RE: CHAN WOON WING ("the Debtor") and EX PARTE: LUN KEE POULTRY LIMITED ("the Petitioner")

HCB144/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO.144 OF 2000

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Reasons Handed Down: 19 June 2000

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R E A S O N S

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1. On the third day of the hearing of a bankruptcy petition, counsel for the petitioner Lun Kee Poultry Limited ("the Company") informed the court that his client would not be pressing for a bankruptcy order. The bankruptcy petition was accordingly dismissed and after hearing counsel's submissions on costs, I awarded costs in favour of the respondent. Counsel for the Company applied for written reasons of the costs order on the basis that his client intended to appeal against it.

2. The bankruptcy petition was presented on the basis that the respondent was indebted to the Company in the sum of HK$1,036,887, being the balance due from the respondent to the Company as at 31 July 1999 under the Company's current account with the respondent as a director. The respondent is one of five directors of the Company. Prior to this bankruptcy petition, winding-up proceedings against the Company were commenced by another shareholder director, namely, Kwan Kam Wah ("Mr Kwan"). The statutory demand in the present case was served after the institution of those winding-up proceedings by Mr Kwan.

3. It would appear from the affirmation filed in support of the bankruptcy petition that the alleged indebtedness is founded on a Special Investigation Report prepared by accountants retained by the Company. It appears from the Special Investigation Report that the report itself was based, inter alia, on unaudited financial statements of the Company for the period 1 July 1998 to 31 July 1999.

4. The petition was set down for a one-day hearing which took place on 5 May 2000. At the commencement of the hearing, counsel for the Company maintained that viva voce evidence was unnecessary and that the court could reach a determination simply on the evidence filed. It was further submitted that the Company no longer had to rely on the Special Investigation Report because of the respondent's admission that $5 million of the Company's money had been paid into his account. The Company accepted the respondent's explanation of what he did with $4 million of that sum, but insisted that it was incumbent on the respondent as a matter of law to account for the balance, namely, the sum of $1 million. Of course, this was inconsistent with the Company's case that the respondent was indebted to it not for $1 million but for $1,036,887 precisely.

5. At the end of that day's hearing, I concluded that it was necessary to hear the evidence of the respondent on certain matters arising from the evidence filed. Directions were then given for the respondent to file a further affirmation (which was duly done on 9 May 2000) and for his attendance for cross-examination at the adjourned hearing on 12 May. At that hearing, counsel for the Company sought leave to file further evidence in reply. As a result, cross-examination of the respondent did not proceed and the hearing was further adjourned.

6. Meanwhile, the Company issued a subpoena requiring Mr Kwan to testify at the hearing which had been adjourned to 15 June. The respondent was duly cross-examined and in the course of that examination, it emerged that there were certain bank transfer or deposit slips in existence. Those had not been exhibited and the respondent was directed to make them available after the lunch adjournment. Mr Kwan who appeared in response to the subpoena was also cross-examined by counsel for the Company. At the conclusion of Mr Kwan's examination, the petition was effectively abandoned.

7. Counsel for the Company submitted that there should be no order as to costs; alternatively, that his client should only bear a part rather than the whole of the respondent's costs.

8. Under the general rule of costs following the event, it would be appropriate to order costs against the Company. I should not depart from the normal rule without good reason. There is none. In my judgment, there was no valid basis for the statutory demand : the Company could not have honestly believed that the respondent was indebted to it for the sum of $1,036,887.

9. It is necessary to state the essential facts on which my conclusion is based. There were two payments. The first was a cheque drawn on the Company's account with the Nanyang Commercial Bank in the sum of $1.5 million on 28 August 1998 and the second was another cheque drawn on the same account in the sum of $3.5 million on 12 September 1998. Both cheques were deposited into the respondent's bank account with the same bank. The cheques were signed by two of the Company's authorized signatories. It was the respondent's case that all the directors were present at the bank when these transfers took place and that the monies were received by him as agent for the Company to be dealt with as directed by the Company. The Company was indebted to Mr Kwan and it was with the knowledge and consent of all present that the monies were paid by the respondent into Mr Kwan's account immediately after the monies were deposited into his account. The Company never sought to adduce evidence to rebut the evidence of the respondent as to the circumstances of the transfers. Rather, it acknowledged that there was no issue as to the first payment of $1.5 million. What I find extraordinary is that the Company never bothered to explain why it paid $3.5 million to the respondent on 12 September 1998. The non-production of the bank deposit slips by the respondent until the eleventh hour was immaterial in that it did not in any way affect the explanation the respondent had given.

10. A bankruptcy petition is a serious matter and should not be brought unless the petitioner honestly believed the debt to be due. On the facts, the Company could not have reasonably believed that the respondent was truly indebted to it as alleged.

11. The bankruptcy proceedings have every appearance of having been brought in order to exert pressure on Mr Kwan in the winding-up proceedings with whom the respondent was perceived to be siding in the dispute between the shareholders. Had an application been made for costs on a different basis (such as on an indemnity basis), I would readily have entertained such an application. The Company's strategy was little short of disgraceful.

12. I see no valid reason for depriving the respondent of costs where he has been subjected to considerable and unnecessary stress in having to contest a bankruptcy petition which was wholly unmeritorious.