Re Noel Ernest Lee

HCB000025/1972

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

NO. 25 OF 1972

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Re: Noel Ernest Lee

Ex Parte: First National City Bank (a body corporate)

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Coram: Leonard, J. in Court.

Date of Judgment: 11th October, 1973.

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JUDGMENT

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1. On the 13th September 1971 the petitioners obtained judgment against the debtor a Mr Noel Lee in the sum of $200,000.00 and $704.75 for costs and the entirety of this sum remains unpaid. A bankruptcy notice was issued on the 22nd August, 1972. This proved difficult to serve but service was finally effected on the 12th September, 1972. Mr. Lee failed to comply with its terms and this petition was presented on the 10th November, 1972 based on his failure, he having in the meantime sought fruitlessly to stay the Bankruptcy Notice. The petition was served on the 25th November, 1972, and on the 19th December, 1972 Mr. Lee filed affidavits alleging inability to pay the judgment debt and averring that he was employed as Manager of I.D.C. Ltd. of 407, Gloucester Building, Hong Kong at a salary of $2,000 per month; that he received no commission or bonus of any kind, that he had no income from any other source but that I.D.C. Ltd. owed him approximately $11,000; that he did not own a motor vehicle; that the rent of, and furniture and fittings in, his flat were paid and owned respectively by his employers I.D.C. Ltd.; that "some money" was owing to him on certain promissory notes but that he was unable to obtain satisfaction on them and that his assets would not be sufficient to pay a dividend of 15%. On this ground and on this ground alone he sought to resist the making of any order on the petition.

2. The matter first came before this court on the 22nd December, 1972, (that is to say, three days after service of Mr. Lee's affidavit on the petitioners' solicitors) when it was ordered that the matter be adjourned to a date to be fixed and that the petitioner be at liberty to file further affidavits and be at liberty to cross-examine Mr. Lee.

3. No further affidavits were in fact filed by the petitioners and the petition was set down for hearing before me on the 27th September, 1973 when Mr. Lee was cross-examined on his affidavit. I should say straight away that while I was not impressed by Mr. Lee as a credible witness I was not satisfied that the assets for division among unsecured creditors will be sufficient to pay a dividend of 15%. The question for me to decide is therefore whether I should exercise the discretion vested in me under Section 9(3) of the Bankruptcy Ordinance to dismiss the petition.

4. It was common case that the debt due by Mr. Lee arose from a guarantee given by him to the petitioners to secure repayment of an advance made by the petitioners to a limited company, The Executive Club (H.K.) Ltd. in which, at the time the advance was made, Mr. Lee owned almost all the shares, the subscribers to the Memo and Articles of this company, which was incorporated on the 8th May, 1968 having been Mr. Lee and a Mr. Twemlow, an accountant. It is to be noted that Mr. Lee described Mr. Twemlow as being one of two principal stockholders in I.D.C. Ltd. presently the employers of Mr. Lee and that on the 1st April, 1972 (that is some 7 months after the date on which judgment was entered against Mr. Lee). Mr. Twemlow as an officer of I.D.C. Ltd. re-confirmed the terms of Mr. Lee's employment with I.D.C. Ltd. which were that that company should pay Mr. Lee $2,000 per month and provide him with furnished accommodation up to a value of $506 per month.

5. The first matter on which Mr. Lee was cross-examined was his averment that he did not own any motor vehicle. A certificate of particulars of a motor vehicle supplied by the Transport Department showed Mr. Lee to be the registered owner of a Chrysler motor car AL 349 which had come here from Australia and had first been registered on the 21st June, 1968. While I was far from satisfied with Mr. Lee's explanation as to the reasons this vehicle was registered in his name rather than in that of the company to which he said it belonged, I had no evidence before me to show conclusively that it forms any part of his assets. Even if it does it can because of its age have little value commercially. Therefore the question of the motor car, save in so far as it goes to Mr. Lee's credibility, may be disregarded.

6. It was however shown that about the time the guarantee the subject of the judgment debt was given by Mr. Lee to the petitioners that is on 31st October, 1968, a financial statement was made by Mr. Lee to the petitioners. This statement purported to show that at that time Mr. Lee was worth $1,571,740.00. Mr. Lee states somewhat ingenuously that although he signed the statement he was not worth anything like that figure in fact but was worth it "on paper". Whatever he meant by that, the statement not only purports to show that he was worth $1 ½ million but goes on to state that his total income during the 12 months ended 31st March, 1968 amounted to $143,000 and his total living expenses amounted to $30,000. Before me he stated that in fact his receipts for the year in question amounted to about $24,000 and his living expenses were minimal as he had his meals at the Executive Club. He appeared to me to be a person who was ready to exaggerate his assets and earning capacity when seeking credit and to minimize them when faced with the consequences of having done so. His excuse for having exaggerated his assets was that the document in question was prepared not by him but by an official, a Mr. Crouse, in the employ of the petitioners with whom he was apparently on friendly terms and that it was prepared as a result of questions put to him by Mr. Crouse (himself a user of the Executive Club who regarded that organization as a viable and profitable project to which the petitioners might safely lend money). Mr. Lee signed the document because it represented the value of his assets and his earning capacity "on paper". He must, one would have thought, have known that the interest of the petitioners (as distinct from that of its official, Mr. Crouse, if Mr. Crouse was not in fact deceived) in securing the Financial Statement in question was to determine Mr. Lee's acceptability as guarantor of the debts of a company in which Mr. Lee had a large financial interest. Any theoretical "paper value" could have been of no interest to the petitioners.

7. One of the statements contained in this Financial Statement which Mr. Lee claimed was inaccurate was that he was the owner of 2 shares in I.D.C. Ltd. Before me he stated that while not the owner of the two shares he had an option to purchase them which he has never exercised yet the statement gives their market value as $76,000.

8. I cannot but consider that whatever may have been the arrangement between Mr. Lee and Mr. Crouse, whom I have not heard, Mr. Lee's actions at the time this statement was signed deserve the closest scrutiny and investigation. Therefore I direct that a copy of these proceedings be sent to the Attorney General who may perhaps wish to direct an investigation by the Commercial Crime Squad. Apart from the so-called "assets" mentioned in the Financial Statement and the motor car which Mr. Lee disowns Mr. Lee is also admittedly in possession of a pleasure craft "Noel's Ark". Although this craft bears his Christian name it also, he insists, belongs not to him but to his employers I.D.C. Ltd. in whose name it is registered. In any event, it is, he suggests, almost co-eval with that which came to rest on Mt. Ararat. It is used for the entertainment of clients of I.D.C. Ltd. I have no information as to its value. As I have mentioned earlier Mr. Lee is not a shareholder in I.D.C. Ltd. Mr. King and Mr. Twemlow, accountants in private practice, are the shareholders but Mr. Lee is its manager and has a free hand in running it. He presently engages on its behalf in the purchase and sale of secondhand cars and boats and is, he tells me, subject to no control whatsoever in doing so other than financial control that is to say it is to the company's funds that he looks when making the purchase of a car or a boat and to the company that he pays the proceeds of sale. He has no personal financial interest in these transactions, is not, he tells me, paid any commission on them, receives nothing except his salary and yet has a free hand in running the company and is held out by it as its agent to engage in such business. This evidence, I find exceedingly hard to accept for it, if true, indicates a surprising degree of irresponsibility on the part of two professional gentlemen. I have not had the advantage of hearing them and cannot comment further.

9. On this evidence, I clearly cannot be satisfied that there exist assets which would enable a dividend of 15% to be paid but, Mr. Asome argues, sufficient suspicion attaches to Mr. Asome argues, sufficient suspicion attaches to Mr. Lee's connection with I.D.C. Ltd. to justify full investigation by the Official Receiver. Miss Smith for Mr. Lee argues that this is not so. She says with some force that Mr. Lee has fully accounted for his connection with I.D.C. Ltd. and that it would be unfair to Mr. Lee to appoint a receiver having regard to the delay which has ensued since the guarantee which gave rise to his indebtedness and to the fact that the petitioning creditor is apparently the sole creditor. Miss Smith's skill and persuasiveness is such that I was initially attracted by this argument but I have decided that it should not carry weight with me. It seems to me that Mr. Lee merits small sympathy. He, by means of a guarantee, obtained credit to the extent of $200,000 for a company engaged in somewhat speculative business in which he himself had a major interest. He was accepted as a guarantor because of misleading information supplied to the petitioning creditor and whether this information was prepared with the connivance of one of the petitioning creditor's officials or not (as to which I can make no finding) seems to me immaterial.

10. 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. The petitioning creditor has not done so.

11. The construction of Section 9(3) of the Ordinance is interesting:

"If the court is not satisfied with the proof of the petitioning creditor's debt or ........ or is satisfied by the debtor that he is able to pay his debts or is not satisfied that the assets for division ...... will be sufficient to pay a dividend of 15% ..... the court may dismiss the petition."

The use of negative, positive and negative clauses following one another each governed by the verb "satisfied" persuade me that when not satisfied that the assets will be sufficient I should be loath to exercise my discretion in favour of the petitioning creditor a conclusion which undoubted commends itself to the overworked and possibly understaffed office of the Official Receiver.

12. Therefore I have decided that this petition should be dismissed. No order as to costs.

Representation:

Mr. Michael Asome (Wilkinson & Grist) for Creditor.

Miss J. Smith of Gordon Hampton & Winter for Debtor.

Mr. North for Officer Receiver.