RE: TANG KAR HUNG, a Debtor and EX-PARTE: HONG KONG HOUSING SOCIETY, a Creditor

HCB 2416/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 2416 OF 2000

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REASONS FOR JUDGMENT

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1. I have before me a bankruptcy petition against the debtor Mr Tang Kar Hung presented by the Hong Kong Housing Society and a summons issued by the debtor two days before the hearing for a stay of the bankruptcy proceedings until further order or an adjournment of the proceedings sine die with liberty to restore. At the end of the hearing, I dismissed the debtor's application for a stay or adjournment and made a bankruptcy order with costs to the petitioner. These are the reasons for my judgment.

The Background

2. The petition was presented on the basis of a judgment debt of HK$21.8 million with interest in HCCT No. 91 of 1998. Judgment was given by Findlay J on 11 May 1999 on the petitioner's application for summary judgment. That application was contested by the debtor and was unsuccessful. He appealed against the judgment and the Court of Appeal dismissed his appeal on 9 November 1999. He sought leave to appeal to the Court of Final Appeal. Leave was refused by the Court of Appeal on 19 January 2000 and by the Appeal Committee of the Court of Final Appeal on 24 March 2000. In refusing leave to appeal, it was noted by the Appeal Committee that "every conceivable point in the [debtor's] favour was scrupulously explored in both courts [i.e. the Court of First Instance and the Court of Appeal]."

3. After the debtor had exhausted all the avenues of appeal, the petitioner served a statutory demand in respect of the judgment debt on the debtor by post and by advertisement in a newspaper on 25 April 2000. The petition was presented on 7 July 2000 and directions were given on 25 September 2000 for the filing of evidence. The parties had agreed that there would be no cross-examination of deponents of the affirmations filed on both sides. Leave to set down the petition for hearing was given on 15 January 2001. The dealings between the parties which gave rise to the judgment debt may be set out as follows.

4. Hing Lee Construction Company Limited ("HLC") was at the material time an approved contractor of the Hong Kong Government for public works in the building category Group C, which meant that it could tender for contracts of any value exceeding HK$50 million. All the shares in HLC were and are beneficially owned by the debtor. On 18 May 1995, HLC entered into a contract with the petitioner ("the first contract") for the redevelopment of Kai Tak Estate (Phase 1) and Tai Shing Street Market ("the Kai Tak Estate Project") whereby HLC was the main contractor and the petitioner was the employer. On 27 May 1996, HLC entered into another contract with the petitioner ("the second contract") for the housing development at Tseung Kwan O ("the Tseung Kwan O Project"). Again, the petitioner was the employer and HLC was the main contractor.

5. In respect of these two projects, HLC requested the petitioner to advance to it part of the retention money held by the petitioner and two supplementary agreements were signed between HLC and the petitioner on 26 November 1997. For the Kai Tak Estate Project, HK$12.8 million was released to HLC as a result and for the Tseung Kwan O Project, HK$9 million was released. It was provided in each of the supplementary agreements that HLC had agreed to complete the works for each project in accordance with the schedule attached, that HLC should arrange for a guarantee to be executed by the debtor as per the specimen attached, and that any dispute or difference arising between the petitioner and HLC should be referred to arbitration in accordance with the first and second contracts.

6. Pursuant to the two supplementary agreements, on 26 November 1997, the debtor executed two deeds of guarantee ("the guarantees") in favour of the petitioner in respect of the early release of part of the retention monies thereunder. It has been held by Findlay J and the Court of Appeal that the guarantees were unconditional performance bonds in view of clause 2 in each of the deeds which was as follows:

"If, in the Employer's [the petitioner's] opinion, the Contractor [HLC] shall be in default of any of his obligations under the Contract/and or the Supplementary Agreement, the Guarantor [the debtor] shall upon demand by the Employer in writing and without conditions or proof of the said default or amount demanded satisfy and discharge the amount identified in the demand of any damages, losses, charges, costs or expenses sustained by the Employer by reason of the default up to the amount of the Retention Advance."

7. On 3 March 1998, the architect in the Kai Tak Estate Project served a notice of default on HLC under the first contract and stated that if HLC should continue the default as particularized for 14 days after receipt of the notice, the petitioner would be entitled to determine its employment under the first contract. On 5 March 1998, the architect in the Tseung Kwan O Project, a different firm of architects, served a similar notice of default on HLC. The petitioner terminated the first contract on 23 March 1998 and the second contract on 31 March 1998. On 12 May 1998, the directors of HLC resolved to wind up HLC on the ground that it could not continue its business by reason of its liabilities. The liquidators of HLC were appointed.

8. The petitioner served its demand on the debtor under the guarantees on 6 August 1998 demanding payment thereunder in the total sum of HK$21.8 million. It was stated in the letters of demand that the petitioner had lodged a provisional claim with the liquidator of HLC for damages for the additional costs of completing the works in the two projects and for delay in completion. In respect of the Kai Tak Estate Project, the claim lodged by the petitioner was in excess of HK$201 million and the claim for the Tseung Kwan O Project was in excess of HK$108 million. The petitioner issued a writ against the debtor for recovery of the amount sought in the demands in HCCT No. 91 of 1998 on 5 September 1998 and applied for summary judgment with the result that I have mentioned.

9. I should point out that after the petitioner had issued the summons for summary judgment, the debtor took out a summons to stay the proceedings in HCCT No. 91 of 1998 pending the outcome of the arbitration proceedings between the petitioner and HLC in respect of the termination of the first and second contracts. However, the debtor's summons for stay of proceedings was withdrawn at the hearing before Findlay J in May 1999 and his counsel had accepted that the guarantees had been expressed to be payable on demand without proof of actual default of contractual performance. In view of that concession, the question of default of HLC in the performance of the first and second contracts was irrelevant and the stay application was abandoned. In the Court of Appeal, the debtor attempted to resurrect this point and to argue that Findlay J had erred in failing to consider that HLC had contested the entitlement of the petitioner to terminate the first and second contracts in arbitration proceedings which were on-going. He was not allowed to resurrect this defence as the Court of Appeal was of the view that the debtor's counsel in the court below was "undeniably correct" in making the concession and abandoning that line of defence. Any argument based on the underlying construction contracts and any breach of them by the petitioner or HLC should not be pursued as the guarantees had been expressed to be payable on demand if HLC had been in default of contractual performance in the petitioner's opinion,. As stated by the Court of Appeal, the opinion held by the petitioner did not have to be reasonable or correct, all that was required was that it was "genuinely and honestly held".

10. In the affirmations filed by the debtor in these bankruptcy proceedings, the debtor has accepted that the debt on which the petition is based is due to the petitioner and that it is "the petitioner's legal right to demand for payments under the guarantees". He also admitted that he is "presently unable to pay the demanded sum totalling HK$21.8 million", that he is "technically insolvent", and that he has "no personal money and asset" as his "entire wealth has been placed in HLC". He has also acknowledged that "the petitioner has every legal right to institute these bankruptcy proceedings" against him. Despite all that, the debtor has contended that a bankruptcy order should not be made against him and that the proceedings should be adjourned or stayed pending the outcome of the arbitration of HLC. I will deal with each of the grounds raised in his affirmations and in the submissions of his counsel, Miss Edith Lam.

Whether the Court should go behind the judgment in HCCT No. 91 of 1998

11. Miss Lam has submitted that I should have regard to the relevance of the arbitration of HLC notwithstanding the judgments of Findlay J and the Court of Appeal in the High Court action. The court of bankruptcy no doubt has power to go behind a judgment debt for "sufficient cause" if, for instance, "evidence is brought before the Court of Bankruptcy of circumstances tending to show that there has been fraud, or collusion, or miscarriage of justice" (Re Flatau, ex p Scotch Whisky Distillers Ltd (1888) 22 QBD 83). In other instances, the bankruptcy court may inquire into the circumstances in which the judgment was obtained where there is reason to believe that the debtor might have suffered an injustice in the compromise of an action or when a judgment was obtained by default. My attention was also drawn to the statement of Warner J in McCourt and Siequien v Baron Meats Ltd [1997] BPIR 114 to the effect that grounds upon which a bankruptcy court may go behind a judgment are more extensive than the grounds upon which an ordinary court of law or equity may set it aside.

12. As I understand Miss Lam's submission, she has not sought to argue that the judgments of Findlay J and the Court of Appeal (which held that the debtor was liable to the petitioner under the guarantees notwithstanding the alleged default of HLC has not been determined in the arbitrations) are wrong in law. What she has sought to argue was that there were matters concerning the debtor's "financial and legal position" in relation to the arbitration proceedings not considered by Findlay J and the Court of Appeal. As the matters for the consideration of the bankruptcy court are not the same as those determined in the High Court action, it would be right for me to "go behind the judgment" in the High Court action. To see whether this is a valid proposition, it would be necessary to examine the arguments advanced by Miss Lam concerning the debtor's "financial and legal position" in relation to the arbitrations.

13. The relevance of HLC's arbitrations as submitted by Miss Lam, would appear to be as follows. Assuming the debtor had satisfied the judgment debt and had paid HK$21.8 million to the petitioner, and assuming that HLC were successful in the arbitrations in that the first and second contracts were determined by the petitioner wrongfully and that HLC was in fact entitled to payment of the retention money, the petitioner would be "unjustly enriched" by the debtor's payment of HK$21.8 million under the guarantees. In that event, the debtor would be able to bring an action against the petitioner based on an implied term to make repayment or a claim in restitution. Hence, Miss Lam submitted that it would be inappropriate to make the debtor bankrupt prior to the determination of the arbitrations because it may be established that the petitioner is not entitled to retain the amount in respect of which it has obtained judgment.

14. I would say immediately that this argument has an element of unreality about it. Firstly, it is founded on the assumption that the debtor had paid the debt of HK$21.8 million under the guarantees which he was adjudged liable to pay. That is not the position and is unlikely to be the position given the debtor's lack of "personal money and asset" as stated in his affirmation. Next, it is rested on the assumption that the arbitrations should be in HLC's favour. It has not been demonstrated to me that HLC would have a real prospect of success in its claim. All that I have is an unsubstantiated assertion of Mr Richard Bowyer, the Principal Project Consultant of HLC in the arbitration proceedings, that HLC has "a very good chance of success" in the arbitration proceedings.

15. Even if the two assumptions were made in the debtor's favour, it seems to me that the legal basis of the debtor's claim against the petitioner for HK$21.8 million is unsound. In the event that the petitioner were unjustly enriched to the extent of HK$21.8 million, Miss Lam's argument that the debtor would have been entitled to recover this from the petitioner is rested on the premise that HLC would not be entitled to recover this amount from the petitioner. I fail to see why this should be the case. This is not the position at law as would appear from the authorities cited to me by Miss Lam and by the petitioner's counsel, Mr Stewart Wong. I say that this for the following reasons.

16. The guarantees in question were unconditional performance bonds. As between the guarantor (the debtor here) and the beneficiary (the petitioner), the guarantor must pay according to the guarantee, on demand, without proof or conditions. The only exception is where there is a clear fraud of which the guarantor has notice, which is not the position here. As stated by Potter L.J. in Comdel Commodities Ltd v Siporex Trade S.A. [1997] 1 Lloyd Rep 424 at 431, "it is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the bond is called, there will at some stage in the future be an 'accounting' between the parties [to the underlying contract] in the sense that their rights and obligations will finally be determined at some future date."

17. I accept the submissions of Mr Wong that where there is a dispute between the principal (i.e. HLC in this case) and the beneficiary (i.e. the petitioner) in respect of the underlying contract, that would have no bearing on the liability of the guarantor (i.e. the debtor) under an unconditional performance bond. The rights and obligations between the principal and the beneficiary would be finally determined at some future date when an "accounting" would take place between them. In turn, if the guarantor has made payment on the performance bond, the guarantor may be indemnified by the principal. The guarantor has no right to recover from the beneficiary of an unconditional performance bond in the event that it is finally determined that the beneficiary is liable to the principal under the underlying contract. If the opposite were the case, as was submitted by Miss Lam, this would strike at the very heart of an unconditional performance bond in which an absolute obligation to pay is assumed by the guarantor irrespective of whether there is any default on the part of the principal or the beneficiary (see Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] 1 QB 159).

18. For the above reasons, I reject Miss Lam's submissions that there is any or any valid basis to go behind the judgments in the High Court action.

If the Court should exercise its discretion not to make a bankruptcy order

19. It was also submitted on behalf of the debtor that regardless of whether he would have a claim against the petitioner, I should nevertheless exercise my discretion not to make a bankruptcy order and grant a stay of the proceedings pending the outcome of the arbitrations between the petitioner and HLC, alternatively for two to three months. If the debtor is made bankrupt on the basis of the judgment debt without considering the outcome of the arbitrations, it was said that this would place the debtor in an "unfair position" if it should be held in the arbitrations that the first and second contracts were terminated wrongfully. It was alleged by the debtor that his insolvency and the liquidation of HLC were directly caused by the wrongful behaviour of the petitioner in terminating the contracts.

20. The court has a discretion not to make a bankruptcy order and to dismiss the petition or to stay the proceedings where, for instance, it is established that the petition is an abuse of the process of the court, as when the bankruptcy proceedings are not used for the purpose for which such proceedings are properly designed but are used for some ulterior or collateral purpose unrelated to the lawful purpose of seeking to obtain a dividend in the bankruptcy. On the facts of the present case, I do not think there is any basis to warrant an exercise of my discretion to refuse a bankruptcy order.

21. In the debtor's affirmation, he has alleged that the petitioner had a "motive" in terminating the first and second contracts because the petitioner "stands to gain a lot financially by terminating the Kai Tak Project alone". He has alleged that 96.5% of the works in that project had been completed by HLC at the time of termination and on completion of the entire works in less than a month's time, the petitioner would have been obliged to pay HK$226 million to HLC. By terminating the first contract wrongfully, the petitioner had avoided paying HK226 million or any part thereof to HLC and it was able to call on the Bank of China Group Insurance Co. Ltd to make payment of HK$40 million under a bond and had also demanded the debtor to pay HK$21.8 million under the guarantees. These are very serious allegations made against the petitioner, which is a public body, and it had acted on the professional advice of two firms of architects in terminating the first and second contracts subsequent to the notices of default served by the architects. They are bare allegations made at virtually the eleventh hour. They are also inconsistent with the finding of Findlay J in HCCT No. 91 of 1998 that, on the evidence, the petitioner had formed the opinion that HLC was in default under the first and second contracts. In dismissing the debtor's appeal, Keith J A had this to say in his judgment in CACV No. 153 of 1999:

"It is theoretically possible, I suppose, that [the petitioner] was being devious, that it realised that the fault was all on its side, and that it was trying to steal a march on [HLC] by purporting to terminate the construction contracts before [HLC] did. But I have not discerned any evidence which would have justified such a conclusion at trial. Findlay J, in my view, was plainly correct to find that there were no grounds for saying that there was a triable question on this issue."

22. Even if it could be shown that the Court of Appeal was wrong in its assessment of the evidence as stated above, which the debtor has failed to show before me, I would not have exercised my discretion in his favour because there is no reasonable prospect of the arbitrations proceeding to a conclusion. As mentioned earlier, HLC is in creditors' voluntary liquidation so the conduct of the arbitrations for the Kai Tak Estate Project and the Tseung Kwan O Project has rested with the liquidators of HLC. For the arbitration of the Tseung Kwan O Project, no steps had been taken following the service of a notice of the liquidators of HLC on the petitioner dated 6 May 1999 requiring the petitioner to concur with the liquidators in appointing a sole arbitrator within 14 days after the service of that notice. According to Mr Bowyer, the consultant of HLC in the arbitration, the liquidators had decided to commence arbitration of the Tseung Kwan O Project after the arbitration for the Kai Tak Estate Project had been concluded. As for the arbitration of the Kai Tak Estate Project, an arbitrator was appointed in June 2000 and on 23 August 2000, the arbitrator published the first interim award which was for security for costs and ordered that the arbitration is to be stayed until HLC has provided security for the petitioner's costs of HK$1.2 million and gave leave to the petitioner to apply for further security after the close of pleadings. The present status is that the arbitration has been stayed because HLC has not provided security for costs within 28 days of the first interim award. To date, no creditor of HLC has provided funds for that purpose. All that I have are assertions from Mr Bowyer and the debtor that the creditors of HLC have the intention to put up the money and to continue with the arbitration. There is no affirmation from the liquidators or from any of the creditors that they would provide the amount of security for costs as ordered or that they would be prepared to meet any further security for costs that may be imposed so that the arbitration could proceed.

23. Lastly, I was asked to have regard to the personal circumstances of the debtor, who I understand is a well-known businessman in the community and is in his sixties. It was submitted that a bankruptcy order against him would achieve no purpose because he has no personal money and assets and if he were to be made bankrupt, this would seriously and irreparably affect his ability to work in the construction industry and affect his participation in and contribution to the arbitration proceedings. Whether the debtor has any assets of his own to meet the claims of his creditor or creditors is a matter to be investigated after a bankruptcy order is made. A bankruptcy order will no doubt work hardship on a debtor but I do not think it would be appropriate to take the personal hardship of the debtor into account in the present situation.

24. For the above reasons, I have come to the view that there is no basis to exercise my discretion not to make a bankruptcy order. I therefore dismiss the debtor's summons for an adjournment or stay of proceedings and I grant the relief sought in the amended petition with costs to the petitioner.