RE TO KIN WAH

HCB 9856/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 9856 OF 2007

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J U D G M E N T

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Introduction

1.  This was the hearing of a creditors’ bankruptcy petition presented on 23 October 2007 against To Kin Wah (“the Debtor”) by To Fook Tim, To Kam Chau and To Kan Chi (“the Petitioners”).  The petition was based on a debt of HK$315,175.32, in respect of which a statutory demand, which went unanswered, was served on 28 September 2007.  The debt represented the amount of the taxed costs awarded to the Petitioners in respect of proceedings between the parties in the Court of Final Appeal (namely, FAMV 9/2006), under an allocatur dated 10 September 2007.

2.  The Court of Final Appeal proceedings in FAMV 9/2006 were the culmination of lengthy litigation between the Debtor and the Petitioners.  On 2 April 2002, the Debtor applied for leave to seek judicial review of the approval of the appointment of the Petitioners as managers of the Tong Tsing Wan Kun (“the Tong”).  The Petitioners were also managers of the To Ka Yi Tso (“the Tso”).  These proceedings were HCAL 105/2002.  The Debtor obtained leave on an ex parte basis on 10 April 2002.  However, such leave was set aside, and the application dismissed, by Chung J on 28 October 2002.  The Debtor appealed, and in CACV 444/2002, the Court of Appeal allowed his appeal.  HCAL 105/2002 then continued, but in August 2004, Tang J dismissed the application on its merits.  The Debtor’s appeal to the Court of Appeal (in CACV 358/2004) was unsuccessful, as was his further appeal to the Court of Final Appeal in FAMV 9/2006.

3.  The Debtor did not deny his liability for the petition debt.  Instead, in various affirmations filed by him in opposition to the petition, he raised a number of grounds for resisting the making of a bankruptcy order against him.  However, at the hearing, Mr Maurellet, appearing for the Debtor, while not formally abandoning any of them, confined his submissions to the following three points:-

(1) The Debtor had a valid and subsisting cross-claim against the Petitioners, in the amount of about HK$1,025,718.10, arising out of a costs order in his favour in CACV 444/2002 (in which the setting aside by Chung J of leave to the Debtor to bring judicial review proceedings against the Petitioners had been reversed).  Although these costs had not yet been taxed, it was submitted that even if something were to be taxed off, there could be little doubt that the amount of costs finally awarded would exceed the amount of the debt on which the petition was based.

(2) Seven members of the Debtor’s family had agreed to pledge their shares in the Tso, or to payments that they were entitled to receive from it, which were said to be worth about HK$55,000.00, to secure payment of the debt on which the petition was based.  The Debtor himself also had one such share, so that there was a total of HK$440,000.00 available, an amount which was more than sufficient to cover the debt.

(3) One of the Debtor’s relatives, a Mr To Cheong Lam, had (by an affirmation dated 15 July 2008) offered to put up his beneficial one-fourth interest in a piece of land in the New Territories as security for the debt on which the petition was based and certain other debts which the Debtor might have to pay to the Petitioners.  This property was, according to Mr To Cheong Lam, worth at least HK$4.4 million.

4.  Mr Chan Chi Hung S.C., appearing for the Petitioners, contended that there was no merit in any of these grounds:-

(1) As to the cross-claim, Mr Chan said that whatever might be the position in respect of the costs order in favour of the debtor (which had not been taxed), any cross-claim based on it would be overtopped by reverse cross-claims available to the Petitioners arising out of two other costs orders made in favour of the Petitioners in HCAL 105/2002 and CACV 358/2002.  Both these costs orders were in existence at the time the petition was presented (having been made in respect of the proceedings in the Court of First Instance and Court of Appeal from which FAMV 9/2006 was the final appeal).  The amount of such costs had been taxed after the presentation of the petition, in the amounts of HK$1,367,596.95 and HK$1,181,629.00 respectively.  Even after allowing for HK$700,000.00 by way of security for costs for CACV 358/2002, these amounts, taken together with the petition debt, comfortably overtopped the amount of the Debtor’s cross-claim.

(2) As to the offer by the Debtor’s relatives to pledge their shares in, or funds payable to them by, the Tso, there was no basis for thinking that it was possible for this to be done as a matter of law, so that the Petitioners could not be expected to accept such an offer in satisfaction of their petition.

(3) As to the offer by Mr To Cheong Lam, leaving aside the lateness of the offer, there was no proper evidence of the value of the land in question, so that the Petitioners should not be expected to accept this offer either.

5.  I shall deal with each of these issues in turn.  However, I think it fair to say that Mr Maurellet’s main focus was on the first of these arguments.

6.  So far as that is concerned, it is well established that a debtor faced with a bankruptcy or winding-up petition is entitled to pray in aid a bona fide and substantial cross-claim in order to resist the petition.  However, it is equally clear that where this is done, it is open to the petitioning creditor to bring in reverse cross-claims where these are available so as to extinguish the debtor’s cross-claim (see e.g. Re Keen Lloyd Resources Limited [2004] 2 HKC 33 and Montgomery v Wanda Modes Limited [2002] 1 BCLC 289).

7.  Mr Maurellet submitted that where a petitioner sought to raise reverse cross-claims, it was necessary for such reverse cross-claims to have formed the basis of a debt on which the petition could have been based – that is to say, that the reverse cross-claim must have been quantified as at the date of the petition.  This was not the case here, as, although the costs orders on which the Petitioners relied for their reverse cross-claims pre-dated the petition, they were not quantified by taxation until some while after the presentation of the petition.

8.  I do not think that this argument is right.  In both the Keen Lloyd and Montgomery cases, the reverse cross-claims relied upon (or at least some part of them) were not quantified as at the date of the petition.  Thus, in paragraphs 17 to 20 of Kwan J’s judgment in the Keen Lloyd case, it appears that while one part of the reverse cross-claim relied upon (a judgment debt) may have been quantified, another part (being a costs order in favour of the petitioner) does not appear to have been quantified as at the date of the petition.  In the Montgomery case, it is clear from paragraph 41 of Park J’s judgment that one of the reverse cross-claims relied upon (also an amount of untaxed costs under a costs order in favour of the petitioner) had not been quantified, even at the date of the hearing.

9.  Although Mr Maurellet submitted that reverse cross-claims relied upon by the Petitioners should, as a matter of principle, be quantified as at the date of the petition, I do not see why that should be so.  It is quite clear that a cross-claim relied upon by a debtor as an offset to the petition debt does not need to be so quantified.  That being so, I see no reason why the debtor should be entitled to pray in aid an unquantified cross-claim to offset the petition debt, on the basis that although unquantified, it is certain to come into existence for an amount in excess of the petition debt, but the petitioner should be disqualified from praying in aid a similarly certain but as yet unquantified reverse cross-claim to offset the cross-claim.  If it is permissible to look at the wider debtor/creditor relationship of the debtor and the petitioner beyond the petitioning debt, I do not see any justification in principle for limiting this so that only additional claims of the debtor against the creditor, but not vice versa, should be brought into account.

10.  I do not think that my decision in Palliser Investments Limited v Man Chi Chuen (unreported, HCB 3633/2005, 17 October 2005) assists the Debtor.  In that case, the question was whether an unsatisfied attempt to execute a judgment debt against the debtor after the presentation of the petition could be introduced into the petition as a further or alternative basis for the petition by way of amendment.  I held that as section 6(2)(c) of the Bankruptcy Ordinance required the debt on which the petition was based to be one which, at the time of presentation of the petition, the debtor appeared to be unable to pay, it was not possible to seek to amend the petition to rely on subsequent evidence of inability to pay.  That is very different from the situation here, where the question is whether, in considering the overall position as between the Debtor and the Petitioners at the hearing of the petition, all substantial cross-claims in either direction should be taken into account.

11.  Thus, although I would accept that the cross-claim relied upon by the Debtor is one of substance and will almost certainly exceed the petition debt, it is not of sufficient size to overcome the combined effect of the petition debt and reverse cross-claims that are clearly of substance and available to the Petitioners.  It therefore does not provide the Debtor with a basis for resisting the making of a bankruptcy order against him.

12.  As for the proposed pledge of the Debtor and his relatives’ shares in or entitlements to funds from the Tso, I do not think that this assists the Debtor either.  It is far from clear that such interests are readily assignable.  Certainly, Mr Maurellet was unable to cite any authority to suggest that they were.  Moreover, given that the entitlements to HK$55,000.00 each appear to have been payable for some considerable time, there seems to be no reason why the persons entitled to them should not, in the time available, simply have obtained payment and passed the funds over to the Debtor to enable him to satisfy the debt on which the petition was based, if they wished to make the funds available to him.  In these circumstances, I do not think that it can be said that such entitlements can be, or have been, effectively pledged so as to secure the petition debt.

13.  Finally, in relation to the offer by Mr To Cheong Lam to provide security over the New Territories property of which he claimed to be a joint owner, I do not think that this is an offer that can be given any real weight, for the following reasons:-

(1) According to the latest position as disclosed by the land search in relation to the property, Mr To Cheong Lam does not appear to be an owner of any share in it any longer.

(2) Even if he were, he would only have had a one-fourth undivided share in the property, and it would be questionable how readily realisable any security he might be able to give would be, from the Petitioners’ point of view.

(3) There is no satisfactory evidence of the value of the property.  No professional valuation has been prepared.  The value ascribed by Mr To Cheong Lam to the property (and hence his supposed share in it) is based on the gazetted basic ex gratia compensation rates for resumed agricultural land.  There was no clear evidence that resumption was likely, still less imminent.  Moreover, depending on the zone in which such land is situated, the ex gratia compensation rates could be less than the basic rate (between 25% and 70% less).  There was no evidence as to the zone in which the land in question was located.  In these circumstances, even leaving aside the first two difficulties, I do not consider that it would be right to ascribe any value to this offer.

14.  I therefore do not think that any of the grounds advanced by Mr Maurellet are sufficient to resist the making of a bankruptcy order against his client, and I shall therefore make the usual bankruptcy order, with costs, against the Debtor.