BKR v. BBM

HCSD 31/2020

[2021] HKCFI 2440

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 31 OF 2020

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D E C I S I O N

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Background

1.  In 2016, the Family Court made an order (by consent) for the Applicant, BKR, to pay a lump sum to his ex-wife, BBM, by 5 equal instalments.  On 25 September 2019, BKR applied to the Family Court to vary its order, such that the lump sum be suspended or otherwise discharged” (“Variation Application”).

2.  Before the Variation Application was heard, the 4^th instalment for $2,000,000 was due on 1 December 2019.  BKR did not pay.  BBM issued a statutory demand, which was served on him on 4 June 2020. 

3.  On 17 June 2020, BKR applied to set aside the statutory demand in the present proceedings (“HCSD Proceeding”). 

4.  Meanwhile, the Variation Application was heard on 3 and 4 September 2020.  Judgment was reserved.

5.  On 30 December 2020, the HCSD Proceeding came before DHCJ William Wong SC.  BKR undertook to the Court that he would make good any shortfall in any lump or periodical payments to BBM upon the making of an order by the Family Court pursuant to the Variation Application.  The HCSD Proceeding was adjourned sine die with liberty to restore and costs were reserved.

6.  On 31 March 2021, the Family Court dismissed the Variation Application but directed BKR to defer the payment of the $2,000,000 plus another $1,000,000 due in the meantime to 1 June 2021.  The $3,000,000 have been paid. 

7.  By consent, and without prejudice to the question of costs, leave was given to BBM to withdraw the statutory demand on 16 June 2021.  The parties reserved the question of costs of the HCSD Proceeding to be determined by the Court on the papers.

8.  BKR suggests that BBM do pay his costs on the ground that the unpaid lump sum was not a provable debt in bankruptcy and thus could not have been the subject matter of a statutory demand. 

9.  BBM disagrees and said that she was entitled to serve the statutory demand as an enforcement tool based on a judgment debt.

Legal principles

10.  Like periodical payments, an unpaid lump sum is not provable in bankruptcy and is not discharged at the end of bankruptcy: Re Limbu Dal Bahadur,HCB 917/2016, 5 April 2016, §4, G Lam J (as he then was).

11.  Mr Barnes, counsel for BBM, assumes, without arguing to the contrary, that Re Limbu is correct and contends that that does not thereby render a statutory demand based on an unpaid lump sum order invalid. He submits that such a non-provable debt is capable as a matter of law of constituting a basis for the presentation of a bankruptcy petition: Re Lo Man Hong [2014] 2 HKC 75, §26, G Lam J (as he then was).

12.  With respect, even though Mr Barnes is correct, G Lam J has also stated that it is difficult to envisage circumstances in which it would be appropriate to make a bankruptcy order on a petition founded on an unprovable debt (§31). The courts do not in practice make a bankruptcy order on a petition founded on such debt: §33; affirmed in Law v Chang [2021] HKCFI 789, 24 March 2021, §9.  This would apply unless eg:

(1)  There is another supporting creditor of a provable debt: Re Lo Man Hong, §33; or

(2)  There is another undisputed provable debt above the statutory threshold of $10,000: Law v Chang, §12.

13.  The statutory demand is a creature of the Bankrupt Ordinance.  It has no independent existence or significance outside that statutory scheme.  All that a statutory demand does, if not set aside or complied with, is to enable the creditor to present a petition for bankruptcy. Law v Chang, §11.

14.  If the court will not in practice make a bankruptcy order, for a particular type of debt, there is no point in issuing a statutory demand.

Analyses

15.  Applying the above principles, given that there is no other supporting creditor or another provable debt, the statutory demand would be set aside if the HCSD Proceeding were to proceed.

16.  Mr Barnes has two other contentions.  Firstly, he invites the Court to recognize the considerable and ever-present difficulty encountered by litigants in matrimonial cases to enforce financial orders against payors who seek to avoid their obligations even under a court order.  The court should be wary of delivering any ruling which would amount to judicial encouragement of the use of a statutory demand as a tool of enforcement.

17.  I understand Mr Barnes’ concerns.  However, that is a matter of policy and legislation.  The payee may not get her debt proved in the payor’s bankruptcy, but the payee gets the advantage that a creditor of a provable debt does not – that the debt survives the discharge of the bankruptcy.

18.  Secondly, Mr Barnes submits that if, which did not place, BBM had presented the petition based on the statutory demand, BKR may have been able to persuade the Court to stay the bankruptcy proceedings pending judgment on the Variation Application.  That was not what BKR chose to do because he feared that a bankruptcy petition might be presented against him with adverse consequences.  That is the “utility” of a statutory demand.

19.  With respect, I do not see why the Court should keep a disputed statutory demand alive until the hearing of the petition.  If the Court’s practice is not to grant a bankruptcy order in circumstances like the present, the refusal for stay of the petition would not alter the position.

Adjournment of the hearing on 30 December 2020

20.  The HCSD Proceeding was due to be heard on 30 December 2020.  By then, the Family Court had heard the Variation Application for 2 days and judgment was reserved.  BKR’s case remained arguable.  The Court could hardly have dismissed the HCSD Proceeding right away without considering the Family Court’s judgment.

21.  Over 2 weeks before the hearing on 30 December 2020, BKR had proposed to adjourn that hearing until after the Family Court had handed down the judgment on the Variation Application, but BBM unreasonably refused.

22.  Eventually, that hearing was adjourned by DHCJ William Wong SC after hearing arguments with costs reserved.

23.  I consider that BBM should bear the costs of the hearing on 30 December 2020 anyway.

Conclusion

24.  For the reasons given, I hold that the statutory demand was not validly issued to support a provable debt in bankruptcy.  The Court will not in practice grant a bankruptcy order on the unpaid lump sum.  BBM should bear the costs of BKR for the HCSD Proceeding, summarily assessed at $315,976.