SANFORD YUNG TAO YUNG v. FAN CHI WING

HCB 6132/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY

NO. 6132 OF 2008

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D E C I S I O N

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1.  This is a hearing of a bankruptcy petition against Mr Fan Chi-wing.  The petition was presented against him by Mr Sanford Yung, who is a creditor of his in the amount of some HK$3.656 million, arising out of a guarantee that was given by Mr Fan in respect of a loan advanced by Mr Yung to a company that was controlled by Mr Fan by the name of Kingston Entertainment.  Kingston Entertainment is now in liquidation, and it is not anticipated that any significant dividend will be paid in the liquidation.

2.    The bankruptcy petition was presented on 24 July 2008.  There had previously been a statutory demand dated 9 May 2008 in respect of the debt on which the petition is based.  That demand went unanswered, and the petition was accordingly presented on 24 July 2008.

3.   The matter first came before the court on 24 September 2008, when the first hearing of the petition was heard before Master Hui.  On that occasion, the debtor was represented by his present solicitors, who informed the Master that the debtor was anxious to put forward a proposal for an Individual Voluntary Arrangement (“IVA”).  At that point, it was indicated to the Master that the debtor’s total level of indebtedness, including that owed to the petitioner, was some HK$15 million.

4.   The petition was then adjourned in the normal way to the bankruptcy judge the following Monday, and it came before me on 29 September 2008.  On that occasion, similar statements were made as to the desire of the debtor to propose an IVA for his creditors’ consideration.  By this point it was indicated that his debts in total were closer to the order of HK$20 million.

5.    I gave directions for the filing of evidence so that the debtor could take such grounds of opposition as he might wish to in relation to the petition itself, but I also made it expressly clear that such evidence should deal also with the proposed IVA and set out details of the proposals that were going to be put forward, and also provide information as to the likely progress of the IVA and the course that it might be expected to take.  Such evidence was to be filed within two weeks of that hearing.

6.    In the event, the debtor filed an affirmation on 13 October 2008 in which he mentioned nothing about the proposed IVA which had been raised previously, but instead focused on one ground of opposition to the petition based on allegedly defective service of the statutory demand and the petition against him.

7.   Those grounds are no longer pursued today, and Ms Ng, who appears for the debtor today, has very properly made it clear to me that she does not propose, in the event that her request for an adjournment is not granted, to pursue those grounds of opposition to the petition.

8.   Thereafter, the matter was due to be heard again by the court on 20 October 2008, by which time the evidence in opposition was expected to have been filed.

9.    The matter was eventually dealt with by way of a consent summons, when directions were given for the substantive hearing of the petition to be fixed.  Thereafter, dates were fixed, and the petition was fixed to be heard today, 9 January 2009.

10.   It appears that thereafter, there was some negotiation between the debtor and the petitioner as to the possibility of settling the proceedings.  The debtor says that he made a proposal towards the end of December, presumably about two weeks or 10 days ago, but the proposal that he made, details of which have not been provided to me, was apparently unacceptable to the creditor, and so nothing came of that.

11.   Instead, what happened was that on 6 January, just three days before today’s hearing, the debtor took out an application for an interim order with a view to proposing an IVA for implementation in relation to his debts.  Although the summons for that IVA was served on or notified to the petitioner the same day, the evidence in support of it was not served until yesterday, at which time the debtor sought to file his second affirmation in these proceedings, in which he stated that although he had, in around September 2008, thought that the best way to deal with his financial problems would be to propose an IVA, he decided not to pursue it at that stage because he had only recently secured new employment with a company called China TV and Movie (Hong Kong) Company Limited, to start from 1 October 2008.  The fact of his employment was in fact mentioned to me at the hearing on 29 September, although, as will be apparent from what I have already said, it does not appear that at that stage the debtor had decided not to pursue the IVA; and, on the contrary, was saying that he was intending to do so.

12.   He then says that in about November or December 2008, he met a friend of his, whose identity is not stated, whom he says he informed of his financial situation, and who offered to lend him a sum of money to enable him to seek to negotiate a settlement with the creditor.  This, he says, led to the settlement proposals towards the end of December 2008, which were not accepted.  He says that thereafter, also at about the end of December 2008, he disclosed, somewhat belatedly, his debt problems to his employer, and he says that the employer - again, no individual is identified - expressly explained that his bankruptcy would affect his employment and that he would be asked to resign or leave his employment in the event that a bankruptcy order was made against him.  He says that as he had no other alternatives left open to him, he made the application for an interim order on 6 January 2009.  That application is returnable on 27 March 2009, and in these circumstances, he seeks a stay of the petition or, alternatively, an adjournment of the petition pending the disposal of his application for an interim order in relation to the IVA.

13.   There are thus before me two applications.  The first relates to an application for leave to file the second affirmation of Mr Fan at this late stage of the proceedings.  Exhibited to that affirmation was a copy of the IVA proposal.  However, no other documentation appears to have been exhibited.  This application was made as such leave is required under the terms of the previous orders that have been made.  Secondly, there is an application for a stay or an adjournment of the bankruptcy petition pending the disposal of his application for an interim order.

14.   Both of those applications are opposed by the petitioner, who is represented by Ms Winnie Tsui.  Ms Tsui made a number of points in opposition to the application.  So far as the application for leave to file further evidence is concerned, she opposes it on the grounds that the evidence was supplied very late in the day.  It was supplied some two days after the application for an interim order was made, and only the day before the hearing, which Ms Tsui said had given her client, herself and those instructing her very little time to consider the evidence and the IVA proposal itself, which is a lengthy document.

15.   Notwithstanding that, Ms Tsui was able to make certain submissions as to the merits of the stay application, and I therefore decided that I should allow the evidence to be looked at on a de bene esse basis so as to enable me to come to a view as to whether or not it should be admitted, and with a view to assisting me in my determination of the application for a stay.

16.   Having considered the evidence and considered the submissions that Ms Tsui has made, I think, on balance, that I would give leave for the evidence to be filed.  It does not seem to me, at the end of the day, that any real prejudice or insuperable prejudice would be caused to Ms Tsui or her client if that evidence were to be allowed to go in.

17.   However, as far as the substantive application for a stay is concerned, I am afraid that I have come to the conclusion that it would not be appropriate for me to exercise my discretion to stay or adjourn the petition pending the hearing of the interim order application.

18.   I have come to this view for a number of reasons.  First of all, the chronology and history of this matter discloses that the notion of an IVA was raised by the debtor as long ago as 24 September 2008.  It seems to me that where a debtor is faced with a bankruptcy petition and he wishes to pursue the possibility of an IVA, this is something that should be done with a degree of promptitude, and is a matter that should be taken seriously.

19.   I regret to say that in this case, the debtor’s behaviour in relation to the progress of the IVA does appear to indicate that he has failed to take the IVA, which he himself proposed in September last year, with any real degree of seriousness, or in a way that shows that he was putting it forward sincerely as a means of seeking to meet his obligations as far as he was able to.

20.   The fact is that, although he mentioned the desire to pursue an IVA at the end of September last year, he thereafter appears to have changed his mind, and has taken a number of other steps with a view to trying to see whether his difficulties could be resolved in some other way.  This suggests that the IVA is something that was very much regarded by him as a last resort.  There is no explanation at all for his failure to have filed any evidence in relation to the progress of the IVA, as he was expressly directed to do at the hearing on 29 September 2008.

21.   Moreover, if it was the case that by the time he came to file his evidence in opposition to the petition that he had decided that it would be appropriate to defer consideration or pursuit of the IVA arrangements until a later stage, this too was something that should have been mentioned.

22.   It seems to me that it is incumbent on a debtor who wishes to pursue some alternative means of arranging his financial affairs in order to avoid the making of a bankruptcy order against him to take those steps with a modicum of despatch and diligence.

23.   In this case, the difficulties that have been caused as a result of the failure of the debtor to pursue the IVA with the degree of diligence that is to be expected of him is that the court and the petitioner have only been provided with details of the IVA at a very late stage, very shortly before the hearing.  This can be expected to cause difficulty in assessing the merits of the IVA, but beyond that, it also causes further problems in that it becomes difficult, and, in this case, impossible, to assess whether or not the IVA has any real prospect of success or is likely to enjoy any real support from the other creditors of the debtor.

24.   In this case, the information disclosed under the IVA proposal indicates that the debtor had in fact debts of some HK$30 million, a considerable increase on the level of debt that had been indicated to the Master and to this court at the end of September.

25.   Leaving that aside for the moment, there is absolutely no indication as to whether or not any of his creditors have expressed any views on the proposal.  It may well be that they have not, given the late stage at which the proposal has been presented, but that, in my view, is simply another factor that indicates that the approach that the debtor has taken to the question of the IVA has been entirely unacceptable.

26.   Had the IVA been pursued at an earlier stage, or had, when it became apparent that an IVA proposal was inevitable, steps been taken to canvass creditors as to the proposals, it might have been possible for some information to be provided to the court as to the likely level of support.  This is a factor that the court would take into account in considering whether or not a bankruptcy petition should be stayed in order to enable an IVA to be pursued.

27.   The position in this regard is, I think, not dissimilar to that in winding-up proceedings in which a company indicates that it seeks to pursue a scheme of arrangement.  In such cases, that indication is usually made at a very early stage in the proceedings, and the court, on being apprised of the possibility, will often grant a limited adjournment to enable more detailed proposals to be formulated and for the views of creditors to be canvassed.  This, I have no doubt, would have been the right course to follow in the present case.  However, as a result of the way in which the debtor has chosen to proceed, these steps were not taken.

28.   It seems to me that a debtor who is proposing an IVA as a means of resolving his financial difficulties, and who does so in the face of a bankruptcy petition with a view to having that petition either adjourned or stayed, is obliged to take steps to proceed with promptitude and to show that he is seriously pursuing the IVA.  I am afraid that the evidence that has been filed and the history of this matter does not demonstrate that this is the case with this particular debtor.

29.   In those circumstances, I do not think that it would be appropriate for me to exercise my discretion by granting the stay or adjournment that is sought.

30.   I should also add that Ms Tsui made a number of points in relation to the evidence that has been filed that, I would accept, give some cause for concern as to the accuracy of the information that has been presented by the debtor.  It is notable that very little information is volunteered as to the identity of persons such as the friend to whom he says he has spoken, or as to the identity of the person at his employer who had indicated that his employment might be in jeopardy in the event of a bankruptcy order being made.  But quite apart from that, there is, even at this stage, no solid evidence as to the employment of the debtor or of the salary that he is being paid.  As Ms Tsui pointed out in her supplemental submissions, given that the debtor has been employed now for some two or three months since October at a salary of apparently HK$70,000 per month, it is somewhat surprising that he should have disclosed in his list of assets in the schedule to the documents under the IVA proposal that he had bank accounts which appear to have a very small amount of money, some HK$600 in total, in them.

31.   In all of the circumstances, it also seems to me that the evidence that has been put forward is lacking in particulars and does raise questions as to whether or not the debtor’s financial position is such that he will be able to comply with the terms of the proposed IVA even if it were permitted to go ahead for consideration.

32.   Finally, although Ms Tsui did submit that the terms of the IVA were not acceptable to the petitioner, I think I should say that although the level of dividend that is proposed at present under the IVA of slightly over 7 per cent may not be a particularly attractive amount, that does not mean that in other cases, a level of dividend of that amount might not be considered to be worth pursuing.  At the end of the day it is necessary to consider the alternatives to the IVA, and it may be that if the alternative to the IVA were truly that there would be little, if any, return to creditors in a bankruptcy, creditors could take a commercial decision to accept what would appear to be a relatively unattractive dividend rather than pursue the alternative.

33.   However, in this case, as I have said, because of the way in which Mr Fan has gone about matters, it is not possible for the court to know what the attitude of other unrelated creditors is, and there is therefore nothing in that respect that can be put forward in favour of the IVA.

34.   For all of those reasons, therefore, I would dismiss the application for a stay or adjournment of these proceedings.

35.   As I have indicated, Ms Ng very properly accepted that there was no defence of substance to the petition, rightly accepting that the points in relation to alleged bad service were not points that could sustainably be argued.

36.   In those circumstances, it seems to me that the appropriate course would be to make the usual bankruptcy order against the debtor, with costs.  In the event that the debtor does not in fact lose his employment as a result of the making of the bankruptcy order against him, or if he is able to obtain alternative employment within the not too distant future, it will of course still be open to him to seek to propose an IVA even after the bankruptcy order has been made.