RE LAI KAM WING

HCB 2701/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 2701 OF 2001

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REASONS FOR JUDGMENT

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1. This petition for bankruptcy brought by Mr Mok Chung Sum is based on an order obtained by him as plaintiff against the debtor Mr Lai Kam Wing as defendant in HCA No. 8178 of 2000. The order was made by Waung J on 3 November 2000 ("the Order"). It is the petitioner's case that by virtue of that Order the debtor is indebted to him in the sum of HK$1.2 million with interest thereon and costs. He has served a statutory demand on the debtor in respect of that sum.

2. At the hearing of the petition, no point was taken by the debtor regarding the service of the statutory demand, notwithstanding that this has been raised in the debtor's affirmations. I am satisfied that there was proper service of the statutory demand in this instance.

3. Another point taken by the debtor as to whether the petitioner is a secured creditor in that the petitioner holds the licence book of the vessel known as "Tai Lee No. 3" ("the vessel") was also dropped, after I have given leave to the petitioner to amend the petition stating that he holds the licence book of the vessel as security and that he would give up such security for the benefit of all the creditors in the event that a bankruptcy order is made.

4. That leaves the only point taken by the debtor in opposing the petition and that is whether there is a bona fide dispute on substantial grounds that he is indebted to the petitioner in the sum of HK$1.2 million by virtue of the Order. It was submitted by Mr Joseph Lam on behalf of the debtor that a different construction of the Order is possible and that the bankruptcy court is not the proper forum to resolve the dispute as to how the Order should be construed.

5. Before I set out the terms of the Order, it would be appropriate to give the background matters leading to the High Court action brought by the petitioner against the debtor.

6. The parties had entered into a loan agreement dated 16 June 1999 ("the Loan Agreement"). By that agreement the petitioner agreed to lend HK$600,000.00 to the debtor at no interest, to be repaid at the end of 12 months on 15 June 2000. The debtor agreed to put up the vessel as security for repayment of the debt. It was further provided that during the continuance of the Loan Agreement, being from 16 June 1999 to 15 June 2000, the debtor should keep the vessel in good and serviceable repair and condition and obtain all necessary licences and permits for the use of the vessel. Subsequent to the Loan Agreement, the vessel was delivered by the debtor to the petitioner and the vessel was in the possession of the petitioner until about August 2000.

7. By a transfer agreement dated 24 December 1999 ("the Transfer Agreement") made between the parties, it was agreed that the debtor was to transfer and assign all his estate and interest in the vessel to the petitioner in consideration of (1) the petitioner agreeing to discharge the debtor from all the liabilities including but not limited to the repayment of the sum of HK$600,000.00 under the Loan Agreement; and (2) an additional sum of HK$600,000.00. The debtor signed a receipt on the same date acknowledging that he had received the additional sum from the petitioner. The Transfer Agreement also provided as follows:-

"1. The Vendor [the debtor] as beneficial owner of all shares in the Vessel hereby transfer, assign and release to the Purchaser [the petitioner] all the estate right title benefit interest and use of the Vessel to the Purchaser free from all encumbrances.

....

3. The Vendor and the Purchaser shall jointly arrange the transfer of the licence of the Vessel from the Vendor to the Purchaser and register the same in the Marine Department.

4. The Vendor and the Purchaser shall jointly arrange the transfer of all the certificate of insurance from the Vendor to the Purchaser and endorse the same (as the case may be) in name of the Purchaser with the consent of the Insurance Company.

5. The Vendor hereby deliver to the Purchaser the certificate of examination of the Vessel together with all other looks [sic] and/or documents in connection with the Vessel and with the use of the same. ...."

8. After the Transfer Agreement was executed, the debtor did not take steps to arrange the transfer of the licence of the vessel to the petitioner and register the transfer of ownership in the Marine Department. The petitioner retained the licence book of the vessel which was delivered to the petitioner as security under the Loan Agreement in June 1999 but the licence of the vessel had expired on 25 May 2000. The debtor did not renew the licence or deliver to the petitioner the certificate of examination of the vessel, as he was required to do under the Transfer Agreement.

9. In June 2000, the petitioner applied to the Marine Department to have the vessel examined in order to have a certificate of survey issued and the petitioner had paid a survey fee of HK$5,670.00. However, the Government surveyor did not issue a certificate because various items of work were required to be carried out before the vessel was fit to be examined, pursuant to a notice issued by the Marine Department on 20 July 1993. It is common ground that the certificate of survey or examination must first be issued before an owner of a vessel could apply to the Marine Department to renew the licence of the vessel and to purchase third party insurance for the vessel.

10. In August 2000, the petitioner left the vessel outside the Causeway Typhoon Shelter and the debtor has taken back the vessel. On 15 August 2000, the petitioner brought the High Court action against the debtor claiming specific performance of the Transfer Agreement and an injunction restraining the debtor from registering the transfer of the vessel which was in the debtor's name to anyone other than the petitioner. Alternatively, the petitioner sought rescission of the Transfer Agreement and repayment to the petitioner of HK$1.2 million.

11. As no notice of intention to defend was given by the debtor, the petitioner took out a summons for judgment to be entered against the debtor under O. 13 r. 6(1) and O. 19 r. 7(1) of the Rules of the High Court on 10 October 2000. In his supporting affirmation, the petitioner set out the circumstances in which the Loan Agreement and the Transfer Agreement were signed and exhibited these agreements to his affirmation. He also exhibited an application for change of ownership of the vessel in the prescribed form of the Marine Department dated the same date as the Transfer Agreement but was not signed by the parties. According to the petitioner, the debtor had shown him that application form before he signed the Transfer Agreement and he was assured by the debtor that the debtor would complete the transfer as soon as possible.

12. The petitioner's application for default judgment was heard by Waung J on 27 October 2000. The hearing was adjourned because the debtor, who had appeared in person, informed the judge that he had a defence and he needed time to find a lawyer. The judge adjourned the petitioner's application to 3 November 2000 on the undertaking of the debtor not to dispose of the vessel in any way until the adjourned hearing.

13. On 2 November 2000, the debtor filed a defence in Chinese in which he alleged that he did not borrow any money from the petitioner in June 1999 notwithstanding that he had signed the Loan Agreement and a receipt acknowledging that he had received the money. He stated that the Loan Agreement was a sham and that it was signed to enable the petitioner to borrow money from a finance company. The debtor also denied that he was obliged to transfer the vessel to the petitioner notwithstanding he had signed the Transfer Agreement and alleged that this document was also a sham and executed for the same purpose as the Loan Agreement.

14. Thus, although the petitioner's application was for judgment in default of defence, when the application came before Waung J on 3 November 2000, he dealt with it on the basis whether the debtor should be given leave to defend conditionally or without conditions or whether summary judgment should be entered against the debtor. This is apparent from a transcript of the proceedings before Waung J which was obtained by the debtor's solicitors in June 2001 but the solicitors have chosen not to place them before me notwithstanding that they have filed a number of affirmations in the bankruptcy proceedings on the debtor's behalf.

15. After hearing the petitioner's counsel and the debtor in person, Waung J made the following order and I produce the Order in its entirety as the debtor's opposition to the petition turns entirely on how the Order is to be construed:

"UPON HEARING the application for default judgment by the Plaintiff [the petitioner] by way of Summons dated 10 October 2000

AND UPON HEARING the Solicitors for the Plaintiff and the Defendant [the debtor] in person

AND UPON READING the Statement of Claim issued on 15 September 2000

AND UPON READING the documents recorded on the Court Files as having been read and the purported Defence dated 2 November 2000

IT IS ORDERED THAT:-

1. The Defendant do within 14 days from the date of the Order execute and deliver a proper document for change of ownership of the vessel 'Tai Lee No. 3' to the Plaintiff.

2. An injunction restraining the Defendant from registering the transfer of the vessel 'Tai Lee No. 3' now registered in the name of the Defendant to any person other than the Plaintiff.

3. Alternatively in case it shall appear that the Defendant is unable to execute the document for change of ownership of Tai Lee No. 3 to the Plaintiff, it is ordered that the Defendant do pay the Plaintiff HK$1,200,000.00 and interest thereon.

4. The Defendant do pay the Plaintiff's costs of this action to be taxed including the costs of the application for default judgment."

16. What happened after the Order was made may be summarised as follows. The debtor then retained solicitors to act for him (these are the same solicitors acting for him in the bankruptcy proceedings) stating that they were instructed by the debtor that the judge had ordered the debtor to execute and deliver a transfer document for change of ownership of the vessel and they enclosed an application for change of ownership of the vessel which was signed by the debtor for further action by the petitioner to complete all necessary formalities to effect the transfer. The application was in the prescribed form of the Marine Department and this was in the same format as the form that had been shown to the petitioner when the Transfer Agreement was signed and a copy of which was exhibited to the petitioner's supporting affirmation in applying for default judgment. The debtor's solicitors further stated that the debtor was ready to deliver possession of the vessel to the petitioner on or before 16 November 2000. Between 13 and 21 November 2000, correspondence was exchanged between the petitioner's solicitors and the debtor's solicitors. The debtor's solicitors took the stance that the debtor had complied with paragraph 1 of the Order in that the debtor had signed the application form and provided a certified true copy of the debtor's Hong Kong identity card for the petitioner to complete the procedures in the Marine Department for change of ownership. The petitioner's solicitors disagreed, because under the procedure for reporting change of ownership to the Marine Department, the application form must be accompanied by, inter alia, the licence book which must be valid and the certificate of survey. As these documents had not been delivered by the debtor, he had not complied with paragraph 1 of the Order. In the last letter written by the petitioner's solicitors to the debtor's solicitors dated 21 November 2000, it was stated that if the debtor should insist that he had complied with paragraph 1 of the Order in full, the debtor should take out an application before the judge for an order that he had discharged his obligation under paragraph 1 of the Order, in view of the dispute between the parties whether he had done so. That suggestion was not taken up by the debtor's solicitors. I made a similar suggestion to the parties when I adjourned the petition to a substantive hearing in September 2001. That suggestion was also not taken up. Although the Order did not contain the words liberty to apply, it is within the court's inherent jurisdiction to entertain an application made by a party subsequently for the purpose of working out the terms of the Order if any difficulty should be encountered subsequently.

17. On 22 January 2001, the petitioner's solicitors issued a statutory demand for HK$1.2 million, as the petitioner took the view that since the debtor had failed to comply with paragraph 1 of the Order, he is under an obligation to pay HK$1.2 million by virtue of paragraph 3 of the Order.

18. On behalf of the debtor, it was argued that the debtor had done all that he was required to do under paragraph 1 of the Order in executing the application form and delivering it with a certified copy of his identity card to the petitioner's solicitors. It was not expressly stated in the Order that the petitioner was to have specific performance of the Transfer Agreement or that the debtor should deliver to the petitioner a certificate of survey after the debtor had carried out the necessary repairs or that the debtor should renew the licence of the vessel. It was submitted that there is a substantial dispute as to whether the Order did have the effect as contended by the petitioner.

19. I do not accept these submissions on behalf of the debtor for a number of reasons.

20. Firstly, I do not accept that in construing the terms of the Order, I should not have regard to the circumstances and the purpose for which the Order was made, bearing in mind that this was not an order made by consent but an order made on a contested application. I have set out the circumstances in which the petitioner had brought the High Court action against the debtor, the obligations that the debtor was required to perform under the Transfer Agreement, the aspects in which the debtor had not performed his contractual obligations and the reliefs sought by the petitioner in the High Court action. I have also looked at the transcript of the proceedings to find out what had happened at the hearing that led to the making of the Order. It is clear from the transcript that the judge had taken the view that the defence raised by the debtor is incredible, having regard to the various documents and receipts signed by the debtor, and hence the judge was giving summary judgment for the petitioner. Having regard to the deadlock between the parties which rendered it impossible for the change of ownership to be registered with the Marine Department, and that was the reason why the High Court action was brought, it seems to me entirely inconceivable that the judge would have ordered the debtor merely to execute and deliver a document that would not have the effect of registering the change of ownership with the Marine Department and leaving the essential dispute between the parties wholly unresolved. Further, it is clear from the exchanges between the judge and the defendant after the Order was made that the defendant had raised with the court that there might be problems in registering the transfer of ownership with the Marine Department due to the expiry of the licence and the absence of a certificate of survey. The judge had made it plain to the debtor that the procedure for registering the transfer of ownership was the responsibility of the debtor and it was up to him whether to comply with paragraph 1 of the Order. If he was unable to effect registration of the transfer, he would have to pay HK$1.2 million to the petitioner.

21. Secondly, even on the wording of the Order, the "proper document for change of ownership of the vessel" that the defendant was required to execute and deliver under paragraph 1 must be understood to be a document that would be effective for registering the transfer of the vessel with the Marine Department, as is implicit from paragraph 2 of the Order. It must be borne in mind that the debtor had already executed the document in the Transfer Agreement in which he assigned all his right and interest in the vessel to the petitioner, so paragraph 1 of the Order would not just order the debtor to do something that he had already done. Indeed, I doubt if the debtor really had any misunderstanding that paragraph 1 of the Order does require him to execute and deliver a document that would be effective in registering a change of ownership of the vessel, because his solicitors had sent the petitioner's solicitors the application form signed by the debtor which is used by the Marine Department to process an application for registration where there is a change of ownership of a vessel.

22. Thirdly, I am of the view that in construing the Order, this must be done with regard to the statutory requirements for the licencing and registration of vessels in the Shipping and Port Control Ordinance, Cap. 313 and the subsidiary legislation made thereunder. It is provided in section 26(1) of Cap. 313 that every vessel to which Part IV applies shall be licensed. The relevant subsidiary legislation applicable to the vessel in question is either the Merchant Shipping (Launches and Ferry Vessel) Regulations, Cap. 313E or the Merchant Shipping (Miscellaneous Craft) Regulations, Cap. 313F. Counsel for both parties have submitted that the Launches and Ferry Vessel Regulations would apply to the vessel. I am not entirely sure about this but it is not in dispute that the vessel would be governed by one of the two subsidiary legislation that I have mentioned. Regardless of which piece of subsidiary legislation is applicable, it is provided by statute that where ownership of a vessel is changed, this must be reported to the Marine Department within a stipulated period and on the application to the Department to register a change of ownership, a valid licence must be produced with the certificate of a government surveyor. Although it was not spelt out in the Order exactly what document is to be delivered by the defendant, it seems to me that when the Order mentioned "proper" document, the meaning of this is to be ascertained with regard to the statutory provisions.

23. For the above reasons, the debtor has failed to satisfy me that there is a substantial dispute on bona fide grounds that he has no obligation to pay HK$1.2 million by paragraph 3 of the Order upon his allegation that paragraph 1 had been complied with. I have therefore made a bankruptcy order against the debtor with costs to the petitioner.