RE LOREA SOLABARRIETA CHEUNG

HCB 3938/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 3938 OF 2014

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REASONS FOR DECISION

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1.  At the end of the hearing of the bankruptcy petition in these proceedings on 19 March 2015, I dismissed it on the grounds that there had not been proper service or proper proof of service of the statutory demand. I now give my detailed reasons.

2.  The petition dated 26 May 2014 was based on a statutory demand dated 3 December 2013.  The debts for which payment was demanded from the respondent were two judgment debts arising from two costs orders and interest on the debts at judgment rate.  Both were orders made in a civil action in the High Court, namely, HCA 1870 of 2012.  One of the costs orders has since been paid by the respondent in July 2014, leaving outstanding a costs order made on 27 September 2013.

3.  HCA 1870 of 2012 was an action in which the petitioner here (as plaintiff there) complained that the respondent here (as defendant in that action) had wrongfully and in breach of confidence published on the internet a video recording and photographs of and other information about the petitioner and his family.  It was said that the petitioner and his wife had allowed themselves to be interviewed by the respondent in order to help her complete a university project, without intending any further publicity.  The details of that action are not relevant for present purposes, though I note from the judgment of Deputy Judge Simon Leung dated 19 February 2013 on an interlocutory application in that action that the respondent’s mother is a former schoolmate of the petitioner.

4.  The outstanding debt on which the petition was founded arose from a costs order relating to (1) the plaintiff’s application to join his wife as 2^nd plaintiff in the action; and (2) the defendant’s application for joinder of the wife as an additional defendant. Those applications were heard, among others, on 27 September 2013, in the absence of the defendant for reasons explained in paragraphs 9 to 22 of Deputy Judge Leung’s Reasons for Decision dated 3 October 2013.  In the end, the judge granted the plaintiff’s application and dismissed the defendant’s application for joinder, and ordered costs of both applications in favour of the plaintiff.  He also gave directions for the summary assessment of those costs pursuant to RHC Order 62 rule 9A.  On 11 November 2013, the judge summarily assessed the costs of the two applications in the sums of HK$80,000 and HK$19,000 respectively.  It follows that no further taxation of the costs is necessary or indeed possible.

5.  The petitioner’s solicitors then prepared the statutory demand in question on 3 December 2013, a Tuesday.  The solicitors sent the statutory demand, under cover of a letter dated 3 December 2013, by email to the respondent’s email address and by ordinary mail to a post office box address.  The reason given for sending the demand to a post office box was that, in the course of HCA 1870 of 2012, the respondent had previously given an address of an apartment in Bonham Road in her Notice to Act in Person filed on 7 March 2013, but had, on 16 May 2013, sent an email to the plaintiff’s solicitors indicating that the Bonham Road address was only a temporary one and that all correspondence should henceforth be sent to a specified GPO box.

6.  The cover letter asked the respondent to attend the solicitors’ office on 6 December 2013, Friday, at 4:30 pm and, if that time was not convenient, asked her to telephone to arrange an alternative time.  The letter also stated that if the respondent failed to arrange an alternative time or attend the appointment, the solicitors would infer that she was evading service and would advertise a notice in newspapers without further notice.

7.  The solicitors did not receive any communication from the respondent asking to fix another date or at all.  Nor did the respondent attend the solicitors’ office on 6 December 2013.  At around 5 pm on that date, the solicitors made a telephone call to the last known mobile number of the respondent but no one answered.

8.  The petitioner’s solicitors concluded that the respondent was “keeping out of the way with a view to avoiding service”. Accordingly they caused the statutory demand to be advertised in one Chinese and two English newspapers as soon as the following Tuesday, 10 December 2013.

9.  The solicitors’ affirmation also stated that at a hearing of a summons taken out in HCA 1870 of 2012, held on 6 January 2014, the respondent indicated that she knew the petitioner had issued a statutory demand against her.

10.  It is for the petitioner to establish the grounds for his petition under section 6 of the Bankruptcy Ordinance (Cap 6). A creditor’s petition may only be presented in respect of a debt if, inter alia, at the time the petition is presented, the debt is one which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay: s 6(2)(c).  By virtue of s 6A(1)(a) and s 6A(2)(a), this requires, so far as relevant here, that a statutory demand has been “served” on the debtor and it has neither complied with nor set aside.  The first question that arose was whether on the facts, there had been proper service of the statutory demand on the respondent.

11.  Rule 46 of the Bankruptcy Rules, which sets out the requirements for service of a statutory demand, provides as follows:

“(1) Rule 49 has effect as regards service of the statutory demand, and proof of that service by affidavit to be filed with a bankruptcy petition.

(2) The creditor shall do all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected.

(3) Where the statutory demand is for payment of a sum due under a judgment or order of any court and the creditor knows, or believes with reasonable cause-

(a) that the debtor has absconded or is keeping out of the way with a view to avoiding service; and

(b) there is no real prospect of the sum due being recovered by execution or other process,

the demand may be advertised in one or more newspapers; and the time limited for compliance with the demand runs from the date of the advertisement’s appearance or (as the case may be) its first appearance.”

12.  As expressly stipulated in rule 46(1), rule 46 has to be read together with rule 49, which provides as follows:

“(1) Where under section 6A of the Ordinance the petition must have been preceded by a statutory demand, there must be filed in court, with the petition, an affidavit proving service of the demand.

…

(5) If neither subrule (3) nor (4) applies, the affidavit must be made by a person having direct personal knowledge of the means adopted for serving the statutory demand, and must-

(a) give particulars of the steps which have been taken with a view to serving the demand personally;

(b) state the means whereby (those steps having been ineffective) it was sought to bring the demand to the debtor’s attention; and

(c) specify a date by which, to the best of the knowledge, information and belief of the person making the affidavit, the demand will have come to the debtor’s attention.

(6) The steps of which particulars are given for the purposes of subrule (5)(a) must be such as would have sufficed to justify an order for substituted service of a petition.

(7) If the affidavit specifies a date for the purposes of compliance with subrule (5)(c), then unless the court otherwise orders, that date is deemed for the purposes of these rules to have been the date on which the statutory demand was served on the debtor.

(8) Where the creditor has taken advantage of rule 46(3), the affidavit must be made either by the creditor himself or by a person having direct personal knowledge of the circumstances; and there must be specified in the affidavit-

(a) the means of the creditor’s knowledge or (as the case may be) belief required for the purposes of that rule; and

(b) the date or dates on which, and the newspaper in which, the statutory demand was advertised under that rule,

and there shall be exhibited to the affidavit a copy of any advertisement of the demand.

…”

13.  It is common ground that there was no personal service of the statutory demand on the respondent.  The petitioner relied instead on rule 46(3) and the newspaper advertisements.  Advertisement of a statutory demand is permissible under rule 46(3) as a means of service where, among other conditions, the debt in question is due under a judgment or order of any court.

14.  The debt here is a debt due under a court order.  The issue in this case was therefore whether, as at 10 December 2013, the petitioner knew, or believed with reasonable cause, the two matters set out in rule 46(3)(a) and (b), ie that (1) the respondent had absconded or was keeping out of the way with a view to avoiding service, and (2) there was no real prospect of the sum due being recovered by execution or other process.  The requirements are conjunctive; both of them must be satisfied before a creditor can resort to advertisement pursuant to rule 46(3).

Keeping out of the way with a view to avoiding service

15.  In this case, it was not asserted that the petitioner knew, as a fact, that the respondent was keeping out of the way with a view to avoiding service.  Rather, it was asserted that there was such a belief with reasonable cause.  In my view, cogent grounds must be provided by the petitioner before the court can be satisfied of the condition in rule 46(3)(a).  Absconding or evading service is a serious matter.  This cannot be established upon the mere assertion of the creditor.  The court has to see whether, objectively, there are facts that provide reasonable cause for the belief.

16.  In the present case, on 3 December 2013 the petitioner’s solicitors sent by email and by post to a GPO box the statutory demand and a request for an appointment to effect personal service.  The date proposed for the appointment was only 4 days later.  A single telephone call was made when the respondent did not turn up within half an hour of the appointed time, and the call was unanswered.  This was the totality of the steps taken to effect service of the demand before the petitioner resorted to advertisement on three newspapers, within 7 days of the issuance of the statutory demand.  In my judgment, there was far from sufficient evidence to infer, or believe with reasonable cause, that the respondent was evading service.

17.  That there was no response from the respondent between 3 and 6 December 2013 could have been due to a number of reasons.  The letter, posted on 3 December, would have taken a day or two to arrive.  Having regard to s 8 of the Interpretation of General Clauses Ordinance (Cap 1) and High Court Practice Direction 19.2, the letter (posted on 3 December) should be assumed to have arrived in the GPO box on 5 December, Thursday.  This was less than the two business days before the appointed time suggested by High Court Practice Direction 3.1 §2.6(d).  In any event, it is possible that the letter was not collected from the GPO box in time prior to 6 December.  As for the email, it cannot for present purposes be assumed that every person checks his or her email every day.  Furthermore, there was evidence in this case that, previously in May 2013, the respondent told the petitioner’s solicitors that she had not checked her email and did not notice an email sent to her on 8 May until 16 May.  The petitioner’s solicitors therefore knew that the respondent did not necessarily check her emails very frequently.  In these circumstances, it seems to me that no intention to avoid service on the part of the respondent could reasonably be inferred from the absence of a response from her by 6 or even 10 December 2013. 

18.  The solicitor telephoned the respondent at her last known number only once between 3 and 10 December.  There was nothing to show that the respondent should have recognised the caller’s number used by the solicitor.  At the hearing the respondent asserted that, in fact, the caller’s number was suppressed so that all she received on 6 December was a telephone call with no caller’s number displayed.  In any event there was no evidence to suggest that she should have known the telephone call was made by the petitioner’s solicitors.  In these circumstances, the missed call was, in my view, hardly sufficient to show the respondent was keeping out of the way in order to avoid service.

19.  It should further be noted that the petitioner and his solicitors were aware that the defendant had told the court in HCA 1870/2012 in September 2013 that she had just secured a job that required her to travel abroad and that her work requirement was unpredictable (see §§17, 18 and 20 of Deputy Judge Leung’s Reasons for Decision in HCA 1870/2012 dated 3 October 2013).  There was nothing in the petitioner’s affirmation of service that contradicted it or suggested that the petitioner did not believe it.

20.  Against that background, it seems to me that the steps taken by the solicitors on behalf of the petitioner were wholly inadequate to provide any reasonable cause for belief that the respondent was trying to evade service.

21.  I should also mention that the respondent did go up to the petitioner’s solicitors’ office to collect the bankruptcy petition in person in June 2014, though this happened subsequently and therefore should not  be taken into account by me in assessing the circumstances in December 2013.

22.  For these reasons, I concluded that rule 46(3) could not be validly relied upon by the petitioner for the statutory demand to be “served” by advertisement because rule 46(3)(a) was not satisfied.

23.  Advertisement of the statutory demand as a means of service is permissible not only under rule 46(3), but also under rules 46 and 49 more generally.  However, if this particular route is to be adopted, rules 46(2) and 49(5) to (7) must be satisfied: see Re Li Wai Man, ex parte Hang Tung Securities Limited (HCB 211/1999, 1 November 1999). In particular, the petitioner has to do all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected (rule 46(2)), and has to have taken all such steps as would have sufficed to justify an order for substituted service of a petition (see rule 49(6)).  As Mr Chain, who appeared for the petitioner, confirmed that the petitioner did not rely on this route, nothing more needs to be said on it.

No real prospect of the sum due being recovered by execution or other process

24.  The second issue is whether, as at 10 December 2013, the petitioner knew, or believed with reasonable cause, that there was no real prospect of the sum due being recovered by execution or other process, which is the requirement in rule 46(3)(b). 

25.  Rule 49(8) provides that where the creditor has taken advantage of rule 46(3), the affidavit proving service of the demand must be made either by the creditor himself or by a person having direct personal knowledge of the circumstances.  Here, the affirmation was made by the petitioner’s solicitor and so far as relevant to this point she deposed as follows:

“Since the Petitioner does not have any information and/or knowledge of the Debtor’s assets, I verily believe that there is no real prospect of the sum due being recovered by other methods of executions.”

26.  Three criticisms can be made of this sentence. 

(1) First, under rule 46(3) it is the creditor, ie the petitioner, who had to know, or believe with reasonable cause, that there was no real prospect of the debt being recovered by execution or other process. Rule 49(8)(a) emphasises that the affidavit of service must specify “the means of the creditor’s knowledge or (as the case may be) belief required for the purposes of that rule” (italics added).  I doubt that it is sufficient if only the creditor’s solicitor had such knowledge or belief. 

(2) Secondly, the source of information for the assertion in the sentence that the petitioner had no information or knowledge of the respondent’s assets was not stated.  Clearly it could not be a matter within the personal knowledge of the solicitor.  The affirmation is on this count defective: see RHC Order 41 rule 5.

(3) Thirdly, and in any event, rule 49(8) requires that the affidavit must be made “either by the creditor himself or by a person having direct personal knowledge of the circumstances”.  The solicitor who made the affirmation here did not appear to have “direct personal knowledge” of the respondent’s assets or of the petitioner’s knowledge or belief.

27.   For these reasons, there was, as it seemed to me, no proper evidence to show that the second condition, ie rule 46(3)(b), was satisfied.

28.   In these circumstances, the petitioner was not entitled to rely on the advertisement of the statutory demand pursuant to rule 46(3).  The statutory demand had therefore not been properly served in accordance with the requirements of the Bankruptcy Rules.

29.   It follows, in my view, that s 6A of the Bankruptcy Ordinance was not satisfied and that the petitioner had failed to establish that the respondent was unable to pay or had no reasonable prospect of being able to pay the debt within the meaning of s 6(2)(c). 

30.   It has been held that failure to serve a statutory demand in accordance with the statutory requirements is not just a formal defect or irregularity, but is “an extremely serious matter” and renders defective the petition founded on the demand: Re Lam Chik Sing, ex parte Hong Kong Chinese Textile Mills Association [2009] 2 HKLRD 107 at §17 per Kwan J (as she then was).

31.   InRe Cheung Hoi Chu, ex parte International Bank of Asia Limited (HCB 865, 866, 867 and 868 of 1998, 24 December 1998), in the earliest days after the statutory provisions relating to statutory demand had first come into force, Le Pichon J (as she then was) said, at pp. 9-10, in a passage of which many practitioners acting for creditors seem to be in need of being reminded:

“The Petitioner’s case comes to this: so long as the statutory demand does come to the notice of the Debtors (and it matters not how this came about), that is sufficient.

If this submission is correct, one wonders why the rules go to such elaborate lengths specifying requirements as to service as well as to what is required by way of proof of service. I do not agree that rules as to service can be flouted with impunity so long as by some lucky happenstance the statutory demand at some point falls into the hands of the debtor. In my judgment, requirements as to and proof of service must be strictly adhered to because of the importance of establishing with certainty the period within which a debtor has to comply with the statutory demand. Non-compliance gives rise to consequences which go far beyond those that would flow from any ordinary action. As stated in Fletcher on the Law of Insolvency, 1996 Edn. at 129,

‘Procedurally, the act of service is one of the most vital steps of all, and the court will scrutinize its execution, and the attending circumstances, with the utmost strictness.’

This observation made in the context of the service of petitions applies with equal force to the service of statutory demands.”

32.  It was for the foregoing reasons that I dismissed the petition at the hearing.