RE: KWOK CHOK YEE and EX PARTE: THE HONGKONG AND SHANGHAI BANKING CORPORATION LTD.

HCB670/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO.670 OF 1999

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J U D G M E N T

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1. This bankruptcy petition presented by the Hongkong & Shanghai Banking Corporation Limited ("the Bank") is based on a Guarantee given by the Debtor in respect of monies due to the Bank under banking facilities provided to Lok Tin Holdings Limited ("the Company").

2. Immediately prior to the hearing of this petition, a compulsory winding-up order was made in respect of the Company. The debt owed by the Company to the Bank was secured by three mortgages. One of the mortgaged properties had been sold after presentation of the petition. The other two properties have not been sold and there is a dispute as to their open market value.

The section 6B point

3. At the hearing, the Debtor opposed the petition on two grounds. First, it was submitted that the debt was a secured debt and that the Bank had failed to comply with the requirements of section 6B of the Bankruptcy Ordinance in that it had neither given up the security nor petitioned in respect of the unsecured balance.

4. This objection is misconceived. "Secured creditor" is defined in section 2 of the Ordinance as meaning -

"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."

For the purposes of this petition, the relevant debtor is the guarantor and not the Company. The properties in question that had been mortgaged to the Bank were properties that belonged to the Company and not the Debtor. The security provided is thus a third party security. After being referred to In re A Debtor (No.310 of 1988) [1989] 1 WLR 452, counsel for the Debtor accepted that the debt founding this petition is not a secured debt. It must follow that the objection based on section 6B has no merit.

The 'liquidated sum' point

5. This left the second point taken by the Debtor which is that the debt is not for "a liquidated sum". It was contended that because the value of the mortgages have not yet been quantified and further, because deposits of $1.7 million the Debtor had with the Bank had not been taken into account, the debt supporting the petition was not a liquidated sum. Further written submissions concerning the meaning of a "liquidated sum" for the purposes of the Ordinance were made by the parties on 11 November.

6. As I understand it, the Debtor's case is that unless and until the properties mortgaged have been sold and the proceeds applied towards satisfying the debt, the sum due and owing by the Company and therefore by the Debtor under the Guarantee cannot be ascertained and therefore the amount specified in the statutory demand and this petition cannot be a debt for a liquidated sum. The premise underlying that submission is that the Debtor's obligation or liability is limited to the "net" amount that may be due and owing. That, as we shall see, is contrary to the terms of the Guarantee.

7. A similar argument had been advanced and rejected in In re A Debtor (No.64 of 1992) [1994] 1 WLR 264 where the court had to consider the meaning of a "liquidated sum" for the purposes of section 267(2)(b) of the Insolvency Act 1986 and Rule 6.5(1) of the Insolvency Rules. In that case, the creditor held security provided by the debtor. In the statutory demand served on the debtor, the creditor had subtracted from the debt an unspecified value as estimate of the value of the security at the date of the demand. The court rejected the submission that the sum claimed was merely "an inchoate anticipated loss" and not a "liquidated sum" and held that rule 6.1(5) of the Insolvency Rules recognized that it is competent for a secured creditor to put a value on its security and to serve a statutory demand for the amount of the total debt less such value. Therefore the net figure resulting from that exercise must be in the nature of a liquidated sum for the purposes of section 267(2)(b). If not, a demand prepared in compliance with rule 6.1(5) could never be a valid demand. Secondly, it must have been within the obvious contemplation of rule 6.1(5) that the value which the creditor puts on his security will be a value with which the debtor may disagree. But the emergence of any such disagreement cannot by itself, and without more, provide a basis for a challenge to the validity of the statutory demand. It cannot result in the sum claimed in the demand ceasing to be a demand for a liquidated sum and becoming one for an unliquidated sum. Any disagreement as to the value of the security might be of important significance and might even justify the setting aside of the demand if the debtor was able to claim by credible evidence that the creditor had undervalued the security and that its true value either equalled or exceeded the full amount of the debt.

8. I am in total agreement with the learned Judge's reasoning. It is to be noted that for practical purposes, section 6B of the Ordinance is substantially similar to rule 6.1(5) of the Insolvency Rules. So even where the debt is a secured debt, a petition may be presented in respect of the unsecured part of the debt which is in the nature of a liquidated sum notwithstanding disagreement as to the value of the security. That case demonstrates the fallacy of the submission advanced on behalf of the Debtor even if it had been the case (which it is not) that he had provided security for part of the debt. In fact, the security here is a third party security.

The Guarantee

9. I now turn to consider the Debtor's liability under the Guarantee.

10. By clause 2.01 of the Guarantee, the Debtor guaranteed "to pay the Guaranteed Moneys to the Bank on demand" in consideration of banking facilities being made available to the Company. "Guaranteed Moneys" was defined as meaning, inter alia,

"all moneys in any currency owing by the [Company] to the Bank at any time ..."

The following provisions of the Guarantee are relevant :

"2.04 The Bank shall be entitled to retain this Guarantee and any security it has in respect of the Guaranteed Moneys for such period as the Bank may certify to the Guarantor to be appropriate in order to protect the interests of the Bank in respect of the Guaranteed Moneys.

4.02 This Guarantee is in addition to, shall not be affected by and may be enforced despite the existence of any other guarantee or security held by the Bank.

10.01 The Guarantor shall not, until the whole of the Guaranteed Moneys have been received by the Bank, exercise its rights of subrogation, indemnify, self-off or counterclaim against the [Company] or its rights to participate in any security the Bank has in respect of the Guaranteed Moneys or, unless required by the Bank to do so, to prove in the bankruptcy or liquidation of the [Company]. The Guarantor shall hold any amount recovered, as a result of the exercise of any of such rights, on trust for the Bank and shall pay the same to the Bank immediately on receipt."

It is clear from these provisions that the Debtor's liability as guarantor is not affected by any third party security that the Bank might have and the guarantor entitled to exercise its rights to participate in any such third party security only after the whole of the Guaranteed Moneys has been received by the Bank. That is abundantly clear from clause 10.01. As Lord Templeman stated in China and South Sea Bank Ltd. v. Tan Soon Gin [1990] 1 AC 536 at 545 C-E :

"...The creditor had three sources of repayment. The creditor could sue the debtor, sell the mortgage securities or sue the surety. All these remedies could be exercised at any time or time simultaneously or contemporaneously or successively or not at all. If the creditor chose to sue the surety and not pursue any other remedy, the creditor on being paid in full was bound to assign the mortgaged securities to the surety. If the creditor chose to exercise his power of sale over the mortgaged security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell. The creditor does not become a trustee of the mortgaged securities and the power of sale for the surety unless and until the creditor is paid in full and the surety, having paid the whole of the debt is entitled to a transfer of the mortgaged securities to procure recovery of the whole or part of the sum he has paid to the creditor."

This statement accurately sums up the position of the Bank vis-à-vis the Company and the Debtor in the present case.

Other considerations

11. It is important to bear in mind that deficiencies in the form and context of a statutory demand including errors involving the over-statement of the Debtor's indebtedness will not automatically entitle the Debtor to have the demand set aside. The relevant question is whether injustice would be caused to the Debtor by allowing the particular demand to stand. See In re A Debtor (No.1 of 1987) [1989] 1 WLR 271 at 276 and 279.

12. The Debtor's liability under the Guarantee is almost $51 million. The mortgaged properties have an aggregate value in the region of $20.5 million. The difference is approximately $30.5 million or $28.8 million assuming in favour of the Debtor that he is correct and that the $1.7 million on deposit has not been taken into account. It is not suggested for one moment that the Debtor is able to pay anything remotely like $28.8 million even if one were to have regard to the net liability position rather than the Debtor's strict legal obligation under the Guarantee. Injustice considerations do not therefore arise.

Conclusion

13. In my judgment there is no question but that the debt for which the Debtor is liable under the Guarantee is a liquidated sum for the purposes of the Ordinance.

14. The further evidence filed by the Debtor is to the effect that as a result of the negotiations he is currently having with a supermarket chain in Shanghai, he expects to enter into a contract in the next four months which would have the effect of generating between HK$9 million and HK$11 million per annum for him. The contract may not materialize and even if it did, it would take several years before the debt could be repaid in full. The matters set out in the latest affidavit do not constitute any compelling ground for the court to exercise its discretion in favour of the Debtor. In the circumstances, it is appropriate for the court to make the bankruptcy order sought.