Re Yuan Yiqiang
Read the full judgment text of HCB 7480/2018 on BabelCite. This HCB judgment was delivered on 22 January 2020.
1. The Petitioner was the landlord. The debtor in this case (“ Mr Yuan ”) and the debtor in HCB 6077/2018 (“ Mr Foo ”) were the guarantors under the tenancy agreement.
Cited by 11 cases · Cites 5 cases
|
HCB 7480/2018 [2020] HKCFI 259 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE BANKRUPTCY PROCEEDINGS NO 7480 OF 2018 ____________ Re: Yuan Yiqiang (袁毅强), Debtor Ex-Parte: NEW CASTLE INVESTMENTS LIMITED (新港投資有限公司), Petitioner ____________
____________
_______________ J U D G M E N T _______________ A. INTRODUCTION 1.The Petitioner was the landlord. The debtor in this case (“Mr Yuan”) and the debtor in HCB 6077/2018 (“Mr Foo”) were the guarantors under the tenancy agreement. 2.The Petitioner obtained Default Judgment dated 7 September 2018 against the tenant, Mr Yuan and Mr Foo in HCA 1632/2018 (“the Action”). 3.Based on the Default Judgment, the Petitioner issued a statutory demand against Mr Yuan on 14 September 2018 for a sum of HK$4,401,248.73 (“the SD”). He was served on 15 October 2018 by advertisement. Having recovered vacant possession of the premises on 29 November 2018, the Petitioner applied the deposit of HK$8,500,000 under the tenancy agreement (“the Deposit”) to set off the judgment debt. 4.The SD was not satisfied. The Petitioner petitioned for the bankruptcy of Mr Yuan on 28 December 2018. On the day of the Petition, Mr Yuan allegedly still owed the Petitioner $966,336.88. The Petition was later amended on 20 November 2019 to plead the application of the Deposit. 5.On 25 November 2019 (“the Previous Hearing”), this court found no defence put forth by Mr Yuan and issued a bankruptcy order against him. See the judgment in this case dated 25 November 2019. 6.Mr Yuan took out the present summons to review and set aside the bankruptcy order (“the Review Summons”). He asks for the present proceedings to be consolidated and heard together with the Petition against Mr Foo. The grounds are that:
7.The Review Summons is opposed by the Petitioner for lack of change of circumstances or fresh evidence and that Mr Yuan simply wanted to delay matters. 8.This is the substantive hearing of the Review Summons. If this court does set aside the bankruptcy order, the Petition against Mr Yuan will also be substantively considered and disposed of. 9.Meanwhile, Mr Foo faced a similar SD. His bankruptcy petition was adjourned for substantive argument to the same day as this hearing. 10.On the same date as this judgment, this court dismissed the Petition against Mr Foo on the ground that, applying the Deposit, as at the date of the SD or the Petition, there was no debt due to the Petitioner. See HCB 6077/2018, Au-Yeung J, 22 January 2020, §§14-30 (“the Foo Judgment”). The same reasoning would have been applicable to Mr Yuan as the underlying tenancy agreement and Default Judgment were the same. The question is whether or not this court should, in the light of the Foo Judgment, review and rescind Mr Yuan’s bankruptcy order. B. UNDISPUTED FACTS 11.A short chronology of the litigation history is set out below:
C. LEGAL PRINCIPLES FOR REVIEW OF A BANKRUPTCY ORDER 12.Section 98(1) of the Bankruptcy Ordinance (Cap 6) (“the Ordinance”) provides that:
13.The power given to the court to review under section 98(1) is a jurisdiction to rehear made in the exercise of its bankruptcy jurisdiction. That jurisdiction is, in a proper case, almost without limit: Wing Lung Bank Ltd v Ho Shiu-sun [1986] HKLR 1134, at 1140 I-J, Clough J, CA. (In that case, the receiving orders were set aside on the ground that the debtors had not received the bankruptcy notices and had not committed the acts of bankruptcy which founded the petitions.) 14.In Zhang Sabine Soi Fan v The Official Receiver (unreported HCB 472/1989, 21 May 1999), p 2, Le Pichon J (as she then was) made the following observations:
15.However, the court is not to review its order simply on the basis that the applicant wants to present essentially the same facts and the same arguments but more forcefully or attractively: Ross v the Commissioners to Her Majesty’s Revenue & Custom [2012] EWHC 1054 (Ch), 19 March 2012, at §§11-12, Norris J; Papanicola v Humphreys [2005] 2 All ER 418, at §§ 25-26, 34, Laddie J. 16.The rationale for these principles have been set out in Re A Debtor, Millett J:
D. THE CONSOLIDATION GROUND FOR REVIEW 17.Under section 101 of the Ordinance,
18.At the Previous Hearing, it was Ms Sharon Ng, counsel for the Official Receiver, who invited the court to “consolidate” the Petitions. She informed the court of 3 questions posed by Anthony Chan J in the Petition against Mr Foo:
19.The then concern of the Official Receiver was that the Petitioner might recover the judgment debt thrice from 2 different debtors. However, the Petitioner had there and then undertaken not to do so. See also the judgment for the Previous Hearing at §§14 and 15. 20.Mr Yuan was represented at that hearing. His solicitor was given an opportunity to address the court on the merits of the Petition. Although the circumstances leading to the underlying debt were the same in the 2 Petitions, as Mr Yuan had not filed an affirmation, there was no issue of facts. Nor could his solicitor identify a common issue of law with the Petition against Mr Foo. 21.Hence, the issue of consolidation was raised and considered, but rejected at the Previous Hearing. 22.As of today, Mr Wong Hok Yan, counsel for Mr Yuan, could not tell this court what form the consolidation should really take, apart from hearing both Petitions together. In fact, in the letter to the court, Mr Yuan’s solicitors took a contradictory position, stating that a de facto consolidation of the 2 Petitions “created embarrassing situations”. 23.In view of the analyses in this Section, Ground 1 fails. E. GROUND 2: THE BONA FIDE DISPUTE GROUND FOR REVIEW E1. Grounds for disputing the debt 24.Many grounds have been advanced by Mr Wong Hok Yan. He submits that there are reasonable prospects of success in the appeal which will be heard next month. It is not disputed that the Default Judgment was entered irregularly. He submits that the court may “go behind” the Default Judgment, which was challenged on the ground of forgery of Mr Yuan’s signature on the tenancy agreement. He challenges the extent to which the Petitioner was entitled to mesne profits, claiming that the tenant was denied entry into the premises after he defaulted in payment of rent. As the tenant has left the premises latest by mid-September 2018, the Petitioner was not entitled to mesne profits thereafter. Mr Wong also suggests that the mesne profits were not liquidated sums that could form the subject matter of the SD or the Petition. For reasons that will become obvious in the following Section, it is not necessary to analyze these grounds. The only issue is whether or not there was any debt due from Mr Yuan to the Petitioner as at the date of the SD or the Petition (“debt due issue”) E2. Exceptional circumstances for review 25.One should not forget the inaction of Mr Yuan. He did not defend the High Court Action. He made every effort to comply with the Condition. He did not challenge Master Lau’s decision until he could not get the second time extension for compliance with the Condition. By then his notice of appeal was out of time for 29 days. He applied for stay of execution pending appeal but failed. He did not apply to set aside the SD. He did not show cause or file any evidence to contest the Petition despite being legally represented. 26.The evidence that Mr Yuan now puts forth was available to him before the Previous Hearing but that is still admissible according to Millett J in Re A Debtor. 27.However, there was one point about the Deposit extinguishing the debt which featured in Mr Foo’s opposition to the Petition against him, now similarly relied on by Mr Yuan. That point led to the dismissal of the Petition against Mr Foo and it should be considered here. For ease of reference, I summarize in Section E3 below my findings in §§8-12 (legal principles) and §§14-31 (analyses of the debt due issue) of the Foo Judgment. E3. Legal principles set out in the Foo Judgment 28.Section 6(2) of 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. 29.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. 30.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. 31.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. 32.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. E4. Analyses of the debt due issue in Foo’s Judgment 33.The issue was whether there was a debt due to the Petitioner as at the date of the SD or the Petition. It turned on how the Deposit should be treated. This was governed by Clause 5 of the tenancy agreement:
34.Mr Foo’s former counsel submitted that the Deposit would have been mandatorily set off pursuant to Clause 5.03 to extinguish the debt. 35.I rejected 2 arguments of Mr Lok, counsel for the Petitioner. 36.Firstly, Mr Lok 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. 37.I accept that Clause 5.03 had to be read in the context of the tenancy agreement. However, with respect, Mr Lok’s submission needed 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. 38.I rejected the first reason of Mr Lok. 39.Secondly, Mr Lok contended 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. 40.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. 41.As for Clause 8.01, it was in these terms:
42.Mr Lok submitted 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). 43.With respect, Re Kwong Ngai Ping merely stated the general proposition. That case did not have a clause similar to Clause 5.03 here. 44.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. 45.In any event, the Petitioner had decided not to exercise the option of forfeiture. Hence, the deeming provision had continued to operate until 29 November 2018. 46.I therefore rejected the second argument of Mr Lok. 47.The total debt due under the Default Judgment was:
48.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 32 above). His Petition must be dismissed on this ground alone. 49.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 was at least a bona fide dispute as to validity of the Default Judgment on substantial grounds. E5. Applicability of the Foo Judgment on Debt Due 50.The reasoning in the Foo Judgment is equally applicable to Mr Yuan as the debt was the same. There is a slight difference between them because the Petition against Mr Foo was issued before recovery of vacant possession and that against Mr Yuan was issued after. If the Deposit could only be applied in the manner proposed by the Petitioner, there was still a debt of over HK$10,000 due as at the date of the Petition. 51.By virtue of Clause 5.03, the debt was extinguished by the Deposit and hence there was no debt to ground the SD against Mr Yuan. 52.From 15 September 2018 onwards, mesne profits and judgment interest continued to accrue. Since the Deposit was not forfeited and the deeming provision continued to apply, it is arguable that an SD could only be issued when the Deposit was exhausted. It was not issued and section 6A of the Ordinance did not apply. The Petitioner did not have proof of Mr Yuan’s inability to pay this part of the debt and so the Petition has to be dismissed. 53.The Foo Judgment and the conclusions in paragraphs 50-52 above were arrived at solely based on evidence from the Petitioner, treating the Default Judgment, the date of the recovery of vacant possession, the figures in the SD and those in the Petition as correctly computed. 54.At the Previous Hearing, neither Clause 5.03 nor the construction placed by Mr Foo’s former counsel on it were brought to the attention of this court. 55.This hearing was not about Mr Yuan re-running his arguments in a more forceful or attractive way. The Deposit went to the root of both SDs and Petitions. The court should not ignore the arguments of a co-guarantor. The result would only be totally irrational and an affront to justice if one of the joint and several guarantors was found to be free from the debt whereas another becomes bankrupt. The bankruptcy order ought not to remain in force. F. THE 3 QUESTIONS POSED BY ANTHONY CHAN J 56.The answers to the 3 questions would not change the outcome of the Review. I summarize those answers as follows:
G. CONCLUSION 57.For the reasons given in paragraphs 53-55 above, I find there to be exceptional circumstances for review. I review myself and set aside the bankruptcy order on the ground that there was no debt due as at the date of the SD. Alternatively, there is a bona fide dispute of the validity of the Default Judgment on substantial grounds in view of the deeming provision in Clause 5.03. 58.As for costs, if Mr Yuan had produced evidence at the Previous Hearing, his Petition would have been adjourned to be heard with Mr Foo’s Petition at this hearing. The Previous Hearing (as a call over) could not have been saved. Costs would have been in the cause. 59.The costs of the Petition should be borne by the Petitioner. The costs of the summons should be borne by Mr Yuan himself. The supporting affirmation that dealt with the evidence in opposition to the Petition should form part of the costs of the petition. 60.On a nisi basis, I make an overall costs order, awarding 80% of the costs of the Petition to Mr Yuan to be summarily assessed on the papers without a hearing. Mr Yuan 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. 61.I thank counsel for their assistance.
Mr Michael Lok and Ms Euchine Ng, instructed by Wilkinson & Grist, for the Petitioner Mr Wong Hok Yan, instructed by MCA Lai Solicitors LLP, for the Debtor |
Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under HCB 7480/2018