THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD. v. HUI SHU LEUNG

HCSD36/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT STATUTORY DEMAND NO.36 OF 1999

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D E C I S I O N

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1. Statutory demands were served on Hui Shu Leung ("the 1st Applicant") and his wife Hui Sung Man Wai Cindy ("the 2nd Applicant") by the Hongkong and Shanghai Banking Corporation Limited ("the Bank") on 31 August 1999. The Bank had granted a home loan to the 2nd Applicant for the purchase of a house in Clearwater Bay. It had also made banking facilities available to a company called Happy Youth Company Limited ("the Company") which the Applicants control. The 1st and 2nd Applicants provided a joint and several guarantee in respect of the Company's debt and the 1st Applicant also guaranteed the 2nd Applicant's home loan. The total amount due and owing to the Bank is some $15.3 million, comprising $10.5 million under the home loan and $4.8 million as banking facilities.

2. At the hearing, the Applicants submitted that as a matter of law, the liability of a guarantor only arises when it is proved that the principal debtor is unable to pay. But the guarantor's liability depends on the terms of the guarantee. The guarantees in question are in substance identical to that recently considered by this court in Re Kwok Chok Yee, HCB670/99 (unreported), 15 November 1999. Of particular relevance are clauses 2.01, 2.05, 3.02 and 9.01 which are identical to clauses 2.01, 2.04, 4.02 and 10.01 of the guarantee considered in Re Kwok Chok Yee. The Applicants' obligation under the guarantees is to pay the "Guaranteed Moneys" (defined as meaning, inter alia, "all monies in any currency owing by the Customer to the Bank at any time") on demand. As a matter of law, the Applicants' liability under the guarantees is not contingent on the Bank first exhausting its remedies against the principal debtor. The point taken on liability under the guarantees is therefore misconceived.

3. At the hearing, the Applicants produced to the court a Provisional Sale and Purchase Agreement dated 21 September 1999 for the purchase of the property in the sum of $14.5 million. It would appear that having paid the initial deposit upon the signing of the Provisional Agreement, the purchasers failed to make any further payment. The Applicants contended that given the value of the property as evidenced by the Provisional Agreement, the shortfall owing to the Bank is a relatively small sum. That, of course, is not a reason for setting aside the statutory demands. It is evident that the Applicants have not made out any valid ground for setting aside the statutory demands.

4. If the court were to dismiss the applications,

"it shall make an order authorizing the creditor to present a bankruptcy petition either forthwith, or on or after a date specified in the order."

See rule 48(7). As regards the scope of the court's discretion under rule 48(7) concerning the permissible period after which a petition could be presented, the Bank submitted that the maximum period would be 21 days but no authority was cited. It would appear from the terms of rule 48(7) that the order authorizing the presentation of the petition has to be made at the time of the dismissal of the application to set aside the statutory demand. As the court would be assisted by further submissions on the scope of the court's discretion, no order was made at the hearing which stood adjourned pending such further submissions.

5. Further written submissions were received from the solicitors for the Bank on 16 November 1999. Having reconsidered the matter, they submitted that the discretion under rule 48(7) is wide and is not restricted to 21 days or at all. Rule 48(7) is the mirror image of rule 6.5(6) of the Insolvency Rules 1986. In Muir Hunter on Personal Insolvency, the learned author commented (at para.7-076) that the court has power to postpone the date when the creditor can present a bankruptcy petition

"...either because of an intended appeal by the debtor, or perhaps because there are some real prospects of the debtor being able to comply with the statutory demand, if time is further extended."

The presentation of the petition is an important protection for creditors since it is the date from which the ability to set aside transactions at an undervalue and preferences is calculated. So the earlier a petition is presented, the greater potential rights a trustee in bankruptcy would have. The view expressed in Muir Hunter is that where a court refuses an application to set aside a statutory demand, the successful creditor should be entitled to present his petition forthwith subject, perhaps, to a stay of proceedings on such petition.

6. In the present case, the Applicants, relying on the Provisional Agreement, contended that the property is worth some $14.5 million. But it is a fact that the Provisional Agreement did not proceed and the revised valuation obtained by the Bank as of 9 November is $11.3 million. At the hearing, the Applicants also suggested that their business was turning round which would enable them to meet the anticipated shortfall.

7. An appropriate balance must be struck between the competing interests. On behalf of the Bank, it was suggested that the applications be dismissed with liberty to the Bank to present bankruptcy petitions forthwith, but that there be a stay of proceedings on the two petitions for such time as the court deems appropriate to allow the Applicants a reasonable opportunity to sell the property and to repay the amount due to the Bank. The proposal appears to me to be an eminently sensible one. Accordingly, the applications to set aside the demand are dismissed. The Bank be at liberty to present bankruptcy petitions forthwith, save that the same shall be stayed until 31 December 1999.

8. So far as costs in resisting the applications are concerned, the appropriate order is for the Bank's costs including the costs of the further submissions to be added to the costs of the Bank's petitions.