RE: CHOW MAN KWONG and EX PARTE: CHOW MAN KWONG the Debtor

HCB 470/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. B470 OF 1999

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J U D G M E N T

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The petition and its opposition

1. On 4 March 1999, Chow Man Kwong ("the debtor") presented a petition for his own bankruptcy on the ground that he was unable to pay his debts.

2. As is required by section 10 of the Bankruptcy Ordinance (Cap. 6) ("the Ordinance"), his petition was accompanied by a sworn statement of affairs dated 3 March 1999. This listed unsecured creditors consisting of various financial institutions which were owed a total of $342,252.13 on credit card, loan and other credit accounts. The debtor stated that he had assets totalling only $3,500. He also disclosed that he was being sued for $1,580,106.65 by Billion Rich Finance Limited ("BRFL") pursuant to a Writ issued on 15 February 1999.

3. On 11 March 1999, the debtor filed a supplemental statement of affairs in which he acknowledged BRFL as a creditor and proposed adding it to the list of unsecured creditors, taking the total (as then calculated) of the sums owed to such creditors to the amount of $1,617,357.65. The debtor also disclosed having an interest in Flat C, 14th Floor, Block 2, No. 112 King's Road, Kornhill, Hong Kong ("the Kornhill property"). He stated that he holds the same in trust for himself and for his younger brother, Chau Man Hau, in equal shares, it having been purchased with money provided by them in equal shares, with the intention that it should be jointly owned. He estimated the market price of the Kornhill property as $2.7 million, which, after deducting a premium payable to Housing Authority on sale in the approximate sum of $900,000, left the property with a net value of $1.8 million, of which the debtor claimed half as his own share. Adding this alleged $900,000 half share to his assets, he stated that his total assets were in the sum of $903,500 and not $3,500 as previously disclosed.

4. In his affirmation filed in the present proceedings on 28 June 1999, the debtor made a further correction, stating that the correct total amount owed to unsecured creditors (including BRFL) was $1,922,358.78, the $1,617,357.65 figure having been erroneously calculated. At today's hearing, letters were produced to the Court with a view to showing that two of the bank creditors had increased the amounts claimed by adding legal costs and further interest claims so that as at today's date, the debtor's total liability is said to be in the sum of $1,990,783.33.

5. BRFL gave notice of intention to oppose the petition on 27 May 1999. The grounds for opposing were that the debtor had failed to make full disclosure of his assets and/or financial circumstances and that there were in fact substantial assets for distribution among the creditors.

The position of BRFL

6. Although there is some dispute as to precisely how the amount arises, the debtor admits that he owes BRFL the sum of $1,580,106.65. According to BRFL, during 1997, it made 4 separate loans to the debtor, totalling $800,000. Then, in 1998, a further $600,000 was lent to him in 6 drawings of $100,000 each. Accordingly, a total of $1.4 million was lent. These loans were duly serviced during 1998 and interest totalling $408,592.05 was paid, interest having been charged by BRFL at the rate of 36% per annum.

7. The security for this indebtedness was, apparently, an equitable mortgage over the Kornhill property by deposit of title deeds, as I discuss further below.

8. The Kornhill property was assigned to the debtor on 20 May 1987 for a consideration of $406,300.00. It was acquired under the Home Ownership Scheme operated by the Housing Authority under which, after vetting by the Director of Housing, an applicant who is approved, enters into a contract to acquire the property from the developer (in the present case, the Mass Transit Railway Corporation). The debtor was approved and, after the property was assigned, he registered himself in the Land Registry as its sole owner.

9. Of the consideration for the property, $206,300.00 was paid as a down payment and the remaining $200,000 financed by Citibank N.A. pursuant to a mortgage dated 20 May 1987 which the debtor executed again on the basis that he was the sole owner.

10. It appears that in 1997, the debtor refinanced the Kornhill property with BRFL. On 8 December 1997, the debtor deposited the title deeds with BRFL. He simultaneously executed a Memorandum of Deposit of Title Deeds ("the memorandum") in which he described himself as the registered owner of the property. He agreed that the title deeds were "to be retained by the Lender as security for the payment on demand" of sums owing to the extent of $800,000 with interest at 36% per annum, i.e., 3% per month or at higher rates which may hereafter agreed to be paid by me ......." and for certain other charges. He also undertook to execute a legal mortgage whenever called upon to do so, appointing directors of BRFL his attorneys for this and other purposes relating to the realisation of the security.

11. The memorandum was registered in the Land Registry against the Kornhill property on 9 December 1997.

12. As he wished to borrow further sums from BRFL, on 4 March 1998, the debtor executed a Letter of Undertaking whereby, in consideration of BRFL granting to him general credit facilities from time to time in amounts not exceeding $100,000, he agreed to make repayment on demand and to pay interest at 36%. He also agreed that this further indebtedness was to be secured by the memorandum.

13. Accordingly, on this basis, further credit was extended by BRFL to the debtor, increasing the principal amount of his indebtedness to $1.4 million, as stated above. BRFL states that it allowed this to occur on the basis that such indebtedness was secured by the entire interest in the Kornhill property and that it would obviously not have extended so much credit to the debtor if his interest was restricted to a half share.

BRFL not a secured creditor

14. Notwithstanding that BRFL had obtained a deposit of the title deeds and execution of the memorandum and letter of undertaking referred to above, it is nevertheless the case that for the purposes of these proceedings, BRFL does not claim to be entitled to deal with the Kornhill property as a secured creditor.

15. This, I understand, is because under the Home Ownership Scheme, by the combined effect of the assignment entered into between the debtor and the MTRC, the Crown Lease to which it was subject and the Schedule to the Housing Ordinance, there exist restrictions on alienation of units, including the Kornhill property, by home-owners and mortgagees. In particular, as Mr. Brian Wong Chau Wai, who appears on behalf of BRFL confirms, the consent of the Housing Authority had not been obtained for the re-financing. While Mr. Wong stresses that, in his submission, this merely makes the memorandum voidable, he also confirms that his client does not claim to be a secured creditor for the purposes of these proceedings.

The basis of BRFL's opposition

16. BRFL contends that the evidence shows that the debtor's allegation that he only has a half share in the Kornhill property is bogus or an allegation which he is estopped from making. It points to the repeated representations that he was the sole owner, made by the debtor in his dealings with financial institutions and the Housing Authority and as entered publicly in the Land Registry. BRFL also points out, for instance, that there is no documentary evidence showing that Chau Man Hau ever had the resources to contribute or that he in fact ever did contribute a half share. In any event, they contend, Chau Man Hau was content to allow the debtor to hold himself out as sole owner and to register the memorandum against the property so that he cannot now complain.

17. BRFL has filed evidence valuing the Kornhill property at $2,050,000.00. Accordingly, they argue, provided one rejects the half share allegation, the debtor is clearly able, upon a realisation of his assets, to pay all his debts. BRFL therefore contends that the debtor has no valid ground for his petition and the Court should decline to make a bankruptcy order.

The debtor's case

18. Mr. Tsang Kam Hung, who appears for the petitioning debtor, submits that on the evidence, there is at least uncertainty as to the extent of the debtor's assets available to pay his creditors. As I have stated, the debtor's brother, Chau Man Hau, claims to be entitled to a half share of the Kornhill property, presumably on the basis that it is held to such extent for his benefit on a purchase monies resulting trust. If such claim is held to be good, then plainly, the debtor's assets will fall well short of his admitted liabilities. On the other hand, Mr. Tsang argues, even if Chau Man Hau's claim is bad, the existence of such a claim is no reason to refuse to make a bankruptcy order today. Chau Man Hau is presently not a party and, as both Mr. Tsang and Mr. Wong agree, the present proceedings are not the proper forum for a determination of the existence or otherwise of his claimed rights. Such rights can be asserted and, if necessary, tried, in proceedings initiated after an order is made.

19. Even if the debtor's brother has no valid interest in the Kornhill property, Mr. Tsang submits that on the evidence, the probability is that the debtor will still be unable to pay his debts. Mr. Tsang argues that the valuation report obtained by BRFL is of course only an estimate of the market price. Estimates by their nature, are subject to being too high or too low. Moreover, no allowance has been made for the likely discount on a forced sale. Accordingly, given that the debtor's liabilities may well exceed the amounts realisable on sale of his only significant asset, Mr. Tsang submits that sufficient grounds have been made out for an order to be made today.

Conclusion

20. The law has long recognized that there are genuine advantages to permitting an insolvent debtor to invoke the bankruptcy jurisdiction on his own motion where he is unable to pay his debts. By doing so, the debtor gives up virtually all his property in return for being freed from the accumulated burdens of his debts and for being given a chance, in due course, to make a fresh start. This avoids "the inconvenience and dissipation of resources caused by multiple executions and other forms of enforcement process." More importantly, it ensures that all creditors "will be dealt with in the most equitable way through the collective process of bankruptcy, whereby such assets as he has for distribution among his creditors will be rateably shared by them in proportion to the debts which they are owed." See Ian Fletcher, The Law of Insolvency, (Sweet & Maxwell, 2nd Ed.), p. 117.

21. The courts have on occasion refused to allow a debtor to invoke this jurisdiction where it considers the petition an abuse of the process: Re Painter [1895] 1 QB 85 and Re Betts [1901] 2 KB 39.

22. There have also been exceptional cases where, because it was entirely clear that the debts could be met, the petition has been dismissed. The example usually cited is Re a Debtor, ex p. the Debtor v Allen (No. 17 of 1966) [1967] Ch. 590 where an infant caused another infant to lose an eye from being hit by a pellet from an air gun and had Judgment for ￡2,400 damages entered against him, but subject to an order to pay at the rate of 25 s. per week. The infant petitioned for his own bankruptcy on the basis that he could not pay the ￡2,400 debt. However, Goff J. (as he then was) held that only the 25 s. weekly instalments were relevant for the purpose of determining ability to pay debts and the debtor was clearly able to pay the weekly instalments. Accordingly, in such circumstances, the court held that he had no reasonable grounds for alleging that he was unable to pay his debts, and annulled a receiving order that had been made under section 29 of the Bankruptcy Act, 1914.

23. In my judgment, the facts of the present case are not nearly such as to make the petition an abuse of the process. There is no doubt that the debtor owes very significant sums which can only be met to any meaningful degree if the Kornhill property is sold and the proceeds representing the debtor's entitlement applied to the discharge of such debts. It is, to say the least, a real possibility that such proceeds will not cover all the debtor's liabilities. This would certainly be the case if his interest in the Kornhill property is limited to a half-share and may well be the case even if he is entitled to the whole of its proceeds.

24. In my judgment, uncertainty of this nature does not deprive the debtor of his locus to petition. Thus, in Re Dunn [1949] Ch 640, a bookmaker had issued a writ against the debtor, causing the debtor to petition for a receiving order. There was from the outset doubt as to whether the bookmaker's debt was legally enforceable and was a matter that required investigation. In such circumstances, the English Court of Appeal held that the order was rightly made (even though, subsequently, it became clear that the bookmaker was not proposing to seek enforcement of the debt). Lord Evershed MR, dealing with the possible unenforceability of the debt, stated at p. 645 as follows:-

"Whether or not that contention is right seems to me to be a matter at any rate requiring some investigation. It is to be observed that one party to the alleged debt, namely, the creditor, the bookmaker, is not now before the court. If it was so clear on the face of the writ that we could say: 'There is manifestly no debt which is enforceable, this writ is really a piece of waste paper,' then it might be right for the court to say: 'There never was a debt and the order which was made on September 13, 1948, adjudicating the debtor a bankrupt ought not to have been made because the statement that he could not pay his debts has been shown to be inaccurate.' But that is going much further, as it seems to me, than we are now or the court below were entitled to go. However doubtful the success of the bookmaker's claim might be, it is, as I say, a matter requiring some argument. I think it is understandable that the debtor, on the issue of the writ, might well have been advised that the case might not be within the ambit of the Gaming Act. He might have been seriously perturbed as to what he ought to do - whether he was going to raise the Gaming Act and fight the action which was obviously going to be a matter causing expenses which were beyond the limits of his financial resources."

His Lordship accordingly upheld the decision below, stating:-

"It seems to me, therefore, that the learned judges in the court below were right in saying that on the face of that writ they could not say that there was here, beyond all doubt, no debt at all." (at p. 645)

25. He expressly rejected the suggestion that a petition in such circumstances might amount to an abuse of process, stating as follows:-

"There is nothing, I think, in the policy of the Act which disentitles a debtor to say: 'I will go bankrupt and protect myself from these possibilities and get rid, whether or not they be provable debts, of any claims which are made against me.' I think there is no ground for saying that that attitude amounts to an abuse of the process of the court, and no ground for saying that (without amounting to an abuse of the process of the court) it can be treated as sufficient reason for the court exercising its powers under s. 29 and annulling the order." (at p. 647)

26. Denning L.J., as he then was, took the same view. He made the following remarks at p. 648:-

"Mr. Aronson strongly urged that here there was no debt which was enforceable in the courts, and that on that ground the adjudication should be annulled. He said it would be a misuse of bankruptcy proceedings if they were allowed to be used in cases where there was no enforceable debt. It is probably correct to say that here there was no enforceable debt."

"Even if the debt was unenforceable nevertheless if the debtor honestly believed on reasonable grounds 'that he was unable to pay his debts' the adjudication was good and should not be annulled ab initio."

"It now turns out, indeed, that there are no debts, but that only means that the bankruptcy proceedings will have to be wound up. This will have the result that the debtor will get his discharge free from any possibility of a claim by the bookmaker. If the bankruptcy were annulled, it would mean that a claim could be still made against him."

Sommervell L.J. agreed.

27. In the present case, the evidence is far from establishing that the debtor is plainly able to pay all his debts. It is accordingly my view that the petition does not constitute an abuse of process and that a bankruptcy order should be made.

28. One other important consideration supporting this conclusion emerged in the course of the hearing. Mrs. Christine Sit, who appears on behalf of the Official Receiver helpfully pointed out that BRFL has obtained judgment it an Action brought by Writ in HCA 2802/1999 for $1,580,106.65 as the total amount due on 4 dishonoured cheques. By way of enforcement, a charging order nisi has been obtained against the Kornhill property. However, pending the outcome of this hearing, an undertaking was given to the Official Receiver that BRFL would not seek to perfect the charge.

29. The main purpose of BRFL's objection to a bankruptcy order being made is therefore to secure for itself, an advantage over other unsecured creditors by perfecting its security for its judgment debt. Mr. Wong realistically acknowledged that this formed part of his client's motivation. In my view, one of the principal objectives of the bankruptcy jurisdiction is precisely to avoid individual creditors securing such an advantage and, as I have said, to ensure that all creditors are given an equitable opportunity to share rateably in the debtor's available assets.

30. Finally, I should mention that just before judgment was delivered, Mr. Wong, on behalf of his client, offered for the purposes of this application to give up $400,000 of the claim. He argued that it would follow that, assuming the Kornhill property was sold for $2 million, a surplus of $459,217.60 would be produced which would adequately cover all the other creditors. On this basis, he invited me to decline to make the order sought.

I am unable to accept that such an offer does justice to all interested parties. It assumes that the whole of the $2,000,000 realisable from sale of the Kornhill property forms part of the debtor's estate. As I have already stated, this is a matter requiring investigation and cannot now be determined in the absence of Chau Man Hau as a party. If and when such claim is dismissed, the availability of the whole of such proceeds in favour of the creditors as a whole will be established. If I refuse to make the order now, the brother's claim will be prejudiced as BRFL will have secured priority over it. I therefore take note of the offer but do not consider it a sufficient basis upon which an order should be refused.

31. I therefore make a bankruptcy order and will now hear the parties as to costs.