GREEN CAPITAL MANAGEMENT LTD v. LEE CLIFF YEE GONG

HCB 3315/2021

[2021] HKCFI 3709

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 3315 OF 2021

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D E C I S I O N

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INTRODUCTION

1.  This was the substantive hearing of the Petition (“the Petition”) of Green Capital Management Limited (“the Petitioner”) filed on 4 June 2021, seeking to bankrupt Mr Lee Cliff Yee Gong (“the Debtor”).

2.  At the hearing, the Petitioner was represented by Counsel Ms Christine Yu, and the Debtor was represented by Counsel Mr Danny Chan.

3.  It is the Petitioner’s case that the Debtor is indebted to the Petitioner for the sum of HK$2,640,000 (“the Debt”).  The Debt comprises two dishonoured cheques made out to the Petitioner dated 15 June 2019 and 15 July 2019 respectively (“the Cheques”).  The Petitioner’s case is that these Cheques were issued within the context of a Consulting Agreement dated 1 December 2018 (“Consulting Agreement”), whereby inter alia the Debtor agreed with the Petitioner to pay a consulting fee by way of four post-dated cheques in the sum of HK$1,320,000 each in exchange for services to be offered by the Petitioner to the Debtor.

4.  There is no dispute that the Cheques had indeed been given to the Petitioner by the Debtor.  However, the Debtor disputes the context under which they had been originally provided and disputes the circumstances under which they were subsequently dishonoured.  This is addressed in further detail below.

5.  The Petitioner had issued a Statutory Demand (“SD”) on 6 March 2021 and says that this was served on 23 March 2021.  There was some dispute in the evidence whether service had been validly effected.  Whilst Mr Chan did not spend much time on this at the substantive hearing, this is also briefly addressed below.

RELEVANT LEGAL PRINCIPLES

6.  The legal principles applicable to bankruptcy petitions are well settled, as summarized below.

Service of statutory demand

7.  Before a creditor can present a bankruptcy petition against a debtor based on a debt, the creditor must serve on the debtor a statutory demand in the prescribed form in accordance with S.6A of the Bankruptcy Ordinance (Cap. 6) (“the Ordinance”).

8.  The requirements as to service of a statutory demand are set out in Rules 46 and 49 of the Bankruptcy Rules (Cap. 6A).  Rule 46(2) provides that the “creditor shall do all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected”: Re Ip Pui Man Nina [2011] 3 HKLRD 299 at §§44-54 per Au J (as he then was).

9.  These requirements as to service must be strictly adhered to given the importance of establishing with certainty the period within which a debtor has to comply with the statutory demand.  Non-compliance gives rise to consequences which go far beyond those which would flow from any ordinary action: Re Lam Lai Wah Susanna [2002] 4 HKC 334 at §21 per DHCJ Poon (as he then was).

Setting aside a statutory demand

10.  Pursuant to Rule 47 of the Bankruptcy Rules, a debtor who wishes to apply to set aside a statutory demand served on him should do so within 18 days from the date of service of the statutory demand.  Ignorance of the law and procedure for setting aside is no excuse: Re Ling Kam Chung (unrep., HCB 12052/2003, 25 August 2003) at §11 per DHCJ To (as he then was).

11.  Rule 48(5) sets out the grounds under which the court may grant an application to set aside a statutory demand.  They include, inter alia, where the debt is disputed on grounds which appear to the court to be substantial (Rule 48(5)(b)).  In determining whether a debt is disputed on substantial grounds, the burden is on the debtor to show that there is a genuine triable issue that the debt is disputed on substantial, as opposed to trivial or frivolous grounds: Lee Pui Chun v Cheng Chi Wah [2017] 2 HKLRD 852 at §7 per Ng J.

12.  If a debtor wishes to apply to set aside a statutory demand after the expiration of the 18-day period, he must apply for an extension of time.  The onus lies on the debtor to show (1) special circumstances explaining his delay in complying with the time limit, and (2) merits (“good cause”) in his defence: Li Wo Hing v Raiffeisen Bank International AG, Beijing Branch (unrep., HCSD 19/2014, 10 July 2014)at §§8-9, 11 per To J. 

Bankruptcy petition against debtor

13.  Where a debtor has failed to comply with a statutory demand properly served on him, the creditor will, by virtue of S.6A(1)(a) of the Ordinance, be taken to have discharged his onus of demonstrating that the debtor “appears to be unable to pay a debt”.  The creditor may then present a bankruptcy petition against the debtor on this basis (S.6(2)(c) of the Ordinance).

14.  However, petitions are not meant to be used for the purpose of debt collection, and the winding-up or bankruptcy jurisdiction of the court will be exercised only in very clear cases.  Therefore, it is trite that the court will not make a bankruptcy order against a debtor if he or she can show, by sufficiently precise evidence which is believable, a bona fide dispute on substantial grounds in relation to the debt on which the petition is based: Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at §§20, 26-27 per Kwan JA (as she then was).

15.  In this regard:-

(1)  It is not sufficient for the debtor to merely raise a “cloud of objections” on affidavits.  The court will caution itself against unsubstantiated and unparticularised assertions: CP Global Inc. (Receivers and Managers Appointed) & Another v Guy Kwok-Hung Lam and Another [2021] HKCFI 2135 at §31 per Linda Chan J.

(2)  The court will also have in mind that the more serious the allegation, the more cogent the evidence is needed to prove it: In re H (Minors) [1996] AC 563 at 586 per Lord Nicholls.

(3)  If the court is satisfied that there is a bona fide dispute on the debt, it will not usurp the function of a civil court and decide the disputes between the parties.  Instead, the usual practice of the court is to dismiss the petition, leaving the petitioner to establish himself as a creditor by judgment to be obtained in the civil court: Re Leung Cherng Jiunn (supra) at §20.

(4)  If there is an abuse of process in invoking the jurisdiction of the court in an improper manner, the petitioning creditor may be ordered to pay indemnity costs: Re Leung Cherng Jiunn (supra) at §27(5).

16.  Likewise, the court may dismiss the petition if it is not satisfied with the proof of the petitioning creditor’s debt or of the service of the petition, or is satisfied by the debtor that he is able to pay his debts or has a reasonable prospect of being able to pay them, or considers that for other sufficient cause no order ought to be made (S.9(3) of the Ordinance).

17.  S.9(5) of the Ordinance further provides that in circumstances where the debtor denies that he is indebted to the petitioner, or that he is indebted to such an amount as would justify the petitioner in presenting a petition against him, the court may, instead of dismissing the petition, stay all proceedings on the petition on such security (if any) being given as the court may require for payment to the petitioner of any debt and costs of establishing the debt.

18.  However, a stay of bankruptcy proceedings, particularly a stay coupled with a payment into court, is only appropriate in a case where the petitioner’s entitlement to the alleged debt can be, relatively speaking, readily and expeditiously determined by a court, since bankruptcy proceedings should generally be determined with reasonable dispatch.  If a debt is subject to a bona fide dispute, the normal course is for the bankruptcy court to dismiss the petition: Re Mak Kam Ling [2004] 4 HKC 202 at §§25-26 per A Cheung J (as he then was).

DISCUSSION

19.  The following issues were addressed by the parties:

(1)  Was the SD validly served?

(2)  Where the Debtor has not applied to set aside the SD, can he still assert that there is a bona fide dispute on substantial grounds at the substantive hearing of the Petition?

(3)  Is there a bona fide dispute on substantial grounds in the circumstances alleged by the Debtor?

Was the SD validly served?

20.  This point can be dealt with briefly.

21.  The Petitioner’s case is that the SD was served on the Debtor on 23 March 2021 at a meeting between the Debtor, and two representatives of the Petitioner.  In the Debtor’s evidence in opposition, he mentioned that it was only much later in time that the SD was brought to his attention.

22.  I do not accept the Debtor’s position:

(1)  He admits he had attended a meeting in around March 2021 with the relevant representatives.  His version is that he was asked to sign on some documents but he did not do so, did not read them and left without taking them.

(2)  The two representatives of the Plaintiff who attended at the meeting have both sworn affirmations confirming that the SD was indeed served personally.  There is no reason to doubt this account.

(3)  There are various contemporaneous documents in March and July 2021 which point to the Debtor’s awareness of the SD.

23.  For personal service to be effective, there is no requirement that the documents must be signed or even taken away.  It suffices that it was served on the person.

24.  I thus consider that the SD was validly served.

Where the Debtor has not applied to set aside the SD, can he still assert that there is a bona fide dispute on substantial grounds at the substantive hearing of the Petition?

25.  As indicated above, once a party is served with a SD, he or she can apply to set it aside.  Such application should be made within 18 days of service (Rule 47, Bankruptcy Rules, Cap 6A).

26.  The Petitioner submits that in view of: (1) the effective service of the SD, (2) there being no application to set aside the SD within time, and (3) there being no application for extension of time to apply to set aside the same, the Debtor cannot argue at the substantive hearing of the bankruptcy petition that there is a bona fide dispute on substantial grounds of the Debt.

27.  In support of this contention, Ms Yu refers to the Butterworths Hong Kong Bankruptcy Law Handbook (6^th ed., 2019), pp.57-58 at §[6D.03], citing the following:

“… The bankruptcy order is made immediately upon the creditor satisfying all conditions at the hearing of the petition. …

  At the hearing of the bankruptcy petition, unless a change of circumstances has occurred since the dismissal of the application to set aside the statutory demand, all the petitioning creditor is required to do is to show that he has made a statutory demand, that either no attempt has been made to set it aside or an unsuccessful attempt has been made, and that the amount of the debt has neither been paid or secured; the debtor cannot go back to re-argue the very grounds on which he has unsuccessfully sought to have the statutory demand set aside: see Brillouet v Hachette Magazines Ltd, Re A Debtor (No 27 of 1990) [1996] BPIR 518 (CA); see also King v Commissioners of Inland Revnue, Re A Debtor (No 960 SD of 1992) p1996] BPIR 414.  The proper place to re-argue the grounds is at the Court of Appeal on appeal, if at all: see Brillouet v Hachett Magazines Ltd, Re A Debtor (No 27 of 1990) (above).”

28.  The Petitioner contends that the effect of SS.6, 6A and 9 of the Ordinance is essentially that:

(1)  A Debtor who intends to contest bankruptcy proceedings against him ought to apply to set aside the SD within time.

(2)  If he fails to do so, he should apply for an extension of time and show that there are “special circumstances” and “good cause” for such extension (per Rule 204, Bankruptcy Rules, Cap 6A).

(3)  If the Debtor does not do so, he should not be permitted to argue that there is a bona fide dispute of the debt on substantial grounds at the substantive hearing of the bankruptcy petition, because that would be tantamount to allowing the Debtor to apply to set aside the SD out of time through the backdoor.

29.  I am not persuaded that this is correct:

(1)  The thrust of the Petitioner’s argument seems to turn on the passage cited at paragraph 27 above.  I have some difficulty in accepting that this supports the Petitioner’s stance.

(2)  Rule 47, Bankruptcy Rules, Cap 6A is permissive in nature and not mandatory.  It states that the debtor may apply to the court for an order to set aside the SD.  Where the debtor does not apply to do so, and the Court is satisfied that the SD has been properly served, the creditor may then issue the petition 3 weeks after service thereof (S.6A of the Ordinance).

(3)  If the debtor indicates that he or she intends to show cause against the petition, the matter then proceeds for directions and substantive determination.  At the substantive hearing of the petition, the Court will consider the nature of the debt (per SS.6D and 9(2) of the Ordinance).  In such a scenario, the petition hearing would be the first occasion on which the Court would substantively consider the question of bona fide dispute.

(4)  Of course, where a setting aside application has already been made, the Court will have considered the various grounds in Rule 48, Bankruptcy Rules, Cap 6A in determining whether to set aside the SD.  This includes inter alia whether there is a bona fide dispute of the debt on substantial grounds, matters of counterclaim, set-off or cross demand, etc.

(5)  Where there has already been a setting aside hearing, and this has been determined in the creditor’s favour, then at the hearing of the petition, there would be no point in traversing the same ground again.

(6)  It is in those circumstances that the observations in the Bankruptcy Law Handbook (supra) are made.  I thus do not consider the passage to be apposite or applicable in the manner suggested in the present case.  In this regard, Ms Yu quite fairly accepted that she could not locate any case authority in support of the Petitioner’s proposition.

(7)  As I pointed out to the parties at the hearing, in the oft cited case of Re Leung Cherng Jiunn (supra), the Court considered at the substantive hearing of the petition whether there was a bona fide dispute on substantial grounds; this was in circumstances where there had not been any application to set aside the SD (see §§3-4 of the Court of Appeal’s decision summarizing the steps taken in the court below).  Whilst the point was not specifically taken, I would point to this case as being indicative of the accepted practice.

30.  There are two further observations I would note:

(1)  First, as a matter of public policy, it is only fair that the debtor is afforded an opportunity to dispute the debt.  This can occur either on the application to set aside the SD or at the hearing of the bankruptcy petition, but not both.

(2)  Second, insofar as the Petitioner may be relying on S.6A of the Ordinance to suggest that it operates in a manner analogous to S.178 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“CWUMPO”) (i.e. in that a company served with a SD in such context is deemed unable to pay its debts), I note that there is a distinction between S.6A of the Ordinance and S.178 of CWUMPO.  The relevant part of S.6A of the Bankruptcy Ordinance refers to the scenario where a debtor “appears to be unable to pay a debt …” (my emphasis) and then sets out the situation where the SD has been served in prescribed form.  On the other hand, S.178 of CWUMPO is an express deeming provision: “A company shall be deemed to be unable to pay its debts…” (my emphasis).  The effect of the two sections is somewhat different, with S.6A of the Ordinance being a gateway into allowing a creditor to petition according to S.6(2)(c), whereas S.178 CWUMPO effects a presumption in respect of the company’s insolvency.  In any event, I note that in winding up proceedings, the presumption may be displaced by the company putting forward evidence of a bona fide dispute of the debt in question.

31.  In the circumstances, I do not consider there is merit in the Petitioner’s submission that the Debtor must seek an extension of time to argue at the present hearing that there is a bona fide dispute on substantial grounds of the Debt.

32.  I will thus proceed to consider the final issue.

Is there a bona fide dispute on substantial grounds in the circumstances alleged by the Debtor?

33.  The crux of the Debtor’s case is set out in his evidence in opposition.  In essence:

(1)  He alleges that he had signed four cheques to assist his mother, Ms Nancy Chia (“Madam Chia”), in her transaction with CS Asia Opportunities Master Fund (“CS Asia”).  He says that in around April 2019, his mother told him she had entered into an initial transaction with CS Asia to pledge a quantity of shares in New City Development Group Ltd (stock code: 456.HK) (“456”) to CS Asia; and that in a subsequent transaction, she hedged / swapped around HK$36,000,000 worth of 456 Shares with CS Asia (“Hedging Agreement”).  He then says that in connection with this latter transaction, she instructed him to issue four post-dated cheques dated 15 April 2019, 15 May 2019, 15 June 2019 and 15 July 2019 each for HK$1,320,000, to be addressed to the Petitioner.

(2)  It was in those circumstances, says the Petitioner, that the four cheques (including the Cheques now the subject of the proceedings) were issued and delivered to Mr Frank Dominick (“Mr Dominick”), representative of CS Asia.  The cheques were described as “interest” under the hedge arrangement.  The Debtor says that his mother subsequently told him that it was no longer necessary to pay the interest, and to cancel the last two cheques.

(3)  In connection with this, he refers to the fact that CS Asia had already initiated proceedings against Madam Chia for breach of the Hedging Agreement, and obtained default judgment against her including for the interest owed thereunder.

(4)  He also professes ignorance of any Consulting Agreement between himself and the Petitioner, saying that it was a forged document which he was only provided with on 22 July 2021.  In connection with this, he filed a police report on 29 July 2021.  He has exhibited immigration records showing that he was not in Hong Kong on 1 December 2018, and thus could not have signed the document on that date.

34.  In answer to the above:

(1)  The Petitioner maintains the validity of the Consulting Agreement and hence, the Debt.

(2)  The Petitioner affirms that there were, indeed, transactions between Madam Chia and CS Asia.  It is the Petitioner’s explanation that this came about as a result of the Debtor.  It was the Debtor who approached the Petitioner and indicated that his mother had certain shares in 456 which she wanted to make some money out of. Upon his making inquiries and introducing Madam Chia to the Petitioner, the Petitioner agreed to introduce Madam Chia to CS Asia.  CS Asia would then provide financing for an equity linked swap on the condition that the Debtor would pay consultation fees to the Petitioner (viz. the four cheques, including the Cheques in issue in the Petition).

(3)  The Petitioner then further explains that the interest owed by Madam Chia under the Hedging Agreement and the consultation fees owed by the Debtor are separate and distinct.  The default judgment obtained against Madam Chia thus has no bearing on the Debt owed by the Debtor.  There is no “double recovery”.

(4)  Finally, it says that the Consulting Agreement was signed in the week of 3 December 2018 when the Debtor was in Hong Kong, and not on 1 December 2018.

35.  Having reviewed both parties’ evidence and the relevant exhibits, I find that the Debtor has not raised a bona fide dispute of the debt on substantial grounds.  In coming to such conclusion, I have borne in mind all of the filed evidence, and would draw particular attention to the points below.

36.  First, Madam Chia has not filed any evidence in support of the Debtor’s case.  One would have thought that she is the obvious candidate to explain the circumstances, her dealings with CS Asia, and why the Debtor issued the cheques. There was no explanation in the evidence why the Debtor has not asked her to give evidence to support his case.  When questioned at the hearing, Mr Chan agreed that Madam Chia could have put forward evidence, but being bound by his instructions and what his client had elected to file, he was unable to throw any further light on why she had not done so.

37.  Second, I bear in mind the trite principle of In re H (paragraph 15(2) above) when considering the allegation that the Consulting Agreement was forged.  Such a serious allegation requires cogent evidence.  In the present circumstances, there is little more than a bare assertion by the Debtor to such effect.  Having considered the chronology of the matter and the other contemporaneous evidence (discussed below), I consider that his police report is a self-serving act and I place no weight on it.

38.  Third, if one goes into the terms of the Consulting Agreement on the one hand and the Hedging Agreement on the other, it becomes apparent that the suggestion that the Cheques were for payment of the interest under the Hedging Agreement does not withstand scrutiny.

39.  Pursuant to the terms of the Consulting Agreement, the consulting fee was to be paid by “four checks from [the Debtor] in the sum of HK$1,320,000 each, post-dated”.

40.  Insofar as the Hedging Agreement was concerned, the Term Sheet dated 27 December 2018 required that Madam Chia pay CS Asia interest at the rate of 24% per annum and such interest should be paid at the end of each quarter.  Upon default, this interest rate was increased to 48% per annum, and the default interest was payable on 15 May 2019, 15 June 2019 and 15 July 2019 (i.e. three payments required).  The amount of interest payable was calculated at US$509,775.  All of these matters have been set out in the Petitioner’s evidence in reply, and also specified in the Statement of Claim in the claim against Madam Chia (for which default judgment had been entered).

41.  In connection with the above, there are a number of glaringly obvious points which render the Debtor’s story incoherent:

(1)  The Debtor agrees that he issued four cheques rather than three.  It simply doesn’t make sense that the four cheques were for the payment of interest under the Hedging Agreement, since the default interest was meant to be paid on three occasions – 15 May 2019, 15 June 2019 and 15 July 2019 – rather than four.

(2)  The default interest payable in connection with the Hedging Agreement is specified in US dollars (US$509,775 / 3 = US$169,925 per payment) rather than Hong Kong dollars.  There is no explanation from the Debtor as to why the cheques were issued in Hong Kong dollars.  Even if one multiplies the US dollar amount by HK$7.78 = US$1, this does not equate to a round figure of HK$1,320,000, but rather is HK$1,322,016.50.

(3)  If the cheques were indeed meant to pay the default interest, four cheques would amount to overpayment.  HK$1,320,000 x 4 equals HK$5,280,000, whereas the default interest under the Hedging Agreement was only US$509,775 x 7.78 (i.e. HK$3,966,049.50).  There is no coherent explanation from the Debtor why there is an excess of HK$1,313,950.50.

(4)  In the circumstances, the existence of four cheques issued in Hong Kong dollars simply does not add up with the Debtor’s own assertion that these were for the payment of the interest under the Hedging Agreement.

42.  Fourth, the Debtor refers to a series of WeChat messages between himself and Mr Dominick in the period June 2019 to June 2021.  He says that the chat shows that the debt arose from Madam Chia’s arrangement with CS Asia rather than any Consulting Agreement between himself and the Petitioner.  He says that throughout the chat, there are references to “interest checks”, “the Fund” (being CS Asia), and “mom’s agreement”; and conversely, there is no reference to any consulting agreement or consultation fees.

43.  As to the WeChat messages, I note, however, that:

(1)  There are acknowledgments from the Debtor, both express and implied, that there is liability owing both on his part on the one hand and his mother’s part on the other.  This is consistent with the Petitioner’s version of events, viz. that the Consulting Agreement was related to the Hedging Agreement in the manner described at paragraph 34 above.

(2)  At numerous junctures in the chat over the approximately two-year period, he asks Mr Dominick for further time to arrange matters.  Not once does he deny liability.

(3)  Even upon being told that a statutory demand was going to be issued against him (in December 2019), the Debtor only said that he understood.  He didn’t deny liability or otherwise protest.

(4)  In June 2021, the Debtor asked Mr Dominick if “your lawyer side are on procedure to file me [sic] bankruptcy?” and then “Pls give me more time regarding the case Frank”.  This was after the issuance of the proceedings against Madam Chia (on 18 March 2021).  He must have been aware by this juncture that these were separate claims.

(5)  The above are non-exhaustive examples of features of the WeChat which do not support the Debtor’s contentions.

44.  Fifth, the story about the Cheques being in support of his mother’s Hedging Agreement only emerged in the Debtor’s affirmation evidence in opposition to the Petition. It was not mentioned in the WeChats.  Nor was it set out in the Debtor’s letter to the solicitors acting for the Petitioner dated 8 March 2021.  This 8 March 2021 letter is significant.  On 1 March 2021, Messrs. Chan, Lau & Wai (acting for the Petitioner) had written to the Debtor and indicated that he was indebted to the Petitioner for HK$2,640,000 (comprising the Cheques) and that unless he paid up, a statutory demand would be issued.  In his letter dated 8 March 2021, the Debtor said inter alia that “I was misled by somebody so that I signed the relative checks to Green Capital Management Ltd.  I stopped to pay the relative checks when I found out that I was not obliged to honor the remaining checks.”  There was no mention at all of Madam Chia’s arrangements with CS Asia, or the fact that the Cheques had been issued for that purpose.

45.  Finally, as I indicated to Mr Chan during the hearing, there are other features and partial conversations in the WeChat which would seem to indicate that there was more going on behind the scenes between the parties.  By way of example, there are more than a few references to the Debtor’s boss and money issues related to the listed company, as well as various arrangements between the Petitioner, CS Asia, the Debtor’s boss, and the Debtor.  However, the Debtor has not explained or particularized what these issues might be, how they could relate to his Debt, and how this fits with his current story as to the allegedly forged Consulting Agreement.  Given he has not brought these matters into issue as part of his case on bona fide dispute on substantial grounds, the Court can only surmise that he must have considered these aspects unhelpful.  Whilst it seems apparent the full story has not been told, insofar as the Petition is concerned, any lack of clarity will not assist the Debtor.

46.  In the circumstances, and bearing in mind it is incumbent upon the Debtor to raise a bona fide dispute, I find that the Debtor has failed to do so.

CONCLUSION

47.  I will grant the usual bankruptcy order, with costs against the Debtor.  The costs will be assessed by way of gross sum assessment in writing.  The Petitioner has already provided its statement of costs.  The Debtor shall provide comments thereon within 7 days of this decision.