RE LO KWAI YING LOUISA

HCB 3145/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 3145 OF 2015

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JUDGMENT

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1.  This is a bankruptcy petition taken out by an insurance company against its former insurance agent. The Petition is opposed by the Debtor.

2.  The Petitioner claims that a debt (“the Debt”) in the sum of $907,224.52 is due from the Debtor and that she is unable to pay it.  Such amount is less than the sum of $1,019,092.20 stated in the Petition because of certain repayment made on the Debtor’s behalf.

3.  The statutory demand dated 10 December 2014 (“the Statutory Demand”) claimed for the same principal sum said to be due in the Petition.  The Statutory Demand was duly served on the Debtor’s then solicitors on 3 February 2015, who indorsed on the Statutory Demand and accepted service on her behalf. There has been no application to set aside the Statutory Demand.

THE PETITIONER’S CASE

4.  The Petitioner is an insurance company in Hong Kong.

5.  With effect on 1 April 2009, the Debtor was appointed as insurance agent and Senior Unit Manager of the Petitioner pursuant to the following agreements between the Petitioner and the Debtor dated 16 March 2009 (“the Agreements”):

(i) “Service Agreement”;

(ii) “Supplemental Agreement for Managers”; and

(iii) “Agency Agreement”.

6.  The Debtor signed each of the Agreements in March 2009.

7.  The Debtor was not engaged as an employee but as an agent of the Petitioner.  Clause 2.7 of the Agency Agreement states that nothing in any agreement, rule, regulation or terms of service is intended to be construed of being capable of giving rise to an employment contract between the Debtor and the Petitioner.

8.  On 19 March 2011, the Debtor tendered a written notice of “resignation”.  On 25 March 2011, the Petitioner acknowledged receipt of her notice and noted that the Agency Agreement was terminated with effect on 1 April 2011.  On 21 April 2011, the Debtor joined another insurance company as an agent.

9.  Based on the aforesaid, the Petitioner claims that the Debtor owes the Debt to it which consists of, inter alia, the following payments.

(i)  The monthly finance payments

10.  Clause 6 of the Service Agreement provides that the Petitioner agreed to make monthly finance payments (“MF Payments”) to the Debtor as a loan that is repayable in full immediately upon the termination of the Service Agreement, but the Petitioner agreed to waive its right to recover part or any of the total MF Payments upon the expiration of 36 calendar months provided the Debtor has performed her managerial services to the satisfaction of the Petitioner throughout the agreed minimum services period.

11.  Clause 8 of the Service Agreement provides that, inter alia, the total MF Payments are required to be repaid if Debtor joins another insurance company within 48 months from the date of the commencement of the Agency Agreement.

12.  Clause 8.11 of the Agency Agreement also provides that any outstanding loan advanced to the Debtor shall be repaid in the event of the Debtor ceasing to act as an agent for the Petitioner or on the termination of the Agency Agreement for any reasons.

13.  From April 2009 to March 2011, a total of $869,512 was paid by the Petitioner to the Debtor as MF Payments.   Since the Debtor has terminated the Agency Agreement (thus triggering Clause 8.11 of the Agency Agreement), terminated the Service Agreement within 36 months of its commencement date (thus triggering Clause 6 of the Service Agreement) and registered with another insurance company within 48 months from the commencing date of the Agency Agreement (thus triggering Clause 8 of the Service Agreement), the Petitioner claims that the Debtor is liable (under any of such provisions) to repay 100% of the MF Payments to the Petitioner, totalling $869,512.

(ii)  The training cost fee

14.  Clause 9 of the Agency Agreement provides that if the Debtor joins another insurance company within 36 months from the commencing date of the Agency Agreement, the Debtor shall reimburse the Petitioner of the sum of $12,000 being the cost of training provided by the Petitioner (“Training Costs Fee”).

15.  As the Debtor joined another insurance company within the 36 months’ period, the Petitioner also claims for the reimbursement of the said sum against the Debtor.

(iii)  The advance

16.  About 10 months after the commencement date of the Agreement, the Petitioner, on 26 February 2010, received a letter written by the Debtor in English whereby she requested the Petitioner to “kindly consider [her] application of an upfront loan equivalent to four months of [her] guarantee income”.

17.  The Debtor’s application was accepted by the Petitioner.  The terms of the loan for a sum of $194,000 (“the Advance”) were set out in a letter dated 2 March 2010 entitled “Guaranteed Finance Advance” (“the GFA Letter”).  The GFA Letter was signed by the Debtor on 8 March 2010.

18.  The GFA Letter provides that the Advance is to be repaid in 12 instalments, but the Advance will become immediately repayable in one lump sum if the Agency Agreement is terminated for whatever reasons.   The GFA Letter also provides that the Advance was jointly and severally guaranteed by Mr Yu Kwok Chun (“Mr Yu”) and Mr Loo Ka Tai both of whom had signed the GFA Letter.

19.  The Petitioner paid the Advance to the Debtor in March 2010.  As the Debtor terminated the Agency Agreement, she was liable to repay the Advance to the Petitioner.  The Debtor had not made full repayment, and there was a negative balance of $98,521.45 in the Debtor’s personal commission account (“the Commission Account Debit Balance”), which the Petitioner says it is entitled to recover as the balance of the Advance.

(iv)  Calculation of the Debt allegedly owed by the Debtor

20.  The Petitioner also claims for interest on the payments due under the Debt under clause 8 of the Service Agreement.

21.  The final breakdown of the Debt is therefore as follows:

(i)	MF payments from April 2009 to March 2011	$869,512.00
(ii)	Training cost fee	$  12,000.00
(iii)	The balance of the Advance	$  98,521.45
(iv)	Adjustment in special unit account	$       450.00
(v)	Interest at a rate of 8% p.a.[1]	$147,920.62
Less:
(i)	Commission account (assigned) credit balance[2]	$    1,149.23
(ii)	Special unit account credit balance[3]	$    2,504.32
(iii)	Repayment from July 2011 to December 2012	$120,000.00
(iv)	Refund of assess card deposit	$       150.00
(v)	Repayment from Mr Yu as guarantor for the Advance	$  97,376.00
	Total:	$907,224.52

THE DEBTOR’S CASE

22.  The Debtor has filed a total of 3 affirmations.  Her evidence can be summarised as follows:

(i) It is the Debtor’s evidence that the MF Payments were “commissions” (佣金) and not “loans”.  The MF Payments constituted her income when working for the Petitioner.  To require the Debtor to repay the MF Payments would deprive her of the fruits of her labour.  In challenging the characterisation of the MF Payments as “loans”, she contends that: (i) the Petitioner reported such sums as commissions in the tax returns; and (ii) the Petitioner booked the MF Payments as commissions in its own books and accounts.

(ii) The terms in the Agreements that require repayment of the MF Payments are “unreasonable” (不合理), “unfair” (不平等) and “not allowed in law” (法律不用許).

(iii) No one has ever explained the terms of the Agreements to her, and she was unable to understand the Agreements because her English is poor.

(iv) The Debtor was ‘misled’ (誤導) by the Petitioner into signing the Agreements.

(v) Taking into account the repayment of the Advance by Mr. Yu as her guarantor, the amount stated in the Statutory Demand and the Petition is more than the actual amount of the Debt owed to the Petitioner.

LEGAL PRINCIPLES

23.  The principles in relation to bankruptcy petitions are well established and have been considered by Ng J in Re Wong Lo Fung[4]:

(i) In order to successfully oppose the petition, a debtor has to show a bona fide dispute on substantial grounds, by sufficient precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one.[5]

(ii) Normally, factual disputes are unsuitable for resolution summarily in the Bankruptcy Court.  Rather they ought to be resolved in ordinary civil litigation where oral evidence is given and tested by cross-examination.[6]

WHETHER THERE IS A BONA FIDE DISPUTE AS TO THE DEBT?

24.  Despite that the court should not try to resolve factual disputes in a bankruptcy petition, I agree with Mr Yu, counsel for the Petitioner, that the Debtor has failed to demonstrate that she has a bona fide dispute as to the Debt.  The reasons are as follows.

(i)  Whether the MP Payments were loans or commissions?

25.  The Debtor’s principal argument appears to be that the MF Payments were, in substance, not “loans” but her “commission”.  However, the Debtor’s argument is wholly irrelevant to the real question in dispute, i.e. whether the MF Payments and the Advance are repayable.  Even if one is to characterise the MF Payments as remuneration or commission presumably for taxation purposes, the question of repayment has to be decided according to the terms of the Agreements.

26.  The principles regarding contractual interpretation are trite.  As observed by Lord Halsbury LC in North Eastern Railway v Lord Hastings[7]:

“The words of a written instrument must be construed according to their natural meaning, and it appears to me that no amount of acting by the parties can alter or qualify words which are plain and unambiguous.”

27.  In Jumbo King v Faithful Properties[8], Lord Hoffmann NPJ also observed that:

“If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.”

28.  The key issue is the ordinary meaning of the words adopted in the Agreements.  The terms of the Service Agreement and Agency Agreement make it clear that the MF Payments and Training Cost Fee would become immediately repayable upon the termination of the Agreements and upon the Debtor joining a competing insurance company.

29.  There is no reason a different meaning should be attributed to the clear words that were used in the Agreements.  There is also no basis for the Debtor to rely on the descriptions of the payments in the Petitioner’s books, accounts or tax returns, as such descriptions are irrelevant as to the issue whether these payments are repayable which is governed by the terms in the Agreements.  In any event, the Petitioner has already explained that the nature of a MF Payment is a “conditional remuneration payment” and has to be repaid upon certain conditions.  Once the conditions for repayment are triggered, the MF Payments have to be repaid.

30.  In addition, I also reject the Debtor’s argument that the MF Payments cannot be loans because the Debtor would otherwise be working for the Petitioner for “no reward” (白做). Firstly, the terms of the Agency Agreement made it clear that the Debtor was an agent and not an employee of the Petitioner.  Her income depended on the commissions she earned. Under the terms of the Agreements, there was an unlimited upside in terms of the commissions she could earn.  If she performed well, she could earn more than the monthly MF Payments.  Secondly, apart from the MF Payments, the Petitioner made other payments to the Debtor, including: (i) Basic Commission totalling $240,153.26; (ii) Overriding Commission totalling $42,372.85; (iii) Agency Production Commission totalling $27,001.51; (iv) Development Allowance totalling $4,000.00; (v) GI Medical Commission totalling $476.60; and (vi) Other incentives totalling $50,800.00.  Thirdly, contrary to the Debtor’s case, the Monthly Commission Statements state that the Debtor had been remunerated for her own work.  For example, in the Monthly Commission Statement in January 2010, the second page starts off with a heading “Type of Production: Own”. The description to the sub-total also reads “First Year Commissioner (Own)”.  Hence, it is factually incorrect for the Debtor to say that she was working for no reward even if she has to repay the MF Payments to the Petitioner.

31.  Furthermore, similar arguments raised by insurance agents in other bankruptcy petitions had been rejected by the courts.  In  Winterthur Life Insurance v Au Oi Fong[9] and Re Ngan Wai Chung[10], the insurance agents tried to argue that similar advances should be treated as employee’s remuneration, but on both occasions the arguments were rejected by the courts.[11]  Hence, the Debtor’s argument has no merit.

(ii)  Whether there are factors vitiating the Agreements?

32.  The starting point in this regard is the Court of Final Appeal’s decision of Ming Shiu Chung v Ming Shiu Sum where Ribeiro PJ held that:^[12]

“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...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.”

33.  I agree with Mr Yu that there are no such vitiating factors in the present case.

34.  The Debtor seems to suggest that she was “misled” into signing the Agreements.   However, there is no allegation that the Debtor had been induced by any representation made by the Petitioner.  On the contrary, it is the Debtor’s evidence that “no one has ever explained to [her] the contents of the contract”.

35.  Despite such allegation, it is trite law that the Petitioner owed no duty to the Debtor to explain the Agreements.  In Chitty on Contracts[13], the learned authors said the following:

“The general rule is that mere non-disclosure does not constitute misrepresentation, for there is, in general, no duty on the parties to a contract to disclose material facts to each other, however dishonest such nondisclosure may be in particular circumstances.”

36.  In Ming Shiu Chung v Ming Shiu Sum^[14], Riberio PJ cited an earlier decision of the Court of Final Appeal to the effect 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 documents, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood...”

37.  Hence, insofar as the Debtor is relying on any defence based on the duty to explain, such kind of defence must fail.

38.  Neither can the Debtor rely on a plea of non est factum.

39.  The test for non est factum is summarised by Le Pichon J (as she then was) in Nanyang Commercial Bank Ltd v Jialing International Holdings Ltd[15]:

(i) There must be a radical or fundamental difference between what a party signed and what he thought he was signing.

(ii) The mistake must be as to the general character of the document, as opposed to its legal effect.

(iii) There must be a lack of negligence, i.e. that the party took all reasonable precautions in the circumstances to find out what the document was.

40.  Applying such test, there is simply no basis for the Debtor to rely on the plea of non est factum.  Firstly, there is no fundamental difference between what the Debtor perceived to have signed and what she actually signed.  The Debtor knew that she was signing contracts with the Petitioner for the purposes of being appointed as an agent of the Petitioner.  She had, at most, misunderstood the legal effect of certain terms in the Agreements about the nature of the MF Payments. Secondly, the Debtor’s notice of termination and request for the Advance were actually written in English.  Her suggestion of misunderstanding due to her poor English should therefore be rejected.  Thirdly, by signing the Agreements without reading and understanding them in full, the Debtor has, in any event, failed to exercise reasonable care.  Even assuming that she cannot understand English, there were certainly many ways for her to ascertain the meanings of the terms in the Agreements before signing them.

41.  One should also note that similar defence had been rejected by the court in Re Wong Lo Fung[16]. In that case, the debtor also joined an insurance company as an agent.  With arrangements similar to the present case, “Career Bonus” and “Monthly Transition Bonus” were made by the petitioner to the debtor.  On the debtor’s early resignation, the company petitioned for his bankruptcy based on those debts.  Ng J dismissed the debtor’s argument on non est factum on the grounds that the Debtor’s mistake was merely a mistake as to the legal effect of the document that he signed, and in any event, that the Debtor had failed to demonstrate that he had taken due care before signing the document in question.[17]  Based on the same reasons, the Debtor in the present case cannot rely on such defence.

42.  Further, the Debtor cannot vitiate the Agreements by relying on the principle of unconscionability.

43.  In Ming Shiu Chung v Ming Shiu Sum^[18], Ribeiro PJ held that:

(i) In order to constitute “unconscionability”, one side of the contract must make “unconscientious use” of his superior position or bargaining power against another party which suffers from a “special disadvantage”.

(ii) To qualify as a “special disadvantage”, the disabling condition and circumstances must be one “which seriously affects the ability of the innocent party to make a judgment to his own best interests”. Examples include illness, inexperience, impaired faculties and financial need.

(iii) On the other hand, the doctrine of unconscionability will not apply in cases where there is only mere difference in the bargaining power.

44.  In the present case, there is no suggestion that the Debtor suffered from a special disadvantage such that she was unable to make a judgment to her own best interests.  This is apparent when considering that:

(i) The Debtor was considered to be an appropriate candidate to take up the position of “Senior Unit Manager”.  Pursuant to the Agency Agreement and the Supplementary Agreement for Managers, the Debtor had fairly extensive duties and powers, including: (i) soliciting applications from third parties for the Petitioner’s business; (ii) serving policyholders pursuant to any requirements or guidelines of the Petitioner; (iii) seeking and nominating persons who are suitable candidates for appointment as agents; and (iv) supervising the conduct of all her nominated agents.

(ii) Although the Debtor is appearing in person, the contents of her affirmations indicate a degree of intelligence and understanding on her part.  Her Notice of Termination and request for the Advance were written in English.  Plainly, she was capable of understanding the state of affairs relating to the Agreements.

45.  Hence, the doctrine of unconscionability cannot assist the Debtor’s case.

46.  Finally, the Debtor cannot rely on statutory provisions such as s 8 of the Control of Exemption Clauses Ordinance (Cap. 71) or s 5 of the Unconscionable Contracts Ordinance (Cap. 458) to vitiate the Agreements.  Both provisions only apply where a party deals “as consumer”.  As confirmed by the judgment of Chu J (as she then was) in Winterthur Life Insurance v Au Oi Fong^[19], it is clear that the Debtor, who was an insurance agent engaged by the Petitioner, did not deal “as consumer” when she signed the Agreements.  Further, there was no exclusion or restriction of liability involved in this case, and so s 8 of the Control of Exemption Clauses Ordinance is not applicable here.

(iii)  Whether overstating the amount of the Debt in the Statutory Demand and the Petition would affect the validity of the proceedings?

47.  The Debtor also contends that, taking into account the repayment by Mr. Yu as her guarantor, the amount of the Debt stated in the Statutory Demand and the Petition is more than the actual amount owed by the Debtor to the Petitioner.

48.  Overstating the amount of the debt in a statutory demand or the petition is not fatal to a bankruptcy petition, and the real question is whether the overstatement is causing any prejudice to the debtor.  In Winterthur Life Insurance v Au Oi Fong^[20], Chu J said the following relating to an overstatement of the amount of the debt in a statutory demand:

“The amount of the debt, i.e. $56,740.89, appearing on the statutory demand is therefore erroneous, but that does not necessarily render the statutory demand defective or void. It has to be demonstrated that injustice would be caused to the debtor by allowing the statutory demand to stand.”

49.  I agree with Mr Yu that no injustice has been caused to the Debtor by reason of the overstatement.  Firstly, the overstatement is negligible as compared to the size of the Debt.  Secondly, there is no suggestion whatsoever that, if the correct amount of the Debt was stated in the Statutory Demand and the Petition, the Debtor would have settled the Debt.  Indeed, that suggestion is inconsistent with the Debtor’s stance that the MF Payments were her “commissions”.  Hence, the Debtor cannot rely on such ground to oppose the Petition.

50.  For the above reasons, the Debtor has failed to establish a bona fide dispute as to the Debt and I therefore make a usual bankruptcy order with costs against the Debtor.