RE SHUN KAI FINANCE CO LTD

HCCW 1325/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1325 OF 2002

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J U D G M E N T

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1. This is a petition to wind up Shun Kai Finance Company Limited ("Shun Kai") presented by Japan Leasing (Hong Kong) Limited (In Creditors' Voluntary Liquidation) ("Japan Leasing") on the ground that Shun Kai is unable to pay its debts. The debt in the petition is based on six allocaturs of costs in favour of Japan Leasing against Shun Kai. These allocaturs arose from three sets of proceedings:

(1)	allocatur A concerns HCA No. 4215 of 2000, in which Shun Kai's claim against Japan Leasing was struck out as an abuse of process. Shun Kai appealed against that decision in CACV No. 752 of 2000 and the appeal was dismissed by consent, this gave rise to allocatur D. Both allocaturs are for indemnity costs;
(2)	allocatur B concerns a discovery application in HCA No. 13826 of 1998 (I shall refer to this as "the main action" in this judgment), which went on appeal in CACV No. 87 of 2000 and resulted in allocatur C;
(3)	allocaturs E and F concern a hearing on 7 February 2002 in HCA Nos. 4316 and 4318 of 2001 in which costs were awarded against Shun Kai.

2. The total amount outstanding under the six allocaturs at the date of petition on 3 December 2002 amounted to HK$1,101,853.62. Allocaturs A to D were made in February and March 2002, the other two were made in October 2002.

The background

3. The relevant background matters may be stated as follows.

4. Japan Leasing and Shun Kai were registered money lenders. They used to have business dealings under which Japan Leasing lent monies to Shun Kai to be on lent to sub-borrowers with further advances made from Shun Kai's own monies, against the securities of mortgages and sub-mortgages over the properties of the sub-borrowers. Their relationship was governed by a loan agreement between them dated 19 May 1993 ("the Loan Agreement").

5. In November 1997, Shun Kai last made payment to Japan Leasing of the monthly instalment due under the Loan Agreement and has since defaulted in payment.

6. In June 1998, Japan Leasing issued notices to the sub-borrowers directing them to make repayment of their instalment payments to Japan Leasing instead of to Shun Kai, thereby terminating Shun Kai's authority to collect such payment from the sub-borrowers under the Loan Agreement.

7. Japan Leasing went into creditors' voluntary liquidation on 29 September 1998. Following the liquidation of Japan Leasing, there are quite a number of proceedings between Japan Leasing and Shun Kai, apart from the proceedings which gave rise to the six allocaturs. The main action, which was brought by Shun Kai against Japan Leasing in or about September 1998 and is still at the stage of inspection of documents, is the main piece of litigation between them. In it, Shun Kai claims damages and an account and restitution of monies had and received on the ground that Japan Leasing had acted in breach of the Loan Agreement in issuing notices to the sub-borrowers in June 1998 requesting them to make payments directly to Japan Leasing. It is alleged that by the terms of the Loan Agreement, Japan Leasing was obliged to give seven days' written notice to Shun Kai to terminate Shun Kai's authority to collect payments from the sub-borrowers. As a result of this failure to give seven days notice, Shun Kai has suffered loss and damage including the loss of monies appropriated and retained by Japan Leasing.

8. In respect of the six allocaturs, Shun Kai had sought a stay of execution before Master de Souza in February and July 2002. The applications were rejected for allocaturs A to D, while the applications in respect of allocaturs E and F were adjourned to be heard by a judge. Shun Kai appealed against the decision of the Master and this was heard by Deputy Judge Woolley in October 2002. The Judge also heard the application for stay of execution in respect of allocaturs E and F. He dismissed the appeal in respect of allocaturs A to D and rejected the application in respect of allocaturs E and F. He ordered costs of the appeal to be paid forthwith by Shun Kai.

9. On 26 November 2002, Shun Kai filed two Notices of Appeal in which it appealed against the decision of Deputy Judge Woolley in respect of allocaturs A and B only. No appeal was lodged as regards the other allocaturs. Shun Kai says that its omission to do so was due to a "technical error", that its intention has always been to appeal against a refusal to grant a stay of execution for allocaturs A to D, and that it has decided not to lodge any appeal in respect of allocaturs E and F as the same principles should apply to these two allocaturs if Shun Kai should succeed in its appeal in respect of the other four. The alleged technical error in respect of the Notices of Appeal has not been rectified to date, nor has Shun Kai applied to fix a date for the hearing of its appeal despite the lapse of almost one year since the filing of the Notice of Appeal.

The grounds for opposing the petition

10. Shun Kai has filed four affirmations in opposition of the petition, all were made by its director Wong Shun. The last affirmation was made the day before the hearing and I gave leave to Shun Kai at the hearing to file this affirmation. In his first affirmation, Mr Wong stated that Shun Kai does not dispute the six allocaturs per se, but has sought to have execution stayed in respect of allocaturs A to D "pending the resolution of its claims against the Petitioner in [the main action]". He went on to say that Shun Kai has appealed against the order of Deputy Judge Woolley for dismissing the appeal from the refusal of Master de Souza to grant the stay sought and that no hearing date has yet been given for the appeal. The two Notices of Appeal were exhibited, as well as the judgment of Deputy Judge Woolley. In the 2nd affirmation of Mr Wong, he stated that he was advised that if Shun Kai were successful in its appeal to the Court of Appeal, this would wholly undermine the case of Japan Leasing as the petitioning debts cannot properly be regarded as due and owing.

11. The other ground of opposition raised in the affirmations filed on behalf of Shun Kai is that it has a genuine and valid cross claim which is greater than the petitioning debts. This relates to Shun Kai's claim in the main action. It is only in the fourth affirmation of Mr Wong, made the day before the hearing of this petition, that he has abandoned reliance on this ground of opposition and stated that he would not ask this court to consider the main action as a cross claim for the purpose of opposing the petition. Shun Kai asserts that it still intends to take the main action to trial. Its counsel, Mr Swaine, is at pains to emphasise that in abandoning reliance on the main action in these proceedings, it is not to be taken that he has conceded that Shun Kai's claim in the main action does not have merits.

12. Mr Swaine provided this court with the written submissions of the parties before Deputy Judge Woolley and sought to demonstrate Shun Kai's appeal is of real substance and not unarguable. His submissions are along these lines.

13. It is not in dispute that Japan Leasing had collected monies owed by the sub-borrowers to Shun Kai after serving notices directing them to make payment to Japan Leasing instead and that it had refused to pay over the monies to Shun Kai. Shun Kai says that the amount collected is at least HK$1,182,947.96. Japan Leasing says it is less, only HK$907,066.67. It was submitted that Shun Kai is entitled to recover the amount as money had and received by Japan Leasing and that its cause of action in the case of each collection had accrued on the date of that collection. The significance of the accrual date of the cause of action is that this was an obligation created only after the liquidation of Japan Leasing in September 1998, and so was not part of the statutory set off prescribed by section 264 of the Companies Ordinance, Cap. 32 and section 35 of the Bankruptcy Ordinance, Cap. 6. By these statutory provisions, where there have been mutual dealings between a company and a creditor before the company went into liquidation, there would be a mandatory statutory mutual set off to establish which way the balance lies and the net balance after set off is then recoverable from the company or the creditor as the case may be. As the amount of at least HK$907,066.67 is not caught by the statutory set off and would not be the subject of mutual dealings required to be determined in the main action, Shun Kai is entitled to require Japan Leasing to apply the amount towards payment in full of the allocaturs.

14. Japan Leasing's contention before Deputy Judge Woolley was two-fold. It did not accept that Shun Kai is entitled to the amount collected from the sub-borrowers in that the authority of Shun Kai to collect payments had been validly terminated, which is the subject of dispute in the main action. Further, the amount collected from the sub-borrowers is part and parcel of the various commercial loan transactions prior to the default in payment of Shun Kai and is therefore subject to the statutory set-off, and must be taken into account in the ultimate balance on the determination of the main action. As the amount is not presently due and owing to Shun Kai by Japan Leasing, it cannot be applied towards payment of the allocaturs.

15. Mr Swaine submitted that Deputy Judge Woolley was in error in that he did not make a definite ruling if the amount collected from the sub-borrowers is caught by the statutory set off and had merely held that the contention of Japan Leasing is "at least arguable" as the collection was "a result of the enforcement of what [Japan Leasing] claims is its right from the previous mutual dealings". He contended that the Judge should have held that the amount held by Shun Kai can be used to pay the costs due on the allocaturs or at least he should have exercised his discretion to stay execution of the costs orders. He submitted that as Shun Kai has a bona fide appeal, this court should adjourn the petition pending the hearing of Shun Kai's appeal. As for the shortfall of HK$194,786.95 by which the petitioning debts exceed the amount admittedly collected by Japan Leasing from the sub-borrowers, Shun Kai seeks 28 days to pay the difference to Japan Leasing but only after Japan Leasing has provided documentary proof of the "actual amount held" and which "ought to be held" on account of Shun Kai.

16. Mr Yu, SC, who appeared on behalf of Japan Leasing, submitted that this is merely delaying tactics and there is complete lack of sincerity in not even putting up the admitted shortfall. The decision to abandon reliance on the main action as a cross claim was made at the eleventh hour, two days after Mr Yu had served full submissions to demolish the argument that Shun Kai has a genuine and substantial cross claim which exceeds the petitioning debts. The avowed purpose of seeking a stay of execution of the costs orders before Deputy Judge Woolley is pending the determination of the main action. As Shun Kai is no longer relying on the cross claim argument in this petition, Mr Yu has asked rhetorically what is the purpose of seeking a stay. He submitted that as a matter of simple logic, I should disregard all arguments relating to the stay of execution. I see considerable force in this. There is an element of unreality about the distinction sought to be drawn by Mr Swaine: he makes no concession that Shun Kai does not have a bona fide claim in the main action, he is just not relying on this as a bona fide cross claim for the purpose of opposing the petition.

17. I am not satisfied that Shun Kai's appeal is a bona fide appeal in the sense that it is being taken seriously by Shun Kai and that it has raised grounds of appeal that are of substance.

18. As I have pointed out, notwithstanding that the two Notices of Appeal were filed for nearly a year, Shun Kai has still not applied to fix a date for the hearing of this appeal. It has not taken any steps to rectify the "technical error" in not lodging any Notice of Appeal in respect of allocaturs C and D, apart from sending a letter to Japan Leasing's solicitors dated 28 February 2003 seeking the latter's consent to file two additional Notices of Appeal out of time or to amend the existing Notices of Appeal (the request was turned down by Japan Leasing on 3 March 2003). In Mr Wong's third affirmation in July 2003, Shun Kai is still seeking counsel's advice on "the most appropriate and cost-effective way to remedy the clerical error". In his fourth affirmation in October 2003, Mr Wong merely stated that there was a change of solicitors on 20 October 2003 as there is a dispute between Shun Kai and its former solicitors arising out of other litigation conducted on its behalf; that when counsel was retained for this hearing on 29 October 2003, counsel has advised the current solicitors to correct the technical error and to set down the appeals for hearing immediately that they are able to do so. There is no explanation at all for the undue delay in prosecuting the appeals. Mr Swaine asserted in his submissions that any delay in the prosecution of the appeals ought to be attributed to the former solicitors and not to Shun Kai. This is simply not supported by any evidence.

19. As for the grounds of appeal, I cannot see any substance in the arguments advanced by Mr Swaine. The Judge held that he is not satisfied that the amount collected by Japan Leasing from sub-borrowers should be taken into account in exercising his discretion whether a stay of execution should be granted. His reasoning is that the sum held is, in the light of the financial disputes between the parties, "as much in issue as anything else". To allow Shun Kai to apply the sum towards payment of the costs ordered against it is to assume that Shun Kai will succeed in the main action. I cannot see how this can be faulted. As to the dispute whether the amount held by Japan Leasing is subject to the statutory set off, I see no valid basis for saying that it is not sufficient for the Judge to rule that he is satisfied that the contention of Japan Leasing is "at least arguable" but he must make a ruling on the available evidence at that stage whether the amount held is subject to the statutory set off.

20. That is sufficient to dispose of the opposition to the petition.

21. It is not strictly necessary for me to deal with the other argument advanced by Mr Yu that Japan Leasing has another claim against Shun Kai being crystallised shortfalls of four sub-mortgage loans in the sum of HK$10,534,630.01 calculated up to 31 October 2002, for which a demand was made against Shun Kai on 1 November 2002. I will merely deal with this shortly.

22. The shortfalls came about when the mortgaged properties of those sub-borrowers were sold by Japan Leasing. Shun Kai's only response to this on affirmation is that Japan Leasing should never have sold these mortgaged properties. Mr Yu has demonstrated to me that this is wrong in fact (as it was with the express consent or at the request of Shun Kai that three of the properties were sold) and in law (as the head lender has a right to enforce the security under the sub-mortgage). Mr Swaine's submission here is that the shortfalls arising from the sale of these mortgaged properties cannot be taken into account as they are subject to the statutory set off and must await the determination in the main action. I am inclined to agree with Mr Yu that the court should not take a blinkered view and have regard only to the sum collected by Japan Leasing from the sub-borrowers (which as contended by Japan Leasing is caught by the statutory set off) and ignore completely what appears to be unanswerable claims against Shun Kai in respect of the shortfalls from the sale of mortgaged properties (which as contended by Shun Kai is caught by the statutory set off). I see no reason for differentiating the treatment of the two sums; if one were to be taken into account, so must the other.

Orders

23. For the above reasons, I make a winding-up order against Shun Kai. I make an order nisi that the costs of Japan Leasing are to be paid out of the assets of Shun Kai.