RE CHAN SHING WO

HEADNOTE

IN THE HIGH COURT OF HONG KONG

IN BANKRUPTCY

NO. B 612 of 1985

---------------

___________

JUDGMENT

___________

1. Shortly prior to the hearing of this petition the debtor filed an affirmation both opposing the making of a Receiving Order and also seeking an adjournment thereof. This application was made on three grounds. The first was that the debtor disputed the amount which was being claimed. This ground was not proceeded with as the debtor conceded that he did owe somewhere in the region of $160,000 to the petitioners. The second ground was based upon the so-called 15% rule and the third ground was based upon the debtor's contention that he had reasons to believe that he would in due course be able to discharge his indebtedness.

2. The petitioners are employees of the debtor and based their claim on wages which are due and owing to them. In the petition they made reference to claims by other employees for wages which are outstanding and the act of bankruptcy relied upon was the debtor's oral notice to the petitioners that he had suspended payment of his debts. Outstanding wages are accorded a priority in bankruptcy proceedings and the first issue for me to determine is whether the 1590 rule can be invoked where a petition is based on a debt which is given priority under section 38 of the Bankruptcy Ordinance Cap. 6.

3. Section 9(3) of the Ordinance reads :

"If the court is not satisfied by the proof of the petitioning creditors' debt or of the act of bankruptcy or of the service of the petition or is satisfied by the debtor it is unable to pay his debts, or is not satisfied that the assets for division among the unsecured creditors, after the payment of all costs, charges and expenses, and the debts which are preferential under this Ordinance, will be sufficient to pay a dividend of 15% or considers that for other sufficient reasons no order ought to be made, the court may dismiss the petition."

4. There is nothing in this sub-section which specifically provides that the 15% rule cannot be invoked where the petition is based upon a preferred debt. This matter was considered in passing by Silke, J.A. on page 6 of Rite-Tex Garment Factory, Ex-parte: TSE Hoi-king and WAI Man-ying.⁽¹⁾ Silke, J.A., was commenting upon a contention of Counsel that it would be wrong to deprive preferred creditors of what they could get from a bankruptcy simply because the assets are not sufficient to pay unsecured creditors a 15% dividend and that it was a matter for the court's discretion.  His Lordship agreed with this contention.  I accept that this must come within the judge's discretion when he considers whether or not to make a Receiving Order. In the exercise of this discretion it is proper for the judge to consider the nature of the claims which are being made by the petitioner. In the present case there are some assets available for distribution. In paras. 4 and 5 of the debtor's affirmation he refers to a warrant of Distress which was issued by the landlords of the premises where he conducted his business. Goods and chattels were seized under a warrant for Distress dated the 4th of July, 1985.  A sum of $119,000 odd was realized on the sale of these assets and this sum is presently held by the Chief Bailiff.

5. Perhaps the most important factor for me to weigh in the exercise of this discretion is the public interest. As I understand it the rationale of the 15% rule is to prevent a disproportionate amount of time being expended in the administration of a bankrupt's affairs when there are no assets available for distribution to creditors. I assume that the 15% rule is designed to prevent this mischief. In deciding whether or not to make a Receiving Order I must balance this possible mischief against the potential advantages of making a Receiving Order. In the present case it is likely that if a Receiving Order is made and there can be recourse to the proceeds of the distraint the preferential creditors will get all or most of the amounts they are claiming. I think that I should take cognizance of the fact that the legislature in its wisdom has seen fit to accord a priority to employees in respect of their wages. There would seem to be good justification for this. Employees are usually in a vulnerable situation. It could be said that in many cases they are innocent victims of circumstances. It is unlikely to be their fault that their employer is unable to pay their wages. In addition to this in many cases they are entirely dependent upon their wages to meet their immediate requirements. It is not difficult to see why the legislature has chosen to accord them a priority. I do not think that it would be likely that it would be a proper exercise of the discretion reposed in the court to decline to make a Receiving Order which would have the effect of defeating the benefits which are conferred upon employees by section 38.  I find it hard to envisage a situation where the court would invoke the 1% rule where there are any appreciable assets and there are preferred claims. This is certainly not such a case and on the material before me I am not prepared to decline making a Receiving Order on this ground.

6. I will now consider the second limb of this application. As I said earlier in this judgment the debtor has stated on affirmation that there is a reasonable prospect that he will be able to satisfy the claims which are being made upon him. In his affirmation he stated that he had been in communication with a Mr Wong Sum Hung who is a manufacturer in Taiwan who has indicated that he would be prepared to put up US $130,000 as his share of a partnership which would be conducted with the debtor. The debtor has for the past ten years or so been conducting a business as a manufacturer of artificial flowers. He expressed the view that if this additional finance was forthcoming it would be possible for him to continue his business and in due course to discharge his indebtedness.

7. At the hearing I advised Mr H.Y. Wong who was representing the debtor that I did not think that there was sufficient material contained in his client's affirmation to satisfy me that I could grant his client the indulgence he was seeking. This being the case Mr Wong informed me that it was his client's wish to go into the witness box to expand the evidence he had given and to make himself available for cross-examination by Mr Eccleton who was acting for the petitioners, and Mr Woollard who was representing the Official Receiver. It became clear from the cross-examination of the debtor that he has not formulated any detailed or comprehensive plans concerning either the continuance or the re-establishing of his business.  I do not think that it would be unfair to say that the debtor's ideas on his future plans are vague and tenuous. He described in some detail the difficulties he has experienced in the past, particularly regarding his trading activities with parties in China. He also said that labour costs in Hong Kong were high and that it was difficult to trade at a satisfactory profit in this line of business in Hong Kong. He had considered the possibility of manufacturing artificial flowers in Taiwan where he had business connections and selling them in Hong Kong. The main idea was that his friend would be responsible for the manufacturing process and he would be in charge of getting orders or marketing the products. The debtor agreed that he presently owed debts of something in the region of $1.2 million. He also accepted that the injection of the additional finance referred to in his affidavit would only be sufficient to stave off creditors for the time being and he did not put forward any meaningful plans as to how future business operations would be financed.

8. It is now necessary to consider the legal position. There is a most helpful passage on page 61 of the 19th Edition of Williams and Muir Hunter on Bankruptcy which describes the circumstances when it may be appropriate for a court to grant to a debtor an adjournment of proceedings. In this passage the following principles are propounded:

"But the court should be satisfied that there is a reasonable prospect of the debts being paid or settled;  if the debtor does apply for an adjournment on the last mentioned ground, 'the court is to be put in possession of every possible information as to the position of the debtor and as to the position of the negotiations which it is said will result in obtaining funds for the payment of the debtor's debts. ' If the court is satisfied as to the prospects of payment it will not require immediate payment, but may allow a reasonable time for the satisfaction of the debts."

Re Bowen ⁽²⁾, Re Decourcy ⁽³⁾, Re Glick ⁽⁴⁾ and Re Dyson ⁽⁵⁾ are cited in support of this preposition. I am satisfied that this extract correctly states the law applicable to this subject. I am also satisfied that the evidence given by the debtor in his affirmation and supplemented by his evidence given before me falls far short of the standard required. He has failed to satisfy me that there is any reasonable prospect of payment of his debts in the foreseeable future.  I would observe that all the debtor can hope to achieve even if he was able to satisfy me that there was a reasonable prospect of his being able to discharge his indebtedness would be that I could adjourn the proceedings for a reasonable period. It will be borne in mind that the consequences of my granting an adjournment could be most detrimental to the petitioners. As I have earlier indicated the landlord of the debtor's premises levied distress on the goods and chattels of the debtor on the 4th of July 1985. If no Receiving Order is made before the 4th of October, that is three months after the said distress, there is every likelihood that the Chief Bailiff will have to account to the landlord with the proceeds of sale of the goods which were seized. In that event, the petitioners may be denied the fruits of the distress.

9. The result of all this is that for the reasons I have earlier given I am not prepared to apply the 15% rule and I am also not prepared to agree to any adjournment of these proceedings as the debtor has wholly failed to discharge the burden of satisfying me that there is a reasonable prospect of his being able to discharge his indebtedness. It was for these reasons that I made the Receiving Order at the conclusion of the hearing before me. The petitioners and the Official Receiver will be entitled to their costs which will be borne from the estate.

(1)     (unreported) Civil Appeal No. 25 of 1985

(2)     1924 Br OR 32

(3)     1968 112 SJ 329

(4)     1969 113 SJ 72

(5)     (unreported) CA England 140 of 1926