XCHRX LAI YUK SHAU v. DAO HENG BANK LTD.

HCSD 39/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE STATUTORY DEMAND
NO. 39 OF 2000

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D E C I S I O N

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1. This is an application by the debtor Mr Lai Yuk Shau to set aside the statutory demand dated 13 October 2000 served by the Dao Heng Bank Limited ("the bank") on him on 23 October 2000.

2. The grounds for doing so are that the statutory demand did not comply with the requirements in r. 44(5) and r. 44(4) of the Bankruptcy Rules and that the court should exercise its discretion under r. 48(5)(d) of the Rules to set aside the statutory demand. Rule 44(5) provides as follows:

"If the creditor holds any security in respect of the debt, the full amount of the debt shall be specified, but (a) there shall in the statutory demand be specified the nature of the security and the value which the creditor puts upon it as at the date of the demand; and (b) the amount of which payment is claimed by the demand shall be the full amount of the debt less the amount specified as the value of the security."

3. The complaint here is that the statutory demand did not set out the particulars required in relation to the three properties mortgaged to the bank not by the debtor himself but by third parties. The relevant words in r.44(5) are "if the creditor holds any security in respect of the debt". The word "security" is not defined in the Rules but "secured creditor" is defined in section 2 of the Bankruptcy Ordinance Cap.6 and this means "a person holding a mortgage, charge or lien on the property of the debtor or any part thereof, as a security for a debt due to him from the debtor".

4. In Re Kwok Chok Yee HCB No.670 of 1999, 15 November 1999, Le Pichon J (as she then was) rejected the submission that the petitioner had failed to comply with section 6B of the Bankruptcy Ordinance in that it had neither given up the security nor petitioned in respect of the unsecured balance because the security there was provided by a third party, not by the debtor. The judge held that the submission was misconceived because of the definition of "secured creditor" in section 2 of the Ordinance. Reference was also made to the case of In re a Debtor (No.310 of 1988) [1989] 1 WLR 452 which was concerned with the construction of r. 6.1(5) of the Insolvency Rules 1986 (equivalent to our r. 44(5)). In that case, Knox J referred to the definition provision in section 383(2) of the Insolvency Act 1986 on the definition of "secured' and related expressions, and that is similar to the definition of "secured creditor" in section 2 of Cap.6. In rejecting the submission that r. 6.1(5) should be construed as having "a different and wider meaning" than the definition section in section 383(2) so as to cover the security provided not by the debtor but by a third party, Knox J had this to say:

"It seems to me that one has to read the Insolvency Rules 1986 in the context of the requirements of the Insolvency Act 1986, and it does seem to me to follow that the word 'security' and the conception of an 'unsecured' debt all hold together, and that the requirement that value should be placed upon a security, and that the amount to be claimed shall be the amount less the amount specified as the value of the security, is closely tied to the way in which the grounds for a creditor's petition are set out in section 267(2) [equivalent to section 6(2) of Cap.6].

It seems to me, therefore, that although the turn of phrase is not exactly the same, and although the definition is in the Act and not in the rules, the two ought to be read so that they mesh together and operate hand in hand." (at 455F-G)

5. A similar approach was followed in construing the expression "secured creditor" in the context of companies winding-up in Re K & R Wong Construction Co. Ltd [1998] 2 HKC 364.

6. In view of the above decisions, I think the position is very clear. I hold that the debt in question is not a "secured" debt and that the mortgages mentioned in the debtor's affirmation are not "security in respect of the debt" under r. 44(5) of the Bankruptcy Rules. Hence, the debtor cannot invoke r. 48(5)(c) of the Rules which provides that the court may grant an application to set aside a statutory demand if "it appears that the creditor holds some security in respect of the debt claimed by the demand, and either r. 44(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt."

7. The next ground relates to r. 44(4) of the Bankruptcy Rules and this provides as follows:

"If the amount claimed in the statutory demand includes (a) any charge by way of interest not previously notified to the debtor as a liability of his; ... the amount or rate of the charge must be separately identified, the grounds on which payment of it is claimed must be stated, and in either case the amount claimed must be limited to that which has accrued due at the date of the demand."

8. The complaint here is that in the statutory demand, the amount claimed in respect of interest charged was the amount due as at 4 October 2000 which was not the date of the statutory demand being 13 October 2000. It was submitted on behalf of the debtor that according to the prescribed form for a statutory demand under section 6A(1)(a) of the Ordinance in Form 163 of the Bankruptcy (Forms) Rules, the amount in respect of interest should be given as the "amount due as at the date of this demand" and not at an earlier date.

9. I am quite unable to see any substance in this point. First of all, the prescribed form made under the Bankruptcy (Forms) Rules could be varied as the circumstances may require. Secondly, the amount of interest calculated up to 4 October 2000 was due at the date of the demand. There is no requirement that any calculation of interest should be brought entirely up to the date when the statutory demand is issued. In my view, the second ground taken on behalf of the debtor also fails.

10. Lastly, it was submitted for the debtor that even if the debtor should fail to make out the grounds that the statutory demand was not in compliance with r. 44, the court still has a discretion under r. 48(5)(d) to set aside the demand if "the court is satisfied, on other grounds, that the demand ought to be set aside".

11. It was submitted that a total of three properties had been mortgaged to the bank to secure the debt notwithstanding that the securities were not provided by the debtor but by third parties. One of these properties had been sold at HK$6.2 million which was higher than the open market value of the property as assessed by the bank's valuer in December 2000 being HK$5.7 million and the forced sale value of HK$4.56 million.

12. It was submitted that the amount realised from the sale of this property plus the open market value of the other two properties as assessed by the bank's valuers would bring the total sum to be realised from the securities to HK$12,850,000.00, which would have exceeded the debt in the statutory demand being HK$11,613,680.00. As the bank could expect to recover the debt in full by realising the securities, it would cause injustice to the debtor if the statutory demand is not set aside.

13. I have some reservation whether the discretion should be exercised under r. 48(5)(d) in these circumstances where the debtor has failed to established that he comes within r. 48(5)(c). Be that as it may, only one of the three properties mortgaged to the bank has been sold. The bank is fully entitled to enforce its right against the debtor notwithstanding it has other securities as it was provided in the guarantee given by the debtor to the bank that "the obligations of the Guarantor under this Deed shall be continuing obligations and shall not be satisfied, discharged or affected by any intermediate payment or settlement of account and are in addition to and not in substitution for any other guarantee and/or indemnity or any security which [the bank] may at any time hold for the payment of the Guaranteed Moneys and may be enforced by [the bank] in [its] discretion without first having recourse to any other guarantee and/or indemnity or any such security, without taking any steps or proceedings against the Principal or any other person, and without resorting to any other means of payment." In the circumstances, I am unable to see how this would work an injustice to the debtor by allowing the bank to enforce its legal rights.

14. For the above reasons, I dismiss the debtor's application to set aside the statutory demand with costs against the debtor. Under r. 48(7) of the Bankruptcy Rules, I make an order authorising the bank to present a bankruptcy petition after 14 days of this order.