RE PATRICK MAJOR LEE

HCB 3448/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCYPROCEEDINGS NO. 3448 OF 2008

----------------------

----------------------

----------------------

J U D G M E N T

----------------------

1.  This was the hearing of a bankruptcy petition presented by Asia Time Technologies Limited, a company that is now in liquidation, against Patrick Major Lee.  The petition is based on a judgment debt of HK$1.25 million, obtained by the petitioner in HCA 1673/2007 under a default judgment.

2.  The underlying claim was based on the use by the debtor of funds of the petitioner in the purchase of a property in Tai Hang Road by him.  The debtor was neither a shareholder nor a director of the petitioner, and the circumstances in which he came to be able to make use of its funds are not entirely clear.  The use of such funds came to light after the petitioner went into liquidation, as the result of investigations by its liquidators.

3.  Having obtained judgment against the debtor, the petitioner served a statutory demand seeking repayment of the judgment debt on the debtor on 29 February 2008.  The statutory demand appears to have been served on the debtor in a prison in Denmark, where the debtor was serving a sentence of imprisonment for his part in a tax fraud.

4.  The statutory demand having (not surprisingly) gone unanswered, the petition was presented on 20 April 2008, and was, like the statutory demand, served on the debtor in prison in Denmark.  There is no doubt that the debtor has received the statutory demand and the petition, as he wrote to the Official Receiver in relation to the petition after its service on him, suggesting that it should be adjourned until after he was released from prison, something which was not likely to happen for some time.

5.  The debtor has thus not taken part in these proceedings.  However, the Official Receiver has appeared at the hearing of the petition, to draw the court’s attention to his concerns as to whether or not the court has jurisdiction to hear the petition.

6.  In the petition, the petitioner alleges that the debtor had, within three years immediately preceding the presentation of the petition, carried on business in Hong Kong under the auspices of companies incorporated in Hong Kong and/or the British Virgin Islands.  The petition then goes on to provide the names of eight companies, four of which were incorporated in Hong Kong, and four of which were incorporated in the BVI.  The four Hong Kong companies were World Triumph Limited, Capital Investments (HK) Limited, Empire Ornament and Jewellery Limited and Jet System Private Limited.  The four BVI companies were Ideal Hardware Limited, Mark Ocean Universal Limited, Mass Gain Pacific Limited and Microtronica Limited.   Each of the BVI companies was registered in Hong Kong as an oversea company in March 2003.

7.  By this allegation, the petitioner seeks to establish jurisdiction in the court to entertain the bankruptcy petition which it has presented pursuant to section 4(1)(c)(ii) of the Bankruptcy Ordinance (Cap. 6).  Section 4(1) of the Bankruptcy Ordinance provides:-

“(1)   A bankruptcy petition shall not be presented to the court under section 3(1)(a) or (b) unless the debtor –

(a) is domiciled in Hong Kong;

(b) is personally present in Hong Kong on the day on which the petition is presented; or

(c) at any time in the period of 3 years ending with that day –

(i)  has been ordinarily resident, or has had a place of residence, in Hong Kong; or

(ii) has carried on business in Hong Kong.”

8.  The Official Receiver has made investigations as to the status of the eight companies – these (and this is not disputed by the petitioner) indicate that:-

(1) In respect of World Triumph Limited, the only annual return filed was dated 21 November 2004, and the only other corporate documents filed in respect of it consisted of various notifications as to the identity of its secretary and director, and the situation of its registered office, all dated 1 April 2005.  No other documents have been filed since then, apart from an information sheet dated 5 December 2008, indicating that the company was at risk of being struck off the register pursuant to section 291(5) of the Companies Ordinance.

(2) In respect of the other three Hong Kong companies, the debtor had in fact filed applications for their deregistration between January and October 2006, and each of the companies had since been deregistered and dissolved between June 2006 and February 2007.

(3) In respect of the four BVI companies, no further documents had been filed since the filing of the certificates of registration as an oversea company and copies of their respective constitutions, all in March 2003.

9.  In these circumstances, the Official Receiver has questioned whether the mere existence of these companies is sufficient to establish that the debtor has in fact carried on business in Hong Kong within the three years immediately preceding the presentation of the petition – that is, within the period after 20 April 2005.

10.  At the hearing, Mr Thomas Lee, appearing for the petitioner, submitted that the court could conclude that the debtor had carried on business in Hong Kong within the three years immediately preceding the presentation of the petition for a number of reasons.  In particular, he submitted that the debtor had carried on business within that period in the following ways, namely:-

(1) By investing in real estate, by virtue of his purchase of the property to which I have referred above in May 2004, granting a mortgage over it (apparently in connection with its purchase) at the same time, and subsequently granting two further mortgages over it to support loans to Capital Investments (HK) Limited, and subsequently selling the property on 15 February 2006.

(2) By signing and causing to be filed an annual return in respect of Capital Investments (HK) Limited dated 15 July 2005.

(3) By carrying on an import-export business, utilising (among others) the eight companies mentioned above, as part of the tax fraud in Denmark in respect of which he was eventually imprisoned.

11.  While accepting that merely acting as a director or shareholder of a company or companies would not amount to the carrying on of business, and that involvement as a director of a company that actively carried on business would not amount to carrying on of his own business, so as to come within section 4(1)(c)(ii) of the Bankruptcy Ordinance, Mr Lee submitted that it was clear that it was possible for a debtor to carry on a business of his own, through companies owned or operated by him, that was separate and distinct from that of the individual company or companies.  In support of this proposition, he relied on Re Brauch [1978] Ch 316, in which it was held that although in running the business of a company owned and controlled by him a debtor was not “carrying on business”, it was possible to establish by appropriate evidence (as was done in that case) that there was a business being carried on by the debtor personally independently of the business of the companies – in that case, the business could be described as that of promoting and acquiring companies to speculate in land, or of finding properties and organising and negotiating their acquisition through companies promoted or acquired for that purpose.

12.  Mr Harry Lo, who appeared for the Official Receiver, did not dispute that this was possible, but questioned whether, in this case, the evidence sufficed to establish that there was the carrying on by the debtor of any such distinct business.

13.  So far as the supposed real estate investment business is concerned, it does appear that the debtor acquired the Tai Hang Road property, held it for a period of time, and subsequently disposed of it.  However, while I would accept, as Mr Lee submitted, that a single transaction can in principle amount to the carrying on of a business, it seems to me that in the present case, the single transaction in property that has been identified as having been transacted by the debtor does not appear sufficient to warrant the drawing of such a conclusion.  The address of the property was stated to be the debtor’s residential address in the annual return of Capital Investments (HK) Limited referred to in paragraph 11(2) above.  It does not seem to me that the acquisition of property as a residence (as appears to have been the case here) constitutes the carrying on of a business, even if the property were (as here) subsequently sold.  There is no evidence to suggest that the debtor purchased the property as a speculation, or for the purpose of resale at a profit – all that is known is that it was subsequently described as his residence, a description which seems to me to be inconsistent with having been acquired as part of a business carried on by the debtor.

14.  Nor do I think the fact that the debtor appears to have mortgaged the property to support loans to Capital Investments (HK) Limited (at a time which was, in any case, prior to the commencement of the three year period immediately preceding the presentation of the petition) sufficient to lead to the conclusion that he was carrying on some business separate from that of the company.  It seems to me that the provision of security for a company in which the debtor has an interest is not something that amounts to the carrying on of a business of his own.  Rather, it would seem to involve no more than the supporting of the business of the company, in which he might be interested.  The position might be different if there were evidence to show that the debtor made a practice of providing security for facilities granted to companies run by him, particularly if he received some consideration for doing so, but that is not shown to be the case here.

15.  I am therefore not satisfied on the evidence that is available that the debtor has carried on a business of dealing or investing in real estate.

16.  Mr Lee’s second argument was based on the debtor’s signing of the annual return in respect of Capital Investments (HK) Limited in June 2005.  Mr Lee submitted, on the basis of the decision in Re Ku Chu Keung [2007] 2 HKLRD 292 that this could amount to the carrying on of business.

17.  However, the facts here are rather different from those in Re Ku Chu Keung.  In that case, the evidence disclosed that the debtor had, during the three years prior to the presentation of the petition against him filed five annual returns in respect of three different companies, and had also filed an application for a business registration certificate in respect of one of them.  He had also continued to pay business registration fees in respect of that company even after leaving Hong Kong.  In these circumstances, Deputy Judge L Chan felt able to hold that the debtor did carry on business in Hong Kong.

18.  I would also note that in that case, Deputy Judge Chan had already held jurisdiction to be established by virtue of the fact that the debtor had had a place of residence in Hong Kong within the relevant period prior to the presentation of the petition, so that the same result would have been reached even without the finding that the debtor there had carried on business in Hong Kong within that period.

19.  In the present case however, the evidence is much more limited.  There is only one annual return which has been identified as having been signed by the debtor within the relevant three year period.  In these circumstances, I would not conclude that the debtor was carrying on business in Hong Kong simply on the basis of his signing of the annual return in question.  In any event, I would respectfully doubt whether the signing of annual returns for a company by a director of the company would generally amount to evidence of the carrying on of a business of his own, as distinct from that of the company, since the company is obliged to file such returns, and must do so through the agency of some person, whether its company secretary or a director.  Whether or not such evidence might support a conclusion that the debtor was carrying on some business of his own through such companies, as was found to be the case in Re Brauch would, I think, require there to be some evidence as to what that business was, at least in broad outline.  Such evidence is lacking here.

20.  Turning to the third form of business relied upon by Mr Lee, it seems to me that the carrying on of a course of conduct involving the use of a number of companies, with the objective of perpetrating a fraud (whether on the revenue, foreign revenue authorities, or others) could, in principle, be regarded as the carrying on of a business.  However, in the present case, there is little evidence before me to enable me to ascertain what exactly was done by the debtor through these companies.  Moreover, as Mr Lee accepted, the activities in question almost certainly predated the relevant three year period.  Although Mr Lee suggested that there might be outstanding debts arising as a result of such activities which remained alive into the three year period, it was not clear what these debts were, and I would, in these circumstances, hesitate to conclude that a business was being carried on by the debtor in Hong Kong in the three years prior to the presentation of the petition, even if the fraud were carried on through (amongst others) the eight companies to which reference has been made.

21.  Thus, I am not satisfied that jurisdiction can be established under section 4(1)(c)(ii) of the Ordinance.  However, this is not the end of the matter.

22.  As I have noted in paragraph 13 above, the Tai Hang Road property was stated to be the residential address of the debtor in the annual return of Capital Investment (HK) Limited filed on 15 July 2005.  This is clear evidence that the debtor had (on his own admission) a place of residence in Hong Kong after 20 April 2005, and thus within the relevant three year period.  When I pointed this out to Mr Lee in the course of argument, he indicated that, if necessary, he would seek to contend that jurisdiction was established under section 4(1)(b) of the Ordinance also.

23.  In my view, jurisdiction to entertain this petition is clearly established under section 4(1)(b) of the Ordinance, having regard to the debtors identification of the Tai Hang Road property as his place of residence in the annual return dated 15 July 2005.

24.  Strictly speaking, it does not seem to me that it is necessary for the facts on which jurisdiction is based to be mentioned in the petition – it would usually suffice to set out the petitioning debt and the grounds on which the bankruptcy order is sought.  It will usually be for the debtor to raise a challenge to the court's jurisdiction under section 4 of the Bankruptcy Ordinance if he has a basis for doing so.  However, as the petitioner has in this case dealt with the jurisdictional basis in paragraph 1 of the petition, I shall, out of an abundance of caution, give the petitioner leave to amend its petition to add the further averment that the debtor had, within three years immediately preceding the presentation of the petition, had a place of residence in Hong Kong.  I do not think that this will prejudice the debtor, who has not suggested that he has any basis for challenging the court’s jurisdiction, and could not do so in relation to this allegation given his signing of the relevant annual return.

25.  Thus, as I am satisfied that the court has jurisdiction to entertain this petition, and as there appears to be no basis on which it could be resisted, I shall make the usual bankruptcy order against the debtor, and shall also order that the petitioner’s and the Official Receiver's costs are to be borne by the debtor.