QBE Insurance (Hong Kong) Ltd. v. Chan Wai Man William

HCB 1879/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 1879 OF 2000

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J U D G M E N T

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The application

1. This is an application of the summons filed on 28 August 2000 by the applicant to annul the bankruptcy order made on 9 August against William Chan Wai-Man, the debtor on his petition, on the ground that such order ought not to have been made.

2. The application is made pursuant to the jurisdiction under section 33 of the Bankruptcy Ordinance, Cap. 6. Section 33(1) provides:

"The court may annul a bankruptcy order if it at any time appears to the court that on any grounds existing at the time the order was made the order ought not to have been made."

3. From the plain interpretation of this action, it is clear that the court does have the jurisdiction to annul the bankruptcy order, and the court's consideration should be the grounds existing at the time the order was made.

4. The applicant's application is on the ground that it is an abuse of the process for the debtor to petition on the spurious evidence relied upon by him, and with the intention of avoiding oral examination by the applicant.

Abuse of the process

5. Counsel refers me to the authority of Re a Debtor [1967] Ch 590. This case dealt with the issue of whether the future debts not immediately payable would amount to debt within the meaning of indebtedness provided in the section under which the debtor is eligible to make the petition for bankruptcy. The court held that future debts were not counted as indebtedness, so from the fair reading of the judgment it can be seen that the court had ruled that the petition was wrongly presented. it amounted to an abuse of the process, when the whole matter is looked at, particularly the intention of the bankrupt. In that particular case, apart from the payment by instalments, there seems to be no other debts for the court to consider at the time of the making of the order. So once the court has decided that future debts cannot be counted as indebtedness at the time of the making of the order, the bankruptcy order must be annulled because the whole foundation for the petition collapsed.

6. So that case is different from our case today, because even apart from the debts in question or in dispute, the court can consider other debts. The main emphasis will be on the other grounds which Mr Smith, acting for the applicant, has put forward to this court for consideration. That is to say, the intention of the debtor to petition for self-bankruptcy was to avoid examination by the plaintiff in another case where judgment has been obtained against him, and this, coupled with the allegation of misleading information, spurious evidence, as alleged by the applicant, would amount to an abuse of the process.

7. According to the authority produced to this court by the applicant, that is the F v. F Divorce: Insolvency: Annulment of Bankruptcy Order [1994] Vol.1 FLR at 359, it has been decided that the burden is on the applicant to prove the case to the court on the usual civil standard of on the balance of probabilities.

The trustee's stance

8. Since a bankruptcy order has been made against the debtor, the trustee has stepped into the matter to administer the estate of the bankrupt. The court will have to consider the stance to be taken by the trustee in bankruptcy. Miss Hardwick, as the trustee, has told me that she would not take any position. I will take it that she takes a neutral stance.

9. However, I have to consider that the skeleton arguments and the relevant materials produced to this court by the applicant have been given to the trustee, and with those information and allegations, the trustee would have made some investigation into the matter. Should there be any matter which the trustee in bankruptcy should bring to the attention of the court, I imagine that Miss Hardwick would have brought such matters to my attention. I have already specifically asked her whether or not there would be any such materials for me to consider, and the answer I obtained from her is that there is no matter which she wants to bring to my attention for consideration.

The factual background

10. The facts leading to this particular application can be set out very briefly, and they can be found in the affirmation of Tsang Man-yung, filed on 28 August 2000, page 136 of the bundle of documents. They are succinctly summarised in Mr Smith's skeleton of argument.

11. On 11 September 1997 the applicant (the plaintiff in that action) obtained default judgment against the 2nd defendant in another action, the debtor in this case, for the amount of $1,039,960.56. The applicant tried to enforce the judgment against the debtor. It had applied for a bankruptcy order against the debtor at one stage. However, the bankruptcy proceedings did not proceed because there was a negotiation between the applicant and the debtor, the agreement being that the applicant would agree to accept $750,000 to settle the judgment sum. However, the debtor had failed to honour the undertaking. The applicant then applied for an order for oral examination of the debtor under Order 49B of the Rules of the High Court.

12. The application for oral examination was made on 18 April 2000. The debtor did not attend; therefore the matter was adjourned. On 7 June 2000 the debtor filed the bankruptcy petition. On the same day the order of 18 April for oral examination was personally served on the debtor. I note (and this is not in dispute) that the filing of the petition was shown to be earlier than the receipt of the notice of the examination. This was brought to my attention by the debtor. The purpose of bringing this to me, as I can see, is to show that the debtor did not intend to defeat the application for examination.

13. Since the bankruptcy order was made, the applicant could not proceed with the examination. However, whether or not the applicant can still proceed by obtaining leave under section 12 of the Bankruptcy Ordinance is something which I have not been told, and there is no argument on that.

14. These are the factual background against which the applicant made the application to this court to annul the bankruptcy order.

Consideration of the grounds for the application

15. On behalf of the applicant, Mr. Smith has put forward the grounds to support the application. In his skeleton of argument he submits that the statement of affairs includes a list of the creditors as to which all items, apart from 10, give rise to serious questions. Item 10 is the debt owned to the applicant, so there should be no question.

Items 1-6 of the Statement of Affairs

16. I will therefore have to consider the Statement of Affairs filed by the debtor for his petition of the bankruptcy order, that is on page 9 of the bundle of documents. Items 1 to 6 are the credit card debts. Mr. Smith submits that although there are bank statements showing that the bank had made demand to the debtor for the amounts, however there are the minimum payments, so the debtor could always have paid the minimum payments.

17. Be that as it may, even if the debtor could have paid a minimum payment, I have to consider whether or not the information in the table is misleading. When one looks at the statements themselves, one can readily see that the banks, by the statements, had notified the debtor that the debtor had to pay the outstanding amounts as stated in the statements. However, the banks were ready to accept minimum payments, leaving the balance to be paid later but, of course, the debtor would have to pay the interest on the balance.

18. It is a prescribed table under the Bankruptcy Ordinance. It specifies that the debtor should state the amount the creditor says he owe them. Having considered the bank statements I do not think the information provided in these boxes is misleading information. This box does not require the debtor to consider whether or not those debts are due in the legal sense. This box only requires the debtor to provide information in accordance with the instructions as provided in the box: the amount the creditor says the debtor owe him or her.

Item 7 of the Statement of Affairs

19. Item 7 is the tax owed to the Inland Revenue Department. Again, the argument put forward by Mr. Smith is that the Inland Revenue Department has taken no legal action or proceedings against the debtor for the tax. In the interpretation of the instruction, I do not think this is misleading. The Inland Revenue Department letter states very clearly that is the tax payable. It does not mean that the debt has to be sued upon by the creditor.

Item 8 of the Statement of Affairs

20. Item 8 is the directors' loan from his own company. The debtor had already agreed that, in fact, this loan is not going to be demanded by the company. However, whether or not the debt will be demanded by the company is one issue, but whether or not that amount can be considered as a loan owed to the company is another matter. Here, even if the company is owned by the debtor, so in the mind of the debtor he will not order the company to make demand, it is still a loan from the company. I do not think that the debtor has given false information by filling in the box that this amount is the directors' loan, particularly when these kind of accounts can be inspected by the trustee in bankruptcy easily.

21. Mr. Smith submitted that items 9 and 10 are duplications. Again, the debtor has told me that he would agree that these two amounts are, in fact, the same amount. The question is whether or not these are misleading information.

Items 9 and 10 of the Statement of Affairs

22. Item 9 is a loan from his company Capital Eagle Consultancy Ltd. to himself; 10 is his personal guarantee for his company in favour of QBE Insurance (Hong Kong) Limited. These two sums of money amount to one single indebtedness, because once the debtor settles the amount due to QBE, the two accounts in respect of the loan and the personal guarantee will dissolve. However, the nature of the indebtedness, in my opinion, can be described as one is directors' loan from the company, the other is a personal guarantee. I do not think that the debtor was trying to mislead the court at the time when he made the application to the court for the bankruptcy order.

Item 11 of the Statement of Affairs

23. As to item 11, that is the residential property of the parents-in-law of the debtor. Mr. Smith submitted that there is a strong suspicion that the debtor was trying to convert the liability of the company and that of the parents-in-law to his personal loan with a view to establishing a foundation for his application for a bankruptcy order. The reason for counsel to make this submission is because the property was mortgaged to Kwong On Bank as a security for the money lent to the debtor's company. The debtor had financial difficulty, and so had his company. Therefore Kwong On Bank called the loan and instructed solicitors to issue demand letter to the parents-in-law, who stood as guarantors for the indebtedness of the company.

24. The parents-in-law made the arrangements to sell the property to another son-in-law, who then arranged another mortgage with another bank. When the parents-in-law were demanded payment under the existing mortgage document, obviously the parents-in-law would have to deal with the matter accordingly. There is no evidence to show that the transaction between the parents-in-law and their another son-in-law was tainted with illegality, nor is there any evidence to show that the other son-in-law's mortgage of the property with another bank was tainted with illegality.

25. One of the parents-in-law, Mr. Chan, has come to court to give evidence on a subpoena. Mr Chan gave clear evidence that it is out of his love for his daughter, and therefore his son-in-law, that they agreed to mortgage the property for the security of the loan to his company. Mr Chan is very co-operative to allow the solicitor acting for the applicant to take copies of those security documents and the correspondence. In the course of examination, there is no allegation of collusion between Mr Chan and the debtor, so that the transactions, as I have mentioned before, was in fact a manoeuvre to convert the liability of the company and the parents-in-law to the personal liability of the debtor.

26. I think it is only a speculation or suspicion on the part of the applicant that such transactions were for the conversion of the liability with a view to establishing grounds for petitioning for bankruptcy. I say this is speculation because without this particular loan the debtor could well have applied to the court for a bankruptcy order. Item 10 is not in dispute. Item 10 is the amount due to the applicant. So why should the debtor use such a method to lay the foundation?

The dividends of Union Square Trading Company Limited

27. Mr. Smith also submitted that there was non-disclosure of assets by the debtor. First of all, there was a dividend from Union Square Trading Company Limited, his own company, of $2.4 million, on 31 March 1996. The debtor was cross-examined by Mr Smith. His explanation was that he had received no cash from the company because he was indebted to the company. The company had used such dividend to set off his indebtedness. However, there is no evidence to show that $2.4 million had been used by the company to set off his indebtedness. The company's account has shown that about $500,000 had been set off from the debt owed by the debtor to the company. As to the balance of $1.9 million, according to the debtor, he said that he had to look at the accounts and the materials. In fact, they are not exhibited in the present proceedings. However, there is no evidence to show that the debtor has stashed away the money. Even if the money was available, it was insufficient to repay Kwong On Bank's debt, which was about $2.6 million.

The Well Fidelity asset

28. The residence of the debtor was under the name of his mother. In order to avoid foreclosure by the bank, the property was sold to a friend of the debtor's, Mr. Tang whilst the debtor remained in occupation under a tenancy. Mr. Tang had used Well Fidelity Investment Limited as a corporate vehicle to hold this property. In July 2000, Well Fidelity sold this property. Mr Smith alleged that from the correspondence from the solicitors acting for the company in the sale of the shares of the company, it could be seen that the debtor was, in fact, the beneficial owner of the company. If he is the beneficial owner of the company, there should be an amount of about $600,000 from the proceeds of the sale, which he has failed to disclose.

29. Again, this was put to the debtor in the cross-examination. The debtor replied that he was never the beneficial owner of Well Fidelity. The reason why this firm of solicitors had written the letter to him, referring to his company, was because he was handling the sale of the property and the firm of solicitors had used the term in a loose sense. I think the applicant's allegation is a rather serious allegation, that the debtor is making false testimony in court and concealing the assets from the court or other creditors. In the absence of concrete evidence, I will be reluctant to draw this conclusion. Here in these proceedings I find no evidence to substantiate the allegation that the debtor is the beneficial owner of the company.

The shares of Qualimax

30. The applicant complains that the debtor has failed do disclose the 135,000 shares in Qualimax Holdings Limited he owes in his Statement of Affairs. It is another company of the debtor. The debtor says that the company has no assets and therefore the shares have no value. I have no evidence to show that this is not the case. Again, in the same analysis, I will be reluctant to draw any conclusion without evidence to show that the debtor was intentionally concealing or giving false information to the court for his petition for bankruptcy.

Conclusion

31. I find that the applicant has failed, on the balance of probabilities, to establish the case against the debtor, and therefore this court will refuse to annul the bankruptcy order. As the debtor has asked for no costs, then I will make no order as to costs for the debtor. As to the costs for the trustee, I will order that the applicant should pay the costs of the trustee. Of course, this is the usual costs following the event.