RE CHUNG CHEUK MAN

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

NO. B232 OF 1985

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JUDGMENT

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1. On 10th June 1985, the Bankruptcy Judge made a Receiving Order against Chung Cheuk Man and Chung Cheuk Wi trading as Lee Kee Motors Co. on a creditor's petition. On 15th July 1985, I set aside the Receiving Order and heard the petition de novo. Mr. Fenton, who appeared for the petitioning creditor, did not oppose the application to set aside the original Receiving Order and both he and Mr. Peter Lee for the debtors consented to the petition being heard forthwith. In the result, I made a fresh Receiving Order and indicated that I would give my reasons in writing later. These are they.

2. At the original hearing, the solicitor for the debtors was prevented from attending by circumstances which appear from his affidavit. A notice of intention to oppose the making of a Receiving Order had been filed, as had supporting affirmations from each of the debtors. The opposition indicated was based on a contention that there would be insufficient assets available for division among the unsecured creditors, after payment of all costs, charges and expenses and the debts which are preferential under the Ordinance, to support a dividend of 15%. But it is apparent from the Order itself that the learned Judge had regard to the contents of the debtors' affirmations and I presume made the Order either because he placed the onus of proof on what has been called "the 15% rule" on the debtors (which I am told is his practice) or, regardless of where the onus of the proof lies on that issue, thought it right in the exercise of his undoubted discretion to make the Order.

3. Section 98(1) of the Bankruptcy Ordinance coupled with Rule 80 of the Bankruptcy Rules seems to allow for the making of an application to rescind a Receiving Order separately from any application to annul an adjudication under section 33(1) of the Ordinance. The application before me is a composite one which invokes that jurisdiction, jurisdiction to annul under section 33 and the inherent jurisdiction of the Court.  I did not think that any application under section 33 could be appropriate at this stage but I was prepared to accept that the Court had jurisdiction in a proper case to set aside a Receiving Order previously made by a court of concurrent jurisdiction. Here the solicitor for the debtors was prevented from attending to oppose the making of the Order or to ask to have the matter adjourned for argument. I feel sure that had he managed to appear before the Court, in accordance with his usual practice, the Bankruptcy Judge would have adjourned the matter to a date to be fixed and would not have made the Receiving Order at that hearing. Consequently, I felt myself able to accept jurisdiction to set aside the original Receiving Order and in the circumstances which I have indicated I thought it right in the exercise of my discretion to do so.

4. I then proceeded to hear the petition.  At once a question arose as to where the burden of proof lay with regard to what I have termed the "15% rule". I was told that the Bankruptcy Judge considers that the onus of proof lies upon the debtor who raises the issue. In other words, it is for the debtor to satisfy the Court that there will not be sufficient assets at the end of the day to pay a 15% dividend. He has supported his view in a learned judgment given on 29th March 1985 ⁽¹⁾. Before me, both Counsel adopted that view of the law and invited me to follow the practice of the regular Bankruptcy Judge. I did, and in the event, it was Mr. Lee for the debtors who undertook the burden of satisfying the Court that there would not be sufficient in the way of assets to pay the 15% dividend. I was referred to a decision of the Court of Appeal ⁽²⁾, in which judgment was given on 3rd April 1985 and which so far remains unreported ⁽¹⁾. In that case Silke, J. A. giving the judgment of the Court expressly approves a contrary approach to the 15% rule. In referring to earlier decisions at first instance by Leonard J. and Clough J., he said "Both held that the onus of proof was on the petitioning creditor to show that the assets available would be sufficient, after the stipulated deductions, to pay a 15% dividend. That, with respect, is clearly right. Clough, J. was conscious of the fact that the burden thus placed on a petitioning creditor "must be very heavy and in many cases impossible to discharge.' Whether it be obiter or not that is a very strongly expressed view and is one which on my reading it again and further reflection makes me think I was wrong not to follow even though to do so might have meant upsetting an established practice in the Bankruptcy Court and would have been in opposition to the submissions of both Counsel. However, as things turned out, placing the burden upon the petitioner in this case would not have made any difference to my ultimate decision.

5. Having assumed the burden. or having had it imposed upon them, the debtors through Counsel sought to satisfy me that there would not be sufficient in the way of assets to produce a dividend of 15%. The evidence was in the form of affirmation - the same affirmations that had been before the Bankruptcy Judge on 10th June. I did not consider that evidence sufficient to discharge what, by an analogy with the principles enunciated by the Vice -Chancellor in Re Field (a debtor), ex parte the debtor v H & J Quick Ltd. and another ⁽³⁾, I took to be a heavy burden of proof, thus compounding my earlier error as to the placing of the onus. Nor was I disposed to allow any adjournment for the debtors to bring forward further evidence in support of their contention because, as I made plain at the time, whether or not I had been satisfied that the assets would be insufficient to make good a 15% dividend I was disposed in the exercise of my discretion to make the Receiving Order. Here it was admitted that there was a very heavy indebtedness, over HK $5,000,000, of which 15% is a substantial sum. I had to have regard to the public interest and the fact that the consequences of the making of a Receiving Order go beyond the mere question of providing funds for distribution. In the exercise of my discretion, I was bound to have regard to the attitude of the Official Receiver which was strongly in support of the making of a Receiving Order notwithstanding the amount of any fund available for distribution at the end of the day. Consequently, it appeared to me that whether or not the debtors were able to discharge the burden with or without the benefit of an adjournment it would not have been right to refuse to make a Receiving Order. Consequently, I was not prepared to stand the matte over and by the same reasoning it appears to me that even if I had not fallen into error with regard to the placing of the burden of proof, a similar exercise of my discretion would have led to precisely the same result.

(1) unreported Bankruptcy 271 of 1984

(2) Re Rite-Tex Garment Factory unreported Court of Appeal (Civil) 25 of 1985

(3) [1978] 2 All ER 981