RE MICHAEL MA WING

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

NO. 181 OF 1985

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JUDGMENT

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1. This is a motion by Michael Ma Wing also known as Michael Ma (the applicant) to rescind the receiving order made against him on the 1st April 1985, to annul the order of adjudication made on the 15th. May 1985, and to dismiss the petition. The application is made under the provisions of sections 98 and 33 of the Bankruptcy Ordinance, but. relief is also sought by way of declarations under the inherent jurisdiction of the court. However, the relief claimed under the inherent jurisdiction is misconceived for bankruptcy is a creature of statute.

2. The petitioning creditor Fong Sze Ming also known as Fong Ming (the petitioner) obtained judgment against the applicant on the 6th December 1984 in a High Court action before Jackson-Lipkin J. By that judgment, the applicant was held to be the trustee for the petitioner, of a one third interest in 5,002 shares in Yat Ming Investment Company Limited and in the proceeds. Judgment was entered inter alia for certain monetary sums, and for accounts to be taken before a Master. An order was also made for the applicant, to file an affidavit of accounts before the 21st January 1985. This order was not complied with.

3. Investigations that have been carried out by the Official Receiver reveal that the applicant left Hong Kong for Bangkok two days , after the trial on the 8th December 1984. No evidence was produced indicating that the applicant has since that date returned to Hong Kong. A prohibition order was made against the applicant on the 19th December 1984.

4. A notice of appeal against the judgment of Jackson-Lipkin J. was filed on behalf of the applicant on the 16th January 1985. On the 30th January 1985, Jackson-Lipkin J. made an order for an interim payment to be made by the applicant of $2.3 million. At that hearing, counsel appeared for the applicant, but informed the Court that although he knew the applicant was in Toronto, Canada he did not have any information as to his exact whereabouts, and had received no further instructions. The appeal was later dismissed by the Court of Appeal on the 15th February 1985 on the grounds of want of prosecution.

5. As no payment was made in respect of the interim award, a bankruptcy notice based upon this sum was issued on the 5th March 1985. Service of the notice upon the applicant was effected by post at his last known address Shiu Fai Terrace Garden, Stubbs Road, Hong Kong. There was no compliance with the terms of the bankruptcy notice with the result that a bankruptcy petition was presented on the 14th March 1985. In addition to failure to comply with the bankruptcy notice, the petition also pleaded an act of bankruptcy under section 3(1) (d) of the Bankruptcy Ordinance in which it is alleged that with intent to defeat or delay his creditors, the applicant departed out of Hong Kong on the 8th December 1984. Under the same section, it is also alleged, in effect as an alternative to the departure abroad, that with intent to defeat or delay his creditors, the applicant departed from his dwelling house on the same date.

6. For the purposes of this motion Mr Barretto who appeared for the petitioner abandoned the acts of bankruptcy that alleged failure to comply with the bankruptcy notice and departure abroad, and relied solely upon the act of bankruptcy alleging departure from the last known address Shiu Fai Terrace.

7. The petition was also served by post at Shiu Fai Terrace. No notice of intention to show cause against the petition under Rule 68 of the Bankruptcy Rules was filed with the result that in the applicant's absence at the hearing on the 1st April 1985, a receiving order was made.

8. After the receiving order was made a representative of the official Receiver's department visited Shiu Fai Terrace when it was ascertained that the applicant was no longer living there. However, the applicant's daughter Constance Ma was in residence.

9. Constance Ma was examined by the official Receiver before a master on the 14th August 1985 under the provisions of S. 29 of the Bankruptcy Ordinance, but claimed that she did not know the whereabouts of her father. Another witness W.H. Bird junior a business associate of the applicant was also examined by the official Receiver on the 28th April 1986 when he said that he did not know the exact whereabouts of the applicant, but believed that he was living in Switzerland.

10. On the 29th May 1985 Deacons, solicitors filed a notice to act for the applicant in the bankruptcy proceedings. However, the Official Receiver's attempts to obtain the assistance of the applicant through his solicitors in the investigation of his affairs met with no response. Eventually on the 27th September 1985 Deacons filed a notice of cessation to act.

11. A final award of damages in the sum of $24.6 million and interest of $11 million was made in the action in favour of the petitioner by Jackson-Lipkin, J. on the 19th June 1985.

12. On the 6th August 1985, the Official Receiver obtained an order for the arrest of the applicant and a warrant was issued on the 13th August 1985.

13. Considerable work has been carried out by the Official Receiver into the affairs of the applicant. The great majority of the assets appear to be abroad with substantial assets situate in Canada and England. Proceedings have been taken by the Official Receiver in those countries to attempt to secure those assets for the creditors. Miss Teresa Wong of the Official Receiver's department recently gave evidence in proceedings issued in Ontario, Canada where a claim has been made in respect of a property registered in the name of Shiu Fai Building Enterprises Limited a company that is believed to be the applicant's alter ego. This action is being defended by the company. Service of the Canadian proceedings was effected on the applicant in Switzerland on the 30th March 1987 through diplomatic channels, but service has been challenged by Swiss lawyers acting on his behalf. With regard to the assets in Hong Kong a vesting order in respect of the Shiu Fai Terrace premises was made in favour of the Official Receiver on the 22nd July 1986 whilst a declaration was made on the 6th October 1986 that a 7 year lease granted to W.H. Bird junior, by Goldflame Limited, the registered owner of the premises of which company the. applicant was the sole director, was null and void. The Official Receiver, during the course of the investigation into the applicant's affairs has ascertained that substantial assets were transferred out of the jurisdiction between December 1984 and the date of the receiving order. The Official Receiver has so far received proofs of debt for sums amounting to about $75 million and has realised assets in the sum of about $3 million.

14. On the 2nd October 1986, the official Receiver received a letter from Baker & McKenzie, solicitors, stating that they were acting for solicitors in Ontario in connection with the property dispute to which I have already referred. However, their action appears to have been limited to making a request for copies of certain documents for they took no further steps after the 17th January 1987. At the end of January 1987 a solicitor from another firm, Freshfields attended the Officer Receiver's office requesting copies of the documents in the bankruptcy proceedings. However, the request was refused as the official Receiver required a written application to be made, but nothing further was heard from this firm.

15. The present notice of motion was filed on the 31st March 1987 and was fixed for hearing on the 22nd June 1987. However, the Official Receiver issued a summons on the 16th April 1987 which came before me on the 30th April 1987 supported by a separate summons issued on behalf of the petitioner in which orders were sought for the hearing of the motion to be expedited and for an order for security for costs together with an application for leave to cross examine the applicant upon his affidavit sworn in Switzerland on the 1st April 1987 filed in support of the motion. After hearing argument on that date, I refused the application for security for costs, but made an order for the hearing of the motion to be brought forward, and granted leave for the applicant to be cross examined.

16. When the motion came before me on the 18th May 1987, I was informed that the applicant, who now resides in Switzerland, had decided not to attend the hearing with the result that the evidence filed on his behalf has not been admitted. In fact Mr. Griffiths, who appeared for the applicant quite properly made no application to adduce his evidence. The main evidence before me has therefore been confined to the affirmations of the petitioner and the reports of the Official Receiver.

17. The provision for service of a bankruptcy petition is governed by section 9(l) of the Bankruptcy Ordinance which provides where relevant as follows:-

"9.         (1) A creditor's petition ....................shall be served in the same manner as a writ of summons unless some other manner of service be prescribed."

Rule 59 of the Bankruptcy Rules also provides that a creditor's petition may be served in the same manner as a writ of summons. As the manner of service is not set out either in the Bankruptcy Ordinance or in the Bankruptcy Rules, it is necessary to refer to section 99(1) of the Ordinance which so far as applicable reads:-

"99.     (1) The rules and practice of the Supreme Court for the time be regulating the ordinary civil procedure of the court shall, so far as the same may be applicable and not inconsistent with the provisions of this Ordinance, be applied to bankruptcy proceedings,.........................."

The provisions with regard to the manner of service of a writ are set out in order 10 of the Rules of Supreme Court. O. 10 r. 2 permits postal service of a writ where the defendant is within the jurisdiction. However, as the applicant had left his address and had either gone abroad or could not be found, postal service was not effective having regard to the provisions of Rule 31 of the Bankruptcy Rules which provide:-

"31.      When the debtor is not in Hong Kong, or cannot be found, the court may order service on him of the petition, the receiving order or any other order made against him, or of any summons issued for his attendance, to be effected within such time and in such manner as it thinks fit.?

In fact Mr. Barretto conceded that postal service of the petition was ineffective. As the petitioner was unaware of the applicant's whereabouts an application should have been made under Rule 31 for substituted service.

18. Since the applicant left his last address in Hong Kong, it is clear that he has lived for part of the time in Canada and is at present living in Switzerland. However, he has made an application for permanent residence in Canada which is being considered by the Immigration authorities.

19. Having left his home two days after the delivery of the judgment by Jackson-Lipkin, J. and with another action against him due to be heard following the conclusion of the petitioner's action, there can be no doubt that the applicant left home with the intention of defeating or avoiding his creditors. In fact this act of bankruptcy has not been challenged during the hearing of the motion.

20. Mr Griffiths submitted that as service of the petition was bad the proceedings are null and void so that the applicant is entitled ex debito justitiae to have the proceedings set aside. He referred to a number of cases in support of his submission that the rules concerning the service of a bankruptcy notice and a bankruptcy petition are treated strictly by the court. In particular he relied on an Australian case. Re Long Ex parte Fraser Confirming Pty. Ltd.⁽¹⁾ where Walters, J. had this to say at p. 343:-

"I have come to the conclusion that the failure of the petitioner to prove personal service of the bankruptcy notice on the debtor is not a formal defect, or an irregularity, which can be corrected by bringing it 'within the umbrella' of s 306 of the Act. in this context, I think I may suitably apply the words of Bowen LJ in Re Howes; Ex parte Hughes [1892] 2 QB 628 at 632; [1891-4] All ER Rep 546: 'I do not regard this as a mere technical matter, for bankruptcy proceedings are of a peculiar character. They involve quasi-penal consequences to the debtor, and it is essential that all those forms, the object of which is to prevent injustice, should be strictly followed.'

 

It is my opinion that the want of personal service of the bankruptcy notice on the debtor makes the petition founded on it a nullity, despite the debtor's subsequently acquired knowledge of the existence of the notice, and even though there is no proof of substantial injustice having been done to him by the defect in service."

21. Nevertheless a different approach has been taken with regard to a petition see Re Collier ⁽²⁾ where Cave, J. at 743 said:-

"Due service of a bankruptcy notice is necessary in order to constitute an act of bankuptcy, and it is more important that the rules and regulations should be properly complied with in the case of a bankruptcy notice than in the case of a petition for adjudication. When an act of bankruptcy has been committed, then the petition is a less formal matter, and one as to which it is not necessary to take exactly the same view."

22. A distinction in my judgment must therefore be drawn between those cases in which the foundation of a petition was based wholly upon the failure to comply with the terms of a bankruptcy notice and the instant case in which reliance is placed upon a different act of bankruptcy being the absence by the applicant from his dwelling. Obviously, in " those cases where the only act of bankruptcy was the failure to comply with the bankruptcy notice, the petition would fail in limine if service of the bankruptcy notice had not been properly effected.

23. Mr. Griffiths also cited Bank of America v. Martin Knitters Ltd.⁽³⁾ where Huggins, J. emphasised the strict need to take all proper steps to ensure that when a writ is not served personally that substituted service of the writ will be brought to the proposed defendant's attention. A review of the authorities on nullities and irregularities was made by Upjohn, L.J. in In re Pritchard⁽⁴⁾ in which he held that the following classes of nullity had been established (1) proceedings which ought to have been served but have never come to the notice of the defendant at all; (2) proceedings which have never started at all owing to some fundamental defect in issuing them; and (3) proceedings which appear to be duly issued but fail to comply with a statutory requirement. This case was decided when the former 0.70 r.1 of the Rules of the Supreme Court which is the equivalent of R. 203 of the Bankruptcy Rules was in force.

24. R. 203 provides:

"Non-compliance with any of these rules, or. with any rule of practice for the time being in force, shall not render any proceeding void unless the court so directs, but such proceeding may be set aside, either wholly or in part, as irregular, or amended or otherwise dealt with in such manner and upon such terms as the court may think fit."

25. It is also convenient to refer to S. 124(1) of the Bankruptcy Ordinance which reads:-

"No proceeding in bankruptcy shall be invalidated by any formal defect or by any irregularity unless the court is of 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."

0. 70 was replaced in 1964 by O. 2 which reads:-

"l(l) where, in beginning or purporting to begin any proceedings or at any stage in the course of or in connexion with any proceedings, there has, by reason of any thing done or left undone, been a failure to comply with the requirements of these rules, whether in respect of time, place, manner, form or content or in any other respect, the failure shall be treated as an irregularity and shall not nullify the proceedings, any step taken in the proceedings, or any document, judgment or order therein.

 

(2) Subject to paragraph (3) the Court may, on the ground that there has been such a failure as is mentioned in paragraph (1) and on such terms as to costs or otherwise as it thinks just, set aside either wholly or in part the proceedings in which the failure occurred, any step taken in those proceedings or any document, judgment or order therein or exercise its powers under these rules to allow such amendments (if any) to be made and to make such order (if any) dealing with the proceedings generally as it thinks fit.

 

(3) .........................

 

2(1) An application to set aside for irregularity any proceedings, any step taken in any proceedings or any document, judgment or order therein shall not be allowed unless it is made within a reasonable time and before the party applying has taken any fresh step after becoming aware of the irregularity.

(2) ......................"

The effect of the change is that whilst 0. 70 only dealt with irregularities and not nullities 0. 2 deals with both irregularities and nullities. Accordingly the court now has a discretion whether the defect amounts to an irregularity or a nullity by the provision of waiver that is contained in rule 2(1).

26. Nevertheless Mr Griffiths argued that 0. 2 does not apply as it is not incorporated into the provisions of the Bankruptcy Ordinance and Bankruptcy Rules. He referred to 0. 1(2) of the Rules of the Supreme Court which reads as follows:-

"(1)    Subject to the following provisions of this rule, these rules shall have effect in relation to all proceedings in the Court.

 

(2)    These rules shall not have effect in relation to ................ bankruptcy proceedings."

He then referred to 0.1, r.2(5) which reads:-

"2.    (5)     In the case of the proceedings mentioned in paragraphs (2), (3) and (4) nothing in those paragraphs shall be taken as affecting any provision of any rules (whether made under the Ordinance or any other ordinance) by virtue of which the Rules of the Supreme Court or any provisions thereof are applied in relation to any of those proceedings."

27. Although 0.1, r. 2(2) excludes the application of the Rules of the Supreme Court to Bankruptcy Proceedings it does not affect the incorporation of the Rules of the Supreme Court where there is reference by other rules. Having regard to this provision, Mr Griffiths contends that 0.1, r. 2(5) specifically effects incorporation of the Rules of the Supreme Court into other rules where it is necessary but that they can only be applied under any provision of any rules made under any ordinance but not, if applied by the Ordinance itself. Accordingly as service was effected under the ordinance it cannot be cured under Rule 203 of the Bankruptcy Rules because that rule is only available for non-compliance with the Rules as opposed to the Ordinance. However, I am unable to agree with this submission for the effect of section 99(1) of the Bankruptcy ordinance is to incorporate the Rules of the Supreme Court provided that they are applicable and not inconsistent with the provisions of the Ordinance. 'Both the Bankruptcy Ordinance and the Bankruptcy Rules must be read together and in conjunction where applicable with the Rules of the Supreme Court. I am quite satisfied that the application of 0. 2, if it is relevant, is not restricted to the Rules. However Mr Griffiths submitted that 0.2 in any event relates to a completely different subject to that dealt with by section 9.(1) of the Bankruptcy Ordinance although it is not incorporated by reference and that it is also inconsistent with section 124(1) for although it deals with the same subject, it is in inconsistent terms. Section 124(1) refers to defects and irregularities which covered the same ground as the former 0.70 with regard to the distinction between a nullity and an irregularity. Under 0.70 if there was a fundamental defect it could not be cured. As a result, as 0.2 is inconsistent with section 124(1) which can validate a formal defect or irregularity, but cannot validate a nullity. He also emphasised that Rule 203 cannot validate a nullity as opposed to an irregularity. Having considered the provisions of 0.2, I do not accept the argument that it is not applicable nor that it is inconsistent with section 124(1) or Rule 203. 0.2, in my judgment, is incorporated into the provisions of the Bankruptcy legislation under section 99(1) with the result that the cases that were cited prior to its introduction in 1964 are no longer relevant. Accordingly, the Official Receiver and the petitioner may take advantage of the waiver provision under 0.2(2).

28. As a result, it is now necessary for me to consider whether I should exercise my discretion to determine whether, although there was bad service, there has been any waiver by the applicant and whether there are circumstances whereby I should exercise my discretion by refusing the application.

29. There is no doubt upon the evidence, which has not been contradicted, that the applicant departed from his last address with the intention of defeating or delaying his creditors. It is clear that by May 1985 he was aware of the bankruptcy proceedings. Since that time he has at various periods instructed solicitors to act on his behalf, but they have taken no positive steps in the bankruptcy. No steps have been taken to set aside the proceedings until the present motion was issued nor has there been any attempt to co-operate with the Official Receiver in his investigation into the affairs of the applicant. Further no statement of affairs has been submitted nor has the applicant attempted to comply with the other statutory requirements under the Bankruptcy Ordinance and Rules. In fact far from attempting to co-operate with the Official Receiver, he has tried to frustrate the investigation at every possible opportunity both here, in Canada and in England whilst until his recent emergence in Switzerland has persistently evaded the steps taken by, the Official Receiver to ascertain his whereabouts. There is clear authority that time can amount to waiver see Holmes v. Russel ^(5), Re Finn⁽⁶⁾, and Re Williams⁽⁷⁾.

30. No explanation has been given by the applicant for the delay of a period of two years from the date of the receiving order whilst no grounds of opposition have been put forward. The applicant has chosen not to come to Hong Kong to give evidence, to say whether he wishes to defend the proceedings on the grounds that he disputes the validity of the debts or whether he is in a position to pay his debts. Even if there had been any merit in the application which I am satisfied there is not, the failure to explain the inordinate delay and the conduct of the applicant alone forfeits the applicant's right to any consideration quite apart from the injustice that will be caused to his creditors while there is no evidence before me that the applicant is solvent and able to pay his debts. No grounds have been shown for rescission in any event. Taking all the circumstances into consideration I have no hesitation in exercising my discretion by refusing the motion with costs to the petitioner and the Official Receiver.

(1)     6 ALR 338

(2)     [1891] 64 LT 742

(3)    (1964) HKLR 898

(4)    [1963] 1 Ch. 502

(5)    [1841] Q.B. 487

(6)    [1981] 58 F.L.R. 54

(7)    [1968] 13 F.L.R. 10