Re Rite-tex Garment Factory

CACV000025/1985

BETWEEN

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Coram: Roberts, C.J., McMullin, V.-P. & Silke, J.A.

Date of Hearing: 14 March 1985

Date of Judgment: 3 April 1985

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JUDGMENT

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Silke, J.A.:

1. On the l9th November 1984 a bankruptcy petition was filed by two petitioning creditors both of whom were employees of the Rite-Tex Garment Factory. The petition was supported by a joint verifying affirmation. On the 15th January 1985 the debtor gave Notice of Intention to Oppose the petition and filed an affirmation in support on the 17th January 1985. The bankruptcy judge at the first hearing on the 21st January 1985 made a Receiving Order.

2. The debtor appeals against the making of that order and seeks an order that it may be set aside or discharged and that the petition may be dismissed or alternatively stayed for such time as may be required for trial of the question relating to the debt.

3. The first petitioning creditor claimed the sum of $1,820 being arrears of wages, wages in lieu of notice, annual leave pay and statutory holiday pay.

4. The second named creditor claimed the sum of $6,090 being arrears of wages, severance pay, wages in lieu of notice and statutory holiday pay. The petition sets out the details of the calculation of these sums.

5. The petitioners averred that the debtor was further indebted to 68 other employees in the aggregate sum of approximately $470,000.

6. The act of bankruptcy relied on, and this is not disputed, was that on the 12th October 1984 Lee Kam Wah, a partner of the debtor, gave verbal notice to his creditors at the Legal Aid Department that he had suspended payment of his debts. Service of the petition is not in dispute.

7. The Notice of Intention to Oppose the petition based itself on two grounds: one: a "dispute" as to the debts of the petitioning creditors and two: a contention that the assets for division amongst the unsecured creditors after payment of all costs, charges and expenses, and the debts which are preferential under the Bankruptcy Ordinance, would not be sufficient to pay a dividend of 15%.

8. As we have said, they also filed a supporting affirmation, unnecessary though that was. In it, Mr. Lee Kam Wah, a partner of the debtor stated "I deny as to the amount of debt, if any, owed by the firm to the petitioners. In all circumstances, if any debt is owed, it would be much below the sum of $5,000."

9. There was exhibited to that affirmation a document entitled "Statement of Assets anal Liabilities" of the debtor as of the 28th May 1984. This showed liabilities of over $16 million to unsecured creditors and approximately $300,000 to those who would be preferred creditors.

10. It made reference to Bankruptcy Petition 269 of 1984 - between the debtor and an unsecured creditor - which petition was dismissed by consent there being less than 15% dividend available for unsecured creditors. The firm is hopelessly insolvent.

11. In the course of a short judgment the Judge said:

"	At the hearing before me the solicitor for the debtor sought dismissal of the petition as the debt admitted to be due to the petitioners was less than the statutory figure of $5,000, or in the alternative an adjournment of the petition to a date to be fixed to argue the defence under section 9(3) of the Bankruptcy Ordinance known as the 15% rule.
	Although Mr. Lam alleged that the amount due to the petitioners was less than $5,000 he gave no particulars in his affirmation.. No application 'was made at the hearing to call any evidence. I preferred the evidence given by the petitioners in their affirmation to that of Mr. Lam who in my opinion was seeking to delay the firm's obligations to its employees. I therefore rejected his evidence.
	I refused the application for an adjournment in respect of the 15% rule which in any event is a matter of discretion as section 9(3) of the Ordinance does not apply to the claims of preferential creditors see Wong Moon-tai Bankruptcy No.80 of 1983. The application for a receiving order was supported by the Official Receiver.
	Having considered the evidence before me I found that the debt claimed by the petitioners was proved and that payment was suspended on 12th October 1984. Accordingly a receiving order was made with costs together with the usual legal aid taxation."

12. Before us the Official Receiver maintained his support for the application.

13. Miss Eu, who appears here for the debtor, has submitted two points. First: that once a Notice of Intention to Oppose is before the Court then the Court has but two courses open to it: either dismiss the petition or stay it pending the trial of that issue.

14. Second, on the 15% rule, that the trial judge was wrong in saying "section 9(3) of the Ordinance does not apply to the claims of preferential creditors". It does apply and if 15% of assets remaining after all deductions cannot be paid to unsecured creditors then the petition should be dismissed. :Further, in so finding, the bankruptcy judge has denied himself the consideration of his undoubted discretion and in so doing has failed to exercise it. She contends, or. that basis alone, that this appeal must succeed.

15. In support of her first submission she seeks leave to call additional evidence to amplify the ambiguous and unsupported assertion contained in Mr. Lee's affirmation..

16. She relies for both of her contentions on the provisions of section 9 of the Bankruptcy Ordinance, Cap.6 - "the Ordinance" - and in particular its subsections (3) and (5). These in order read:

"

(3)    If the court is not satisfied with proof of the petitioning creditor's debt or of the act of bankruptcy or of the service of the petition, or is satisfied by the debtor that he is able to pay his debts, or is not satisfied that the assets for division among the unsecured creditors, after payment of all costs, changes and expenses, and the debts which are preferential under this Ordinance, will be sufficient to pay a dividend of 15 per cent, or considers that for other sufficient cause no order ought to be made, the court may dismiss the petition.

(5)    Where the debtor appears on the petition and denies that he is indebted to the petitioner, or that he is indebted to such an amount as would justify the petitioner in presenting a petition against him, the court, on such security (if any) being given as the court may require for payment to the petitioner of any debt which may be established against him in due course of law, and of the costs of establishing the debt, may, instead of dismissing the petition, stay all proceedings on the petition for such time as may be required for trial of the question relation to the debt."

17. Dealing first with the 15% rule. This was considered by Leonard, J,. (as he then was) in Re: Noel Earnest Lee⁽¹⁾ and also in an unreported decision of Cough, J.: Fan Hung Sang⁽²⁾. In the latter, Clough, J. made reference to Lee⁽¹⁾. It is to be noted that in both the Court was concerned with an unsecured creditor and in neither did the Official Receiver support the petition. Both held that the onus of proof was on the petitioning creditor to show that the assets available would be sufficient, after the stipulated deductions, to pay a 15% dividend. That, with respect, is clearly right. Clough, J. was conscious of the fact that the burden thus placed on a petitioning creditor "must be very heavy and in many cases impossible to discharge."

18. Even if a petitioning creditor has not proved on the balance of probabilities that there is the capability of paying a 15% dividend the Court has still to consider the exercise of its discretion as to whether it does or does not dismiss the petition.

19. In that exercise a factor of importance is the support, or lack of it, of the Official Receiver. We do not accept Mr. Mitchell's contention that the attitude of the Official Receiver is of "paramount" importance. Were it so then the effect would be to give the Official Receiver the power to exercise the discretion which must be judicially exercised by the Court alone.

20. Both of these cases provide guidelines, and very useful ones, in relation to the interpretation of subsection (3) of section 9 but they are not declaratory of the law where the petitioning creditor would become a preferred creditor, were a Receiving Order made.

21. By section 9(3) of the Ordinance, as we interpret it, the assets of the debtor must first be estimated so far as they can be. From them must be deducted costs, expenses and the claims of preferred creditors. If the resulting balance is insufficient to pay 15% of the amount claimed by unsecured creditors, the Court may dismiss the petition.

22. Mr. Mitchell contended that it would be wrong to deprive preferred creditors of what they could met from a bankruptcy simply because the assets are not sufficient to pay unsecured creditors a 15% dividend and that it is a matter for the Court's discretion. A contention which commends itself to us.

23. Leonard, J. commented in Lee ⁽¹⁾ at page 318:

"

What concerns me most, in the exercise of the discretion, conferred on me by section 9 of the Ordinance, is whether the public interest would best be served by the making of an order, the effect of which would be to set in motion the somewhat ponderous and expensive machinery of bankruptcy. The Official Receiver Mr. North, who also opposes the making of an order, argues that to do so would be like using a sledge hammer to break a nut. The only benefit that would accrue to the public would be, to prevent Mr. Lee under pain of criminal penalties from obtaining further credit. But the bankruptcy law does not exist to safeguard innocents who neglect to make elementary enquiries as to credit worthiness before granting credit.'I am persuaded that it is unlikely that the Official Receiver would discover any worthwhile assets not already disclosed."

24. Mr. Mitchell accepts that the judge's comment that "section 9(3) does not apply to preferred creditors", could be clearer. However, we interpret it as being merely a concise way of expressing the principle set out above - i.e. that the 15% calculation is applied to unsecured creditors' claims only.

25. On the disputed debt point Miss Eu argues that the course which the bankruptcy judge should have taken, and was expected to take by those then appearing for the debtor, was to adjourn to allow the issue be tried.

26. Subsection (1)(a) of section 6 of the Ordinance provides that the aggregate of the debts of two or more creditors who join in the petition must be more than $5,000 before they are entitled to present a petition. She submits that if the matter were to be tried and the aggregate debts were found to be less than that amount then, there being no application to substitute other petitioners, there was no entitlement in the named petitioners to present it.

27. She has referred us to Mann v. Goldstein(3) which concerned a winding-up petition but which, nevertheless, she says is relevant. Unglued-Thomas, J. at page 1095 said:

"

It seems to me that to 'defend' a substantial claim in accordance with the procedure provided and in the normal manner, even though with personal hostility or even venom, and from some ulterior motive, such as the hope of compromise or some indirect advantage, is not an abuse of the process of the court or acting mala fide but acting bona fide in accordance with the process. And certainly no authority suggesting otherwise has been brought to my attention."

28. Here she says it matters not that the defence is for the purpose of delay, if indeed it be that. There is a right conferred by the Ordinance to defend and there are alternate courses one of which must be taken by the bankruptcy judge. And this is particularly so where the debtor appears. No affirmation from the debtor is required.

29. The adequacy of the creditors' proof - here of the debt - is influenced by the filing of an Notice of Opposition by the debtor and his appearance or non appearance to show cause against the petition. If he does appear then the creditor is placed under the necessity of proving all matters in respect of which the debtor has given notice that he disputes. Rules 69 and 70 of the Bankruptcy Rules make this clear. A point taken by Miss Eu.

30. Evidence may be given viva voce on affidavit or by way of interrogatories.

31. Mr. Mitchell has advanced the proposition that looking at section 9 overall, and in particular its subsection(2), there are in fact three courses open to a bankruptcy judge. He may be satisfied. as to the debt and make the Receiving Order; he may be dissatisfied as to the proof of debt and dismiss the petition or he may stay the matter for a trial of the issue of the debt.

32. He argues that where the issue is neither substantial nor complex it can be tried summarily at the hearing.

33. For myself I find this submission attractive for the debtor here has little merit on his side. That the Judge did try the debt issue on the evidence then before him is clear from his judgment.

34. But the difficulty is the sufficiency of that evidence relevant to the burden of proof placed upon the petitioner - and this added to that which is the normal course, a stay pending the resolution of the issue of the debt.

35. Here the Judge had but the verifying affirmation. We do not think that this can usually be "sufficient proof" once the fact of a dispute is clear. However unmeritorious the debtor's opposition may be he is entitled to have it resolved at a proper trial. We do not accept Miss Eu's contention that, once a dispute exists, it is mandatory to either dismiss the petition or stay it.

36. There may well be cases where the petitioner's evidence is in strong enough form, the dispute neither substantial nor complex, and the debtor's evidence so devoid of substance that a summary hearing will suffice and a Receiving Order made.

37. We regret that we do not think this to be the position here. There was a dispute of substance in that if the debtor were correct then there could be no petition. in the first place. Further the burden. of proof placed upon the petitioner was not properly discharged. A stay, even of one not exceeding a week, should have been granted.

38. Miss Eu's application to call fresh evidence on the hearing of this appeal does not commend itself to us. She seeks to produce it for the dual purpose of showing the genuineness of the dispute and to persuade this Court to either dismiss or to stay the petition. She accepts that it may not be necessary for her to rely upon it but attempts to place it before us out of an abundance of caution. There is nothing to prevent her from adducing whatever this evidence may be at any trial of the issue which may take place.

39. In the event we think, with respect, that the bankruptcy judge exercised his undoubted discretion upon the wrong principles. We would allow the appeal, set aside the Receiving Order and stay the petition pending the resolution. of the question of the debt.

40. We would wish to tie the stay down to a very limited period indeed.

41. Having heard Counsel: There will be a stay of 14 days.

(1)    [1974] H.K.L.R. 313

(2)    Bankruptcy No. 7 of 1983

(3)     (1968) 1 W.L.R. 1091

Representation:

Miss Audrey Eu instructed by Messrs. Charles H.Y. Yeung Co. for debtor/appellant.

Denis Miitchell, Esq. assigned by DLA for creditors/respondents.

John Edge, Esq. for Official Receiver.