RE TONG WAI TAK

HCB 3621/2022

[2023] HKCFI 719

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 3621 OF 2022

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D E C I S I O N

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1.  There is before the court a Summons dated 18 November 2022 issued by the petitioner, the Incorporated Owners of Morning Ray Mansion (“Petitioner”), under s.98(1)  of the Bankruptcy Ordinance (Cap. 6)  (“BO”)  to set aside the order made by this Court on 31 October 2022 dismissing the petition presented against the debtor, Mr Tong Wai Tak (“Debtor”), with costs to the Debtor (assessed at HK$3,000)  and the Official Receiver (assessed at HK$6,500)  (“Order”).

Background

2.  The Petitioner and the Debtor have since 2016 been embroiled in litigation in LDBM 181/2016 in which the Petitioner sought various injunctive relief requiring the Debtor to reinstate the podium and other common areas to their original state.  In LDBM 181/2016:

(1)  On 29 May 2018, the Lands Tribunal entered judgment against the Debtor.  The Debtor did not comply with the judgment which led to the Petitioner applying for further order to enforce the judgment. 

(2)  On 14 July 2020, the Tribunal ordered the Debtor (a)  to comply with the judgment within 72 days failing which the Petitioner may engage contractor to carry on the reinstatement and seek reimbursement of the cost from the Debtor, and (b)  pay the costs of the application, to be taxed if not agreed (“1^st Costs Order”).   

(3)  By summons issued on 8 October 2020, the Debtor applied for leave to appeal against the 1^st Costs Order.  At the hearing on 30 November 2020,  the Summons was dismissed and the Debtor was ordered to pay costs to the Petitioner at HK$16,976.50 (“2^nd Costs Order”).

(4)  On 23 March 2021, the Petitioner gave notice of taxation in respect of the 1^st Costs Order to the Debtor claiming costs in the amount of HK$194,991.  On 19 April 2021, the Debtor filed a notice stating that the amount claimed by the Petitioner was very unreasonable. 

(5)  On 3 June 2021, the Registrar made an interim assessment of (a)  the costs under the 1^st Costs Order at HK$131,378.82, and (b)  the costs of taxation at HK$6,570.

(6)  By an Allocatur dated 5 July 2021 the total costs payable by the Debtor under the 1^st Costs Order was certified at HK$137,948.82.

(7)  On 24 September 2021, the Petitioner obtained a charging order absolute (“Charging Order”)  against the Debtor’s property at Flat B, 2^nd Floor, Morning Ray Mansion, 182-186 Ma Tau Wai Road, Kowloon (“Property”)  with costs at HK$6,100 (“3^rd Costs Order”).

(8)  By Summons dated 11 August 2022, the Debtor applied for review of the taxed costs under the 1^st Costs Order, which was dismissed by the Tribunal on 24 August 2022 with costs awarded against the Debtor at HK$11,405.6 (“4^th Costs Order”).

3.  On 16 May 2022, the Petitioner served a statutory demand on the Debtor requiring him to pay HK$152,393.78 (“Debt”), being the taxed costs under the 1^st Costs Order together with interest accrued thereon (HK$8,344.96)  and the 3^rd Costs Order, within 21 days (“SD”).  In the SD, there was no reference to the 2^nd Costs Order. 

4.  No payment was made by the Debtor. 

5.  On 5 July 2022, the Petitioner presented a bankruptcy petition against the Debtor, relying on the Debtor’s failure to comply with the SD.  In the petition, the Petitioner states that it has obtained the Charging Order against the Property, but “is willing, in the event of a bankruptcy order being made, to give up his security for the benefit of all the bankrupt’s creditors”.

6.  In his affirmation filed on 15 August 2022, the Debtor raises the following grounds in opposition to the petition:

(1)  Messrs. CLY Lawyers (“CLY”)  have not been appointed by the Petitioner as its solicitors to commence these proceedings;

(2)  At the time of the taxation, the Petitioner and its management committee were not properly appointed in accordance with clauses 5(1)  and (2)  of Schedule 2 to the Building Management Ordinance (Cap. 344)  (which requires the management committee to be re-constituted once every 2 years).  This renders the taxation of the 1^st Costs Order invalid; and

(3)  The taxed costs under the 1^st Costs Order is excessive, and he has on 11 August 2022 applied for review of the same (see §2(8)  above). 

7.  At the first callover hearing on 19 September 2022, this Court indicated to the Debtor that the matters raised in his affirmation are not valid grounds in opposition to the petition and in particular, as the Debt arose out of the 1^st Costs Order and 3^rd Costs Order, there was no bona fide dispute in respect of the same.  In response, the Debtor stated that he had liquidity problem and asked for time to pay the Debt.  The petition was adjourned for 6 weeks to give one last chance for the Debtor to pay or compound for the Debt.  It was not brought to the attention of the court that the Debtor owns the Property which remains unencumbered save for the Charging Order. 

8.  Subsequently, on 3 October 2022, the costs of the petition was assessed at HK$80,000.

9.  At the second callover hearing on 31 October 2022:

(1)  The Debtor stated that the petition was a personal vendetta deployed by the Petitioner against him in response to the proceedings brought by him at the Lands Tribunal requiring the incumbent chairman to remove the illegal structure built on the common area.  Further, he paid the Debt by delivering a cheque for HK$152,393.78 payable to CLY (“Cheque”)  on 25 October 2022.  He owns 3 companies which carry on business in Hong Kong, and 3 properties (including the Property)  which are unencumbered, and any one of them would be sufficient to discharge the Debt.  He was not able to sell the Property as the Petitioner had registered the Charging Order against it.

(2)  Ms Teresa Yu, counsel for the Petitioner, confirmed that the Cheque was received by CLY on 26 October 2022, but the Debtor did not pay the assessed costs of the petition or the other costs orders made in LDBM 181/2016.  She accepted that the assessed costs and the other costs orders were not pleaded in the petition.  She also confirmed that the Debtor owns the Property which is unencumbered. 

(3)  Ms Rebecca Louie, solicitor for the Official Receiver, submitted that if the court comes to the view that the value of the assets owned by the Debtor exceed his liability, it may dismiss the petition.   

10.  In view of the undisputed fact that the Debtor owns the Property the value of which far exceeds the Debt, and the Petitioner has the right to enforce the Charging Order by selling the Property, this Court was not satisfied that the Debtor was unable to pay his Debt and made the Order.

Applicable principles

11.  Section 6(1)  of the BO provides that a creditor’s petition must be in respect of one or more debts owed by the debtor. Section 6(2)  states that:

“Subject to sections 6A to 6C, a creditor’s petition may be presented to the court in respect of a debt or debts if, but only if, at the time the petition is presented –

(a)  the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds $10,000 or a prescribed amount;

(b)  the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured;

(c)  the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay; and

(d)  there is no outstanding application to set aside a statutory demand served under section 6A in respect of the debt or any of the debts.”

12.  Section 6A(1)  of the BO provides that “for the purposes of section 6(2)(c), the debtor appears to be unable to pay a debt if, but only if, the debt is payable immediately and either” (a)  a statutory demand in the prescribed form was served and the demand has been neither complied with nor set aside in accordance with the rules; or (b)  execution in respect of the debt on a judgment or order of any court has been returned unsatisfied in whole or in part. 

13.  Thus, where the debtor has failed to comply with a statutory demand in respect of the debt which he does not dispute, by virtue of s.6A(1)(a)  of the BO, the petitioner has discharged the onus of showing that the debtor is unable to pay his debt.  The burden is on the debtor to show a bona fide dispute on substantial grounds by adducing sufficiently precise factual evidence which is believable.   

14.  The Summons is issued under s.98(1)  of the BO, which provides that “[t]he 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”.  The section confers a wide jurisdiction on the court, but the discretion to re-hear a case should not be exercised in favour of an applicant who is in effect seeking another opportunity for appealing against the order in question (Re Tobias & Co., ex p Tobias [1891] 1 QB 463).  The test is whether the applicant has shown exceptional circumstances, involving a material difference to what was before the court earlier, to justify the overturning of the order which is sought to be rescinded or varied.  Where the applicant relies on facts which had occurred before the order sought to be reviewed was made, he would have to explain why he had not drawn them to the attention of the judge earlier (Re Cheung Hing Chik (Debtor) [2021] 3 HKLRD 541, §22.3).

Discussion

15.  Ms Yu advances 3 grounds in support of the application:

(1)  The court erred in requiring the Petitioner to enforce the Charging Order before presenting the petition (1^st Ground);

(2)  The court erred in accepting the Debtor’s contention that he had the financial means to pay the Debt (2^nd Ground); and

(3)  The Debt remains unpaid (3^rd Ground).

16.  As regards the 1^st Ground, Ms Yu submits that the Petitioner has the right to elect how to enforce the 1^st and 3^rd Costs Orders and is not required to enforce the Charging Order before it presented the petition.  Her arguments run like this:

(1)  Under s.6B(1)(a)  of the BO, a secured creditor has the right to present a bankruptcy petition so long as “the petition contains a statement by the person having the right to enforce the security that he is willing, in the event of a bankruptcy order being made, to give up his security for the benefit of all the bankrupt’s creditors”.  The requirement is satisfied as §6 of the petition contains such a statement. 

(2)  A creditor has the right to elect the form of proceedings for seeking payment of the debt.  For example, in 張鳯珊v富邦銀行 [2021] HKCA 1927, §§3-4, 7, the Court of Appeal rejected the debtor’s argument that the petitioning creditor should have applied for a charging order over her property before presenting a petition and seeking a bankruptcy order against her, and held that the court could not compel the creditor to accept a charging order in place of bankruptcy petition.  Similarly, in Re Tam Yuen Fai, HCB 6115/2010, 28 October 2011, §§19, 22, the court held that the petitioning creditor was entitled to elect the form of proceeding in enforcing the costs order, including seeking a charging order or presenting a bankruptcy petition against the debtor.

17.  In my view, the fact that a secured creditor is willing to give up the security for the benefit of all the creditors only gives it the locus to present a petition against the debtor.  The court still needs to consider the evidence and be satisfied that the debtor is unable to pay his debt. 

(1)  The starting point is that s.6(2)(b)  provides (inter alia)  that the debt payable to the petitioner must be unsecured.  The section is subject to s.6B(1), which states that a secured creditor may present a petition if the creditor either gives up the security for the benefit of all the bankrupt’s creditors (s.6B(1)(a))  or the petition is made not in respect of the secured part of the debt (s.6B(1)(b)).

(2)  The above requirements reflect the fact that a secured creditor has the right to realise the security to pay the debt and does not need to participate in the pari passu distribution of the debtor’s assets (Goode, Principles of Corporate Insolvency Law, 5^th ed., §3-04). In that sense, a secured creditor has no real interest in pursuing the petition.

(3)  If the secured creditor has locus to present the petition, the court will consider whether the petitioning debt is either (a)  a debt which has neither been paid nor secured nor compounded for; or (b)  a debt which the debtor has no reasonable prospect of being able to pay when it falls due.  If the court is not so satisfied, it “shall not make a bankruptcy order on a creditor’s petition” (see s.6D(1)  of the BO). 

(4)  Further, s.9(3)  states that if the court “is satisfied by the debtor that he is able to pay his debts or has a reasonable prospect of being able to pay them, or considers that for other sufficient cause no order ought to be made, the court may dismiss the petition.”  Thus, where the evidence before the court shows that the debtor is able to pay his debts or has a reasonable prospect of being able to pay them, no bankruptcy order would be made. 

(5)  The above provisions reflect the purpose of the statutory scheme for bankruptcy, which is to put in place a scheme for collecting, realising and distributing the assets of an insolvent debtor for the benefit of all the unsecured creditors.  It would not be in the interests of the creditors to make a bankruptcy order against the debtor who is solvent.  This is because much time and costs would be incurred by the trustee-in-bankruptcy in collecting and realising the assets of the debtor, all of which would have to be paid out of the assets of the debtor in priority to the claims of the unsecured creditors. In addition, all the assets of the debtor would be subject to the scale fees prescribed by the Bankruptcy (Fees and Percentages)  Order (Cap. 6C)  which include (a)  10% of the cash paid into the “Official Receiver in Bankruptcy Account” (item 1); (b)  5% of the amount paid to the OR (item 3); and (c)  another 2%-10% of the aggregate amount of assets realised and brought to credit (item 9).   

18.  As for the 2^nd Ground, at the time of the second callover hearing, it was not in dispute that the Cheque was delivered to and accepted by the Petitioner’s solicitors on 26 October 2022 and the Debtor owns at least the Property with the Charging Order registered against it.  This Court considered that the petition should be dismissed having regard to the following matters:

(1)  It is well established that payment by cheque is an actual payment at the time the cheque is delivered to the payee, but there is a condition subsequent that if the cheque is dishonoured, the payment will not have been made. A creditor who has accepted payment of a debt by cheque ceases to be a creditor unless and until the cheque is dishonoured (French, Applications to Wind Up Companies, 4^th ed., §7.386).  By accepting the Cheque, the Debt was paid or compounded for and no bankruptcy order could be made against the Debtor.

(2)  The only encumbrance against the Property was the Charging Order.  The value of the Property worth at least a few millions, many times more than the Debt.  The Petitioner or the Debtor could sell the Property, or the Debtor could use it as security to borrow a loan so as to repay the Debt. On this basis, the Debtor had a reasonable prospect of being able to pay the Debt.

19.  At the hearing of the Summons, Ms Yu contends that the following evidence shows that the Debtor is unable to pay the Debt:

(1)  After the dismissal of the petition, the Debtor instructed the bank to stop payment of the Cheque and as a result, the Debt remains unpaid (i.e. 3^rd Ground);

(2)  The Debtor has failed to comply with the SD for more than 320 days and is deemed unable to pay his debts by virtue of s.6A(1)(a)  of the BO;

(3)  The Petitioner had on 1 August 2017 already obtained an order for sale of the Property and even took possession of the Property with the assistance of the bailiff. However, the sale of the Property was cancelled on 6 August 2019 after the Debtor had re-entered the Property; and

(4)  The Debtor has not adduced any evidence to show that he intends to sell the Property or that he has other readily realisable assets in his hands.  A debtor would be regarded as being unable to pay his debts if he could only pay his debts over a period of time by a steady realization of his assets(Butterworths Hong Kong Bankruptcy Law Handbook, 7^th ed., §[6D.05]; Re Margaret Chiu [2020] 2 HKLRD 1118).   

20.  I accept that the Debtor’s act in stopping payment of the Cheque was a material change of circumstances which justify the Petitioner asking the court to review the Order. 

21.  At the hearing, the Debtor explains that he stopped payment of the Cheque as there was insufficient fund in the bank account and if the Cheque bounced, all his bank accounts would be frozen which would be disastrous to his business.  He refers to his letter dated 20 December 2022 to CLY in which he offered to issue a new cheque in the amount of HK$149,392.78 (being the Debt less HK$3,000 costs), payable to CLY upon their returning the Cheque to him (“Offer”).  As regards the Property, he says that it is the residence of his family and he would not agree to sell it.  However, he may use the Property as collateral to borrow a loan if necessary. 

22.  I note that the Offer was rejected by CLY on 26 December 2022 primarily on the ground that the Petitioner had already made an application for review of the Order, and it would not withdraw the same unless the Debtor agrees to pay all the costs in LDBM 181/2016 as well as the costs occasioned by the petition.

23.  I do not think that there was valid ground for the Petitioner to reject the Offer which, if accepted and honoured by the Debtor, would result in payment of the Debt in full. 

(1)  If and to the extent that the Petitioner was concerned about whether the cheque would be honoured, the obvious thing to do would be to accept the Offer and tender the cheque for payment.   

(2)  The fact that the Petitioner believed that it was entitled to seek costs of the Summons and of the petition was not a reason for rejecting the Offer.  It is a matter which can be resolved through correspondence or by the court if the parties cannot agree on the same.   

24.  It seems to me that the Offer satisfies the requirements of s.6D(3)  of the BO in that (1)  the Debtor offered to secure or compound for the Debt; (2)  the acceptance of the Offer would have required the dismissal of the petition; and (3)  the Offer has been unreasonably refused by the Petitioner.  This provides a ground for dismissing the petition and the Order does not need to be rescinded or varied.

25.  However, given the history of the matter and to avoid the need for the Petitioner to present yet another bankruptcy petition against the Debtor, it seems to me that it is appropriate to adjourn the Summons to 23 March 2023 at 9:30am. 

(1)  If the Debtor has paid the Debt before the hearing on 23 March 2023, the Summons will be dismissed. 

(2)  If, on the other hand, the Debt remains unpaid, the Order will be rescinded and in place thereof, the court will make a bankruptcy order against the Debtor. 

26.  As for costs:

(1)  For the reasons stated in §§16 - 18 above, I consider that there were valid grounds to dismiss the petition and award costs of the petition to the Debtor.

(2)  It seems to me that the Petitioner had valid ground to pursue the Summons up to 26 December 2022, the date when it should have accepted the Offer, and should be entitled to recover its costs up to that day.  As the Summons and the supporting affirmation are simple and straight forward, I make a preliminary assessment of the Petitioner’s costs up to 26 December 2022 at HK$20,000.  If the Petitioner and the Debtor both accept this preliminary assessment, it is not necessary for the Petitioner to prepare a statement of costs for gross sum assessment.  If no agreement is reached, the court will decide the difference at the hearing on 23 March 2023.