RE LI WANG

HCB 15846/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 15846 OF 2003

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J U D G M E N T

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1. I have before me an application by the bankrupt to annul or rescind the bankruptcy order that has been made against her.

2. On 15 October 2003, the bankruptcy order was obtained on the strength of a statutory demand. The bankrupt did not appear in the bankruptcy proceedings to defend the petition; the bankruptcy order was made in her absence. Shortly after the making of the bankruptcy order, that is to say on 4 November 2003, the bankrupt applied to annul or rescind the bankruptcy order.

3. At today's hearing, Mr Lo, counsel for the bankrupt runs a number of points in support of his client's application, namely a defence under the Money Lenders Ordinance (Cap. 163), an attack on the service of the statutory demand, a similar attack on the service of the bankruptcy petition, a defence based on the alleged failure on the part of the petitioner - a bank - to make a demand under the guarantee for payment of money by the bankrupt, out of which the debt comprising the statutory demand arose, undue influence and a challenge to the quantum of the alleged or disputed debt.

4. I will deal with the service of the statutory demand first. During the course of the hearing, it has become common ground that if service of the statutory demand was not done in accordance with the requirements under rule 46 of the Bankruptcy Rules (Cap. 6), the whole bankruptcy proceedings would be tainted to such an extent that the bankruptcy order that was made eventually should be set aside. I agree that this should be the result because after all a bankruptcy order is a very serious order and there must be strict adherence to the procedural requirements which to some extent serve as a safeguard of fairness to the alleged debtor in the proceedings, before the court would make such a draconian order of bankruptcy. Computing of time for complying with the statutory demand also depends on the proper service of the statutory demand in the first place. If any authority is required, that can be found in International Bank of Asia Limited, a creditor, HCB 865, 866, 867 and 868 of 1998 (unreported), Le Pichon J (as she then was), 24 December 1998, pp. 9-11. Her ladyship held in that case that it was not sufficient service if somehow the statutory demand came to the notice of the debtor notwithstanding the failure to strictly comply with the requirements under rule 46, and there was no question of any waiver of the irregularity in such circumstances.

5. Rule 46 reads as follows:

46. Requirements as to service

(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.

(3) Where the statutory demand is for payment of a sum due under a judgment or order of any court and the creditor knows, or believes with reasonable cause-

(a) that the debtor has absconded or is keeping out of the way with a view to avoiding service; and

(b) there is no real prospect of the sum due being recovered by execution or other process,

the demand may be advertised in one or more newspapers; and the time limited, for compliance with the demand runs from the date of the advertisement's appearance or (as the case may be) its first appearance."

6. Rule 46 should be read together with rule 49, which reads:

"49 Proof of service of statutory demand

(1) Where under section 6A of the 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 paragraph (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.

(6) The steps of which particulars are given for the purposes of paragraph (5)(a) must be such as would have sufficed to justify an order for substituted service of a petition.

(7) If the affidavit specifies a date for the purposes of compliance with paragraph (5)(c), then unless the court otherwise orders, that date is deemed for the purposes of these rules to have been the date on which the statutory demand was served on the debtor.

(8) Where the creditor has taken advantage of rule 46(3), the affidavit must be made either by the creditor himself or by a person having direct personal knowledge of the circumstances; and there must be specified in the affidavit-

(a) the means of the creditor's knowledge or (as the case may be) belief required for the purposes of that rule; and

(b) the date or dates on which, and the newspaper in which, the statutory demand was advertised under that rule,

and there shall be exhibited to the affidavit a copy of any advertisement of the demand.

(9) The court may decline to file the petition if not satisfied that the creditor has discharged the obligation imposed on him by rule 46(2).

(L.N. 77 of 1998)"

7. In my judgment, in order to constitute good service of the statutory demand, the creditor must do "all that is reasonable" for the purpose of bringing the statutory demand to the debtor's attention. Furthermore, if practicable in the particular circumstances of the case, he must also do "all that is reasonable" to cause personal service of the demand to be effected. So far as evidence and proof is concerned, rule 49(5) in particular requires, where personal service has not been effected, the deponent to set out on oath particulars of the steps which have been taken with a view to serving the demand personally, and, amongst other things, state the means whereby it was sought to bring the demand to the debtor's attention, those steps that he has taken having been ineffective.

8. Pausing there, a fair reading of the two rules and the requirements thereunder would, in my judgment, suggest that even though a step may turn out to be ineffective, nonetheless if it was a step which should reasonably have been taken by the creditor at the time of his effort to effect service, he must take the step. Utility is not the criterion here. For quite obviously, rule 49(5)(b) presupposes in the first place that there had been steps taken which were ineffective.

9. In the present case, the bank tried to effect personal service of the statutory demand at two addresses, one of which was given by the debtor in a guarantee executed by her together with a co-guarantor in favour of the bank on 29 July 1997 in respect of loans of a principal borrower in which both the debtor and her co-guarantor were directors and shareholders. It is clear from the affirmation of service made by the server that in the course of his attempts to effect service of the statutory demand at the two addresses, both of which he personally attended, the debtor could no longer be found there. One of the addresses was quite obviously a residential address; the server was told that the debtor no longer resided there and had moved out for quite some time. As for the other address, which was the address stated in the guarantee, it was clear by the time service was attempted that it was occupied by a firm of solicitors. Moreover, it was clear from the guarantee itself that the business address given by the debtor in the guarantee was the address of the principal borrower. In fact it was the principal borrower's registered address.

10. Apart from attempting service at the two addresses that I have referred to just now, the bank did not take any other steps either to cause personal service of the demand to be effected or to bring the statutory demand to the debtor's attention, apart from placing an advertisement in Chinese in a Chinese newspaper for one day.

11. Mr Lo, on behalf of the bankrupt, argues strongly that the bank has not done all that was in the circumstances when it tried to effect service reasonable for the purposes of bringing the statutory demand to the bankrupt's attention, and if practicable, to cause personal service of the demand to be effected. He argues that since quite obviously the address given in the guarantee was the business address or registered office of the principal borrower and since to the knowledge of the bank, the bankrupt was a director and shareholder of the company, the bank ought to have at least done an updated company research on the principal borrower with a view to finding out whether further information either relating to the bankrupt or to the company itself of which supposedly the bankrupt was a director and shareholder could be obtained. That was not done. Mr Lo argues that that was something that ought reasonably to have been done. In those circumstances, rule 46(2) has not been complied with.

12. Mr Ng, appearing for the bank seeks to counter that argument by saying that if the company search had been done, it would not have revealed any new address of the bankrupt at all. The same old residential address was given in the latest company records. Although the company search would have revealed that the company had changed its registered address to another place, the same document would have told the bank, if the bank had done the company search, that in late 2000, the bankrupt had transferred all her shareholdings in the company to a third party and was no longer a director of the company.

13. Moreover, Mr Ng reminds the Court the fact that, in fact, to the knowledge of the bank, the company has been wound up by the court under a winding-up order made on 19 December 2001. Given those circumstances, the bank, armed with that actual knowledge as well as the (constructive) knowledge that it would have got if it had conducted the company search, would not have reasonably concluded that it should try to effect service at the latest registered address of the company or take any other steps. For that reason, the bank had not failed to do all that was reasonable in the circumstances of the case to effect service.

14. I have given Mr Ng's argument much serious consideration. In the end, I am unable to accept the argument. As I said when I analysed the requirements under the Bankruptcy Rules, the rules themselves envisage that some if not all of the steps that a creditor should reasonably have taken in the circumstances of the case to effect personal service might not be effective at all. As I said, rule 49(5)(a) and (b) proceeds on the basis that the steps, which by definition must have been the reasonable steps that the creditor ought reasonably to have taken at the material time, were not effective insofar as effecting personal service is concerned.

15. In my judgment, there is no question of using the benefit of hindsight to determine what a creditor should or should not have reasonably done in seeking to bring the demand to the attention of the debtor and if practicable to effect personal service. That is, firstly, too restrictive a construction of rule 46(2), and secondly, an unwarranted watering down of the protection intended to be afforded by the relevant rules to a debtor on whom a creditor seeks to serve a statutory demand as the first step towards filing a petition for bankruptcy. An additional reason against the suggested construction is that it would bring in much uncertainty.

16. In my judgment, on a proper construction of the rules, if a step was reasonable at the time to be taken, it ought to have been taken regardless of whether if taken, it would have resulted in the debtor being made aware of the demand or his being effectively served with the demand. That is the first and foremost reason why I say I am unable to agree with Mr Ng's argument which has been presented with much force.

17. Secondly and in any event, on the material before me, I do not agree that if the company search had been done, it would not have been a reasonable step for the bank then to take to attend at the latest registered address even though the bankrupt was no longer a director or shareholder of the company. The fact that her directorship had ceased and she was no longer a shareholder did not necessarily mean that she had severed all connections with the company, nor did it necessarily mean that no further useful information could be obtained by attending the latest registered office.

18. The fact that the company had been wound up did not necessarily mean that the registered office had been abandoned by the company in liquidation. There was and is simply no or no sufficient evidence to that effect. The problem is compounded by the fact that according to the evidence, in fact the bank never contacted the Official Receiver's office regarding the affairs of the company in liquidation. It was and is simply not open to the bank to say that no useful purpose would be served by any attempt to contact the bankrupt through the registered office. Nor, likewise, is it open to the bank to say that no useful information could be obtained through contacting the Official Receiver's office.

19. Of course, I am not suggesting that there is an unlimited obligation on the part of the bank, or for that matter, any creditor, to play detective. No hard and fast rule can be laid down. The test is one of reasonableness in the particular circumstances of each individual case.

20. On the facts and evidence of the present case, I am not satisfied that the bank can have reasonably stopped where it was.

21. Lastly, I should refer to whose burden it was to place evidence before the court. Of course, it is the bankrupt's application to annul or rescind the bankruptcy order. She raises non-compliance with rule 46 as one of her grounds of application. So, prima facie, it is for the bankrupt as applicant to place evidence before the court so as to establish her allegation that the bank had not done all that was reasonable in the circumstances regarding notice and service under rule 46(2).

22. However, in my judgment, that she has already done, and if the bank should wish to contend as it did that even if it had done what it ought to have done but did not do, the result would still have been the same (assuming that that is a good argument as a matter of law and construction of the rules), it would then be up to the bank to place evidence before the court to make good that suggestion.

23. On the material before me, as I have sought to analyse above, I am simply not satisfied that the bank has done what it has to do in terms of placing such evidence before the court, even assuming that such a - as it were - "no utility" argument would be theoretically effective in salvaging the position under rule 46.

24. For those reasons, I have come to the view that there has been non-compliance with rule 46. As I said, that was a serious matter. The petition was based on the statutory demand. In fact, the petition was purportedly served in the same manner as the statutory demand.

25. Strictly speaking, the Court retains a discretion not to annul the bankruptcy order. I fail to see any circumstances which would justify the Court not to exercise its discretion to annul the order by reason of the procedural non-compliance.

26. For that reason, the present application must be allowed and for that reason also, I do not wish to say anything regarding the other points, all of which go to the merits of the alleged liability, though I have heard arguments from both parties. I do not find it appropriate for this bankruptcy court to express any views on those matters. They would have to await another day for adjudication.

27. I make an order accordingly. As regards the petition, because of the defective service of the statutory demand, it must be dismissed.

28. As regards costs, I order that the costs of the present application be paid by the petitioner to Madam Li Wang as well as the Official Receiver. By agreement, the Official Receiver's costs in respect of the present application are assessed in the sum of $20,400.00. No agreement can be reached in relation to Madam Li Wang's costs; such costs are therefore to be taxed.

29. Madam Li Wang has through her counsel confirmed that she has not incurred any costs in respect of the petition. All her costs were incurred in relation to the application. So I make no order as to costs as between her and the petitioner as regards the costs of the petition. However, I order that the petitioner pay the Official Receiver his costs of the petition, which are by agreement assessed in the sum of $10,722.94. Save as aforesaid, I make no order as to costs regarding the petition. In other words, the petitioner must bear its own costs of the petition.

30. Lastly, I thank counsel for their assistance.