LIU JIANGYUAN v. DONGHAI INVESTMENT HOLDING LTD

HCB 1227/2023

[2023] HKCFI 3002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 1227 OF 2023

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DECISION

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INTRODUCTION

1.  This is an application made by the bankrupt pursuant to section 33(1)(a) of the Bankruptcy Ordinance (Cap.6, Laws of Hong Kong) (“the Ordinance”), seeking to annul a bankruptcy order made against her on 4 September 2023 (“the Bankruptcy Order”).

2.  The bankrupt initially contended that the Bankruptcy Order ought not to have been made against her for the following reasons:

(1)  The Amended Petition had never been served on her personally; and

(2)  There are substantial disputes to her liability under a Guarantee dated 12 July 2017 (on the basis of which a Statutory Demand was issued, which in turn was the basis of the Bankruptcy Order) which ought to have been considered at the time of the Bankruptcy Order.

3.  However, at the hearing, Mr Chan for the bankrupt informed the Court that the ground on personal service would be abandoned.

4.  In my view, this concession must be right, because the Amended Petition had been served pursuant to a substituted service order (“the Substituted Service Order”) made by Master J Wong on 18 July 2023, and the bankrupt had not explained in her evidence as to why such an order should not have been made. Neither was it disputed that the Amended Petition had indeed been served in accordance with the means set out in the Substituted Service Order. In fact, the bankrupt had had notice of the Amended Petition, and that was the reason why she was legally represented both before Master on 29 August 2023 and before Linda Chan J on 4 September 2023.

THE LEGAL PRINCIPLES

5.  Section 33(1) of the Ordinance provides that:

“(1) The Court may annul a bankruptcy order if it at any time appears to the court that –

(a) on any grounds existing at the time the order was made, the order ought not to have been made; or

(b) to the extent required by the rules, the provable debts and the expenses of the bankruptcy have all, since the making of the order, been either paid or secured to the satisfaction of the court.”

6.  The leading case in Hong Kong on the legal principles applicable to an application for annulment of a bankruptcy order is Kam Hung Cheung v Bank of China (Hong Kong) Ltd. [2009] 3 HKLRD 597, in which the Court of Appeal adopted the following summary of principles as follows:

“22. The relevant decided cases show that, in considering whether to exercise the power under section 33(1)(a), the court should first look at whether there were any grounds on which a bankruptcy order ought not to have been made at the material time when it was made. If the court does not think that such grounds existed, it cannot invoke section 33(1)(a) to annul the bankruptcy order. If the court thinks that such grounds existed, it still has to consider whether it should exercise its discretion to annul the bankruptcy order: see Society of Lloyds v. Waters [2001] BPIR 698, 704G-H, and also Artman v. Artman [1996] BPIR 511, 513-514, and Askew v. Peter Dominic Ltd [1997] BPIR 163, 164.

23. In exercising the discretion under section 33(1), the court has to carefully consider the interests of the creditor, the debtor and the public, bearing in mind that a bankruptcy order is to be annulled only under exceptional circumstances.

24. Furthermore, the person applying to annul a bankruptcy order bears the burden of proving that when the order was made there were grounds on which the order ought not to have been made: see OBE Insurance (Hong Kong) Ltd v. Chan Wai Man William, HCB 187/2000.

25. And if a debtor disputes the debt on which a bankruptcy order is based, he must adduce cogent prima facie evidence to show that the dispute is supported by genuine and cogent reasons. Where the debt which forms the basis of a bankruptcy order is a judgment debt, the court will normally not reconsider any dispute on the debt: see paragraph 24 of the judgment in Re Kwong Ngai Ping, HCB 9447/2003.

26. In addition, where a bankruptcy order was made in the absence of the debtor, or where the underlying judgment in favour of the creditor was obtained by reason of the debtor’s failure to give Notice of Intention to Defend, then the debtor must provide reasonable and credible explanations for his absence or failure to give Notice of Intention to Defend: Re Luk Tsun Yin [2000] 1 HKC 774, 777, and Re Ng Chi Wo, HCB 2819/2003.” (emphasis added)

7.  Parties have no dispute that the relevant principles have also been set out in a recent case Re Chu Jiaru [2023] HKCFI 721. For the present purpose, I only have to quote the followings:

“40. […] one of the situations where an ‘order ought not to have been made’ is where there is a bona fide dispute on substantial grounds in relation to the debt which forms the basis of the bankruptcy order. As is well-established, the court will require that the debtor to adduce sufficiently precise factual evidence so as to satisfy the court that he has a bona fide dispute on substantial grounds: Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at [21] & [27] per Kwan JA, with whom Yuen JA and Au J agreed. It was not suggested that the standard of a bona fide dispute on substantial grounds should be replaced by a higher one for the purposes of an annulment application.

41. In other words, the standard should be the same on an application to set aside a statutory demand or on the hearing of a petition on the one hand, and on an application for annulment of a bankruptcy order on the other. In my view, this is correct because if there was a bona fide dispute on substantial grounds of the underlying debt at the time when the bankruptcy order was made, the order should not have been made in the first place. This is consistent with the approach adopted in England in a number of cases decided under section 282 of the UK Insolvency Act 1986: Guinan III v Caldwell Associates Ltd [2004] EWHC 3348 (Ch) at [16] per Neuberger J; Woolsey v Payne at [2015] EWHC 968 (Ch) at [14-25]; Dusoruth v Orca Finance UK Limited (in liq) [2022] EWHC 2346 (Ch) at [31] per ICC Judge Mullen.

42. I have borne in mind that bankruptcy proceedings are summary in nature and are not intended to be used for the purpose of debt collection. The jurisdiction to make a bankruptcy order will only be exercised in very clear cases, and if the court is satisfied that there is a bona fide dispute on the debt, the court will not usurp the function of a civil court and decide the disputes between the parties: Re Leung Chern Jiunn at [20].

43. The use of the word ‘may’ in section 33(1) makes it clear that the court’s power to annul is discretionary. Accordingly, I wish to stress that it is not the case that once a debtor demonstrates the existence of a bona fide dispute that she is automatically entitled to an annulment of the bankruptcy order.

44. The debtor must still persuade the court to exercise its discretion in her favour under section 33(1)(a). The court is not bound to set aside a bankruptcy petition or order especially where the creditor has acted reasonably, and the debtor has failed to raise defences which were open to him at an earlier stage: Owo-Samson v Barclays Bank Plc (No 1) & Anor [2003] BPIR 1373 at [35] per Carnwarth LJ. […]” (emphasis added)

DISCUSSION

8.  As a matter of background, before I go on to discuss the bankrupt’s assertion that she has raised substantial dispute to the underlying debt, I should set out the relevant history of this case briefly, which has been summarised by Linda Chan J in her Reasons for Judgment [2023] HKCFI 2326 as follows:

“3. Pursuant to a guarantee dated 12 July 2017 entered into between the Debtor and the Petitioner (“Guarantee”), the Debtor agreed to guarantee the obligations of Honghua Investment Fund Limited (“Fund”) including paying the amount due and payable to the Petitioner under the Private Placing Memorandum dated July 2017 (as subsequently amended in February 2018 and May 2018) (“PPM”).  

4. The Fund defaulted in paying following amounts due and payable under the PPM:

(1) Class A Fixed Return for the period of 1 January 2020 to 18 March 2022 in the amount of HK$22,136,986.30 (“Class A Return”);

(2) Class B Fixed Return for the period of 1 January 2020 to 18 March 2022 in the amount of HK$22,136,986.30 (“Class B Return”);

(3) Subscription amount for Class A Shares in the amount of HK$100 million (“Class A Subscription”); and

(4) Subscription amount for Class B Shares in the amount of HK$100 million (“Class B Subscription”).

5. The Debtor was liable to pay the aforesaid amounts pursuant to clause 2.1 and 2.2 of the Guarantee.

6. As at 18 March 2022, the amounts stated in §4 remained unpaid, and the total amount payable by the Debtor was HK$244,273,972.60 (“Debt”).

7. On 22 April 2022, the Petitioner served a statutory demand dated 28 March 2022 (by way of advertisement) requiring the Debtor to pay the Debt (“SD”).

8. The Debtor did not comply with the SD and is deemed insolvent by virtue of s.6A(1)(a) of the Bankruptcy Ordinance (Cap. 6). The Petitioner has discharged the onus of showing that the debtor is unable to pay his debt, as required by s.6(2)(c) of the same Ordinance.   

9. On 10 June 2022 and 7 July 2022, copies of the SD, the Guarantee and the PPM were provided by Messrs. Kwok Yih & Chan (“KYC”), the Petitioner’s solicitors, to Messrs. Franki Ho & Associates (“FHA”), the solicitors for the Debtor.

10. By letter dated 27 October 2022 to FHA, KYC referred to the documents provided to the Debtor and stated that if the Debtor failed to pay the Debt within 7 days, bankruptcy proceedings would be commenced against her.

11. By another letter dated 16 November 2022 to FHA, KYC put on record that the Debt had not been paid and the Petitioner would proceed with bankruptcy proceedings against the Debtor without further notice.

12. On 7 March 2023, the Petition was presented. […]”

9.  In support of the present application, the bankrupt has filed an affirmation on 25 September 2023, in which she explained that the Bankruptcy Order ought not to have been made by reason of substantial disputes to the underlying debt on the following bases:

“5. I have been aware of the Statutory Demand herein dated 28 March 2022 (“SD”) from June 2022. Nonetheless, I have never regarded myself to be liable thereunder because I do not recall the signing of the purported guarantee allegedly dated 12 July 2017 (the purported “Guarantee”) and for the reasons mentioned below.

6. Nor have I seen the purported private placing memorandum (“PPM”) in respect of a fund known as Honghua Investment Fund Limited (“Honghua Fund”) as an exempt company incorporated under the laws of the Cayman Islands. It should be noted that as learned from my lawyers, the copy of the PPM consists of about 190 pages, which is a very sophisticated and bulky legal document.

7. At this juncture, after checking with the court documents filed with the Court herein so far, I, through my legal team, am unable to find copy of the PPM having been filed with the Court in these proceedings.

8. In case of the absence of this important document supporting the Petitioner’s petition, the Petitioner has obviously failed to provide sufficient documentary evidence to prove their case to the satisfaction of the Court.

9. Even if I had signed the purported Guarantee, it should be noted that: -

(a) I totally had no idea of what document (the purported Guarantee) I had been requested to sign;

(b) neither would I be aware of the connection between the purported Guarantee and the PPM;

(c) the signing of the purported Guarantee must not be done in a law firm;

(d) the whole process for the signing of the purported Guarantee should have been done somewhere in the office in just a few minutes;

(e) I have never been reminded to seek independent legal advice prior to signing the purported Guarantee;

(f) the amount guaranteed under the purported Guarantee, namely HK$244 million far exceeded my net worth and ability.

10. I do not recall signing the purported Guarantee. The content of the purported Guarantee has never been explained to me, and I do not recall reading the purported Guarantee. Neither have I been invited nor involved in the negotiation of any part of the whole transactions relating to the PPM and the purported Guarantee. No one has ever explained the content or the legal implication of the purported Guarantee to me.”

10.  Bearing in mind that this Court has to consider whether the bankrupt has adduced cogent prima facie evidence to show that the dispute is supported by genuine and cogent reasons, I now turn to consider her grounds of dispute.

11.  First of all, insofar as it is alleged by Mr Chan for the bankrupt[1] that she disputes her signature on the Guarantee, with greatest respect, this submission is not supported by evidence, for the bankrupt had only gone so far as to say that she did not recall executing the Guarantee. In my view, this is different from her disputing that she had indeed signed on the Guarantee.

12.  Whether she can now recall that she has ever executed the Guarantee is neither here nor there, particularly when she has admitted before that she has so executed the document (see further below).

13.  Even if she is now categorically saying that she has not signed the Guarantee (which she is not), such an assertion must be rejected, because this is contrary to the Notice by Debtor of Intention to Oppose Petition dated 30 August 2023 (“the Notice of Opposition”) (see further below).

14.  Pausing here, it is noted that the Notice of Opposition was filed without leave, and no retrospective leave had been granted by Linda Chan J at the hearing on 4 September 2023 because her counsel did not make any application for extension of time for the filing of the same. Even if any such application had been made, it would have been rejected by the Court because the bankrupt had failed to explain her delay. In this regard, one should bear in mind paragraph 16.1 of Practice Direction 3.1 in which it was provided that:

“The Respondent opposing the petition is expected to file his notice to show cause or affidavit in opposition in accordance with rule 68 of the Bankruptcy Rules and rule 32(1) of the Companies (Winding-up) Rules respectively. An application for an extension of time to file such notice or affidavit must be supported with good reasons […]” (emphasis added)

15.  Coming back to the Notice of Opposition, in my view[2], even though it was filed without leave, this Court is entitled to take what the bankrupt stated therein into account when assessing her case which she is now putting forward. In the said Notice, she stated that:

“1. the Debtor denies any liabilities under the purported guarantee dated 12 July 2017;

2. the Debtor had and has neither knowledge nor true implication of the said purported guarantee;

3. the Debtor has not been given any chance or sufficient time to read the said purported guarantee;

4. the Debtor has never been informed nor advised to seek independent legal advice;

5. the Debtor has been pushed by the management of the listed company and/or its associated entity to sign the said purported guarantee in a rush manner; and

6. the Debtor was under pressure and influence from the management of the listed company and/or its associated entity in signing the said purported guarantee.”

16.  It is apparent from the Notice of Opposition and beyond dispute that the bankrupt had admitted that she had executed the Guarantee.

17.  For the above reason, the bankrupt has clearly failed to establish bona fide dispute on substantial grounds by asserting that she did not execute the Guarantee.

18.  The bankrupt then stated that even if she had executed the Guarantee, she should not be held liable because of various reasons.

19.  In this regard, Linda Chan J held in the present case that:

“29. In any event, the Guarantee is admittedly signed by the Debtor. It is well established that persons of full age and understanding are bound by the documents they signed unless they can establish a recognised legal basis to disown such documents. For this purpose, the facts constituting the particular vitiating factor relied on must be pleaded and established by the evidence (Ming Shiu Chung & ors v Ming Shiu Sum & ors (2006) 9 HKCFAR 334 at §§84-87, per Ribeiro PJ).

30. The Debtor has not identified, let alone established by evidence, a recognised legal basis or the particular vitiating factor relied on in seeking to disown the Guarantee. None of the grounds stated in the Notice constitute a valid ground to disown the Guarantee given that:

(1) Even if the Debtor did not understand or did not read the Guarantee or did not take any independent legal advice before signing the Guarantee, that does not per se invalidate the Guarantee.

(2) As regards the pressure or influence of the (unidentified) management of the (unidentified) listed company and/or its associated entity allegedly applied to the Debtor, they were acts of those unidentified parties and cannot be attributed to the Petitioner.”

20.  I totally agree with her Ladyship’s view. I should also add that the matters which have been raised in paragraphs 5 – 10 of the bankrupt’s affirmation would not absolve her legal liability under the Guarantee and therefore are totally unhelpful.

21.  At the hearing, Mr Chan drew this Court’s attention to paragraph 6 of the bankrupt’s affirmation[3] and emphasised that the bankrupt had not had sight of the private placing memorandum and that the same had not been considered by Linda Chan J. With respect, this argument does not assist the bankrupt:

(1)  A fair reading of the said paragraph 6 of the bankrupt’s affirmation shows that her lawyers (whoever they are) must have a copy of the same, otherwise they would not have known that this document consists of about 190 pages. In such circumstances, whether she had seen the document herself is irrelevant;

(2)  In any event, the basis of the Bankruptcy Order was the Statutory Demand which the bankrupt has received for a long time. If the bankrupt considered the said document relevant, she should have produced the same in the action herein.

22.  As I am not satisfied that there were any grounds on which the Bankruptcy Order ought not to have been made at the material time when it was made, this application should be dismissed, and the question of whether the Court should exercise its discretion in annulling the Bankruptcy Order does not arise.

23.  Even if such a question arises, I do not think this Court should exercise its discretion in the present case.

24.  In this regard, the bankrupt alleged that she did not have sufficient time to give proper instructions to her legal team to file affirmation, and as a result, Linda Chan J did not have a chance to consider her case properly.

25.  Mr Chan for the bankrupt submitted that the Court should take into account the time when the bankrupt’s solicitors filed their Notice to Act, which was on 28 August 2023 (the day before the call-over hearing before Master).

26.  With greatest respect, this argument must be rejected.

27.  As pointed out by the learned Judge[4], the bankrupt had had notice of the Statutory Demand back in June/July 2022, and by then she had already engaged Messrs. Franki Ho & Associates as her solicitors. By a letter dated 27 October 2022, her solicitors had already been warned that if she failed to pay the debt within 7 days, bankruptcy proceedings would be commenced against her. By another letter dated 16 November 2022, her solicitors were once again warned that the petitioner would proceed with bankruptcy proceedings without further notice.

28.  At the end of the day, the Petition herein was only presented on 9 March 2023. Because of the debtor’s refusal to give instruction to her solicitors in accepting service of the same, the petitioner had to take extra steps on service, and as a result, the first call-over hearing before Master could only take place on 29 August 2023.

29.  In these circumstances, it is totally unacceptable for the bankrupt to say that she did not have sufficient time to give instructions to her solicitors.

THE BANKRUPT’S APPLICATION FOR ADJOURNMENT

30.  By letter dated 13 November 2023, the bankrupt’s solicitors applied to the Court for an adjournment of the hearing today so as to rectify a procedural defect in the present application as pointed out by the Official Receiver in her report dated 8 November 2023, namely, that the Notice of Hearing has not been gazetted and advertised.

31.  The adjournment application was opposed strenuously not only by the petitioner but also by another creditor, China Huarong Macau (HK) Investment Holdings Limited, which had submitted a Proof of Debt.

32.  The hearing was therefore proceeded with as scheduled, so that further submissions could be received.

33.  Having heard the bankrupt’s submissions, as explained above, I am of the view that the bankrupt’s application to annul the Bankruptcy Order is totally without merit.

34.  I therefore consider it a waste of time and costs if the hearing is adjourned.

ORDER

35.  For reasons of the aforesaid, the bankrupt’s application is dismissed.

COSTS

36.  Costs should follow the event.

37.  I therefore order that the bankrupt shall bear the petitioner’s costs of this application.

38.  Pursuant to Order 62 rule 9A(1)(a) of the Rules of the High Court, the petitioner’s costs is summarily assessed at  $74,900.

39.  The bankrupt shall also bear the Official Receiver’s costs in the sum of $5,000.

40.  As the joint and several trustees of the property of the bankrupt have not asked for costs, I make no order as to their costs.