XCHRX WONG SHUN v. JAPAN LEASING (HONG KONG) LTD.

HCSD 7/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

STATUTORY DEMAND NO. 7 OF 1999

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D E C I S I O N

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1. This is an application to set aside a statutory demand. The statutory demand was dated 26th January 1999 and was issued on behalf of a company now in liquidation called Japan Leasing (Hong Kong) Limited. The statutory demand was served on 8th February 1999 on the Applicant, Mr. Wong Shun. He made an application to set aside the statutory demand on 26th February 1999 and this is the adjourned hearing of that application.

2. The statutory demand refers to three loans. The total indebtedness of the three loans comes up to $6.79m., of which the first loan (referred to in the statutory demand as "loan A") comprises $3.18m. However, Japan Leasing gives value of the security held by it as $5.9m. and therefore, the demand under the statutory demand is the total debt of $6.79m. less the value of the security of $5.9m. leaving a balance of only $894,539.00.

3. On an application to set aside a statutory demand, r. 48(5) of the Bankruptcy Rules provides that:

"the court may grant the application to set aside 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; ...

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

4. The Applicant at first put forward three grounds for setting aside the statutory demand, now there are only two. The first (which is a historical ground no longer pursued by Mr. Swaine) is that the loans have been sufficiently secured. I would only add that the Bankruptcy Ordinance does contain provisions for loans where the creditor has been given security. One can see that from section 6B(1) and r. 44(5), those provisions have been followed by Japan Leasing. The value of security has been supported by an affirmation of a valuer, and therefore, even though the security was an all monies mortgage, there is still a substantial part of the debt that is unsecured as the security does not extend to that part of the debt.

5. The second ground for the application to set aside the statutory demand was that Japan Leasing was a registered money lender but it has failed to comply with certain statutory requirements in the Money Lenders Ordinance. There is a summary of those breaches in para. 3(2) of the Applicant's first affirmation. Japan Leasing accepts some of those charges. In relation to the 1st loan, there seems to be no dispute that there had been a breach of section 18(1)(b), and in relation to the 2nd and 3rd loans, a breach of section 22(1).

6. However, Japan Leasing argues through Mr. Ng that the 1st loan should be exempted because it was a loan made bona fide for the purchase of property and to refinance such mortgage. And in any event, any such breach would have been a technical breach only. Mr. Swaine is prepared to accept for present purposes that could have been an exempt loan, because he is home anyway by reason of the breaches relating to the 2nd and 3rd loans.

7. In relation to the 2nd and 3rd loans, Japan Leasing has submitted that those breaches were minor and would not cause any prejudice to the Applicant. The Applicant is a sophisticated businessman whose business was in money lending and therefore, it is submitted on Japan Leasing's behalf that this court could and should, under section 22(2) of the Money Lenders Ordinance enforce the agreement to such extent as the court considers equitable. Mr. Ng has referred me to certain calculations which show that there would nonetheless be substantial indebtedness even if one were to ignore the payment of compound interest and front-end fee.

8. Section 22(2) provides as follows:

"Notwithstanding sub-section (1) if a court before which the legality of any agreement comes in question is satisfied that in all the circumstances, it would be inequitable that any such agreement which does not comply with this action should be held to be unenforceable, the court may order that such agreement is enforceable to such extent and subject to such modifications or exceptions as the court considers equitable."

9. However, in my view, it would not be right for the court to do so at this stage and in this forum. First of all, as at the date of the service of the statutory demand, these two loans were illegal and unenforceable under section 22(1) of the Money Lenders' Ordinance. So there was no indebtedness under the 2nd and 3rd loans at the time when the statutory demand was served.

10. It is not a question of errors in the figures appearing in the statutory demand. The question is one of the legality and the enforceability of the debts under the 2nd and 3rd loans themselves. And if those two loans are excluded leaving only the 1st loan, the security given to the creditor is, even on the creditor's own case, sufficient to cover the indebtedness.

11. Secondly, in my view, even if the statutory demand was not per se defective, the court would not exercise its discretion to order the enforceability of the 2nd and 3rd loans now. In my view, it would be inappropriate for this court in this forum and at this stage, when only considering whether there is a triable issue for the setting aside of a statutory demand, to consider whether it should make such orders. In my view a court, when considering the questions postulated in section 22(2), would require a more detailed consideration and much fuller evidence than is permissible in the present exercise.

12. The third ground relied upon by the Applicant is that he says that he has a substantial cross claim against Japan Leasing. I have been referred to the pleadings in High Court Action No. 13826 of 1998 issued by a company controlled by the Applicant, the Applicant himself and his wife against Japan Leasing in 1998 for breach of a written agreement between his company and Japan Leasing and procurement of breach of contract. And there is also a personal claim by the Applicant and his wife against Japan Leasing. There are particulars which have been filed now which show that substantial figures are being claimed.

13. Mr. Swaine submits that under section 35 of the Bankruptcy Ordinance applied to the Companies Ordinance, it is mandatory to have mutual set offs so that Japan Leasing cannot claim from the Applicant anything other than the balance (if any) of mutual credits and debts and other "mutual dealings", which have been interpreted widely to cover transactions giving rise to rights and liabilities between them.

14. Mr. Ng for Japan Leasing says that the Applicant's personal claim borders on the ridiculous. However, no application has been made by Japan Leasing to strike out the Applicant's personal claim in the period since the issue of writ, as has been remarked upon by Yeung J. in his recent judgment in the action. On the contrary, Japan Leasing has pleaded to the Applicant's personal claim, and the pleadings are closed had it not been for the Plaintiff's application for the amendment of the Statement of Claim.

15. In light of my view on the second ground, it is unnecessary for me to decide this third ground and in my view, it would be inappropriate for this court to do so, given that the validity of the individual Plaintiff's personal claim has been and no doubt will continue to be the subject of scrutiny by the court in that action.

16. As I have indicated, it would not be right in the present forum, which is the consideration of an application for the setting aside of a statutory demand, for the court to give any full views. Therefore, I would order that the statutory demand be set aside with costs.