RE CHIU CHI HONG

HCB 1056/2019

[2020] HKCFI 2486

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 1056 OF 2019

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REASONS FOR JUDGMENT

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INTRODUCTION

1.  This is the hearing of the bankruptcy petition presented on 25 February 2019 (the “Petition”) by ZhongTai International Securities Limited (the “Petitioner”) against Chiu Chi Hong (the “Debtor”). The Petition is based on an undisputed debt as set out in a statutory demand dated 18 October 2018 (the “Statutory Demand”) which was not set aside and the debt, being a sum of HK$20,084,960.82 (“the Debt”) remains unsatisfied.

2.  The Petition was first heard on 24 December 2019 in the afternoon. Shortly before the hearing, in the morning of 24 December 2019, the Debtor applied by way of summons for leave to file, serve and rely on the 2^nd Affirmation of Chiu Chi Hong dated 24 December 2019.

3.  This Court acceded to the application and the substantive hearing was adjourned to 3 January 2020 to, inter alia, allow the Petitioner to file and serve affirmation evidence and submissions in response to the 2^nd Affirmation of Chiu Chi Hong and the Debtor’s reliance on a new ground, namely, section 6D(3) of the Bankruptcy Ordinance (the “Ordinance”), as well as to provide updates to the Court in relation to the status of the privatization of Hanergy Thin Film Power Group Limited (stock code: 566) (“Hanergy”) which were charged as security in favour of the Petitioner.

4.  The Petitioner duly filed and served the 3^rd Affirmation of Zhang Tong dated 31 December 2019 in reply to the 2^nd Affirmation. However, on the same date, the Debtor applied to file, serve and rely on the 3^rd Affirmation of Chiu Chi Hong which referred to the Debtor’s second offer.

5.  At the hearing on 3 January 2020, the Debtor proposed further directions for the Petition to be adjourned to 20 April 2020 on the conditions, inter alia, that:

(1)  The Debtor shall make payment of not less than HK$3,000,000 to the Petitioner within 3 days;

(2)  On or before 10 January 2020, the Debtor shall cause shares and/or other securities listed and tradable on the Hong Kong Stock Exchange of market value of not less than HK$13,000,000 to be deposited into securities accounts maintained with the Petitioner;

(3)  Starting from (and including) 22 January 2020, the Debtor shall cause not less than HK$1,000,000 to be deposited into the account designated by the Petitioner on every Wednesday, until and including 8 April 2020;

(4)  Starting from 11 February 2020, the Debtor shall cause not less than HK$280,000 to be deposited into the account designated by the Petitioner on the 7^th working day of each month.

6.  This Court adjourned the Petition for one month to 11 February 2020 to see how much the Debtor would pay the Petitioner in accordance with his own proposed directions and at the same time, this Court could also deliberate on the legal issues raised by the Debtor.

7.  Regrettably, due to the general adjournment of court proceedings occasioned by the COVID-19 pandemic, the hearing on 11 February 2020 was adjourned and re-fixed to 16 June 2020 instead.

8.  At the adjourned hearing, this Court was informed that none of the Debtor’s proposed directions have been complied with. Mr Oh for the Petitioner submitted that:

(1)  Either the Debtor had been lying all along about being “able to repay about HK$16,000,000 to the Petitioner by early March 2020, and I am able to repay all outstanding debt owe[d] to the Petitioner within the next 1 year” and the alleged supporting documents were fraudulent (the cheque, the employment contracts, the statements of account etc.); or

(2)  The Debtor has dissipated all the money he had obtained under, inter alia, the cheque (in any event it has already become invalid due to the lapse of over 6 months) and the employment contract, as well as the shares procured to repay the Debt to the Petitioner.

9.  I agree. Further, whatever is the factual position, I am satisfied that the Petitioner has reasonably and legitimately lost its confidence on the Debtor’s ability to make good his offers. I should also say that this Court had accommodated the Debtor’s applications for adjournments with the genuine hope that if the Debt could be paid, it would be beneficial to both the Petitioner and the Debtor.

10.  However, given the Debtor’s own failure to comply with his own proposed directions and there are no bona fide and substantive disputes to the Debt, I made the usual bankruptcy order against the Debtor on 16 June 2020 and gave my brief reasons for making the said order. Now I gave my full reasons.

Undisputed Debt

11.  The starting point is that the Debt is not disputed. It is established law that where a debt is clearly established and the procedural requirements have been complied with, a petitioning creditor has a prima facie right to a bankruptcy order. (See Ho Ying Pat Bobby v Overseas Way (China) Ltd [2011] 2 HKLRD 837 at §12 per Le Pichon JA).

12.  The Debt stemmed from a securities trading relationship between the Petitioner and the Debtor. The Petitioner, a securities company, entered into a number of agreements with the Debtor on or about 27 March 2016, whereby the Petitioner provided, inter alia, securities trading services and margin loan facilities to the Debtor. It is undisputed that the Debtor owed the Petitioner a principal amount of HK$20,002,527.16 and interest of HK$82,433.66 as at 18 October 2018.

13.  The Statutory Demand was served on the Debtor. No application to set aside the Statutory Demand had been made by the Debtor and the Debtor has never complied with the Statutory Demand.

14.  The Petitioner holds security of 2,000,000 shares in Hanergy. However, due to the suspension of reading of Hanergy shares, the Hanergy shares have been estimated to have no actual value.

15.  At the first hearing on 24^th December 2019, Mr Hui on behalf of the Debtor relied on three grounds to oppose the Petition, namely, the Statutory Demand fails to comply with Rule 44(5) of the Bankruptcy Rules, Cap.6A, there was defective valuation of the Debtor’s security and the service of the Statutory Demand was defective. Despite the comprehensive and tenacious submissions of Mr Hui, I am not convinced that there are merits in any of the grounds of opposition.

Rule 44(5) of the Bankruptcy Rule, Cap.6A

16.  Rule 44(5) of the Bankruptcy Rule, Cap.6A (“the Rule”) provides that:

“(5) If the creditor holds any security in respect of the debt, the full amount of the debt shall be specified, but –

(a) there shall in the statutory demand be specified the nature of the security, and the value which the creditor puts upon it as at the date of the demand; and

(b) the amount of which payment is claimed by the demand shall be the full amount of the debt, less the amount specified as the value of the security.” (Emphasis added.)

17.  Mr Hui for the Debtor submitted that the issue is whether the word “security” in the Rule means security provided by the Debtor only, or any security including those provided by third parties. The Debtor argues the latter. It is not disputed that the Statutory Demand has not stated the security provided by one China Rich Securities Limited in favour of the Petitioner. The argument is that since the Statutory Demand did not specify third party securities, the Statutory Demand is defective and as the Petition is based on a defective statutory demand, the same should be dismissed. I disagree.

18.  First, it is common ground that the present status of the law in Hong Kong is that third party security need not be stated in a statutory demand, but only those belonging to the debtor. (See Re A Debtor (No.310 of 1988) [1989] 1 WLR 452 at 455C-456A per Knox J; Cheng Wai Kei v Commerzbank Aktiengesellschaft [2002] 2 HKC 340 at §§11-18, per Chu J (as she then was) and Wong Ho Ming Kenneth v The Hongkong Chinese Bank, Ltd (unrep, HCSD 17/1999, 13 April 2000 at §19-20, per Deputy High Court Judge Woolley).

19.  Mr Hui also accepted that to be the legal position. However, he submitted that the position in Hong Kong was assumed without much analysis. He referred to Re Kwok Chok Yee [2002] 2 HKC 543 at 546 where Le Pichon J (as she then was) ruled that an objection to an omission to state a third party security was misconceived. However, the point was not substantively argued. The same applies to the case of Re Ip Lam On, unrep, HCSD 11/2000, 8 January 2001 at §§9-10 where Deputy High Court Judge Woolley followed the decision of Re Kwok Chok Yee (supra).

20.  Mr Hui submitted that this Court is free to consider the relevant rule on its proper interpretation and as a matter of policy. I consider that I should not depart from the line of Hong Kong cases unless I am persuaded that they are plainly wrong. Judicial comity dictates that heavy weight should be given to the decisions of the Court of First Instance unless it is clearly shown that they are wrongly decided.

21.  In any event, first, purely as a matter of statutory construction, I am of the firm view that the security in the Rule means security provided by the Debtor only. Sub-paragraph (b) of the Rule provides that the amount of which payment is claimed by the demand shall be the full amount of the debt, less the amount specified as the value of the security. If third party securities are to be taken into account, it means that a petitioning creditor will only be able to rely on the amount after deducting third party securities when as a matter of law, the petitioning creditor can pursue the underlying debts both against the debtor and third party security providers. There is no reason why a petitioning creditor has to choose.

22.  In Lau Yu also known as Jaffe Lau v The Hongkong and Shanghai Banking Corporation Ltd [2019] 2 HKC 18, Kwan JA (as she then was) at §35 said:

“…Second, as a matter of law, the Bank as creditor had an unfettered choice as to how, and against whom, it should proceed to recover the debt to which it is entitled. The Bank was not legally obliged to resort to available security before pursuing the debtor personally for the debt. The presence of security provided by a third party is not a defence to an action against the debtor or a winding up petition…”

23.  Secondly, it is not entirely correct to state that Hong Kong Courts have not considered the meaning of the word security under the Rule in a detailed and careful manner.  Madam Justice Chu has analyzed the same in Cheng Wai Kei v Commerzbank Aktiengesellschaft [2002] 2 HKC 340 at §§10-23.  Mr Oh for the Petitioner also helpfully referred this Court to the fact that the Rule was adopted after considering the apparent advantage a creditor with third party security has over other unsecured creditors. (See §§1.17, 19.20, 19.21 and 20.4 of The Law Reform Commission of Hong Kong Report on Bankruptcy (May 1995), of which most of the recommendations were implemented in the Ordinance in December 1996.

24.  Thirdly, the same conclusion has been reached in relation to statutory demands in the context of winding-up petitions. (See Re K&R Wong Construction Company Limited [1998] 2 HKC 364 and Re Fame Dragon International Investment Limited, unrep, HCCW 373/2016, 20 March 2017).

25.  I have carefully considered Mr Hui’s detailed submissions (§13-27 of the Debtor’s Skeleton Submissions), but am not persuaded that the analysis there changed the legal position as stated above. Accordingly, there are no merits on this ground of objection.

Valuation of the Debtor’s Security

26.  The Debtor contended that in the Statutory Demand, the value of the security provided by the Debtor, i.e., the Hanergy shares, was estimated to be HK$0. This valuation was plainly wrong. It is, thus, submitted that the Statutory Demand is defective. I disagree.

27.  First, in Re SNG Allan [2018] HKCFI 2016, G Lam J, at §5 the court has accepted a nil valuation in relation to Hanergy shares upon its suspension since May 2015. In the circumstances, it is reasonable for the Petitioner to put a nil value on the Hanergy shares in the Statutory Demand. 

28.  Secondly, the general principles in relation to estimating the value of a security in a statutory demand or petition are as follows:

(1)  The court should only be concerned with the value of the security as at the date of the statutory demand or petition and later valuations are of little use in determining whether the value is so inaccurate as to justify setting aside the statutory demand or petition. (See Wong Ho Ming Kenneth v The Hongkong Chinese Bank Ltd (supra) at §18, per Deputy High Court Judge Woolley);

(2)  The court would not inquire into the correctness of a petitioning creditor’s estimate. (See Re Button [1905] 1 KB 602 at 605 per Stirling J. though this practice should not be applied inflexibly: Re Choi Chi Kwan [2000] 3 HKC 503 at 507A per Deputy High Court Judge Susan Kwan (as she then was));

(3)  Disagreement of the value which a creditor puts on his security per se cannot provide a basis to challenge a statutory demand, unless the debtor is able to claim by credible evidence that the creditor had undervalued the security and that its true value either equaled or exceeded the full amount of the debt: Re Kwok Chok Yee [2000] 2 HKC 543 at 546I to 547C per Le Pichon J (as she then was);

(4)  The same principle apply with greater force in relation to a petition, as the debtor would have had ample opportunity to challenge the valuation prior to the hearing of the petition and had not done so, and no adjournment should be allowed for valuation evidence to be given: Re Choi Chi Kwan [2000] 3 HKC 503 at 507A-508E per Deputy High Court Judge Susan Kwan (as she then was).

29.  In the present case, the Debtor has not adduced relevant expert evidence to demonstrate how the Hangery shares should be valued as at the date of the Statutory Demand or the Petition. It merely submitted that it must have a value more than zero. With respect, this is not quite good enough. There is no deficiency in the Statutory Demand.

30.  It is also unhelpful for the Debtor to rely on a valuation report which shows that the Hanergy shares had a value of HK$3.3489 per share as at 30 June 2019, ie, post-date the Petition. If so, the Debtor could have realized the said shares and partially repaid the Petitioner. That was not done at all.

31.  The privatization of Hanergy is speculative and has no bearing on the value of the Hanergy shares as at the date of the Statutory Demand or the Petition. Even if calculated according to HK$3.3489 per share, the Hanergy shares would only worth HK$6,697,800, which is still lower than the Debt.

32.  Thirdly, I agree with Mr Oh for the Petitioner that the case of Cheng Hung Kit v Tsoi Chik Sang [2018] 3 HKLRD 517 is distinguishable as the creditor there simply had not mentioned any security or the value of the security in the statutory demand at all, and there was not even any attempt to amend the statutory demand to state the security and the value of the security.

33.  Fourthly, I am also satisfied that the net figure resulting from deducting the estimated value of a security from the total debt owed was a liquidated sum for the purposes of sections 6 and 6B of the Ordinance (See Re Kwok Chok Yee [2000] 2 HKC 543 at 546D per Le Pichon J (as she then was)).

Service of Statutory Demand

34.  In relation to service of a statutory demand, the general principles as set out in Re Pang Mei Lan May [2005] 1 HKC 319 and Practice Direction 3.1 at §2.1-2.6 are as follows:

(1)  If practicable, personal service of the statutory demand should be effected, including attempting to arrange an appointment for personal service through the debtor’s solicitors;

(2)  If not, the creditor should do all that is reasonable to bring the statutory demand to the debtor’s attention, i.e. by making two personal calls to the debtor’s address on separate days, the second of which should be by appointment letter.

(3)  Failing all other reasonable means of bringing the statutory demand to the debtor’s attention, the creditor should apply for substituted service by advertisement of the statutory demand.

35.  The initial burden is on the debtor to show that the petitioner had not done all that was reasonable for the purpose of bringing the statutory demand to the notice of the debtor. (See Re Lela Tong, unrep, HCB 14214/2009, 15 June 2011 at §8 per Barma J. (as he then was)).

36.  If the Petitioner has done all that are practically reasonable, whether or not the debtor had in fact received the documents is besides the point. (See Re Li Wai Man, unrep, HCB 211/1999, 1 November 1999 at §43 per Yuen J. (as she then was))

37.  In the present case, the Petitioner had:

(1)  attempted to serve the Debtor personally through his solicitors by asking by letter if they had instructions to accept service or to arrange for an appointment to personally serve the Statutory Demand on the Debtor, but to which no reply was ever given.

(2)  attempted to serve the Debtor personally at his two known addresses with proper inquiries made and/or answers given (the whereabouts of the Debtor and when the Debtor would be back at the particular address) and at the appropriate times (between 9 am to 6 pm for the 1^st address and after 730 pm for the 2^nd address) on 23 October 2018.

(3)  delivered appointment letters at the Debtor’s two known addresses by post, fax, email addresses, provided by the Debtor himself in previous hearings. The Debtor has not been able to point to any other methods or addresses through which the Petitioner should have delivered the appointment letters to.

(4)  attempted to call the Debtor at all his known telephone numbers on both 23 October 2018 and 25 October 2018, but could not reach the Debtor. Even inquiries with the receptionist of the Debtor’s office proved fruitless as the receptionist simply did not know where the Debtor was and when he would return.

(5)  attempted to serve the Debtor personally at his two known addresses again on 1 November 2019 pursuant to the appointment letters, with proper inquiries made and/or answers given (the whereabouts of the Debtor, when the Debtor would be back at the particular address and whether the Debtor or the person inquired knew about the appointment letters) and at the appropriate times (between 9 am to 6 pm for the 1^st address and after 730 pm for the 2^nd address).

(6)  advertised the Statutory Demand on 9 November 2018.

38.  On the facts of the present case, I am satisfied that the Petitioner has done all that are reasonably practical to bring the Statutory Demand to the attention of the Debtor.

Section 6D(3) of the Ordinance

39.  As the Debtor has not even been able to comply with his own proposed directions and the Petitioner is reasonable in having no confidence on the execution of offers made by the Debtor, I am of the view that it is most reasonable for the Debtor to reject the Petitioner’s offers.

40.  I should also say as a last-ditched effort, the Debtor proposed to give the Petitioner a set of post-dated cheques to fully repay the Debt. This offer was also rejected by the Petitioner. There is no jurisdiction and in any event it will not be right for the Court to impose a payment by instalments on the Petitioner.

DISPOSITION

41.  For all the reasons stated above, I made the usual bankrupt order with costs to be paid by the Debtor to the Petitioner, on a party to party basis, to be taxed if not agreed.

42.  Finally, I thank Mr Oh for the Petitioner and Mr Hui for the Debtor for their helpful assistance to this Court.