  This court finds Mr Cheng a truthful witness, accepts his evidence and finds, on balance of probabilities, what happened on that day was as he testified.  The reasons are these.

23.  Mr Cheng is a long-time legal assistant and had the knowledge as well as experience in effecting personal service of documents prior to November 2016.  On 18 November 2016, he was specifically instructed to personally serve Mr Xiao at the Petitioner’s office with the statutory demand.  For that purpose, there was even a Whatsapp group consisting of Mr Cheung, Ms Miki Lee of the Petitioner’s legal department, Ms Leung and Mr Cheng.  There is no dispute (and in any event it is indisputable) that

(1)  on that day, at around 5pm, Mr Cheng did arrive at the Petitioner’s office with the statutory demand and waited at the reception area for Mr Xiao to come out of his meeting with Mr Cheung;

(2)  a few minutes later, Mr Xiao did walk out of the conference room and Mr Cheng approached him whilst holding a document in his hand; on the evidence before this court, the document could only be the statutory demand;

(3)  after a brief encounter between Mr Cheng and Mr Xiao, Mr Xiao walked out of the Petitioner’s office and waited for the lift at the lift lobby;

(4)  Mr Cheng did not give chase.

24.  It seems to this court the natural course of event must be that Mr Cheng did try to serve the statutory demand on Mr Xiao.  Despite the numerous authorities cited by counsel on the subject, personal service of a document is not that difficult to comprehend or learn.  Either you hand it to or leave it with the person to be served and that person accepts it; or, if the person to be served refuses to accept it, you inform him of the nature of the document and throw it down in his presence.  In this court’s view, it is wholly incredible that Mr Cheng, having been specifically instructed by his new employer[5] to serve the statutory demand on Mr Xiao, having taken the trouble of going to the Petitioner’s office for that purpose, and having met Mr Xiao in person, did not do what he was instructed to do.  It is doubly incredible since the place of service was the office of his employer’s client and when he met Mr Xiao, he knew Mr Cheung was just behind him and would see what he did or did not do.

25.  Imagine what would happen if Mr Cheng had behaved the way Mr Xiao claimed he had behaved ie upon being shouted at, Mr Cheng was taken back, stopped approaching Mr Xiao, remained silent, did not say anything to him and did not try to hand over the statutory demand to him or throw it at him.  All of these would have taken place while Mr Cheung was present.  One does not have to be a genius to figure out that Mr Cheng would expect Mr Cheung to lodge a complaint with the Petitioner’s solicitors and he could also expect to be sacked by his employer the next day.  And why should Mr Cheng be afraid and stopped doing what he was specifically instructed to do just because he was shouted at very loudly by Mr Xiao?  Mr Cheng was an adult and he was in an office during office hours.  More probable than not, there would be other employees of the Petitioner around — at least the receptionist and Mr Cheung were there.

26.  Not only does this court find Mr Xiao’s description of what happened on 18 November 2016 wholly incredible, this court also finds him not forthcoming when he was questioned about the statutory demand in HCSD 46/2016. Mr Xiao accepted service of that statutory demand only a few months earlier ie July 2016 at the end of a meeting with representatives of Asia Equity Value Ltd.  He then applied to set it aside in August 2016.

27.  Despite his denial, it is inherently improbable that he had never bothered to take a look at that statutory demand after receiving it or in the course of consulting and giving instructions to his lawyers.  It is even more unlikely that he would not have been given some explanation by his lawyers as to what a statutory demand was, what its legal significance was and what he should do about it.  Yet, Mr Xiao told this court he did not look at the statutory demand nor did anyone explain it to him.  He also told this court he could not remember whether he and his secretary brought the statutory demand to see his lawyers or whether his lawyers told him what the statutory demand was.  In so far as Mr Xiao wishes to bolster up his counsel’s alternative case that, in any event, he did not understand what Mr Cheng meant when he said “係statutory demand” and that he had no knowledge of the nature of the document that Mr Cheng handed to him, he fails.

28.  To conclude, this court is satisfied that on 18 November 2016, Mr Xiao was personally served with the statutory demand.  His opposition to the Petition fails.

Disposition and costs order nisi

29.  There shall be a usual bankruptcy order against Mr Xiao and an order nisi that costs be to the Petitioner, to be taxed if not agreed, with certificate for counsel.