RE LEUNG TZE HANG DAVID

HCB 18073/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS

NO. 18073 OF 2002

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REASONS FOR DECISION

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1.  In these bankruptcy proceedings, the petitioner and judgment creditor, New Regent Finance Ltd (“New Regent”) applied under Order 38, rule 2(3) of the Rules of the High Court, for an order requiring the judgment debtor, Mr Leung Tze Hang, David to attend for cross-examination on his 1^st and 2^nd affidavits filed herein on 28 March 2003 and 31 March 2003 respectively failing which the said affidavits shall not be used as evidence herein, and for costs. Having heard argument I made an order in terms of the summons. I now give my reasons for so doing.

2.  The background is as follows. On 11 September 1997, New Regent lent $9,000,000.00 to one Pacific System Development Ltd (“Pacific System”). Mr Leung gave a guarantee of the company’s debt. It was not paid. On 26 June 1998 New Regent instituted proceedings in High Court Action No. 10575 of 1998 against Pacific System as principal debtor and Mr Leung as guarantor. Both consented to judgment, which was entered against both of them on 14 January 2000 for an aggregate sum including capital and interest of $20,175,041.10. New Regent served on Mr Leung a statutory demand dated 3 April 2002 for the judgment debt, after which Mr Leung paid $940,000.00. The Petition was filed on 30 August 2002 and avers an outstanding debt of $19,235,041.10. A further payment of $150,000.00 was made on 4 September 2002.

3.  Mr Leung seeks to have the Petition dismissed. It is his case that following on three oral agreements made with New Regent he is no longer liable for the debt. He says that the first oral agreement was made with a Mr Andrew Chan, a solicitor action for New Regent, that Pacific System and he would consent to judgment; that the judgment would not be enforced; that he would pay interest at $90,000.00 per month until the judgment was discharged; and that he would procure the sale to New Regent of shares in a company, AWT Holdings Company Ltd, (“AWT”) of which he was chairman. AWT was to be restructured and the plan was to procure the sale of the shares by those AWT creditors who were to be allotted AWT shares in the resturcturing, and who intended to sell them as soon as possible. Subject to this agreement he made various payments of interest to New Regent up to December 2001.

4.  Then, according to Mr Leung, in early 2001 he entered into a second agreement with New Regent whereby he was to procure the sale of AWT shares by one Win Eastern Ltd to New Regent, at a price to be agreed between the two of them; the acquisition of such shares would be in full and final settlement of the judgment against him and Pacific Systems, with costs; New Regent would sell the shares within a reasonable time but if it sold at a loss he would indemnify it for the shortfall; and he could continue in the interim to pay interest on the judgment debt. Ultimately New Regent acquired the shares from Win Eastern; and so he was no longer liable for the judgment debt save for the residuary liability to pay interest and the indemnity given to New Regent.

5.  That indemnity, according to Mr Leung was the subject of a third oral agreement by which, in lieu of the indemnity, he was to pay New Regent $1.6 million. He says that $1,090,000.00 has been paid.

6.  Needless to say the solicitor Mr Chan and the director of New Regent, Mr Leung Wing Leung, have filed affirmations denying that there were any such agreements. It is pointed out that at the time of the judgment Mr Leung was represented by solicitors. Reliance is also placed on subsequent correspondence in which Mr leung refers to payment outstanding principal, and the like, and which is relied on as being inconsistent with his evidence of the agreements.

7.  By a letter dated 22 July 2003 the solicitors for New Regent suggested that witnesses for both parties attend court for cross-examination, including Mr Leung himself. His solicitors however refused, saying that the mere fact that cross-examination was required indicated that there was a serious dispute of facts which could not be resolved without a full trial.

8.  It is argued for Mr Leung by Mr Rimsky Yuen, SC that the Bankruptcy Court is not and should not be used as a debt-collecting court. So a petition should be dismissed where there is substantial and bona fide evidence as to whether the alleged debt exists. Once the court is satisfied that there is a substantial and bona fide dispute it should not go into details and seek to resolve the dispute since that should be done by way of an ordinary High Court action. In this case the is a substantial and bona fide dispute appears on the face of the affirmation evidence. The court can decide the petition on that evidence wihtout the need for cross-examination.

9.  The principles governing the court’s discretion under Order 38, rule 2(3) to permit cross-examination on evidence were considered by Fuad JA in Wendy Wenta Seng Yuen v Philip Pak-yiu Yuen [1984] HKLR 431 (CA) at 436:

“As regard affidavits in general, there will be cases where the interests of justice dictate that a deponent should be subject to cross-examination. For example, where the motives of directors in exercising their powers is in issue, as in Re Smith and Fawcett [1942] 1 Ch 304. In other cases, in my judgment, the true rule must be that the court has an unfettered discretion to permit cross-examination on an affidavit but the applicant is not entitled to this right as of course. He has to establish that in all the circumstances of the case there is a good and sufficient reason for the application. He will not find this difficult where the evidence on the affidavits will result in what I might call a final order. He will find it more difficult in interlocutory matters, perhaps, for, as the judge below had in mind, great delay and expense might be entailed. It seems to me that what is essential for the applicant to show is that the proposed cross-examination might be productive of a useful result at the stage that the application is made. If no reason can be suggested for supposing that the cross-examination will then be helpful, the application will be refused in the discretion of the court, indeed, in certain circumstances it might be regarded as oppressive and, as such, an abuse of the process of the court.”

10.  Mr Lawrence Ng, for New Regent, relies in particular on the fact that the hearing of the Petition will result in a final order. He argues that the deponent should be cross-examined if his evidence is for good reasons not acceptable to the other side. He relies on dicta of To DJ in Chow Kam Fai David, Exp. Rambas Marketing Co, LLC, HCB1364/2003, unreported.

11.  It seems to me that the matter is quite simple and does not need close consideration of the authorities cited. In any event where the question is one of discretion, precedents are illustrative of how the discretion has been exercised but often do not give any direct assistance.

12.  By section 6 of the Bankruptcy Ordinance, Cap.6, the grounds of the Petition must be that (inter alia) the debt is for a liquidated sum payable to the petitioning creditior, immediately or at some certain, future time, and is unsecured and the debt is one which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay. So the Petitioning creditor has to prove the debt. By sectin 6D, the court shall not make a bankruptcy order unless it is satisfied that the debt is one which having been payable at the date of the petition or later, has been neither paid nor secured nor compounded for.

13.  Here the dispute is whether the debt, the existence of which is not denied, was paid or compounded for, and therefore not payable at the date of the Petition. While the onus is on the creditor to prove the debt, it seems to me that where the debtor agrees that the debt was payable at some time but says that he has paid it the evidential burden must shift to him. Otherwise, any debtor could have a petition dismissed by simply swearing that he had already paid the debt, without further inquiry. So I think the matte goes further than simply that the debtor should be able to get the petition dismissed by simply showing that there is a substantial and bona fide dispute as its existence; in this case, the dispute is as to whether he has paid it and that must be for him to establish.

14.  Even if it were simply a matter of showing that there is substantial and bona fide dispute as to the existence of the debt, that in itself is in question here. The court will have to decide whether the dispute is bona fide or whether the allegations of collateral agreements are, like so many such allegations, yet another fairy-tale told by a debtor attempting to escape liability for a debt the existence of which he cannot deny. In this connection the authors of the Hong Kong Civil Procedure 2004 at paragraph 38/2/5 cite Re Smith and Fawcett, referrred to in the judgment of Fuad JA above, as authority for the proposition that where there is a question as to motive or good faith of the deponent, the court ought not to be asked to act without cross-examination.

15.  Either way, the court’s decision on the Petition cannot, in my view, be reached on affidavit evidence alone. It can only be reached after the court has heard cross-examination on that evidence to decide whether or not it is genuine and bona fide. I was therefore satisfied that there were good and sufficient reasons for the application before me and made the order accordingly.