RE CHAN HON KWONG

HCB 6548/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6548 OF 2016

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J U D G M E N T

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Introduction

1.  This is a bankruptcy Petition (“Petition”) presented by Mr Chan Hon Lung (“Petitioner”) against Mr Chan Hon Kwong (“Debtor”) on 12 September 2016.  The Petition is opposed by the Debtor.

2.  The Petition is based on the Debtor’s non‑compliance with a Statutory Demand dated 25 July 2016 (“Statutory Demand”) for the taxed costs of HK$71,841.24 together with interest (“Debt”).  The Statutory Demand is in turn founded on an Order dated 2 August 2012 made by Master Chan in DCCJ 3434/2011.  Pursuant to the Order, the Debtor was required to pay the costs of a summons issued by him (“Summons”) which was dismissed.  The costs were subsequently taxed at HK$71,841.24, as certified by an Allocatur issued on 31 October 2014.

Background

3.  By way of background, DCCJ 3434/2011 was instituted by the Debtor as plaintiff against the Petitioner as defendant.  By the Summons, the Debtor sought to strike out the Petitioner's defence.  The Debtor failed and was ordered to pay costs of Summons, hence the Costs Order.

4.  The Debtor applied for leave to judicially review the Order.  That application was dismissed by Au‑Yeung J on 2 January 2013 in HCAL 136/2012. The Debtor appealed against the Order.  The appeal was dismissed by DHCJ Yee on 31 December 2013.  There is no further appeal against the Costs Order. The Debtor, however, applied to stay the execution of the Costs Order.  That application was dismissed by Master Yip on 29 December 2014.  The Debtor’s application for leave to judicially review the decision of Master Yip was also dismissed by Au J on 10 February 2015 in HCAL 9/2015. 

5.  As far as this court is aware, there is no further appeal from the decisions of Au‑Yeung J, DHCJ Yee, Master Yip or Au J.  Nor can it be shown that there is any prospect of the Debtor successfully appealing therefrom.

6.  The Statutory Demand was personally served on the Debtor.  The Debtor then applied to set aside the Statutory Demand in HCSD 45/2016.  His application was dismissed by Au‑Yeung J in a Judgment handed down on 5 September 2016.  In summary, Au‑Yeung J, at paragraphs 5 to 7 of Judgment, held that:

a.  The Debtor did not dispute the Costs Order or the amount of taxed costs as set out in the Statutory Demand.

b.  The Debtor was just repeating his case in DCCJ 3434/2011 as “grounds” to set aside the Statutory Demand.

c.  Even if the Debtor’s contentions were valid, they did not constitute valid grounds to set aside the Statutory Demand.

d.  The unpaid costs constituted a judgment debt and the Petitioner had sufficient basis to issue the Statutory Demand.

e.  The Debtor failed to come within r 48(5) (a) to (c) of the Bankruptcy Rules.  The Court could not see other grounds for setting aside the Statutory Demand.

7.  There is no appeal from Au‑Yeung J's said Judgment.

Deliberation

8.  I shall first remind myself of the applicable legal principles.

9.  In order to successfully oppose the Petition, a debtor has to show a bona fide dispute on substantial grounds, by sufficiently precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: Re Tam Mei Kam unrep; HCB 3777/2011; 25 April 2012; Barma J (as he then was); Re Yuen Mun Wa (a debtor)[2012] 5 HKLRD 108 (Recorder A Chan SC, as he then was).

10.  Where an issue has been properly ventilated at the stage of an application to set aside a statutory demand, and has been determined by the court at that hearing, a res judicata operates to preclude a debtor from raising, at the hearing of the petition, the same argument which has been determined against him, in the absence of any change of circumstances: Re Choy Wai Bor unrep, HCB 8565/2001; 28 May 2002; Kwan J (as she then was) at [30]; Re Sy Chin Mong Stephen unrep, HCB 5784/2013; 9 May 2014; Ng J.

11.  Unless a material change of circumstances has occurred since the dismissal of the application to set aside the statutory demand, all that the petitioning creditor has to do at the hearing of the bankruptcy petition is to show that he has made a statutory demand and that the amount of the debt has neither been paid nor secured nor compounded for: Brillouet v Hachette Magazine Ltd [1996] BPIR 518, 520, cited with approval by Kwan J (as she then was) in Re Choy Wai Bor, supra at [26].

12.  Where the underlying debt is based on a judgment, the court hearing the bankruptcy petition will treat the judgment as prima facie evidence that the judgment debtor is indebted to the judgment creditor.  In appropriate circumstances, the court may “go behind” the judgment — what is normally required is some “fraud”, “collusion” or “miscarriage of justice” which impinges on the validity of the judgment, the latter phrase being clearly capable of wide application according to the particular circumstances of the case: Dawodu v American Express Bank [2001] BPIR 983; Re Tam Mei Kam unrep; CACV 87/2012; 8 May 2013; Cheung, Yuen & Lam JJA.

13.  In Re Tam Mei Kam, supra, Yuen JA set out the principles to be applied where a petition is based on a judgment debt or court order at [22.1]–[27] as follows:

“22.1 The bankruptcy court will treat a judgment for a sum of money as prima facie evidence that the judgment debtor is indebted to the judgment creditor for that sum.

22.2 As prima facie evidence of indebtedness, it may be rebutted and that is what is meant by “going behind” the judgment. It is important to understand the rationale for this approach. First, bankruptcy affects an individual’s legal status. Secondly and importantly in this context, the bankruptcy court’s exercise of the power and/or duty to inquire into a judgment is necessary to protect a debtor’s real creditors from collusive judgments entered into by the debtor in order to initiate a bankruptcy and thereby reduce the funds available for his real creditors.

...

23. In other words, the reason why a bankruptcy court is not conclusively bound by a judgment debt is so that (in appropriate circumstances) it can inquire whether there was actually bona fide consideration for it. Of course apart from opposing creditors at the petition seeking to impugn the judgment debt, the judgment debtor himself can also seek to do so, especially if the judgment had been obtained by default. See Fletcher, The Law of Insolvency, 4^th ed p 163 para 6–116:

“One justification for the existence of this power is that a debtor might connive with others to allow a number of bogus default judgments to be entered against himself by his ‘allies’, who could rescue some of his estate on his behalf by later proving for the debts in the bankruptcy. But the far more usual occasion for invoking this doctrine is when it is the debtor who will otherwise suffer injustice, and this is particularly capable of occurring when the judgment was obtained by a compromise of action or by default. A default judgment, by its very nature, involves a one‑sided presentation of the facts which may lack objectivity and may even be inaccurate or unfair ...”.

However that is not to say that in every case the bankruptcy court should exercise its powers of inquiry simply for a judgment debtor to get a second bite of the cherry and conduct parallel proceedings to review a judgment which he has lost or to avoid its execution.

24. The rationale discussed above should guide the approach to be taken by the bankruptcy court when a judgment debtor opposes a petition on the ground that he challenges the judgment debt.

25.1 If the judgment debtor has lodged either an application to set aside the judgment (in a case where the judgment did not require a decision on the merits) or an appeal, the bankruptcy court maystay the hearing of the petition to await the result of the application or appeal.

25.2 However, the bankruptcy court need not do so in every case. It may refuse to stay the petition and may proceed to make a bankruptcy order if the judgment debtor fails to satisfy the court that he has a reasonable prospect of succeeding in the application to set aside or the appeal (Watts v London Borough of Newham [2009] EWHC 377 at [53]). Put another way, an application to set aside or an appeal falling short of that standard would not be a viable or bona fide one, and the judgment debtor would have failed to rebut the prima facie evidence of indebtedness...

...

26.1 Where the judgment debtor has not lodged an application to set aside or an appeal by the time of the petition hearing but intends to do so (probably out of time), he must, in addition to satisfying the bankruptcy court of the reasonable prospects of success in his application or appeal, also provide a reasonable explanation why he has failed to act in time. If he can do so, the bankruptcy court may adjourn the hearing of the petition to enable him to commence an application to set aside or appeal, giving appropriate directions to ensure that it is conducted expeditiously, with liberty to apply so that either party may apply to restore or dismiss the petition as appropriate.

26.2 Where the judgment debtor is unlikely to be able to pursue an application to set aside or an appeal for procedural reasons eg where there has been gross and inexcusable delay, the bankruptcy court may consider his case to see if he can rebut the prima facie evidence of indebtedness. Before arriving at a decision, the bankruptcy court will consider the circumstances in which the judgment was obtained. At one end of the spectrum, the court may decide to dismiss the petition even if a regular judgment had been obtained in default, eg if service of a writ had been effected on the judgment debtor’s previous address and he can clearly establish a substantial defence. At the other side of the spectrum is a petition based on a judgment obtained after a full trial on the merits. In the latter situation, the general principle is that the bankruptcy court would inquire into such a judgment only if the judgment debtor can show fraud, collusion or miscarriage of justice, the latter term having been described as “something from which [the court] can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the claimant” (Dawodu v American Express [2001] BPIR 983 quoted in Watts at [48]).

27. Where the judgment debtor has already failed in his application to set aside the judgment or his appeal on substantive grounds at the time of the petition hearing, it would be most unlikely in that situation that the bankruptcy court would find that the judgment debtor could nevertheless rebut the prima facie evidence of indebtedness, unless he could satisfy the court that he could impugn the judgment of the court deciding the setting aside or appeal on the grounds discussed in the paragraph above.” (emphasis added)

14.  This court has carefully considered the Debtor’s grounds of opposition contained in his affirmations.  This court has also considered his summary submission dated 5 December 2016.  This court agrees with Ms Chui, Legal Aid Counsel for the Petitioner, that the Debtor is essentially repeating his case and, in particular, his disputes with the Petitioner over a squatter hut in DCCJ 3434/2011 and sought to adjourn the present proceedings until the conclusion of the District Court action.  This court further agrees that none of the “grounds” raised by the Debtor constitute a bona fide dispute to the Debt on substantial grounds.  Lastly, this court agrees with Ms Chui that the “grounds” raised by the Debtor are in substance a repetition of those he raised in HCSD 45/2016, which were rejected by Au‑Yeung J, and that there has been no change of circumstances since the dismissal of his application to set aside the Statutory Demand.

15.  To conclude, in the present case, the Debtor has failed in his application to set aside the Statutory Demand, failed to show a bona fide dispute to the Debt on substantial grounds or “fraud, collusion or miscarriage of justice”.  In these circumstances, this court is satisfied that the Petition is well‑founded and the Petitioner is entitled to a bankruptcy order against the Debtor.

Disposition

16.  There will be a usual bankruptcy order against Mr Chan Hon Kwong and an order nisi that costs of the Petition, including all costs reserved, if any, be to the Petitioner and the Petitioner’s own costs be taxed in accordance with Legal Aid Regulations.