RE CHEUNG HING CHIK also known as CHARLES H.C. CHEUNG

HCB 1901/2020

[2020] HKCFI 2534

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 1901 OF 2020

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J U D G M E N T

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Introduction

1.  This is the Bankrupt’s application to rescind the bankruptcy order made against him by this Court on 3 August 2020 pursuant to section 98(1) of the Bankruptcy Ordinance, Cap 6 (“BO”) and the inherent jurisdiction of the Court.  The grounds are that the Bankrupt has entered into an Agreement to sell his interest in a partnership subject to the condition that the bankruptcy order is set aside.  Further, he is due to receive loans and funds.  The monies to be received by him would enable him to clear the underlying loans which led to the petition.

2.  The petitioner opposes the application, questioning the true availability of the loans and funds.

3.  The Official Receiver maintains a neutral stance.

The Facts

4.  The Bankrupt and one Mr Lam are certified public accountants and equal partners to a CPA company.  On 12 August 2020, they entered into the written Agreement whereunder the Bankrupt would sell (i) his 50% interest in the CPA company; and (ii) his 27.7% interest in a service company, to Mr Lam for HK$5,600,000.  A deposit of HK$100,000 would be paid by Mr Lam within 5 working days after the Court sets aside the bankruptcy order.  Completion would take place within 3 months thereafter, whereupon Mr Lam would pay the balance of the consideration.

5.  As part of the consideration, the Bankrupt would be employed by the CPA company and the service company as a consultant for 3 years from completion at a salary of HK$50,000 per month and housing allowance of not more than HK$20,000 per month.  The Bankrupt has the option to renew the consultancy employment on the same terms for another 3 years.

6.  The Agreement is subject to the condition that the bankruptcy order would be annulled or set aside within 3 months from 12 August 2020.

7.  Further, the Bankrupt has found the Promissory Note dated 8 June 2019 from Mr Lagahit which he referred to at the hearing of the petition (“the Hearing”).  The Promissory Note stated that Mr Lagahit was entitled to inheritance.  He promised to inject a minimum amount of US$3 trillion in cash/assets into companies for investment purposes.  The companies will be owned as to 30% by the Bankrupt and 70% by Mr Lagahit directly or indirectly through intermediary holding company owned respectively by the Bankrupt and Mr Lagahit.

8.  Mr Lagahit died on 17 July 2020. His family members have requested the Bankrupt’s assistance to follow up the inheritance entitlement of Mr Lagahit when travel restrictions to the Philippines are lifted.

9.  The Bankrupt also affirmed that:

(i)  There will be funds within 3 working days from 4 September 2020 from a Canadian Company to his business associated company, Core-Tech Industries Ltd and they will make available to him a sum of not less than EUR700,000 to repay the Balance;

(ii)  Ms Rapi, his debtor, informed him that her mother would be able to withdraw the first tranche of GBP5,000,000 from her father’s estate after 18 September 2020.  That debtor confirmed that she would immediately send the agreed loan of GBP 1,000,000 to the Bankrupt inclusive of her repayment of indebtedness to the Bankrupt of about US$150,000.

10.  The best estimated time for receiving other sources of income and/or personal loans to settle his outstanding liabilities will be within 7 to 28 September 2020.

11.  The Official Receiver has informed this Court that the amount recovered for the Bankrupt’s estate is a bank balance of HK$1,474.92.  There are 2 proofs of debt – one from the petitioner and another from Star Sight Holdings Limited, claiming a total of US$1,099,000. 

Legal principles for setting aside a bankruptcy order

12.  Annulment and rescission of a bankruptcy order are different.  As the English Court of Appeal explained in Yang v Official Receiver [2017] EWCA Civ 1465, [2018] Ch 178, §54, rescission terminates the bankruptcy whereas annulment treats the bankruptcy order as having never been made.

13.  Mr Wong, counsel for the Bankrupt, has made clear that this is an application for rescission and not the original application for annulment.

14.  Section 98(1) of BO provides:

“The court or the Registrar may review, rescind or vary any order made by it or him, as the case may be, under its or his bankruptcy jurisdiction.

15.  In Re Yuan Yiqiang [2020] HKCFI 259 at §13-15, Au-Yeung J set out the principles for reviewing/setting aside a bankruptcy order:

“13. The power given to the court to review under section 98(1) is a jurisdiction to rehear made in the exercise of its bankruptcy jurisdiction. That jurisdiction is, in a proper case, almost without limit: Wing Lung Bank Ltd v Ho Shiu-sun [1986] HKLR 1134, at 1140 I-J, Clough J, CA. (In that case, the receiving orders were set aside on the ground that the debtors had not received the bankruptcy notices and had not committed the acts of bankruptcy which founded the petitions.)

14. In Zhang Sabine Soi Fan v The Official Receiver (unreported HCB 472/1989, 21 May 1999), p 2, Le Pichon J (as she then was) made the following observations:

(a) In practice, the courts are cautious in exercising the jurisdiction to review their own decisions, since the effect of so doing is to allow what may amount to a second application for the order or relief which is being sought, possibly beyond the time limited for making the original application;

(b) The cases in which the court will exercise its discretion to entertain such an application will therefore be somewhat rare, and will normally involve the operation of exceptional circumstances, such as fresh and cogent evidence such as would, if unanswered, furnish grounds for reversing or varying the original order of that court; and

(c) What is needed is evidence to show either that there was no debt or for some other reason the statutory demand ought to have been set aside. The statutory demand ought to have been set aside either where the debt is proved to have been paid or to be no longer owing, or never to have arisen or where the debt is bona fide disputed on substantial grounds. Fresh evidence must be cogent, and where credible, it obviously need not be incontrovertible: see also Re A Debtor [1993] 2 All ER 991 per Millett J.

15. However, the court is not to review its order simply on the basis that the applicant wants to present essentially the same facts and the same arguments but more forcefully or attractively: Ross v the Commissioners to Her Majesty’s Revenue & Custom [2012] EWHC 1054 (Ch), 19 March 2012, at §§11-12, Norris J; Papanicola v Humphreys [2005] 2 All ER 418, at §§25-26, 34, Laddie J.”

16.  Mr Wong has also referred to section 6D(3) of BO which provides that the court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts or is satisfied:

(a)  That the debtor has made an offer to secure or compound for a debt in respect of which the petition is presented;

(b)  That the acceptance of that offer would have required the dismissal of the petition; and

(c)  That the offer has been unreasonably refused,

In determining for the purposes of this subsection whether the debtor is able to pay all his debts, the court shall take into account his contingent and prospective liabilities.

17.  In my view, section 6D(3) has no application as it deals with the Court’s power to dismiss the petition, ie based on facts before any bankruptcy order being made.  In the present case, the Bankrupt is relying on facts occurring after the bankruptcy order to have it set aside.

Analyses

18.  The offer to sell his interest in the partnership and to use loans/funds to meet the underlying debt was raised before this Court at the Hearing.  However, for the reasons given in §§5 and 6 of the Judgment dated 3 August 2020 (“the Judgment”) giving rise to the bankruptcy order, this Court decided that the settlement offer could not meet the requirements of section 6D(3) of BO.

19.  The Bankrupt now comes back with the Agreement and some documents to support that settlement offer.

20.  The Bankrupt claims to have repaid EUR9,000 and US$28,000 after the bankruptcy order was made.  The balance of the underlying debt is thus about HK$5,623,800 (“the Balance Debt”).  The petitioner disputes this but, for present purposes, I shall take the Bankrupt’s version as true.

21.  Having considered the evidence and submission, I do not consider it appropriate to set aside the bankruptcy order for the following reasons.

22.  First and foremost, there is no proof of availability of funds from Mr Lam, Mr Lagahit, Ms Rapi or Core-Technology and no certainty as to the date when the funds would come in. The Court cannot take the word of the Bankrupt without independent proof, especially when the underlying debt arose out of the Bankrupt’s own dishonesty.

23.  Secondly, the lump sum consideration under the Agreement itself is barely sufficient to cover the Balance Debt.  The Bankrupt has to rely on his monthly income as consultant to meet the deficit and costs due to the petitioner.  Before completion, he does not have income under the Agreement.

24.  Thirdly, as pointed out by Mr Li, counsel for the petitioner:

(1)  While the turnover of the CPA company in 2019 was HK$7,618,891.85, its net profit was HK$1,212,157.99. The CPA company only had net assets in the amount of HK$308,313.76 in 2019, a nosedive from HK$15,246,149.77 in 2018.

(2)  While the turnover of the service company in 2019 was $2,346,008.75, its net profit was HK$98,876.03.  The service company only had net assets in the amount of HK$101,414.92 in 2019, a nosedive from HK$3,785,738.89 in 2018.

(3)  The Bankrupt suggested at the Hearing that his 50% interest in the CPA company alone could be sold at HK$6 million (§5 of the Judgment).  It now turns out that the total value of the Shares of both the CPA company and the service company is HK$5.6 million.

25.  Fourthly, the deposit is only to be a mere HK$100,000.  It is negligible compared to the Balance Debt.  There is no security for the completion money.  The petitioner may be asked to wait for 3 months in vain.

26.  Fifthly, on the Bankrupt’s own evidence, sale of his share in the partnership is at an undervalue (§§11 and 13 of his 1^st affirmation).  The consideration payable under the Agreement is not sufficient to meet both proofs of debt.  It also allows the Bankrupt to prefer the petitioner over another creditor, Ling Sing.

27.  Mr Wong submits that the Court should only focus on the underlying debt for this petition and not another petition.  Further, that other petition by Star Sight has been withdrawn.

28.  Mr Li informs this court that the petition of Star Sight in HCB 1905/2020 was filed by his instructing solicitors as well.  It was withdrawn only because this Court has already granted this bankruptcy order.

29.  Regardless of paragraph 27, even if I were to accept Mr Wong’s submission, the proof of debt filed by Star Sight has not been withdrawn.

30.  Seventhly, the Promissory Note carries no weight.  It was a promise to invest in companies, not to lend to the Bankrupt.  In any case, there is no certainty as to when that money would be available.

31.  At the Hearing, I have stated that the promisor under the Promissory Note and a lender had promised to lend the Bankrupt money by July and July has gone by (§5 of the Judgment).  Now, September has also almost gone by.  The funds from any of the persons mentioned by the Bankrupt are still nowhere in sight.

32.  Given the above analyses, the fact that the Bankrupt acted in person at the Hearing and was not able to put in an affirmation to set out his offer to settle the underlying debt was irrelevant.  His affirmations in support of this application, even if adduced before the Hearing, would still not be considered sufficient to meet the requirements of section 6D(3) of BO.

33.  The Bankrupt has merely tried to present his case based on essentially the same facts presented to the Court at the Hearing but with a few more documents.  The documents are not weighty and the arguments are neither forceful nor attractive.

34.  Simply put, as a matter of principle, if the Court is to grant this application, then in future, every bankrupt can seek to rescind a bankruptcy order by agreeing to sell some assets on the condition that the bankruptcy order is rescinded.  Bankruptcy proceedings will become otiose.

35.  As rightly pointed out by Mr Li, given that the underlying debt was not an ordinary debt arising out of business transactions but arose out of Mr Li’s theft of the petitioner’s funds, immediate intervention and investigation by the Official Receiver are required.

36.  As the 2^nd affirmation of the Bankrupt was filed just before this hearing, I have invited the Official Receiver to make further submission within 2 weeks from this hearing.  The Official Receiver remains neutral.

37.  The petitioner’s solicitors wrote in to say that if the Bankrupt were to repay the debt in full by 18 September 2020, the petitioner would agree to have the bankruptcy order set aside.  The Bankrupt has not paid the petitioner by that date nor was any settlement reached.

Conclusion

38.  The Bankrupt fails to meet the requirements for setting aside under section 8(1) of BO.  Relying on inherent jurisdiction does not assist him as the power of setting aside stems from statute.

39.  I therefore dismiss this application.

40.  On a nisi basis, costs will be

(1)  to the petitioner, summarily assessed at $60,000; and

(2)  to the Official Receiver, summarily assessed at $5,000.

both payable out of the estate.

41.  I thank Mr Wong and Mr Li for their assistance.