RE WIEMER MARK

HCB 3533/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 3533 OF 2012

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REASONS FOR JUDGMENT

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Background

1. On 7 January 2013, I made a bankruptcy order against the Debtor.  Hereunder are the reasons.

2. The Debtor was a director and shareholder of Parkway International Limited (“the Company”).  The Company was granted mortgage facilities by the Petitioner which were guaranteed by the Debtor.  The facilities were used by the Company to acquire a property in Smiling Shaukeiwan Plaza (“the Property”).  In 2007, the Company defaulted in repayment of the mortgage loan.  The Petitioner commenced proceedings in HCA 2115/2007 to recover the loan.  On 19 February 2008, the Petitioner obtained judgment under which the Company and the Debtor were ordered to pay the Petitioner the sum of $13,318,462.06 and to deliver possession of the Property.

3. On 22 September 2009, the Petitioner entered into an agreement to sell the Property to a purchaser for $10 million.  The sale was completed on 22 October 2009.  A balance of $9,172,385.23, net of the proceeds of sale, remained due to the Petitioner.  The substantial increase in the amount due was attributable to interest on the judgment, legal costs incurred by the Petitioner and management fees for the Property.

4. On 5 February 2010, the Petitioner served a statutory demand for the said balance on the Debtor. On 24 February 2010, the Debtor applied to set aside the statutory demand on the grounds that the Petitioner, as mortgagee in possession, had failed to sell the Property for a reasonable price.  The application was made out of time by one day.  Barma J, as he then was, granted leave to the Debtor to make the application out of time and gave directions leading to the hearing on 10 December 2010.  On 21 September 2011, Barma J dismissed the application and authorized the Petitioner to present a bankruptcy petition against the Debtor.

5. On 17 October 2011, the Debtor appealed against the judgment of Barma J in CACV 222/2011.  On 27 April 2012, Kwan JA granted the Petitioner’s application for security for costs of the appeal and ordered the Debtor to give security in the sum of $90,000 within 28 days and in default of such payment the appeal would stand dismissed without further order.  The Debtor failed to give security.  On 1 June 2012, the Petitioner presented the present petition, the petitioning debt being the said balance of $9,172,385.23.

6. On 4 June 2012, the Debtor appealed against Kwan JA’s order for security for costs.  The appeal was dismissed by the Court of Appeal on 6 August 2012.

Grounds of objection to the petition

7. The Debtor advanced five grounds of objection. The first one is that his appeal against the Kwan JA’s order for security was heard on 27 July 2012 and judgment was reserved.  He had a high hope of success in his appeal which would lead to overturning the judgment of Barma J.  That hope evaporated when his appeal was dismissed on 6 August 2012.

8. His second and fifth grounds are that the Petitioner was in breach of duty in taking reasonable steps to achieve the sale of the Property at its proper market value.

9. His third ground is that he had made a complaint to the Monetary Authority against the Petitioner’s conduct and investigation was still continuing.  He thought that was a serious factor for consideration in this petition.  I consider otherwise and dismiss this ground as irrelevant.

10. His fourth ground is that Barma J was biased in accepting the evidence of the Petitioner’s valuation expert, Savills Valuation and Professional Services Limited (“Savills”), but not giving weight to the valuation report prepared by his expert, Allied Surveyors Limited (“Allied”), a relatively smaller local firm of surveyors than Savills.  In addition, he wished to tender two valuation reports prepared by RHL Appraisal Ltd dated 26 November 2004 (“the RHL report”) and by CB Richard Ellis dated 16 February 2007 (“the CBRE report”) in support of this grounds of objection.

Discussion

11. The petitioning debt was a judgment debt.  There is no dispute that the Debtor is unable to pay.  In any event, he is deemed to appear to be unable to pay by reason of the service on him of the statutory demand which has not been set aside and the non-payment.  Thus, unless he can show a genuine dispute about the debt, a bankruptcy order may be issued against him.  In gist, the Debtor’s grounds of objection are that the Petitioner failed to take reasonable steps to achieve the sale of the Property at its proper market value and Barma J was biased in favour of Savills’ valuation against Allied’s.  He argues that had the Petitioner sold the Property at its proper value, the sale proceeds would have covered the outstanding loan and left him with a surplus.  He also wishes to adduce new evidence to support his grounds of objection.  It is immediately obvious that his grounds of objection offend two well settled principles: first, the court in the exercise of its bankruptcy jurisdiction will not, except in special circumstances, review the order of any other court which formed the subject matter of the bankruptcy petition; and second, the principle of res judicata, precludes the Debtor from re‑litigating on issues which had been determined against him and from adducing new evidence at the subsequent hearing.

12. Under the first principle, as a general rule, the court in the exercise of its bankruptcy jurisdiction will not review the earlier order of another court.  However, there are exceptions but such jurisdiction will only be exercised sparingly: see Re Onslow, ex p Kibble (1875) LR 10 Ch 373, Re Beauchamp, ex p Beauchamp [1904] 1 KB 572, Re Flatau, ex p Scotch Whisky Distillers Ltd (1888) 22 QBD 83.  These English decisions were adopted by the Hong Kong courts: see Re Yu Tat Yum Robert, ex p Fortune Retail Holdings (Beijing) Ltd [1999] 2 HKC 799 and Re Chung Kau, HCB 581/2003.  From the precedents, it can be seen that this power was only exercised where but for the judgment there was no petitioning debt and the judgment was obtained by fraud, collusion or miscarriage of justice: see for example, Re Hawkins [1895] 1 QB 404, Re Flatau, ex p Scotch Whisky Distillers Ltd (1888) 22 QBD 83, Re Saville (1887) 4 Morr 277, Re Lipsocombe (1887) 4 Morr 43, Re Fraser [1892] 2 QB 633, Re Howell (1915) 84 LJKB 1399, Re Turvey (1918‑1919) B & CR 128, Dawodu v American Express Bank [2001] BPIR 983.  The party seeking to review the order bears the burden of proof.  It is not the Debtor’s argument that Barma J’s judgment was obtained by fraud, collusion or miscarriage of justice.  He only argues that it was wrong.  It is therefore not open to this court to review the judgment of Barma J in refusing to set aside the statutory demand which formed the basis of this petition.

13. Furthermore, under the principle of res judicata which is of more general application, in the absence of any material change of circumstances, a party is precluded from arguing at a subsequent hearing the same issue which has been determined against him at an earlier hearing.  Except for the RHL report and CBRE report, all the evidence had been presented and the same issues fully argued before Barma J at the hearing of the Debtor’s application to set aside the statutory demand.  There is no change of circumstances.  Hence, Mr Kwok, on behalf of the Petitioner, argues, quoting Re Choy Wai Bor HCB 8565/2001, that the principle of res judicata applies and the Debtor is precluded from raising at the hearing of this petition the same issues which have been determined against him.

14. On the facts, all these issues now raised by the Debtor had been fully argued and carefully considered by Barma J in the earlier proceeding.  As regards the steps taken by the Petitioner, Barma J said in paragraphs 20 and 21 of his detailed judgment:

“ 20. The first criticism is that the Respondent (ie the Petitioner herein) had failed to take reasonable steps to achieve the sale of the Property at its market value. …

  21.  However, it seems to me that given that the Respondent took steps to market the property immediately upon obtaining vacant possession, and having regard to the very extensive efforts that were made to do so, it cannot be said that the Respondent has failed to take reasonable measures to obtain the best price achievable for the Property.  Having placed the Property with a large number of estate agencies, advertised it for sale both by direct mailings and newspaper advertisements, and in particular having put it up for sale by auction on seven occasions, without attracting a single offer or bid until the first written offer of May 2009 was received, it cannot seriously be suggested that the Respondent has failed to take reasonable measures to sell the Property at a proper price.  It may be, as Mr Suen suggested, that the very high management fees attributable to the Property served to dampen the interest of prospective purchasers.”

15. As for the Savills’ and Allied’s valuation, Barma J said in paragraphs 22 to 25:

“ 22. Further, so far as the Allied valuation is concerned, this has been considered by Savills in the further valuation reports prepared by them for the purpose of this application. The fundamental problem with the Allied valuation is that the approach adopted was to look at sales of other properties within the same development, to take an arithmetic average of the sales price per square foot, and apply that to the floor area of the Property. Using this method, Allied took the sales prices in respect of 21 sale transactions of other units within the same development during 2009, and arrived at [an] average price of HK$2,810 per square foot on a gross floor area basis, or HK$5,351 per square foot on a saleable (or net) area basis. This produced a valuation of HK$26.7 million on a gross floor area basis, or HK23.75 million on a saleable area basis, leading Allied to adopt a valuation of HK$25 million, approximately the mid point between these two calculations.

23. However, as Mr Suen pointed out, when one looks at the actual underlying data (which was set out in Savills’ third report, at Appendix II), it discloses a very wide range of unit prices, ranging from HK$1,020 per square foot to HK$8,608 per square foot on a saleable area basis, leaving out the highest and lowest examples. This suggests that it would not be appropriate to simply calculate the average sale price and apply it to the Property without closer analysis of other factors that might affect the per square foot sale price of a particular property.

24. One such factor is the size of the property concerned. The Property itself had a saleable area of somewhat over 5,600 square feet. However, most of the sales data relied upon by Allied related to units that were much smaller, with some 14 units sold having areas of around 100 square feet or less, and these achieved significantly higher per square foot sale prices. By contrast, a property of some 1,422 square feet sold at the end of November 2009 achieved a sale price of only HK$1,020 per square foot, which was just over half of the price per square foot obtained by the Respondent from the sale of the Property.

25. Although the second Allied Report made some criticisms of the Savills report in relation to alleged miscalculation of the size of the Property (a difference of only 71 square feet, or 1.3% odd), and in relation to the description of the Property, it does not respond to the criticism that it was inappropriate to simply take the average sale price per square foot for all properties in the development, regardless of the size of the property.

  26.  In the circumstances, I do not think that the Allied valuation is one that can bear the weight that the Applicant seeks to place upon it for the purpose of suggesting that the Respondent has failed to take reasonable steps to secure the best price achievable for the Property, and cannot displace the conclusion that having regard to the steps actually taken by it, the Respondent clearly has done what is necessary to meet its obligations in this regard.”

These passages demonstrate not only that the issues had been raised and argued but also the care taken by Barma J in evaluating the Savills report and the Allied report.  These passages dispel any suggestion of bias in favour of a larger reputable foreign firm of surveyors against a smaller local one.  Indeed, it is notoriously well known that in any valuation exercise a valuer should pick comparables of similar size, age, location and time of transaction as the property to be valued.  If a comparable does not bear those similarities, adjustments have to be made.  It is also notoriously well known that properties of smaller size command a higher unit rate than properties of larger size because smaller properties are more marketable.  This was what caused Barma J to prefer Savills’ report to Allied’s.  There is no substance in the Debtor’s complaint of bias.

16. The Debtor further argues that as new evidence is now available, the principle of res judicata should not apply.  While the principle is open to exception, it was held in Arnold v National Westminster Bank [1991] 2 AC 93 that the principle will only cease to apply under special circumstances, for example, where the further material which became available was relevant to the correct determination of a point involved in the earlier proceedings but could not, by reasonable diligence, have been brought forward in those proceedings.

17. The RHL report and CBRE report were available well before the hearing of the Debtor’s application to set aside the statutory demand.  The Debtor could give no reasonable explanation why he chose not to disclose them during that proceeding.  Those reports do not fall within the category of materials which could not have been brought forward in the previous proceeding by reasonable diligence.

18. The Debtor wanted to produce the reports to show that in November 2004 when the property price index was 165, the valuation of the Property according to the RHL report was $20 million; and that in February 2007 when the property price index was 170, the valuation of the Property according to the CBRE report was $24 million.  The purpose of adducing this evidence is to advance his argument that in August 2009 when the property price index was 205, Savills’ valuation of $11 million was grossly under value.

19. These reports were probably obtained for purposes other than litigation.  Despite the coverage and the length of the reports, these reports only gave the assessor’s opinion of the market value of the Property without any supporting basis.  No comparables were quoted and no reason was given for the valuation.  Even if these reports had been adduced, no court would have given them any weight.  Such reports render the comparison of the valuations against the property price index meaningless.  These reports are not helpful and not relevant to the correct determination of the issue in dispute in the earlier proceeding.  Furthermore, as submitted by Mr Kwok, the valuations were for November 2004 and February 2007, long before the sale of the Property by the Petitioner on 22 October 2009. These reports are not relevant for the determination of the issue whether the Petitioner failed to take reasonable steps to achieve the sale of the Property at its market value.  These reports do not assist the Debtor.

20. On the facts, the issues raised by the Debtor are issues which have already been determined by the court previously in his application to set aside the statutory demand.  He is therefore precluded by the principle of res judicata from re‑litigating on those issues.  Further, it is not open to this court to review the judgment of Barma J in refusing to set aside the statutory demand served on him.  In the result, the Debtor has no genuine dispute about the petitioning debt.

Conclusion

21. For the above reasons, I am satisfied that the Debtor has no genuine dispute about the petitioning debt and no valid grounds to resist the petition.  Accordingly, I make the usual bankruptcy order with costs against the Debtor.