RE FOO WAI LOK

HCB 6077/2018

[2020] HKCFI 258

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6077 OF 2018

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J U D G M E N T

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A. Introduction

1.  The Petitioner was the landlord.  The debtor in this case (“Mr Foo”) and the debtor in HCB 7480/2018 (“Mr Yuan”) were the guarantors under the tenancy agreement.

2.  The Petitioner obtained Default Judgment dated 7 September 2018 against the tenant, Mr Foo and Mr Yuan in HCA 1632/2018 (“the Action”).

3.  Based on the Default Judgment, the Petitioner served a statutory demand on Mr Foo on 26 September 2018 for a sum of HK$4,401,248.73 (“the SD”). The SD was not satisfied.  The Petitioner petitioned for the bankruptcy of Mr Foo on 24 October 2018. 

4.  Having recovered vacant possession of the premises on 29 November 2018, ie one month subsequent to the Petition, the Petitioner applied the deposit of HK$ 8,500,000 under the tenancy agreement (“the Deposit”) to set off the debt.  As a result, Mr Foo allegedly still owed the Petitioner $966,336.88.

5.  Mr Foo opposes the Petition on the ground that there was no debt due under the SD after the Deposit was mandatorily applied to set off the judgment debt pursuant to the terms of the tenancy agreement.  The Deposit was never mentioned in the Action or the Default Judgment.  The contents of Mr Foo’s defence filed on 6 January 2020 are not relevant.

6.  The Petitioner denies that there was any automatic set-off and asserts the rights of a landlord to apply the Deposit at his discretion.

7.  This is the substantive hearing of the Petition.

B.  Legal principles

8.  Section 6(2) of the Bankruptcy Ordinance, Cap 6 (“the Ordinance”) provides that a creditor’s petition may be presented to the court in respect of a debt that exceeds $10,000, if the debt is for a liquidated sum payable to the petitioning creditor either immediately or at some certain, future time, and is unsecured.  Under section 6(2)(c), the debt has to be one which the debtor appears to be unable to pay.

9.  Under section 6A of the Ordinance, 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, after lapse of at least 3 weeks since service, the statutory demand was neither complied with nor set aside.

10.  In bankruptcy, it is not the debtor’s general inability to pay his debts that is crucial but the apparent inability to pay the debt in the statutory demand, and at the hearing of the bankruptcy petition the failure to pay or secure or compound for that debt: Re Leung Cherng Jiunn, unrep, HCB 244/2014, 21 May 2015, §24, Recorder Linda Chan SC (as she then was), following TBS Bank plc v Platts (No.2) [1998] BPIR 284, at 288H-290A.

11.  Under rule 48(5) of the Bankruptcy Rules, Cap 6A, the court may set aside a statutory demand if (a) the debtor appears to have a counterclaim or set-off which equals or exceeds the amount of the debt specified in the statutory demand; or (b) the debt is disputed on grounds which appear to the court to be substantial.

12.  The debtor will not normally be precluded from taking the points which he could have taken on an application to set aside the statutory demand at the hearing of the Petition: Re Leung Cherng Jiunn, §24.

C.  Issues

13.  The following issues were raised at the call-over hearing  before Anthony Chan J and by Mr Foo’s former counsel (Mr Kelvin KH Liu):

(1)     Whether Mr Foo owed the Petitioner any debt as of the date of the Petition after the Deposit was mandatorily applied to set off the debt? (“debt due issue”)

(2)     Whether the amount of debt stated on the Petition could be considered as a liquidated sum? (“liquidated sum issue”)

(3)     Whether the amount of debt stated in the Petition was identical to that on the SD; if not, whether this would render the Petition defective? (“identical debt issue”)

(4)     Whether it was open to the Petitioner to seek a bankruptcy order with an underlying debt which included mesne profits from 14 September 2018 (date of the SD) to the date of the Petition, or to 29 November 2018 (date of recovery of possession) and/or any amount other than that stated in the SD? (“mesne profits issue”)

D.  Debt due issue

14.  Resolution of this issue turns on how the Deposit should be treated. This was governed by Clause 5 of the tenancy agreement:

“5. Deposit

5.01 On or before the signing of this Agreement the Tenant shall pay the Deposit to the Landlord to secure the due observance and performance by the Tenant of the agreements stipulations and conditions herein contained and on the Tenant’s part to be observed and performed. The Deposit shall be used and enjoyed by the Landlord as his own money free of any trust to the exclusion of and free of any interest to the Tenant.

5.02 Should the First Schedule hereto provide for an increase in Rent during the Term of Tenancy, the Tenant shall upon receiving written notice from the Landlord or its agent pay to the Landlord in cash by way of an increase in the Deposit a sum proportional to the said increase in Rent in order to restore the ratio of Deposit to Rent to that previously subsisting prior to such increase. Upon payment of the said sum, all references herein to the Deposit shall be deemed to be references to the Deposit as increased by the said sum.

5.03 Without prejudice to any other rights or remedies of the Landlord hereunder, in the event of the amount of any Rent or other charges payable hereunder being in arrear or any loss or damage being incurred or sustained by the Landlord as the result of any non-observance or non-performance by the Tenant of any agreements stipulations or conditions contained in this Agreement, the amount of the Deposit paid to the Landlord by the Tenant shall be deemed to have been reduced by the amount of Rent or other charges in arrear or the loss or damage suffered by the Landlord [“the deeming provision”] and the Tenant shall on demand by the Landlord forthwith further deposit the amount by which the Deposit is deemed to have been reduced and failure by the Tenant so to do shall entitle the Landlord forthwith to re-enter the Premises and to determine this Agreement as herein provided.

5.04 Subject as aforesaid, a sum equivalent to the Deposit (reduced by the amount of Rent or other charges in arrear or the loss or damage suffered by the Landlord, if applicable) shall be paid to the Tenant by the Landlord without interest within thirty days after the expiration or sooner determination of this Agreement and the delivery of vacant possession of the Premises and the Furniture to the Landlord in such repair and condition in accordance with Clause 6.08 hereof or within thirty days of the settlement of the last outstanding claim by the Landlord against the Tenant in respect of any breach, non-observance or non-performance of any of the agreements stipulations or conditions herein contained and on the part of the Tenant to be observed and performed, whichever is the later.” (underline added.)

15.  Mr Liu submitted that the Deposit would have been mandatorily set off pursuant to Clause 5.03 to extinguish the debt as at the date of the SD or the Petition. 

16.  Mr Lok disagreed for 2 reasons. 

17.  Firstly, he submitted that Clause 5.03 did not deal with the amount of indebtedness owed by the tenant.  It merely deemed but did not actually reduce the Deposit.  It simply provided the Petitioner with the option of requesting for extra deposit that represented the amount due from the tenant; at the same time, the landlord could, still hang on to the $8,500,000. 

18.  I accept that Clause 5.03 has to be read in the context of the tenancy agreement.  However, with respect, Mr Lok’s submission needs only be stated to be rejected, as being contrary to the terms of the tenancy agreement.  “Deposit” was defined as meaning $8,500,000 only.  See the First Schedule to the tenancy agreement.  The only situation for increasing the Deposit was upon an increase in rent: Clause 5.02.  If Mr Lok was correct, the landlord could ask for extra deposit without limit upon every default of the tenant.  If so, why was it necessary to include the “deeming provision” in Clause 5.03 in the first place?  And it was in mandatory terms – “shall be …”.  On the other hand, why would the tenant have to pay the extra deposit?  If the tenant had money to pay it, it would have paid off eg the rent or charges in arrears.

19.  I reject the first reason of Mr Lok.

20.  Secondly, Mr Lok contends that Clause 5.03 expressly provided that that Clause was “without prejudice to any other rights or remedies of the landlord hereunder [ie under the tenancy agreement]”. It would include the Petitioner’s rights to retain the Deposit under Clause 5.04 and/or to forfeit it upon the tenant’s breach under Clause 8.01.

21.  With respect, Clause 5.04 was not talking about the right of the Petitioner but its obligation to return the Deposit.  Clause 5.04 plainly foresaw the possibility of the Deposit being reduced to below HK$8,500,000 because of arrears of rent or loss and damage, such that the Petitioner was only obliged to return a lesser sum to the tenant.

22.  As for Clause 8.01, it was in these terms:

“If the Rent or any part thereof shall be unpaid for ten (10) days after the same shall have become payable (whether formally demanded or not) or if the Tenant shall fail or neglect to perform or observe any of agreements stipulations and conditions herein contained and on his part to be performed or observed ... this Agreement shall absolutely determine and the right of the Tenant to the payment of a sum equivalent to the Deposit or any part thereof shall be forfeited and the Landlord shall be absolutely discharged from his obligation to make such payment notwithstanding Clause 5 but without prejudice to any right of action of the Landlord in respect of any breach of the Tenant’s agreements stipulations and conditions herein contained ... ” (underline added)

23.  Hence, Mr Lok submits that whilst the Petitioner had the option to do so, the Petitioner had no obligation to apply the Deposit to offset any debt or the tenant at any point in time.  Read with Clause 5.01 which defined the purpose of the Deposit as being “to secure the due observance and performance by the tenant of the agreements”, and the free right of the Petitioner to use the Deposit; the tenant was not entitled to set off the Deposit against Mr Foo’s indebtedness.  Mr Lok cited Re Kwong Ngai Ping, HCB 9447/2003, Reasons for Judgment dated 22 April 2004, at §27, DHCJ Poon (as he then was).

24.  With respect, Re Kwong Ngai Ping merely stated the general proposition.  That case did not have a clause similar to Clause 5.03 here.

25.  Moreover, the Deposit represented 4.25 times the monthly rent of $2,000,000, much more than the usual 1-2 months’ rental deposit in a tenancy. Clause 8.01 was by its nature an unenforceable penalty clause.

26.  In any event, the Petitioner had decided not to exercise the option of forfeiture (paragraph 14(b) of Wong Kai On’s 3^rd affirmation).  Hence, the deeming provision had continued to operate until 29 November 2018.

27.  I therefore reject the second argument of Mr Lok.

28.  The total debt due under the Default Judgment was: 

(a)     HK$4,401,248.73, as at the date of the SD; and

(b)     HK$7,102,414.79, as at the date of the Petition;

29.  Applying the Deposit on either of those 2 dates, the debt was totally distinguished.  Although Mr Foo did not apply to set aside the SD, that did not preclude him from raising the arguments as he did on points of law: Re Leung Cherng Jiunn (paragraph 12 above).  The Petition must be dismissed on this ground alone.

30.  Alternatively, because of the deeming provision, the rent, repair and maintenance charges due to the Petitioner would have automatically been set-off as soon as they fell into arrears.  It was plainly questionable for the Petitioner to obtain judgment on those arrears or charge interest on them.  This is at least a bona fide dispute as to validity of the Default Judgment on substantial grounds.

31.  The rest of the issues are only dealt with for the sake of completeness.

E.  Liquidated sum issue

32.  The Default Judgment required Mr Foo to pay the Petitioner, amongst others, mesne profits “at the rate of HK$2,000,000 per month from the 1^st day of August 2018 to the date when vacant possession of the Premises is delivered up by [the tenant] to [the Petitioner].” 

33.  Insofar as mesne profits are concerned, a plaintiff could opt for (i) interlocutory judgment for mesne profits to be assessed; or (ii) final judgment on mesne profits at the same rate as the agreed rent of the premises.  Both options would state the commencement date for the mesne profits but peg the ending date to the date of recovery of vacant possession.  The amount due under option (i) is unliquidated in nature and is a matter (usually) for the Master to adjudicate upon having considered evidence on the market rent etc. Ascertainment of the amount due under option (ii) is only a matter of calculation and so the amount is liquidated in nature: Hong Kong Civil Procedure 2020, Vol 1, §13/4/6; Ng Chi Wing v Mok Chung Tim, HCA 3826/1981, 3 May 1982, at §10, Rhind J.

34.  In the present case, the Default Judgment was described as Final and Interlocutory Judgment.  It was interlocutory in nature as damages and costs were to be assessed.  However, it was a final judgment as regards mesne profits, the monthly rate of HK$2,000,000 for which was same rate as the rent under the tenancy agreement.  The debt due under the Default Judgment was for a liquidated sum that could be ascertained by simple calculation.  It could support the Petition.

F.  Identical debt issue

35.  Mr Lok has confirmed that the SD and the Petition referred to the same underlying debt; although the Petition also claimed post-petition mesne profit up to the date of recovery of possession.

G.  Mesne profits issue

36.  It was open to the Petitioner to seek a bankruptcy order with an underlying debt which included mesne profits from 14 September 2018 (date of the SD) to the date of the Petition, or to 29 November 2018 (date of recovery of possession), as recovery of possession only took place after the Petition was filed.  However, because such additional mesne profits were not covered by the SD, the Petitioner has to prove Mr Foo’s inability to pay under section 6(2)(c).  Such proof is lacking.

37.  Even if the Petition was not entitled to claim the post-SD mesne profits, so long as the debts accrued before 14 September 2018 exceeded the statutory minimum of $10,000 (and they did), the Petition could be presented.

H.  Conclusion

38.  Clause 5.03 mandatorily reduced the Deposit by the amount of arrears of rent or loss and damage of the Petitioner.  Such reduction left no outstanding debt to be paid by Mr Foo as at the date of the SD or the Petition.  I therefore dismiss the Petition.

39.  On a nisi basis, I award costs to Mr Foo to be summarily assessed on the papers without a hearing.  Mr Foo shall file and serve his statement of costs by 12 February 2020.  The Petitioner shall file and serve its grounds in opposition by 19 February 2020.

40.  I thank counsel, including Mr Kelvin KH Liu, for their assistance.