RE　CHAN YUK LUN

HCB 8188/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 8188 OF 2013

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J U D G M E N T

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Introduction

1. This is a bankruptcy Petition (“Petition”) brought by Mr Chan Ying Chit (“Petitioner”) against Mr Chan Yuk Lun (“Debtor”) on 8 November 2013.  The Petition is opposed by the Debtor.

2. The Petition is based on the Debtor’s non-compliance with a Statutory Demand dated 3 June 2013 (“Statutory Demand”) for the sum of HK$59,067.55 (“Debt”). The Statutory Demand is in turn founded on a number of costs orders made in favour of the Petitioner against the Debtor in HCA1628 of 2012 as follows:

(1) Order dated 9 January 2013 by Master J Wong;

(2) Order dated 7 March 2013 by Mr Justice Chung;

(3) Order dated 7 March 2013 and Gross Sum Assessment of costs dated 15 March 2013 by Mr Justice Chung.

Background

3. By way of background, HCA1628 of 2012 was instituted by Mr Chan Ying Wai (“Chan Senior”) as plaintiff in September 2012. The Petitioner, Chan Senior’s brother, is the 1^st defendant while the Debtor, Chan Senior’s son, is the 2^nd defendant in that action.

4. As far as the substantive matters before Master J Wong and Mr Justice Chung are concerned, the Debtor’s application was dismissed by Master J Wong on 9 January 2013, his appeal from Master J Wong’s Order was dismissed by Mr Justice Chung on 7 March 2013, and his application for leave to appeal against Mr Justice Chung’s Order of 7 March 2013 was dismissed by Mr Justice Chung on 27 May 2013 and by the Court of Appeal on 14 August 2014. There is no further appeal from the Court of Appeal’s decision of 14 August 2014. Nor can it be shown that there is any prospect of the Debtor obtaining leave to appeal therefrom. In other words, the several costs orders made against the Debtor, which formed the basis of the Statutory Demand, will not be set aside.

5. On 10 January 2014, the Debtor made an application to set aside the Statutory Demand in HCSD 3 of 2014. The application was heard by Mr Justice G Lam on 7 July 2014 and dismissed in a judgment handed down on 1 September 2014. According to the Judgment, all four grounds in support of the Debtor’s application to set aside were rejected by Mr Justice G Lam viz:

(1) The Debtor intended to appeal against the Order of Mr Justice Chung in HCA 1628 of 2012 (“1^st Ground”).

(2) The Statutory Demand has not been properly served on the Debtor – it was not personally served on the Debtor; rather it was served by advertisement in a newspaper by way of substituted service (“2^nd Ground”).

(3) The Petitioner commenced bankruptcy proceedings against the Debtor with ulterior and improper motives (“3^rd Ground”).

(4) The Debtor had a counterclaim against the Petitioner in a sum exceeding the amount specified in the Statutory Demand (“4th Ground”).

6. The Debtor’s application for leave to appeal against the dismissal of his application was also dismissed by Mr Justice G Lam in a judgment handed down on 16 December 2014.

Deliberation

7. I shall first remind myself of the applicable legal principles.

8. In order to successfully oppose the Petition, a debtor has to show a bona fide dispute on substantial grounds, by sufficiently precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: Hong Kong Bankruptcy Law Handbook 4^th Ed. at p 47 para. 6A.10; ICS Computer Distribution Ltd. [1996] 1 HKLR 181; Re Tam Mei Kam unrep.; HCB 3777 of 2011; 25 April 2012; Barma J (as he then was); Re Yuen Mun Wa (a debtor)[2012] 5 HKLRD 108.

9. Where an issue has been properly ventilated at the stage of application to set aside the statutory demand, and has been determined by the court at that hearing, a res judicata operates to preclude a debtor from raising, at the hearing of the petition, the same argument which has been determined against him, in the absence of any change of circumstances: Re Choy Wai Bor unrep., HCB 8565 of 2001; 28 May 2002; Kwan J (as she then was) at para. 30; Re Sy Chin Mong Stephen unrep., HCB 5784 of 2013; 9 May 2014; Ng J.

10. Unless a material change of circumstances has occurred since the dismissal of the application to set aside the statutory demand, all that the petitioning creditor has to do at the hearing of the bankruptcy petition is to show that he has made a statutory demand and that the amount of the debt has neither been paid nor secured nor compounded for: Brillouet v. Hachette Magazine Ltd. [1996] BPIR 518, 520, cited with approval by Kwan J (as she then was) in Re Choy Wai Bor supra at para. 26.

11. Where the underlying debt is based on a judgment, the court hearing the bankruptcy petition will treat the judgment as prima facie evidence that the judgment debtor is indebted to the judgment creditor. In appropriate circumstances, the court may “go behind” the judgment - what is normally required is some “fraud”, “collusion” or “miscarriage of justice” which impinges on the validity of the judgment, the latter phrase being clearly capable of wide application according to the particular circumstances of the case: Dawodu v American Express Bank [2001] BPIR 983; Re Tam Mei Kam unrep.; CACV87 of 2012; 8 May 2013; Cheung, Yuen & Lam JJA.

12. In Re Tam Mei Kam supra, Yuen JA set out the principles to be applied where a petition is based on a judgment debt or court order at [22.1] – [27] as follows:

“22.1 The bankruptcy court will treat a judgment for a sum of money as prima facie evidence that the judgment debtor is indebted to the judgment creditor for that sum.

22.2 As prima facie evidence of indebtedness, it may be rebutted and that is what is meant by “going behind” the judgment. It is important to understand the rationale for this approach. First, bankruptcy affects an individual’s legal status. Secondly and importantly in this context, the bankruptcy court’s exercise of the power and/or duty to inquire into a judgment is necessary to protect a debtor’s real creditors from collusive judgments entered into by the debtor in order to initiate a bankruptcy and thereby reduce the funds available for his real creditors.

…

23. In other words, the reason why a bankruptcy court is not conclusively bound by a judgment debt is so that (in appropriate circumstances) it can inquire whether there was actually bona fide consideration for it. Of course apart from opposing creditors at the petition seeking to impugn the judgment debt, the judgment debtor himself can also seek to do so, especially if the judgment had been obtained by default. See Fletcher, The Law of Insolvency, 4^th ed. p.163 para.6-116:

“One justification for the existence of this power is that a debtor might connive with others to allow a number of bogus default judgments to be entered against himself by his ‘allies’, who could rescue some of his estate on his behalf by later proving for the debts in the bankruptcy. But the far more usual occasion for invoking this doctrine is when it is the debtor who will otherwise suffer injustice, and this is particularly capable of occurring when the judgment was obtained by a compromise of action or by default. A default judgment, by its very nature, involves a one‑sided presentation of the facts which may lack objectivity and may even be inaccurate or unfair …”.

However that is not to say that in every case the bankruptcy court should exercise its powers of inquiry simply for a judgment debtor to get a second bite of the cherry and conduct parallel proceedings to review a judgment which he has lost or to avoid its execution.

24. The rationale discussed above should guide the approach to be taken by the bankruptcy court when a judgment debtor opposes a petition on the ground that he challenges the judgment debt.

25.1 If the judgment debtor has lodged either an application to set aside the judgment (in a case where the judgment did not require a decision on the merits) or an appeal, the bankruptcy court maystay the hearing of the petition to await the result of the application or appeal.

25.2 However, the bankruptcy court need not do so in every case. It may refuse to stay the petition and may proceed to make a bankruptcy order if the judgment debtor fails to satisfy the court that he has a reasonable prospect of succeeding in the application to set aside or the appeal (Watts v London Borough of Newham [2009] EWHC 377 at [53]). Put another way, an application to set aside or an appeal falling short of that standard would not be a viable or bona fide one, and the judgment debtor would have failed to rebut the prima facie evidence of indebtedness…

…

26.1 Where the judgment debtor has not lodged an application to set aside or an appeal by the time of the petition hearing but intends to do so (probably out of time), he must, in addition to satisfying the bankruptcy court of the reasonable prospects of success in his application or appeal, also provide a reasonable explanation why he has failed to act in time. If he can do so, the bankruptcy court may adjourn the hearing of the petition to enable him to commence an application to set aside or appeal, giving appropriate directions to ensure that it is conducted expeditiously, with liberty to apply so that either party may apply to restore or dismiss the petition as appropriate.

26.2 Where the judgment debtor is unlikely to be able to pursue an application to set aside or an appeal for procedural reasons eg where there has been gross and inexcusable delay, the bankruptcy court may consider his case to see if he can rebut the prima facie evidence of indebtedness. Before arriving at a decision, the bankruptcy court will consider the circumstances in which the judgment was obtained. At one end of the spectrum, the court may decide to dismiss the petition even if a regular judgment had been obtained in default, e.g. if service of a writ had been effected on the judgment debtor’s previous address and he can clearly establish a substantial defence. At the other side of the spectrum is a petition based on a judgment obtained after a full trial on the merits. In the latter situation, the general principle is that the bankruptcy court would inquire into such a judgment only if the judgment debtor can show fraud, collusion or miscarriage of justice, the latter term having been described as “something from which [the court] can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the claimant” (Dawodu v American Express [2001] BPIR 983 quoted in Watts at [48]).

27. Where the judgment debtor has already failed in his application to set aside the judgment or his appeal on substantive grounds at the time of the petition hearing, it would be most unlikely in that situation that the bankruptcy court would find that the judgment debtor could nevertheless rebut the prima facie evidence of indebtedness, unless he could satisfy the court that he could impugn the judgment of the court deciding the setting aside or appeal on the grounds discussed in the paragraph above.” (emphasis added)

13. It is indisputable that the Debt is a Judgment Debt immediately payable and unsecured. It is also indisputable that at least 3 weeks have elapsed since the Statutory Demand was served and it has been neither complied with nor set aside.

14. This court has carefully considered the Debtor’s grounds of opposition contained in his affirmation dated 7 April 2014  (“Affirmation”).

15. The Debtor’s first ground is that the Petitioner has no basis to present the Petition since there is in fact no debt. I reject this ground. In my judgment, for the reasons given in paragraphs 2 and 4 above, the Debt owed to the Petitioner is indisputable. Further, apart from a bare assertion and some irrelevant factual/ personal background, there is nothing in the Affirmation which shows that the Debtor has a bona fide dispute to the Debt on substantial grounds.

16. The Debtor’s second ground is that he has a counterclaim which exceeds the Debt. In particular, the Debtor refers to HCA2602 of 2013 in which he is the plaintiff and the Petitioner is the 1^st defendant. I reject this ground. Apart from a bare assertion that he has claims against the Petitioner to the tune of over $100 million, there is nothing in the Affirmation which shows that the claims are well‑founded. This ground is in substance a repetition of the 4th Ground he raised before Mr Justice G Lam and dismissed by the learned Judge.

17. The Debtor’s third ground is that the Petition was presented by the Petitioner with ulterior and improper motives. I reject this ground. This ground is in substance a repetition of the 3^rd Ground he raised before Mr Justice G Lam and dismissed by the learned Judge.

18. The Debtor’s fourth ground is that the Petitioner commenced bankruptcy proceedings against the Debtor as improper and abusive litigation tactics. I reject this ground. Apart from a bare assertion and some irrelevant factual/ personal background, there is nothing in the Affirmation which supports the allegation that these proceedings are an abuse of the court’s process. On the facts of this case, the Petitioner has satisfied the requirements of section 6 of the Bankruptcy Ordinance in presenting a creditor’s petition, and has established the Debtor appears to be unable to pay a debt or appears to have no reasonable prospects of being able to pay a debt within the meaning of section 6A of the Bankruptcy Ordinance. If so, I do not see any abuse on the Petitioner’s part.

19. The Debtor’s fifth ground is that there was no personal service of the Statutory Demand. This ground is in substance a repetition of the 2^nd Ground he raised before Mr Justice G Lam and dismissed by the learned Judge.

20. To conclude, in the present case, the Debtor has exhausted the avenues for appealing against the Orders of Master J Wong and Mr Justice Chung. He has also failed in his application to set aside the Statutory Demand. The Affirmation has fallen short of showing a bona fide dispute to the Debt on substantial grounds. Nor can he show “fraud, collusion or miscarriage of justice”. In these circumstances, this court is satisfied that the Petition is well-founded and the Petitioner is entitled to a bankruptcy order against the Debtor.

Disposition

21. There will be a usual bankruptcy order against Mr Chan Yuk Lun and an order nisi that costs be to the Petitioner.