RE LAM YIK KAI

HCB7865/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 7865 OF 2009

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BETWEEN

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JUDGMENT

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Introduction

1.  By Petition dated 4 June 2009, the Petitioner applies for a bankruptcy order against himself on the basis that he is unable to pay his debts.  Although previously represented by solicitors on the record, on 26 May 2011 the Petitioner filed a Notice to Act in Person.  He appeared this morning in person. 

2.  The Petition is opposed by the Opposing Creditor, who was represented this morning by Mr Lawrence Cheung of counsel. 

3.  The Petitioner and the Opposing Creditor were formerly married, though the marriage has since been dissolved (in matrimonial proceedings numbered FCMC14539/2007), but for convenience I shall refer to them as “the Husband” and “the Wife” respectively.  There is a decree nisi of divorce, but the decree has not yet been made absolute because the issue of ancillary relief has not been resolved.  The basis of opposition to the Petition is that the Wife says the Husband’s attempt to make himself bankrupt is simply a ploy to circumvent court ordered spousal maintenance and child support. 

4.  In support of his Petition, the Husband has sworn a verifying affirmation and three supplemental affirmations.  Though Mr Cheung casts doubt on the existence of an original verifying affirmation for the Petition, as the Husband and his former solicitors have been unable to provide a copy of it, I have checked the original court file and such an affirmation was indeed made on the date of the Petition.  

5.  (In passing, I note that the Husband’s former solicitors were in correspondence with those acting for the Wife as recently as 18 May 2011 about this affirmation, and there was no suggestion that the Husband might wish to file any further evidence.) 

6.  However, the Husband’s three supplemental affirmations were filed because of requisitions raised by the court in relation to the Statement of Affairs exhibited to the first affirmation. 

7.  The Wife has also filed an affirmation and two supplemental affirmations.  All of the affirmations were filed after the last affirmation filed on behalf of the Husband.  The central parts of her opposition to the Petition are contained in her first affirmation and first supplemental affirmation.  That evidence has not been answered by the Husband, notwithstanding that an unless order was made by Chu J (as she then was) dated 16 November 2009 which provided that unless the Husband filed his affirmation in reply by 7 December 2009, he would be barred from adducing evidence in reply. 

8.  That same order provided that the Petition should be set down for hearing on a date to be fixed with 3 hours reserved.  It is not clear to me why it has taken so long for the hearing to come on, but it may be that the Husband was not pushing the progress of this matter. 

9.  The Wife’s second supplemental affirmation is dated 30 April 2011 and simply exhibits a judgment dated 29 April 2010 obtained by her against the Husband and others in HCA2075/2008 (to which proceedings I shall refer later). 

Applicable principles

10.  Mr Cheung fairly outlined the applicable principles.  He accepted that the allegation that it is the Husband’s intention to circumvent court orders in the matrimonial proceedings is an allegation of an intended abuse of process, and the burden of proving the allegation rests with the Wife making the allegation. 

11.  The standard of proof is the ordinary civil standard of the balance of probabilities.  But, as the allegation is serious, there are stringent legal requirements on the evidence, and more compelling evidence would be needed to prove the allegation to the civil standard : see, for example, F v. F (Divorce: Insolvency: Annulment of Bankruptcy Order) [1994] 1 FLR 359, at 366D to G. 

12.  I was also referred to a passage from a judgment of Kwan J (as she then was) in Re Li Kam Kwan; HTF v. LKK (unreported, HCB749/2005 & HCMC3/2006) at [89], where the well-known principle was repeated that a litigant in a financial claim is under a duty to make full and frank disclosure to the court of his own financial condition and resources. Where the respondent is considered to have wilfully withheld information on his assets, the court is entitled to draw inferences against him. 

Summary of conclusions

13.  For the reasons which appear from what I am about to say, I have no difficulty in holding that the Wife has plainly satisfied the standard she has assumed. 

14.  The Husband has failed to prove that he is insolvent.  In the circumstances, I shall dismiss the Petition. 

Analysis and Reasons

15.  The Husband and the Wife were married in Hong Kong on 19 November 1998.  There are two children of the marriage, a boy born on 14 March 1999 and another boy born on 28 February 2001. 

16.  During the marriage, the Husband was engaged in the business of trading spare parts of vehicles.  That business had originally been the business of the Husband’s father and another partner, but in 2000 the business was taken over by the Husband and the Wife. 

17.  The business was conducted through a company called Sun Yick Auto Parts Co. Ltd (“Old Sun Yick”), of which the Husband and Wife were both the only shareholders and the only directors. 

18.  The matrimonial proceedings were commenced by the Wife’s petition for divorce, on the grounds of the Husband’s unreasonable behaviour and his adultery with the second respondent to those proceedings. 

19.  On 6 February 2008, Deputy District Judge K.W. Wong made an order for what he later called “interim” maintenance pending suit (“MPS”) that the Husband should pay $10,000 per month for the two children of the family.

20.  On 11 November 2008, the Deputy Judge heard two further applications.  One application was the Wife’s, seeking MPS for herself and an upward variation of the MPS for the children.  The other application was the Husband’s, seeking a downward variation of the previous order.  

21.  By a written Decision dated 5 December 2008, the Deputy Judge dismissed the Husband’s application and made an order for MPS in the sum of $20,000 in total, comprised by the sums of $5,000 per month for the Wife and $15,000 per month to be paid to the Wife for the benefit of the two children (i.e. $7,500 per child). 

22.  Before making the order, the Deputy Judge canvassed the evidence then before him.  The Husband’s position was that he could not afford to pay any significant MPS.  This was said to be because of losses made by Old Sun Yick leading to no alternative but to cease that business, and for the Husband to look for a new job.  He said that he was now employed by a company called Sun Yick Development Trading Co. Ltd (“New Sun Yick”) as a sales manager earning just $8,000 a month. 

23.  The Wife said there was no justification for the cessation of business on the basis that it was not profitable.  She produced evidence before the Deputy Judge which showed that New Sun Yick was solely owned by a Mr Law Fat Shui.  Mr Law had previously been a delivery worker of Old Sun Yick.  The Wife said that though she had been a director of Old Sun Yick, she had never been asked for nor granted permission for it to cease business, nor for the release of the tenancy or disposal of stock to any third party.  

24.  Nevertheless, the evidence showed that the business and registered addresses of the two Sun Yick companies was the same, and it appeared that New Sun Yick had simply assumed the business of Old Sun Yick. The Wife stated in evidence put before the Deputy Judge that she had spoken to Mr Law in July 2008, and he had confirmed that the business arrangement was orchestrated by the Husband, and that the Husband also continued to control the bank account of New Sun Yick.  (This evidence was apparently not contradicted by the Husband.)

25.  The Wife also referred to the High Court action commenced by her against the Husband, Mr Law, New Sun Yick (and Old Sun Yick as nominal defendant) for breach of the Husband’s fiduciary duties as director and employee of Old Sun Yick. 

26.  After pointing out that the Husband’s solicitor had not denied that the monthly expenses of the family had previously been in the region of $40,000 to $50,000 per month, and that they all came from the Husband and his business, the Deputy Judge went on to consider the financial ability of the Husband to pay MPS.  Materially, the Deputy Judge made the following comments and findings :

“I must say that the change of the Husband’s status from being the employer of Mr. Law to be his employee so dramatized that, in the absence of detailed explanation, should be viewed with scepticism. ...

In fact the Husband appears to be evasive on for whom he is now working. ...

Even if (which is not accepted for the time being) the sale of the business is inevitable, the question of why he disposed of the entire business to his employee in discharge of the company’s liability, but leaving nothing for his family members remains unanswered. ...

I do not accept that [the Husband] is now an employee of his former employee doing exactly the same business at the same place where he formerly carried out his own business.”

27.  The Deputy Judge also accepted the submission that the Husband had not made full and frank disclosure of his assets, and did not think that he earned only some $8,000 a month as alleged.  He also criticised the Husband’s giving no reply whatsoever to obviously relevant questions, including as to the fate of large sums of money withdrawn from personal bank accounts and share trading accounts. 

28.  I accept that the Deputy Judge was making his findings in the context of an interlocutory application, but they are nevertheless instructive in considering the basis of opposition to the order sought by the Husband in his Petition for bankruptcy. 

29.  In any event, looking at the evidence produced by the Wife for this hearing, it is perfectly plain that the Husband has failed to give full and frank disclosure in the matrimonial proceedings (he simply ignored two orders requiring him to disclose his financial information) and the comments and findings of the Deputy Judge are wholly supported by the evidence before him and now before me. 

30.  Further, the proceedings in HCA2075/2008 have (as stated above) reached judgment.  That the judgment was entered in default of the defendants’ compliance with an order or orders for outstanding costs makes no difference to the effect of the judgment.  The judgment contains a declaration that all profits of New Sun Yick from the date of commencement of its operations or incorporation, whichever is earlier, and all its existing assets and inventory, shall belong to and be held on trust by New Sun Yick for Old Sun Yick.  It also orders a full account and repayment of the amounts found on account, as well as damages against the defendants to be assessed, with interest. 

31.  That judgment seems to me at least arguably to give rise to an issue estoppel as regards the matters pleaded in the claim against, inter-alia, the Husband.  Mr Cheung does not go so far as to ask me to apply any estoppels, as he is content that the matters arising from the judgment are matters also entirely consistent with the findings of the Deputy Judge. 

32.  But in any event, on the evidence that I have seen, such findings would have been inevitable even had the action been defended to a conclusion after trial.

33.  Old Sun Yick was apparently a financially sound and profit-making business, where its business name itself obviously held substantial goodwill.  There is no other explanation for the similarity in the name chosen for the “new” business.  Were any lack of profitability to have been a real reason for business cessation, there would be no reason for the Wife as co-director not to have been involved in the relevant decisions to cease the business, and to sell the goodwill and stock to a third party. 

34.  There was clearly no genuine sale of the goodwill and stock, nor any other part of the business, to a genuine third party.  As Mr Law appears himself to have acknowledged, in evidence not controverted by the Husband, he was simply a nominee for the Husband, who remained the true owner and operator of the business.  

35.  I have seen a surveillance report which notes that the Husband has continued to drive the business vehicle, apparently still registered in the name of Old Sun Yick.  The Wife has also produced evidence identifying that the Husband continues to operate the bank accounts of both companies on his sole signature, and has issued checks and funds from the account of New Sun Yick in favour of Old Sun Yick.  No explanation has been offered by the Husband how the new company took over the lease of the premises operated by the old company, nor how there was a disposal or transfer of the business, orders from customers, inventory and assets. 

36.  That the shareholding of Mr Law has subsequently been transferred to a Thai Nhi Thuc only means that that person is the new nominee of the Husband, and why that person became the 5^th Defendant in HCA2075/2008 (and who is also bound by the judgment in that action). 

37.  Further, notwithstanding the various supplemental affirmations filed by the Husband in response to the requisitions on his Statement of Affairs, that Statement essentially remains one of bare assertions.  There is no documentary evidence underpinning any of the alleged debts, which on their face are mainly doubtful.  The trenchant, and cogent, criticism of the Statement of Affairs contained in the Wife’s evidence has remained unanswered. 

38.  There is no evidence to suggest that the Husband has been subject to demand for payment of any of the alleged debts by his creditors, and he himself asserts that he has not sought to come to any agreement with any creditors for the payment of the alleged debts, nor to introduce any voluntary arrangement. 

39.  The Wife gave evidence of her understanding that the Husband was furious with the MPS order made by the Deputy Judge in December 2008.  Certainly, he paid virtually no money under that order.  The outstanding payments accumulated to approximately $330,000, and that sum was reduced to about $135,000 only by the receipt of the proceeds of sale of the former matrimonial home.  From the evidence before me, it seems clear that the Husband was deliberately obstructive in relation to that home, and in effect deliberately triggered a sale by the mortgagee bank (probably at a price lower than would have been achieved had there not been a forced sale).  Though I have not performed the calculation, I anticipate that the outstanding sum under the MPS order has continued to accumulate.  

40.  Clearly, at no time has there been any subsequent application by the Husband to vary the MPS order downwards upon his production of proper evidence which might have been put forward to seek to establish his inability to pay the existing order. 

41.  The Husband has not sought to file any further evidence in these proceedings, even for the purposes of updating the Court as to his alleged financial position.  Nevertheless, in his address to the court this morning, the Husband has in effect sought to introduce new evidence and tell a version of events which he has not previously sought to put in by way of evidence in these proceedings.  Subject to a couple of exceptions (to which I shall make reference in a moment), I have not allowed the Husband at this very late stage to try to put in evidence by way of his submissions in court today. 

42.  In particular, I refer to the order made by Chu J on 16 November 2009 which gave the Husband an opportunity to file evidence in reply to the evidence already filed by the Wife and set a deadline for that evidence, failing which the Husband was to be barred from producing evidence in reply.  The Husband was represented by a solicitor at the hearing before Chu J, and he was himself present in court at that hearing, and I would reject the suggestion he made this morning that he was not told (and presumably did not ask) the effect of the order made in his presence. 

43.  Nevertheless, the last affirmation filed by the Wife post-dated Chu J’s order.  As I have indicated, that affirmation simply exhibited a copy of the judgment entered in the HCA2075/2008 proceedings.  I explained the content of that judgment to the Husband this morning, and asked him if he had any comments to make on its being entered. In short, he had no real explanation as to why none of the defendants — not even the suggested new beneficial owner Mr Thai — had not put up the relatively small sum of $6,800 costs to avoid the Defence being struck out and judgment being entered. 

44.  The Husband did bring some documents to court this morning, comprising various tax demands and amended tax demands raised against him by the Inland Revenue Department for the tax years 2002/03 to 2008/09 inclusive.  The Husband suggested that the documents evidenced a revenue investigation of his asset position, and that it had been accepted that he had no assets. 

45.  However, the tax demands show no such thing.  Rather, they identify significant earnings/income over the relevant period of the demands, and say nothing of the asset position of the Husband over that or any other period, including as to the present position.  Indeed, as Mr Cheung pointed out, the tax demand for the year 2008/09 is raised on an income in excess of $250,000, in the period when (for at least 10 of the relevant 12 months) the Husband has previously claimed that he was merely an employee of New Sun Yick earning just $8,000 per month. 

46.  I note that all of the tax demands are dated with the same date of 3 June 2011, and are all addressed to the Husband care of his solicitors.  The Husband told me, in answer to my question, that although they no longer act for him in these proceedings those solicitors continue to assist him with his tax affairs. 

47.  As I have pointed out in passing above, those solicitors remained on the record until late May 2011, and were even in correspondence with the solicitors for the Wife as late as 18 May 2011 about the evidence for this hearing.  There was apparently no suggestion from those solicitors that any attempt would be made to put in any further evidence on behalf of the Husband, whether as to recent tax matters or otherwise. 

48.  I did ask the Husband if he had brought any other documents to court which he might show the court, and he confirmed that he had no other documents to show the court. 

49.  Whilst the Husband has asked me this morning to make a bankruptcy order, failing which he says he will be in real trouble, including with the banks, there remains the startling lack of documentation produced at any stage of these proceedings in support of the claimed insolvency position as is said to justify the making of a bankruptcy order.  

50.  At the end of the day, I must decide this case on the evidence, and the evidence is compelling. I have no difficulty whatsoever in concluding that the Husband’s petition was a cynical and abusive ploy to attempt to avoid generally the financial obligations owed to the Wife and the two children of the marriage, and specifically to circumvent the court order for MPS already in place. 

51.  I do not accept that the Husband has come anywhere close to establishing that he is insolvent.  I dismiss the Husband’s Petition. 

52.  I will now hear the parties on costs. 

[Submissions on costs]

53.  I see no reason why costs should not follow the event, and I order the Opposing Creditor’s Costs to be paid by the Petitioner, to be taxed if not agreed.