FUNG TAK CHI v. BILLION EAGLE LTD

[English translation]
HCSD 27/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND NO. 27 OF 2009 

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J U D G M E N T

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1. The Applicant commenced this action on 14 October 2009 to apply to set aside the ‘Statutory Demand' issued by the Respondent Billion Eagle Limited on 25 September 2009. The ‘Statutory Demand' was based upon the Lands Tribunal's decision in LDPE32/2009 and the judgment debt involved was $721,904.

Factual background

2. The relevant factual background in the present case is summarized below.

3. The Respondent is the registered owner of a shop located at Ground Floor, No. 153, Sai Yee Street, Mongkok, Kowloon (“Shop No. 153”).

4. The Applicant entered into a tenancy agreement with the Respondent on 15 July 2008 to lease Shop No. 153 from the Respondent. The term of the tenancy was from 1 September 2008 to 31 August 2014, with the first three years being fixed tenancy whereas the subsequent three years being open tenancy. The rental for the first three years was $80,000 per month. Clause 1 of schedule 2 to the tenancy agreement provides that Shop No. 153 can be used commercially as a restaurant.

5. In a letter dated 24 August 2008 to the Respondent, the Applicant wrote that a site inspection was carried out by the Buildings Department at Shop No. 153 on 21 August and that he was informed that “the brick walls at both sides of the front entrance and the metal gate are illegally structures” which had to be removed by the owner before a restaurant licence could be granted. The Applicant demanded a reply from the Respondent on how to deal with it.

6. In response to the Applicant's application for a restaurant licence, the Food and Environmental Hygiene Department sent a letter to the Applicant on 5 September 2008 informing him of its licensing requirements and those of the Buildings Department. In Annex B to the letter, it was mentioned that the Buildings Department noticed that there were certain illegal structures at Shop No. 153.

7. The Applicant did not pay any rentals since November 2008. On 9 January 2009, the Respondent filed a claim in the Lands Tribunal (Case No. LDPE32/2009) to recover the rentals in arrears from 1 November 2008 and the rates payable from 1 January 2009. He also claimed possession of Shop No. 153 on the ground that the Applicant's rentals were in arrears. On 16 January 2009, the Applicant filed a Defence which stated that owing to the illegal structures at Shop No. 153 and the fact that the Respondent had not assisted him in removing them, he could not apply for a restaurant licence and his business had to stop. The Applicant stated in the Defence that he would repay all the rentals in arrears on condition that a lawful restaurant licence could be obtained and that he could recover from the Respondent damages in the sum of several hundred thousand dollars for his loss of business.

8. On 17 March 2009, the case was tried by Deputy Judge Frankie Yiu (as he then was), a Presiding Officer of the Lands Tribunal, who decided the case in favor of the Respondent. The Respondent was granted vacant possession of the commercial premises at Shop No. 153 after 24 March 2009. The Presiding Officer also ordered the Applicant to pay to the Respondent the following: the rentals or mesne profits from 1 November 2008 at $80,000 per month until the delivery of the vacant possession of Shop No. 153, rates payable from 1 January 2009 until the delivery of the vacant possession of Shop No. 153, and costs of the action at $28,500.

9. The Respondent successfully obtained vacant possession of Shop No. 153 through the court bailiffs on 14 July 2009.

10. On 24 August 2009, the Applicant filed a claim in the District Court (Case No. DCCJ3535/2009) against the Respondent for damages (including punitive damages) and for a court order that the tenancy agreement had been terminated on 15 July 2008. The ground for the Applicant's claim was that before the signing of the tenancy agreement, the agent of the Respondent had made a fraudulent misrepresentation that Shop No. 153 had formerly been used generally as a restaurant. The Applicant also alleged that the Respondent had breached the implied terms of the tenancy agreement because he had neither removed the illegal structures at Shop No. 153 nor reinstated the premises to a state as required by the law. He further alleged that the Respondent had breached the tenancy agreement by concealing the existence of the illegal structures at Shop No. 153.

11. The Respondent submitted his Defence and Counterclaim on 23 October 2009. He denied the Applicant's claim and made a counterclaim against the Applicant in respect of the award granted in LDPE32/2009, the total amount of which was $721,904 including the rentals in arrears / mesne profits for the period between 1 November 2008 and 14 July 2009, rates for the period between 1 January and 14 July 2009 and costs.

12. In the beginning of this year, an order was made by a master of the District Court to transfer DCCJ3535/2009 to the Court of First Instance of the High Court for trial.

13. On the other hand, after the Respondent had issued the ‘Statutory Demand' of this case to the Applicant, the Applicant issued a Lands Tribunal summons on 7 October 2009, applying to: (i) lodge an appeal out of time against the judgment dated 17 March 2009; (ii) transfer the case LDPE32/2009 to the District Court so as to consolidate it with DCCJ3535/2009; and (iii) set aside the judgment dated 17 March 2009 until the conclusion of DCCJ3535/2009. On 15 October 2009, Presiding Officer Yiu of the Lands Tribunal refused the various applications of the Applicant. On 27 October 2009, the Applicant applied to the Court of Appeal for leave to appeal against the judgment dated 15 October 2009 (Case No. HCMP2167/2009). That application was originally fixed for hearing on 9 December 2009, but had to be adjourned for 42 days since the Applicant had applied for legal aid. For that reason the hearing was cancelled. The Applicant has not applied to re-fix the hearing of his application up to the present.

Grounds of the application

14. The Applicant's grounds to set aside the ‘Statutory Demand' can be summarized as follows:

(1)  It was against the rules of court for the lawyer of the Respondent to serve the ‘Statutory Demand' on the Applicant inside the District Court building.

(2)  The Applicant was applying to the Court of Appeal for leave to lodge an appeal out of time against the judgment of LDPE32/2009 dated 17 March 2009. There was the possibility that the judgment debt would be set aside.

(3)  In view of the illegal structures at Shop No. 153, certain unlawful rentals were included in the judgment debt. Therefore the judgment debt could be unlawful.

(4)  When the Respondent leased out Shop No. 153, he was aware of the existence of the illegal structures but he concealed it. He subsequently refused to remove the illegal structures and that led to the Applicant not being able to obtain a restaurant licence. The Respondent had therefore breached the tenancy agreement, causing damage to the Applicant. The Applicant had lodged a claim in DCCJ3535/2009 which had already been transferred to the Court of First Instance of the High Court for trial. The Court should dismiss the unreasonable claim of the Respondent, or alternatively consolidate his claim for the rentals in arrears and transfer the case to the Court of First Instance, and deal with it after the conclusion of the claim.

The applicable legal principles

15. It is provided in rule 48(5) of the Bankruptcy Rules (Cap. 6A) that the Court may grant the application to set aside a ‘statutory demand' if:

“(a)    the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand;

(b) the debt is disputed on grounds which appear to the court to be substantial;

(c)  it appears that the creditor holds some security in respect of the debt claimed by the demand, and either rule 44(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or

(d) the court is satisfied, on other grounds, that the demand ought to be set aside.”

Service of the ‘Statutory Demand'

16. Neither party disputed that the ‘Statutory Demand' was served on the Applicant in a conference room at the District Court building on 25 September 2009. Mr. Alan Kwong of Messrs. B. C. Chow & Co. said in his Affirmation that on 25 September 2009, the case DCCJ3535/2009 was heard before Master Clement Lee in the District Court. The Master made a series of directions during the hearing and told Mr. Kwong to ensure that the unrepresented Applicant understood the meaning of his directions. Therefore when the hearing ended, Mr. Kwong explained the Master's directions to the Applicant in a conference room at the court building. After the explanation was given, the assistant of Mr. Kwong took out the ‘Statutory Demand' and handed it over to the Applicant. In view of this, Mr. Kwong took the opportunity to explain the content of the Demand and its legal effect to the Applicant. The Applicant did not dispute that the document was served in the way as stated in Mr. Kwong's Affirmation.

17. Some old precedents indicated that it was an act in contempt of court to serve court documents within the precinct of the court: Cole v Hawkinsi (1738) Andrews 275; 95 ER 396. Precedents of the modern days regard that legal principle as obsolete, and that serving a court document in the precinct of the court will only constitute an act in contempt of court under extremely rare circumstances: Jones Ex p. McVittie [1931] 1 KB 664. As to whether the service of a court document in the precinct of the court is valid service or not, the English Court in Ex p. Brantschen The Times, December 7, 1970 and the Australian Court in Re O'Sullivan (1995) 129 ALR295 are of the view that a service should not be rendered invalid because it is performed within the precinct of the court.

18. I agree with the analysis in Re O'Sullivan (at page 304). When the court assesses the validity of the service of a court document, the focus is not on where the document is served, but whether the act of service has interfered with the judicial process of the court. Therefore the court should not come to the conclusion that the service is an abuse of the court's process or is invalid, and should not set it aside simply because the service of a court document is performed within the precinct of the court.

19. In the present application, the Applicant and Mr. Kwong met each other inside the District Court building because they had to attend the hearing of DCCJ3535/2009 on 25 September 2009. The Affirmation of Mr. Kwong shows that he did not deliberately plan and make use of that hearing for the purpose of serving the ‘Statutory Demand'. The Applicant and Mr. Kwong met inside a conference room after the hearing following the direction of the Master. I am of the view that the handing over of the ‘Statutory Demand' by Mr. Kwong's assistant to the Applicant at the conclusion of the meeting did not constitute an abuse of process, and it did not cause any interference to the judicial process. Therefore, the process of serving the ‘Statutory Demand' was valid. Furthermore, even if the process of service was not valid, the Court should only set aside the process of service and not the whole ‘Statutory Demand'. To put it simply, the Applicant could not rely on the ground that the ‘Statutory Demand' was served inside the court building to support his application to set aside the Demand.

Dispute on the judgment debt

20. The ‘Statutory Demand' in the present case concerns a judgment debt. The Applicant obviously did not accept the judgment of the Presiding Officer of the Lands Tribunal on 17 March 2009. The Applicant intended to appeal against the judgment to the Court of Appeal but the time limit for applying leave to appeal had expired. Presiding Officer Yiu of the Lands Tribunal has already refused the Applicant's application for leave to appeal out of time. Presiding Officer Yiu has also refused to suspend the execution of the judgment dated 17 March 2009. Although the Applicant has formally applied to the Court of Appeal for leave to appeal out of time, the hearing is yet to be fixed. In the circumstances, the judgment made on 17 March 2009 is an effective one and the Applicant is bound by the order.

21. According to established legal principles, in the case of a ‘Statutory Demand' being made in respect of a judgment debt, the Court when considering an application to set aside the demand, will in general not re-visit the issue of the appropriateness or otherwise of the judgment or the debt. Nor will the Court adjourn the application to set aside the Demand because the debtor has filed an application to dismiss the judgment: see Re Maydwell [1999] 3 HKLRD 325 at 334, Re Choy Wai Bor, HCB 8565 of 2001 (28 May 2002), and Hong Kong Civil Procedure 2010, Vol. 2, page 526 at paragraph I1/39.

22. In this application, the Applicant emphasized that there were illegal structures at Shop No. 153 but the Respondent had refused to remove them. He had to cease the business because he could not obtain a restaurant licence. The Applicant was of the view that the Respondent should not be entitled to rental payment and that some of the rentals were unlawful. In other words, the Applicant considered the judgment dated 17 March 2009 a wrong one and the Respondent's claim against him an illegal one.

23. However, the Applicant has already put forth these arguments in LDPE32/2009 in defence to the Respondent's claim. The Presiding Officer took these arguments into account and had set out clearly in his judgment the reasons why the defence could not succeed.

24. When dealing with the present application, this Court does not have the jurisdiction of the Court of Appeal and should not consider whether the judgment made on 17 March 2009 was correct or not. Furthermore, Mr. Lai, Counsel for the Respondent, submitted that even if, with the illegal structures at the front entrance, the precinct of the shop premises had gone beyond the area owned by the Respondent, the common law principle of estoppel by tenancy applied and the Applicant could still not refuse to pay rent on that basis.

25. To sum up, I am of the view that the Applicant's challenge of the judgment dated 17 March 2009 and the disputes arising out of the judgment debt do not constitute a ground for setting aside the ‘Statutory Demand'.

The Applicant's claim and DCCJ3535/2009

26. The Applicant alleged that due to the illegal structures inside Shop No. 153 and the Respondent's refusal to remove them, he could not obtain a restaurant licence. He had to cease business and thus suffered loss. The Applicant then commenced an action DCCJ3535/2009 against the Respondent to recover damages. He indicated to the Master of the District Court that his claim exceeded one million dollars, and eventually the Master transferred his case to the Court of First Instance of the High Court for trial. In view of his claim in DCCJ3535/2009, the Applicant thought that the amount of claim was sufficient to set off the judgment debt even if the judgment of LDPE32/2009 was upheld. Mr. Lai, on the other hand, submitted that there was no merit in the Applicant's claim.

27. Rule 48(5)(a) of the Bankruptcy Rules stipulates that if the debtor has a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the ‘statutory demand', the Court may set aside the ‘statutory demand'. It thus follows that even though the proceedings of DCCJ3535/2009 are not concluded and that I am not dealing with the trial of that case, I still have to go into the merits of the Applicant's claim and analyze them.

28. The Applicant alleged that the Respondent was aware of the existence of illegal structures at Shop No. 153 before it was leased out to the Applicant but he deliberately concealed the fact and made a fraudulent misrepresentation. The Respondent denied the allegations. The Applicant said in his Statement of Claim in DCCJ3535/2009 that the Buildings Department had issued a notice to the Respondent in May 2008, demanding the Respondent to remove the illegal structures at Shop No. 153. At the hearing of the present application, the Applicant said that his allegation of the Respondent's knowledge of the illegal structures before leasing out Shop No. 153 was based on a letter sent to him by the Buildings Department on 6 May 2009 which mainly states that:

“On 15 April 2008, our Department sent a letter to the Owners Corporation of No. 151 – 153, Sai Yee Street informing them that their Building has been selected to be a target building under the ‘Co-ordinated Maintenance of Building Schemes'. Our Department in collaboration with six other government departments will assist the owners of the Building and the Owners Corporation to resolve issues concerning the management and maintenance of the Building.

Our staff carried out inspections at the above premises in May and July 2008 and in January 2009. We found that there were illegal structures attached to the shop premises. Our Department issued a letter on 22 January 2009 to the owners and the occupiers of the shops, advising them to remove the illegal structures. Orders to remove the illegal structures were also issued on 7 April 2009 against the owners of the above premises.”

29. It appears from the letter that the Buildings Department did not write to request the Respondent to clear the illegal structures until 22 January 2009, and that the removal order was made on 7 April. The Respondent did not dispute that it had received the two letters. In the Buildings Department's letter sent to the Respondent on 6 May 2009, there is no mention of the Buildings Department issuing any notice to the Respondent in respect of the illegal structures prior to May 2008 or prior to the signing of the tenancy agreement. The Applicant has not adduced any other evidence in the present application to support his allegation that the Respondent was already aware of the existence of illegal structures at Shop No. 153 before the signing of the tenancy agreement, and that the Respondent had intentionally concealed the fact.

30.  The Applicant also said that the Respondent refused to remove the illegal structures and that Miss Choi Sin Ying (transliteration), a member of staff of the Realty Department of the Respondent company, told him not to pay heed to the Buildings Department's instructions to remove the illegal structures, but to continue with the renovation of the premises and to start the business. I have noted that the Applicant has given a similar account of the incident in LDPE32/2009. The Respondent denied the allegation and called Miss Choi to give evidence in court. Presiding Officer Yiu was satisfied with the testimony of Miss Choi and found that before the Buildings Department's letter dated 22 January 2009, the Respondent had not received any request from any government department to clear the illegal structures at Shop No. 153. So even after the receipt of the Applicant's letter dated 24 August 2008, the Respondent would not take any rash action before receiving any official letter from a government department. Presiding Officer Yiu also accepted the testimony of Miss Choi that after the Respondent received the letter dated 22 January 2009, it liaised with the staff of the Buildings Department and work contractors to conduct evaluation of the project and to get quotations. The Respondent mentioned in the Defence and Counterclaim in DCCJ 3535/2009 that after vacant possession of Shop No. 153 was obtained, the illegal structures had been removed, and that the removal order dated 7 April 2009 had been withdrawn on 13 October 2009.

31. Regarding the Applicant's allegations that he could not obtain a restaurant licence and had suffered losses because of the illegal structures at Shop No. 153, the Respondent pointed out in the Defence and Counterclaim that the Applicant had intermittently opened the shop for business from August 2008 to 19 January 2009, and that he had not complied with the Fire Services Department's and other departments' instructions for partial alteration and setting up of installations. Therefore even if there were no illegal structures at Shop No. 153, the Applicant would not be issued a restaurant licence.

32. Clearly, the Respondent disputed whether the existence of the illegal structures at Shop No. 153 was the only or major reason for the Applicant's failure to obtain a restaurant licence, denying that it had caused damages to the Applicant.

33. Besides, it is important to note that in the Statement of Claim filed in DCCJ3535/2009, the Applicant only mentioned that he sustained and incurred substantial damage (see paragraph 15) without specifying the nature or type of damage, the amount of damages or how the damages were calculated. It thus seems that the Applicant was claiming unliquidated damages. Despite the Applicant's allegations that he had sustained damages exceeding one million dollars, there was neither any evidence in this regard in the present claim, nor any information to show or support the nature or type of damage, the amount of damages and method of calculation of the damages alleged by the Claimant. Admittedly the Master of the District Court has transferred DCCJ3535/2009 to the Court of First Instance of the High Court, but I have no idea on what factual basis the order was made. There is no explanation in the Applicant's Statement of Claim regarding the amount of damages he claimed or how the amount was worked out, and there is no evidence in this regard in the present application. In the circumstances, I do not accept that the order to transfer DCCJ3535/2009 to the Court of First Instance of the High Court is sufficient to support the Applicant's allegation that his claim exceeds one million dollars.

34. All in all, I am of the view that the Applicant cannot prove that he has a counterclaim, set-off or cross demand against the Respondent, the amount of which equals or exceeds the amount of the debt specified in the ‘Statutory Demand'.

Conclusion

35. In view of the above analysis and reasoning, the Applicant does not have sufficient grounds to support his application to set aside the ‘Statutory Demand', so the application cannot succeed. I dismiss the application. Pursuant to rule 48(7) of the Bankruptcy Rules, I shall make an order authorizing the Respondent to present a bankruptcy petition after 21 days since the delivery of this judgment.

36. The usual rule applies and the costs shall follow the event. I therefore order the Applicant to pay to the Respondent costs of this application, to be taxed if not agreed. This is a costs order nisi and if there is no further application on costs within 14 days after the delivery of this judgment, the costs order nisi herein shall automatically become absolute.