RE XU XIUZHI

HCB 8815/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 8815 OF 2014

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JUDGMENT
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Introduction

1.  There is before this court a bankruptcy petition dated 18 November 2014 (“Petition”) presented by CTBC Bank Company Limited (“Bank”) against Mr Xu Xiuzhi (“Debtor”).  The Petition is based on the Debtor’s non-compliance with a statutory demand dated 5 June 2014 (“Statutory Demand”) for the sum of over HK$8 million (“Debt”).

2.  The Statutory Demand was served on the Debtor (i) by way of advertisement in Sing Tao Daily, a Chinese newspaper published and circulated in Hong Kong, on 11 July 2014 and (ii) by ordinary post to the Debtor’s three last known addresses – two business addresses and one residential address (“Addresses”) – on 17 July 2014. The premises at his residential address ie Flat B, 45/F, Tower 1, The Harbourside, 1 Austin Road West, Kowloon, Hong Kong were purchased by the Debtor in 2008 and still registered in his name at the time of service.

3.  The Petition itself was served by way of substituted service by (i) advertisement in Apple Daily, a Chinese newspaper published and circulated in Hong Kong and (ii) ordinary post to the Addresses pursuant to an Order made by Master H. Au-Yeung on 23 December 2014.

4.  The Debtor is the guarantor under a guarantee dated 12 November 2013 (“Guarantee”) executed by him in favour of the Bank for the indebtedness of Flourish-High International Trading (HK) Company Limited (“Company”). The Debtor was at the material time the sole director and shareholder of the Company. The Company was wound up by the Court on 6 October 2014.

5.  On 27 January 2015, the Debtor came under administrative detention at Taizhou Luqiao District Detention Centre  (台州市路橋區看守所) (“Centre”) in Zhejiang Province, PRC.  On 5 March 2015, he was formally arrested by Taizhou Public Security Bureau for illegally absorbing public funds (非法吸收公衆存款). As at the date of the hearing of the Petition, he was apparently still being detained in the Centre. 

6.  The Debtor opposes the Petition on the following grounds:

(1) invalid service and/or insufficient proof of service of the Statutory Demand (“Invalid Service Point”); and

(2) disputed liability on the Guarantee (“Disputed Debt Point”).

Invalid Service Point

7.  Rule 46 (1) and (2) of Bankruptcy Rules, Cap. 6A (“BR”), provide:

“(1) Rule 49 has effect as regards service of the statutory demand, and proof of that service by affidavit to be filed with a bankruptcy petition.

(2) The creditor shall do all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected.”

8.  Rule 49 (1) to (5) of BR provide:

“(1) Where under section 6A of the [Bankruptcy Ordinance] the petition must have been preceded by a statutory demand, there must be filed in court, with the petition, an affidavit proving service of the demand.

(2) Every affidavit must have exhibited to it a copy of the demand as served.

(3) Subject to subrule (4), if the statutory demand has been served personally on the debtor, the affidavit must be made by the person who effected that service.

(4) If service of the statutory demand (however effected) has been acknowledged in writing either by the debtor himself, or by some person stating himself in the acknowledgment to be authorized to accept service on the debtor’s behalf, the affidavit must be made either by the creditor or by a person acting on his behalf, and the acknowledgment of service must be exhibited to the affidavit.

(5) If neither paragraph (3) nor (4) applies, the affidavit must be made by a person having direct personal knowledge of the means adopted for serving the statutory demand, and must

(a) give particulars of the steps which have been taken with a view to serving the demand personally;

(b) state the means whereby (those steps having been ineffective) it was sought to bring the demand to the debtor’s attention; and

(c) specify a date by which, to the best of the knowledge, information and belief of the person making the affidavit, the demand will have come to the debtor’s attention.”

9.  In Re Pang Mei Lan May [2005] 1 HKC 319 at [25] to [28], Barma J (as he then was) said:

“25. Rule 46(2) specifies the steps which must be taken by a creditor in relation to service of a statutory demand on a debtor.  The creditor is required to do “all that is reasonable” for the purpose of bringing the statutory demand to the debtor’s attention.  Where personal service is practicable, this is required. But the steps to be taken by the creditor must, I think, also include doing all that is reasonable to effect personal service, such as the taking of reasonable steps to obtain an address at which personal service might be effected. This seems to me to follow from the general requirement of doing all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention…  

26. Thus, where a creditor has one or more addresses for a debtor, personal service should ordinarily be effected at each of those addresses.  Where a creditor has one or more avenues by which an address for service might be obtained, he should, if it is reasonable for him to do so, follow up those avenues so as to obtain, if possible, an address for service.  Whether or not it will be reasonable to expect him to do so will depend on the particular circumstances of the case, including the ease with which the step in question can be taken, and the likelihood of obtaining information which might enable personal service to be effected…

27. I would also add that as Yuen J (as she then was) pointed out in Re Li Wai Man (unreported, CFI, HCB 211/99, 1 November 1999), what is reasonable is to be judged objectively in the light of the information actually or constructively available to the creditor at the time (see paragraph 31 of the judgment).

28. If, as a result of making such reasonable inquiries, he obtains such an address, he should attempt personal service at it.  Where personal service has failed, and reasonable enquiries have led nowhere, it will always be open to the creditor to take such other steps as may be reasonable to bring the statutory demand to the debtor’s attention. In many cases, this will consist of an advertisement of the statutory demand in a newspaper circulating in Hong Kong.”

10.  According to the affirmation of service of Mr Hon Chi Kit Andy dated 15 August 2014 (“Hon 1”), staff of the Bank’s solicitors has twice attempted personal service of the Statutory Demand on the Debtor at the Addresses on 9 June and 20 June 2014 but without success. Then, on 30 June 2014, the Bank’s solicitors sent, by ordinary post, letters to the Debtor at the Addresses for the purpose of making an appointment for personal service of the Statutory Demand at three different times on 8 July 2014 at each of the Addresses. On 8 July 2014, staff of the Bank’s solicitors did attempt to effect personal service on the Debtor at the Addresses but again without success.

11.  According to Hon 1, the Bank’s solicitors have also tried to send the appointment letter to the Debtor’s email account but it bounced back. They also tried to contact the Debtor by phone at his mobile and office numbers, but again without success.

12.  According to a letter dated 19 July 2014 from his present solicitors Messrs Alfred Lam, Keung & Ko (“LKK”) to the Bank’s solicitors, the Debtor has been outside Hong Kong since June 2014. But when the Bank’s solicitors, by letter dated 24 July 2014, asked LKK inter alia (i) the current whereabouts of the Debtor, (ii) whether the Debtor had any plan to come back to Hong Kong and (iii) the means to contact the Debtor for arranging personal service of the Statutory Demand on him, there was only a holding reply from LKK.

13.  In these circumstances, this court accepts that the Bank has taken all reasonable and practicable steps to personally serve the Statutory Demand on the Debtor and to bring the Statutory Demand to his attention. Since the exact whereabouts of the Debtor were unknown to the Bank, it was not practicable for personal service to be effected. In my view, objectively speaking and in light of the information available, what the Bank has done in the circumstances falls within the range of reasonableness for the purpose of Rule 46(2) of BR: re Ho Kai Wa Francis (a debtor) [2015] 1 HKLRD 277 at [7] to [8].

14.  Counsel for the Bank submits that the weakness of the Invalid Service Point is that the Debtor’s legal advisers are unable to point out, by reference to the information actually or constructively available to the Bank at the time, what reasonable steps ought to have been taken by it but which was not taken. I agree.

15.  At paragraph 28 of her written submissions, Ms Wong, Counsel for the Debtor, makes a bald assertion that the Bank’s means of serving the Statutory Demand is contrary to Rule 46(2) of BR in that inter alia service by advertisement is insufficient – Rule 46(3) of BR permits service by advertisement only if the “statutory demand is for payment of a sum due under a judgment or order of any court”, which is not the present case.  At paragraph 29 of her written submissions, Ms Wong submits there is insufficient proof of service of the Statutory Demand by affirmation.

16.  To be fair to Ms Wong, she does withdraw the submissions at paragraph 28 (a), (b) & (d) and paragraph 29 of her written submissions, advisedly in my view, after having sight for the first time of the affirmations of service by Mr Hon. Ms Wong however maintains that the service of Statutory Demand is invalid by reason of the use of advertisement as a “substituted service”. She submits the essence of substituted service is to ensure that the person to be served has notice of the document in question, in this case, the Statutory Demand, by analogy with cases on substituted service of writs of summons. She further submits the principle is particularly important in the context of service of documents in bankruptcy proceedings owing to the serious consequences of such proceedings, citing Re A Judgment Debtor [1937] Ch 137, a case on the Bankruptcy Act 1914.

17.  This court agrees that Rule 46(3) of BR is not applicable but, as a matter of law, service by advertisement can be sufficient and valid service for the purpose of Rule 46(2), even though Rule 46(3) does not apply: Re Pang Mei Lan May supra; re Ho Kai Wa Francis (a debtor) supra.

18.  This court is also well aware of the serious consequences of bankruptcy proceedings. But what is in issue here is not whether a judgment debtor has committed an act of bankruptcy for failing to comply with a bankruptcy notice seven days after the service of the notice on him under the 1914 Act. This court is concerned with the proper construction of Rule 46 (2) of BR. Under that rule, the creditor is only expected to do what is reasonable for the purpose of bringing the statutory demand to the debtor’s attention. In the circumstances of this case, this court has concluded what the Bank has done falls within the range of reasonableness for that purpose.

19.  In particular, this court does not accept Ms Wong’s submission that where a debtor is outside the jurisdiction, the advertisement of the statutory demand must be published in the jurisdiction in which he is said to be located. To begin with, the two letters dated 19 and 31 July 2014 from LKK to the Bank’s solicitors did not reveal the Debtor’s whereabouts save that he was not in Hong Kong. Ms Wong’s submission is also silent on where the Statutory Demand should have been advertised back in July 2014 and how. On the evidence, the Debtor only came under administrative detention in the PRC on 27 January 2015. Even if the Debtor was somewhere in the PRC back in July 2014, it is unclear from Ms Wong’s submissions how the Statutory Demand should have been advertised in the PRC in order to bring it to the Debtor’s attention.

20.  For the above reasons, this court rejects the Invalid Service Point.

Disputed Debt Point

21.  It is a well-established legal principle that in order to successfully oppose a Petition, a debtor has to show a bona fide dispute to the debt 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; Re 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 (debtor) [2012] 5 HKLRD 108.

22.  Owing to the Debtor’s detention in the PRC, he is unable to swear an affirmation before a notary public. A signed copy of his affirmation dated 27 February 2015 (“Affirmation”) was exhibited to his solicitor’s affirmation and adduced as his hearsay statement.

23.  In the Affirmation, the Debtor accepted that the Company had successfully applied for a loan from the Bank. He however disputed his liability under the Guarantee on the ground that it was signed by him under a mistake. The Debtor said he did not understand the Guarantee which was in English and Traditional Chinese – he said he only understood Simplified Chinese.  The Debtor said he thought that he was signing the Guarantee as the sole director of the Company instead of in his personal capacity.  Hence, he thought the Company’s borrowing from the Bank had nothing to do with him in his personal capacity and would not result in personal liability on his part. Lastly, the Debtor said he never intended to act as a guarantor under the Guarantee.

24.  Ms Wong submits that where a person signing a document has made a fundamental mistake as to the character or effect of the document, he may rely on the doctrine of non est factum which renders the contract void ab initio: Saunders v Anglia Building Society [1971] AC 1004. The doctrine requires that person to show a disparity between the effect of the document signed and the document as it was believed to be. Such  disparity must be “radical”, “essential”, “fundamental” or “very substantial”.

25.  In the leading case of Ming Shiu Cheung & Others v Ming Shiu Sum & Others (2006) 9 HKCFAR 334 at [84] to [86], the Court of Final Appeal stated:

“84. It is in law highly material to ask how or why the father nevertheless signed the documents. Reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory's assent or adherence to what that document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed. It is an everyday occurrence that people sign documents without reading the small (or even the large) print and therefore sign without actually knowing the terms (or all the terms) of the document signed. But they are held to the documents which they have chosen to sign unless there is shown to be a recognized legal basis for concluding that their apparent consent has been in some way vitiated or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity.

85. Thus, in Saunders v Anglia Building Society [1971] AC 1004 at 1016, Lord Reid warned against an approach, like that of the Court of Appeal, which inverts the general rule:

‘We find in many of the authorities statements that a man's deed is not his deed if his mind does not go with his pen. But that is far too wide. It would cover cases where the man had taken no precautions at all, and there was no ground for his belief that he was signing something different from that which in fact he signed. I think that it is the wrong approach to start from that wide statement and then whittle it down by excluding cases where the remedy will not be granted. It is for the person who seeks the remedy to show that he should have it.’

86. And in Bank of China (Hong Kong) Ltd v Fung Chin Kan & Another (2002) 5 HKCFAR 515 at p.533, Litton NPJ acknowledged:

‘…the fundamental principle that, generally speaking, when a person signs a legal document, he or she is bound by the act of signature: As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document; that person takes the chance of being bound by its terms, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood.’ ”

26.  It is important to bear in mind that in order to invoke the doctrine of non est factum, the person who signed the document must prove that he has taken all reasonable precautions in the circumstances. Further, in the case of a person of full mental capacity, the doctrine will be available to him only in very exceptional circumstances and certainly not where his reason for not scrutinising the document before signing it is that he is too busy or too lazy. The plea cannot be available to anyone who is content to sign without taking the trouble to try to find out at least the general effect of the document: Saunders v Anglia Building Society supra at 1016 per Lord Reid.

27.  This court has carefully considered the content of the Affirmation. This court is not satisfied that the Debtor has a bona fide defence of substance. The reason is that the Affirmation is extremely “thin” on the circumstances under which the Debtor came to the alleged mistaken belief that he was signing the Guarantee only as director of the Company instead of in his personal capacity and that he would not incur any personal liability for the Company’s borrowing. If his case were that he had been misled into that mistaken belief, there is no explanation as to who had misled him or how. Further, the Affirmation is silent on what if any precautions and steps the Debtor had allegedly taken to find out the general effect of the Guarantee before he signed it and, if he had indeed taken those precautions and steps, how he still came to the mistaken belief. In any event, it seems to this court that signing a document in a language which the Debtor does not understand is prima facie carelessness which excludes the defence of non est factum.

28.  Applying the aforesaid principles stated in Ming Shiu Cheung & Others v Ming Shiu Sum & Others and Saunders v Anglia Building Society, this court is of the firm view that the plea of non est factum is not available to the Debtor and that he has failed to show a bona fide defence of substance to the Bank’s claim on the Guarantee.

29.  For the above reasons, this court rejects the Disputed Debt Point.

Disposition and Costs Order Nisi

30.  In these circumstances, this court is satisfied that the Bank is entitled to a bankruptcy order against the Debtor.

31.  There will be a usual bankruptcy order against Mr Xu Xiuzhi and an order nisi that the costs of the Petition, including all costs reserved, be to the Petitioning Creditor.