XCHRX CHENG WAI KEI v. COMMERZBANK AKTIENGESELLSCHAFT

HCSD25/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND
NO.25 OF 2001

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J U D G M E N T

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1. This is an application by Cheng Wai Kei ("the applicant") for the setting aside of a statutory demand dated 24 August 2001. After hearing submissions, I dismissed the application and gave oral reasons for so doing. I now reduce the reasons into writing.

THE STATUTORY DEMAND

2. The Statutory Demand in question is in respect of a debt of US$5,514,418 arising under a guarantee dated 11 June 1997 given by the applicant in favour of the respondent bank ("the Guarantee"). The Guarantee is to secure a US$20 million multiple credit facility ("the Credit Facility") granted by the respondent to one WCP International Industry & Commerce (Anhui) Co. Ltd now known as Philco Air Conditioning (Hubei) Industry & Commerce Co. Ltd ("Philco") under a credit agreement dated 11 June 1997.

THE APPLICATION

3. The Statutory Demand was admittedly received by the applicant on 24 August 2001. The present application was issued on 8 October 2001. Plainly it is out of time. Although direction for fixing date was given on 10 October 2001, a date was only fixed on 1 November 2001 at the instigation of the respondent. The applicant's explanation is that his solicitors did not receive the court's letter by fax that contained the direction. That does not explain why the applicant did not check with the court the outcome of his application.

4. There is only one ground relied upon by the applicant in the affirmation in support of the application, namely, the Statutory Demand is defective in failing to comply with Rule 44(5) of the Bankruptcy Rules, Cap.6 ("the Rules"). In his submissions, Mr Fung for the applicant relied on a further ground that the value of the securities held by the respondent far exceeds the amount of the debt.

APPLICATION FOR TIME

5. Mr Fung in the last section of his written submissions set out certain proposed directions. They include adjourning the matter for argument together with directions on filing of further evidence. Two reasons were advanced by Mr Fung in support of his proposal to adjourning the matter for argument.

6. Firstly, he wished to carry out further research and to file evidence on the applicant's interest in Philco and one Winful International (Holdings) Limited ("Winful"). This is for the purpose of making good a point, which he referred to as the "equity point". Mr Fung's contention is that if the court accepted that the equity point is arguable, then he wished to research further on the law and to file evidence to show that the applicant is the majority shareholder of Philco and Winful. For reasons that I will set out in the latter part of this judgment, I do not accept that "the equity point" is tenable in law. The request for time for the purpose of substantiating this point is therefore refused.

7. Secondly, Mr Fung said he wished to confirm with the applicant whether he would like to dispute the debt in question. What was submitted is that he had advised his instructing solicitors to seek instruction from the applicant whether the debt would be disputed, but his solicitors had no firm instruction in this regard. I have to say that I am skeptical of the manner in which the applicant has proceeded with this application. There is a lapse of over a month between his receipt of the Statutory Demand and the issue of this application. Though his solicitor claimed that the applicant cannot read English, it is not said that the applicant did not know that it was a legal document. At any rate, it is not a convincing reason for him to ignore the document just because he cannot read English and did not understand the contents of it. Even after he had been explained of the contents and effect of the Statutory Demand, it does not appear that he considered the matter significantly important enough to warrant his personal attention. The affirmation in support of this application was made by his solicitor on his behalf. No reason was offered. Mr Fung said in his submissions that the applicant had gone to Mainland China to attend to his business. In my view, if the applicant wishes to and has good grounds to dispute the debt, there is ample opportunity for him to do so, but he has chosen not to do so thus far. An adjournment to enable him to consider whether he will challenge the debt is not going to serve any useful purpose. Neither is it in the interest of justice bearing in mind that public interest demands that applications to set aside statutory demand be proceeded with swiftly and without undue delay. The request for time for the purpose of further instruction is therefore refused.

APPLICATION FOR LEAVE TO ISSUE THE APPLICATION OUT OF TIME

8. Mr Fung made the application for leave to issue the application out of time orally at the hearing. The reason given is that the applicant does not read English, so he did not bother to deal with it until he returned to Hong Kong on about 27 September 2001. He consulted his solicitor on 29 September 2001 and was informed of the contents of the Statutory Demand. The application was then issued on 8 October 2001.

9. It is a matter of the court's discretion whether to enlarge the time for making an application to set aside the Statutory Demand. The reasons for the delay and the merits of the application are relevant matters to be considered in exercising the discretion. In the present case, I have observed that the reason given for the delay is not convincing. That is not necessarily fatal if the application has merits. But for reasons that I will come on, I am of the view that the application has no merit. In the circumstances, leave to issue the application out of time ought to be refused.

MERITS OF THE APPLICATION

(1) Rule 44(5) of the Bankruptcy Rules

10. In paragraphs 7 to 10 of the affirmation filed in support of the application, it is pointed out that :

(1) The Credit Facility granted by the respondent to Philco is secured by :

(a) the Guarantee;

(b) a Mortgage Agreement dated 11 June 1997 created by Philco in favour of the respondent over one plot of land and two factory complex in Anhui province, PRC ("Philco's Mortgage"). One of the factory complex was subsequently released;

(c) a guarantee dated 11 June 1997 given by Winful in favour of the respondent ("Winful's guarantee"); and

(d) an Assignment of Ownership Rights dated 11 June 1997, whereby Winful mortgaged and assigned to the respondent its beneficial interest and rights in Philco ("Winful's Assignment").

11. The applicant said that the Statutory Demand has failed to set out the other securities held by the respondent in respect of the Credit Facility it granted to Philco. Accordingly, it was submitted that the Statutory Demand is defective for failing to comply with Rule 44(5) of the Rules and is liable to be set aside.

12. Rule 44(5) of the Rules states that :

" (5) If the creditor holds any security in respect of the debt, the full amount of the debt shall be specified, but -

(a) there shall in the statutory demand be specified the nature of the security, and the value which the creditor puts upon it as at the date of the demand; and

(b) the amount of which payment is claimed by the demand shall be the full amount of the debt, less the amount specified as the value of the security."

13. Rule 48(5)(c) of the Rules provides that the court may set aside a statutory demand if "it appears that the creditor holds some security in respect of the debt claimed by the demand, and either Rule 44(5) is not complied with in respect of it, or the court is specified that the value of the security equals or exceeds the full amount of the debt".

14. Miss Leung for the respondent argued that Rule 44(5) has no application to the present case in that the other securities were not provided by the applicant, relying on the judgment of Deputy Judge Woolley in Re Ip Lam On, HCSD11/2000. The facts of that case are not dissimilar to those in the present case. It is an application by a guarantor to set aside a statutory demand based on the guarantee he gave to the respondent bank. Apart from the guarantee, the respondent bank in that case also held legal charges over 15 properties owned by third parties. When the borrower defaulted, the respondent bank obtained possession of 11 of the properties. The applicant argued that the statutory demand should have set out the 11 properties and that the value of the 11 properties was sufficient to cover the indebtedness of the borrower. Deputy Judge Woolley rejected the argument and held that Rules 44(5) and 48(5) only relate to security provided by the applicant himself and that securities provided by others need not be specified in the statutory demand.

15. Deputy Judge Woolley reached that conclusion after considering and applying the judgment of Le Pichon J (as she then was) in Re Kwok Chok Yee [2000] 2 HKC 543. In Re Kwok Chok Yee, Le Pichon J noted the definition of "secured creditor" under section 2 of the Bankruptcy Ordinance, Cap.6, namely, "a person holding a mortgage, charge or lien on the property of the debtor or any part thereof, as a security for a debt due to him from the debtor". She went on to observe that in the context of a bankruptcy petition presented against a guarantor, the term "debtor" is a reference to the guarantor himself and not the borrower, so that the debt under the petition is not a secured debt where the security held by the creditor is provided by the borrower and not the guarantor. These observations are in line with the English authorities : In re a Debtor (No.310 of 1988) [1989] 1 WLR 452.

16. The purpose of Rule 44(5) is to require a secured creditor to give credit for the security he held so that he should only claim against the debtor the balance of the debt, after deducting the value of the security. Alternatively, the secured creditor may elect to give up the security he held upon the making of the bankruptcy order. Under section 2 of the Bankruptcy Ordinance, a creditor only becomes a secured creditor if he holds security provided by the debtor over the debtor's properties. Rule 44(5) should therefore only apply to a secured creditor who holds security over property of the person against whom the statutory demand is made.

17. In the present case, all the other securities held by the respondent were either over properties of Philco or of Winful. They were not provided by the applicant nor were they in respect of the applicant's properties. As against the applicant, the respondent is not a secured creditor for the purpose of section 2 of the Bankruptcy Ordinance. Rule 44(5) therefore has no application and the Statutory Demand needs not specify the nature and value of the other securities held by the respondent to secure the Credit Facility granted to Philco.

18. Mr Fung argued that Re Ip Lam On is distinguishable on three groundssaid . Firstly, it was that the applicant is a guarantor of a liability which has yet to be adjudicated uponThe . question that he posed was whether a guarantor could or should be equated with a debtorIn . my viewA , the distinction that Mr Fung sought to draw is irrelevant in the present context. guarantor becomes a debtor when he is unable to pay upon a demand being made pursuant to the guarantor. His unfulfilled liability to the creditor becomes a debt due from him to the creditor. He is a debtor and his liability to pay becomes a debt for the purposes of a statutory demand. Accordingly, the fact that the applicant is a guarantor and not the borrower or a judgment debtor is irrelevant.

19. The second ground argued by Mr Fung is that the applicant, being a guarantor, is entitled to know the nature and value of all security held by the respondent so that he may exercise his right to claim contribution or indemnity from the other guarantors. The short answer to this is that the respondent is under no legal obligation to assist the applicant to exercise his right of contribution or indemnity. Neither is a debtor's right to claim contribution or indemnity the purpose underlying the requirement in Rule 44(5). As a matter of fact, clause 3 of the Guarantee provides that the guarantee given by the applicant is a continuing guarantee and clause 15.03 further provides that the respondent may enforce the Guarantee independent of any security held by it. The position is that, both under the Guarantee and the law, the respondent has many resources to satisfy the indebtedness owed by Philco and it is not bound to exhaust the other resources before enforcing the Guarantee : China and South Sea Bank Ltd v. Tan Soon Gin alias George Tan [1990] 1 AC 536. The respondent can pursue one or more of the securities simultaneously or in such order as it considers appropriate. The applicant's desire or right to claim contribution or indemnity from other parties is simply no concern of the respondent. Quite apart from these considerations, the applicant admittedly is the chairman and major shareholder of Philco and Winful. As such, he must have knowledge of the security provided to the respondent for the Credit Facility. The possibility of him being prejudiced by the Statutory Demand in its present form is remote : Re A Debtor (No.1 of 1987) [1989] 1 WLR 271, In re A Debtor (No.64 of 1992) [1994] 1 WLR 264, 268.

20. The third ground Mr Fung relied on for distinguishing Re Ip Lam On is the equity point. It runs as follows : The applicant can lead evidence to show that he is the chairman and major shareholder of Philco and Winful. Under Winful's Assignment, Winful had mortgaged and assigned its beneficial rights and interests in Philco to the respondent as security for the Credit Facility granted to Philco. Hence, in the eyes of equity, the applicant had used his shares to provide security for the Credit Facility so that the other security held by the respondent can be seen as security provided by the applicant over the applicant's property.

21. In my view, this equity point is misconceived. The mortgage and assignment of the interest and rights of Philco were made by Winful. Winful and Philco are legal entitles, separate and distinct from their shareholders. Miss Leung did not take issue with the claim that the applicant is the major shareholder of Winful and Philco. Even then, it cannot be said that the security provided by Winful and/or Philco can be treated as security provided by the applicant. The legal position is the same whether under common law or equity. Mr Fung's argument tentamounts to an attempt to lift the corporate veil, for which there is no justification.

22. The submission that the Statutory Demand is defective for non-compliance with Rule 44(5) therefore fails.

(2) The value of the security

23. It follows from the analysis in the preceding part of this judgment that the value of the security referred to in Rule 48(5)(c) means the value of the security over the property of the person against whom the statutory demand is made : see also Re Ip Lam On. Rule 48(5)(c) does not extend to properties provided by parties other than the applicant. The value of the other securities provided by Winful or Philco is therefore irrelevant. It is not open to the applicant to rely on Rule 48(5)(c) and argue that the value of the other securities exceeds the amount of the debt due by the applicant under the guarantee.

CONCLUSION

24. For the above reasons, the application for leave to issue the setting aside application out of time is refused. The application to set aside stands to be dismissed with costs to the respondent to be taxed if not agreed.

POSTSCRIPT

25. Subsequent to the dismissal of the application, the respondent applied by correspondence for an order under Rule 48(7) of the Rules, authorizing the presentation of a bankruptcy petition. The application was made pursuant to Order 20, rule 11 of the Rules of the High Court. It was opposed by the applicant. For my part, I do not consider that this is a proper case for Order 20, rule 11 of the Rules of the High Court. It is not a clerical error or slip. However, independently under Rule 48(7), the court is under an obligation to authorize the creditor to present a bankruptcy petition either forthwith or on or after a specific date, if the application to set aside is dismissed. Accordingly, I made an order that the respondent be authorized to issue a bankruptcy petition after the expiry of 14 days from the date of the dismissal of the application to set aside. It was an order nisi to be made absolute after the expiry of seven days from 3 December 2001. It was communicated to solicitors for the parties by fax on 3 December 2001. It was only on 18 December 2001 that the applicant wrote to court asking to be heard on the order nisi. The applicant and his solicitors were asked to explain the delay and to indicate the substance of the intended representations, to which there has been no reply. In the circumstances, the order nisi became absolute on 10 December 2001.