Re China Trade Investment Co

HCB000022/1965

IN THE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

ACTION NO. 22 OF 1965

-----------------

-----------------

Coram: Li, J.

Date of Judgment: 30th May, 1975 at 10.05 a.m.

-----------------

JUDGMENT

-----------------

1. This is a motion by one Mr. YUE TING TSOONG (hereinafter referred to as "the applicant") for the relief as set out in the Amended Notice of Motion.

2. The facts in this case are that the applicant was a client of a firm by the name of China Trade Investment Company (hereinafter referred to as "the firm" ) which had two partners, namely, the late FISHER YIN C. YU and the China Trade Corporation (Hong Kong ) Limited ( hereinafter referred to as "the Corporation" ). The business of the firm was to deal in American shares in its own name through a firm of American sharebrokers named R.W. Presswich and Company of 80 Pine Street, New York. The modus operandi of the firm was that it received money and took instructions from its clients for the purchase of American shares and in turn, it instructed R.W. Presswich to acquire such shares collectively in the firm's own name. A list was kept by the firm as record of purchase or sale for its various clients of the specific shares it was instructed to purchase or sell. Presswich and Company would then account to the firm for the profit and loss collectively and the firm would in turn, account to its various clients individually for the profit and loss of the clients' transactions. In 1965 both the firm and FISHER YU ran into financial difficulties and became insolvent. FISHER YU committed suicide on the 11th August, 1965. One FRANCIS PAN, a Director of the Corporation, the remaining partner of the firm, issued a notice on behalf of the firm to the firm's clients and creditors to the firm's suspension of payment on the 7th September, 1965. On the 8th September, 1965, Mrs. CHANG, alias Mrs. FRANCIS PAN, petitioned for a Receiving Order against the firm. A Receiving Order was made against the firm on the 16th October. 1965, and the Official Receiver was appointed Receiver of the firm. No Statement of Affairs had been prepared on behalf of the firm in compliance with section 18 of the Bankruptcy Ordinance. However, the Official Receiver was able to obtain a list of the firm's clients. On the 22nd October, 1965 the Official Receiver gave notice to all the firm's clients and creditors, including the applicant, of a creditors' meeting to be held on the 4th November, 1965, and, accordingly, these clients or creditors were requested to prove their debts. Further, the notice was gazetted in the Government Gazette and advertised in the newspaper. The applicant did not prove his debt, nor did he attend the creditors' meeting. At the meeting of the creditors there was a resolution of those creditors who had proved their debts that the firm should be adjudicated bankrupt. Thus on the 25th November, 1965, an Order of Adjudication was made and the firm was adjudged bankrupt. The Official Receiver was appointed Trustee of the firm's estate on the 14th December, 1965. The Official Receiver then realized that the remaining partner was a corporation. Accordingly, an application was made in Court and an Order obtained that the Receiving Order and the Order of Adjudication be amended against all the partners of the firm excluding the Corporation. Nothing of relevance occurred for some years except that presumably the Official Receiver was trying his best to get in the assets of the firm. On the 1st of February 1974 however, solicitors for the applicant wrote to the Official Receiver on the subject matter of creditors and there followed an exchange of correspondence with the Official Receiver as exhibited in the Affidavit of Roderick BUN WOO in Exhibit 8. I shall read some of these letters as they disclose relevant facts in these proceedings. The letter dated the 1st of February, 1974 reads as follows - it is addressed to the Official Receiver:

There follows a list of twelve persons including the applicant.

"Please advise us fully of the situation and whether any dividend is likely to be paid to our clients in the near future."

3. On the 2nd of February there was a second letter, a reminder to the Official Receiver, in these terms from the applicant's solicitors:

"Further to our letter of the 1st instant we shall be glad to have your confirmation that you have duly received a formal claim from every one of our clients whose names were set out in that letter."

4. On the 4th of February the Official Receiver replied to the applicant's solicitors in these terms:

Then on the 5th of February the Official Receiver wrote to the applicant's Solicitors again. It reads:

"Further to my letter of yesterday's date I write to inform you that I have received the following proofs of debt which appear to be included in the list of your clients contained in your letter of 1st February."

5. Then the letter listed four persons who had proved their debt, of whom the applicant was not one. It goes on to read:

"I do not appear to have received proofs of debt from the following."

Then the Official Receiver sets out the names of eight persons, including the applicant, who had not proved their debts. The letter goes on:

After that letter nothing was done until 1975. On the 31st January, 1975 the Official Receiver gave Notice of Intended Dividend which was duly advertised in the English and Chinese newspaper and gazetted in the Government Gazette. No formal notice, however, was sent to inform creditors because there was no Statement of Affairs prepared and therefore no creditor was so listed.

6. On the 17th March, 1975 a dividend of 13.12% was declared and it was again duly gazetted and advertised in the Chinese and English papers. The dividends were declared payable as from the 1st April, 1975. Indeed, part of the assets called in by the Official Receiver had been distributed on the 1st April 1975 to creditors who had proved their debt. On the 2nd of April the applicant's solicitors wrote to the Official Receiver again. The letter reads:

And the letter sets out the same persons, including the applicant, who had not proved their debt.

"Although you said you did not appear to have received proof debts from these 8 clients of ours, we would advise them to lodge formal proofs of debts again if there was a possibility of a dividend being declared herein."

This letter arrived too late because part of the assets had been distributed to creditors who had proved their debts. Accordingly, the Official Receiver replied on the 3rd April in the following terms:

7. It is alleged by the applicant's solicitors that both the applicant and his solicitors did not notice, whether it was a Notice of Intended Dividend or Notice of Final Dividend, advertised in Gazette or in the newspapers at all. Hence this motion for the relief. The Official Receiver entered an appearance to oppose this application.

8. The applicant's case is that the whole proceedings are void since the act of bankruptcy was committed after the dissolution of the partnership, which occurred on the death of FISHER YU. Counsel for the applicant contends that the Receiving Order was made on the ground of an act of bankruptcy of a non-existing partnership and therefore the Order was void ab initio. On the death of FISHER YU the firm had no other remaining partner except the Corporation, which was a limited company. No proceedings were further invalidated by fundamental irregularity in that no Statement of Affairs was prepared as required by section 18 of the Bankruptcy Ordinance before the Order of Adjudication.Learned counsel for the applicant further contends that even if these proceedings were not void the Official Receiver failed to give formal notice to the applicant of his intention to declare a dividend in compliance with rule 123 (1) of the Bankruptcy Rules. For these reasons I am asked to rescind the Receiving Order because it is null and void or to cure such irregularity for failure to give formal notice of intention to pay dividend by allowing the applicant to prove his debt out of time.

9. The Official Receiver's case is that the firm was not dissolved on the death of FISHER YU. On the facts as disclosed in the Affidavits, the Director of the surviving partner, the Corporation, FRANCIS PAN, gave instructions to wind up the firm's business after the 11th August, namely, the date of death of FISHER YU. I am referred to Exhibit 1 of Mr. Roderick WOO's Affidavit which is a letter from a firm of chartered accountants Lowe, Bingham & Matthews. Part of the letter reads as follows:

10. The aforesaid letter gave the reason why a Statement of Affairs had not been prepared after the Receiving Order was made, explained how the list of creditors and clients was obtained by the Official Receiver, and showed that the remaining partner, after the death of FISHER YU, was carrying on the business of the firm for the purposes of winding-up the business. It was in the course of carrying on the business that the act of bankruptcy was committed on the suspension of payment to the firm's creditors. It is contended by learned counsel for the Official Receiver that as a result of the circumstances that prevailed it was impossible to give a proper notice to creditors in compliance of rule 123(1). Nonetheless the applicant had ample notice: first of all, there was the notice to the applicant for the proof of debt dated 22nd October, 1965; there was the gazetting of the Petition; there was correspondence between the Official Receiver and solicitors for the applicant in 1974 and the proof form was sent out to the applicant's solicitors who had done nothing with them for the whole year; there were also gazettes and advertisements of the intended dividend and there were also gazettes and advertisements in the papers as to the payment of final dividend. In other words, the applicant or the solicitors had been completely inactive until one day after the dividend was available for distribution, and, in fact, part of the assets had been distributed. The Receiving Order was made against the firm and not against individual partners. It is contended that it is only the firm's assets that are involved. Counsel for the Official Receiver urged that the Petition or the proceedings should be taken as valid and that it was too late for the applicant now to come to Court and ask for his right to prove his debt.

11. A large number of authorities have been cited to me in support of the arguments by counsel for both parties but not all of them are directly relevant. Having regard to the facts in this case I do not consider the cases of Re Pritchard ⁽¹⁾, Harkness v. Bill's Asbastos & Engineering Ltd. ⁽²⁾. and Re Geisel ⁽³⁾ to be of assistance to me. It is clear law that where there is a fundamental flaw in the proceedings the whole proceedings, including the subsequent acts are void ab initio, though in the Asbastos case it was held that where there was a good cause of action a non-compliance of the Rules of the Supreme Court could be regarded as an irregularity instead of a fundamental flaw which could be cured under 0.2 ...(illegible) of the Rules of the Supreme Court of England. The case of Re Geisel is not applicable since the proceedings were not taken against FISHER YU personally but against the firm. It is true that after FISHER YU's death the only surviving partner was a Corporation to which the Receiving Order could not apply but the Petition was presented against the firm and the Official Receiver appointed Trustee of the firm's assets only. Thus the whole question revolves around the issue of whether the death of one of two partners necessarily put the partnership business to an end and dissolved the partnership for all purposes and whether the bankruptcy proceedings could be taken out against the firm after the death of a partner on the ground of the firm's insolvency before that partner's death. It is the law that the death of a partner does not necessarily put to the end of a partnership and dissolve the partnership business for the purposes of winding-up the business. Section 40 of the Partnership Ordinance provides:

"After the dissolution of a partnership, the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue, notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:"

12. In page 251 of Lindley on the law of Partnership, 13th Edition, it reads ..... the following passage is found:

"Notwithstanding a dissolution each partner can pay, or receive payment of, a partnership debt; for it is clearly settled that payment by one of several joint debtors, or to one of several joint creditors, extinguishes the debt irrespective of any question of partnership. So, again, it has been held that a continuing or surviving partner may issue a bankruptcy notice in the firm name in respect of a judgment obtained before the dissolution, and that notice to him of the dishonour of a bill of exchange is sufficient, and that he can withdraw a deposit or sell the partnership assets, or pledge them for the purpose of completing a transaction already commenced, or of securing a debt already incurred, or the overdraft on the partnership current account at the bank. The authority of a partner in this respect is well illustrated by the cases of Butchart v. Dresser and Re Bourne."

I need only refer to Re Bourne, which is again on the same page of this volume:

"In Re Bourne the survivor of two partners carried on the partnership business for some eighteen months on his own behalf but in the firm name, and continued the partnership banking account in that name. This account was overdrawn at the death of the deceased partner, and remained overdrawn till the final winding up of the business. After operating on the account for nine months, the surviving partner deposited with the bank the title deeds of certain real estate forming part of the partnership property, accompanied by a memorandum of deposit signed by him in the firm name as security for the overdraft. The bank knew of the deceased partner's death. A considerable sum was due to the executors of the deceased partner in respect of his share in the partnership at the time of his death, and the question arose whether the bank or the executors were entitled in priority to the proceeds of the sale of the real estate. It was contended on behalf of the executors that the surviving partner had no power to mortgage the real estate of the partnership, that by the operation of the rule in Clayton's Case the partnership overdraft had been paid off before the date of the deposit and that the executors' lien on the partnership property for the amount of the deceased partner's share took priority over the equitable mortgage to the bank. The Court of Appeal, affirming the decision of the court of first instance, held, however, that as regards the power of a surviving partner to deal with partnership assets, no distinction could be drawn between real estate and personal estate; that it is not only the right but the duty of a surviving partner to realise the assets for the purpose of winding up the partnership affairs, that the bank were entitled, in the absence of evidence showing the contrary, to treat the amount as continued by the surviving partner for this purpose, and the sums paid into and drawn out of that account as paid and drawn for the purpose of winding up the partnership; and that consequently the bank's security was valid for the balance ultimately due to them, and took priority over any claim by the executors of the deceased partner in respect of his share in the partnership."

At page 651 there is another passage in the same volume to this effect:

"An action may be brought, and judgment obtained against a firm in the firm name after its dissolution in respect of a cause of action which arose before its dissolution, and bankruptcy proceedings on the judgment will lie against the firm; and a bankruptcy notice addressed to the firm and served on the partners is sufficient to support a receiving order against them, or either of them."

Then in Re Wenham⁽⁴⁾ which is an action brought by a bank against a sole surviving partner who deposited with the bank certain agreements of sale to secure a debt owed by the firm, the learned Master of the Rolls had this to say at page 705:

"The facts are shortly these. The firm was dissolved on November 18, 1899; the writ was issued on December 8 against the firm, but in respect of goods which, on the face of the writ and for the purpose of the judgment, may be taken to have been supplied before the partnership was dissolved. I feel no doubt myself that those proceedings were strictly in order and in accordance with the true intent and meaning of s.115 of the Bankruptcy Act, 1883. That section provides that "Any two or more persons, being partners, or any person carrying on business under a partnership name, may take proceedings, or be proceeded against under this Act in the name of the firm". I think the words "being partners" are intended to mean "who have carried on business in partnership for the purpose of the liability which is sought to be enforced". In my opinion dissolution does not enable partners to get rid of the liability to have proceedings taken against them under s.115 for the purpose of enforcing payment of a partnership debt. I think the true meaning of the 115th section is, that if persons have been partners in a business, then bankruptcy proceedings can be taken against them in the partnership name."

Lord Justice Rigby at page 707 in the same case said this:

"From the first I have been unable to see what ground of complaint John Wenham could possibly have under the circumstances of this case, treating his ground of complaint as being the difficulty, perplexity, or trouble he might be brought into. Though there have been general suggestions of difficulty, I have not heard any particular difficulty defined in a manner that I can understand. True it is that, though there is no solid ground of complaint here, it would be sufficient, in certain circumstances, to show that the provisions of the Bankruptcy Act and the rules under it had not been complied with. Technically such an objection may, perhaps, be open to John Wenham; but how are we to treat it having regard to the circumstances of this case? Persons who carry on business under a firm name hold out, in effect, to those persons with whom they do business, "You can have your rights against us enforced on the basis that we are a firm"; and it has been held in many cases that partners are not at liberty by a dissolution effectually to alter that state of things."

In Re Clough ⁽⁵⁾ Mr. Justice North at page 327 said:

In the present case there is evidence that the firm was insolvent before the death of FISHER YU and before dissolution. The Corporation, through FRANCIS PAN, instructed Lowe, Bingham & Matthews to investigate into the firm's accounts and then gave notice of suspension of payment. All the acts that were done were in preparation of a winding-up of the firm's business. It was up to then a continuance of the firm's business and such acts were binding on the firm. The Petiti on was made against the firm. Section 7(b) is only an enabling section so as to enable the Official Receiver to go against individual partners if necessary. It does not force the Official Receiver to proceed against the deceased's estate or against the Corporation. As I understand it, at the time that the bankrupt's estate was administered both the deceased FISHER YU's estate and the Corporation itself were insolvent. It was held in Re Mcrae ⁽⁶⁾ that a partnership debt was not a separate debt of the individual partner. At page 21 of this report Lord Justice Lindley said:

"..... Neither before nor since the Judicature Acts has a partnership debt been held to be the separate debt of the partners, nor has a partnership creditor ever had a right to maintain a suit or obtain a decree simply for the administration of the separate estate of a deceased partner. It is true that he might bring a suit against the representatives of the deceased partner, and so obtain relief against the estate of the deceased partner, but the decree in that case would be quite different from that sought for here. The plaintiff brings his action as a separate creditor, and asks for judgment for administration in the usual form. The first action is a defective action, and the Plaintiff is not entitled to the conduct of the proceedings."

In view of this I am of the opinion that if efforts made to go against the deceased's estate or in the winding-up of the Corporation it would probably be a waste of time and effort. Further, in the case of Re Barnard ⁽⁷⁾ where the separate estate of a partner was insufficient for the payment of his separate debt, and therefore no part would be available for payment of the partnership debts, a summons by a partnership creditor for the administration of the estate of the partner distinguishing the separate debt from the partnership debts was dismissed. Lord Justice Cotton at page 451 said this:

"Then with respect to the summons, it is contended that a creditor of the firm cannot institute proceedings against the separate estate of a deceased partner in this way. I have already stated that there is another ground on which we think this summons ought to be dismissed, and therefore I give no opinion on this objection, except to say that people in the situation of this Plaintiff would be well advised to bring an action in the ordinary way instead of taking out a summons like this. But we do not expressly decide the question whether he had a right to commence proceedings by an originating summons. Here it is proved that the estate of the testator is insufficient to pay the separate debts, and that being so, the Plaintiff, as a creditor of the partnership estate, can derive no advantage from prosecuting these proceedings, and therefore in our judicial discretion we think it right to discharge the order of the Vice-Chancellor."

And then at page 453 Lord Justice Lindley said this:

"..... Here the Plaintiff is not a creditor: it is well-established law that he has no claim against the separate estate till all the separate creditors have been paid, and it is established as a matter of fact that no separate estate is available; so that it is quite inconceivable that anything will ever come to the Plaintiff. Therefore I think the summons ought to be dismissed."

13. In view of the facts and the law I hold that, indeed, a failure to obtain a Statement of Affairs is an irregularity but the proceedings were not void because of this irregularity, and certainly not void ab initio simply because the Petition was presented against the firm after the death of Mr. YU. Despite this irregularity I also find that the applicant was not prejudiced because a notice dated the 22nd October 1965 was actually sent to him to prove his debt and to attend a creditors' meeting. I rule that the partnership was not necessarily dissolved by an act of bankruptcy of the firm, and even if it had been so dissolved then the Petition was not void ab initio. In any event, the proceedings have gone before no less than four judges in succession, Mr. Justice Scholes, the late Mr. Justice Creedon, Mr. Justice Briggs as he then was and Mr. Justice McMullin. Section 124 of the Bankruptcy Ordinance provides this:

"No proceeding in bankruptcy shall be invalidated by any formal defect or by any irregularity unless the court is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of the court."

For these reasons I feel that there is no substantial injustice as far as the proceedings are concerned and that I cannot in all fairness hold that the proceedings were void in any way because of the failure to prepare a Statement of Affairs.

14. The second point that was taken is that there was a lack of formal notice to declare a dividend or intended dividend. This to a large extent followed form the failure to prepare a Statement of Affairs. Having read section 18 of the Bankruptcy Ordinance I am of the opinion that the Statement of Affairs is merely to enable the Official Receiver to have a clear picture of the financial position of the debtor, to notify any creditor for the proof of debt and to enable a creditor to examine the available assets of the debtor. So far as the applicant is concerned, he took a completely passive attitude despite receiving the notice to prove his debt. He never applied to examine the Statement of Affairs as he was entitled to do under the provisions of sub-section (4) of section 18 of the Ordinance. The absence of the Statement of Affairs never really actually affected the applicant because the forms for proof of debt were sent to his solicitors, on the 5th February, 1974. There was no response for over one year. I have referred to letters once and I shall not repeat their contents again. Right from the beginning when the correspondence took place in 1974 it was quite clear in the mind of the solicitors of the applicant that dividends would be payable. He even had some information that it should be around 11 per cent. Letters in reply told him in so many words that unless his clients proved their debt they would be excluded. I need only refer to yet another rule to show that promptness in action was required not only of the Official Receiver or the Trustee but also of the creditors. Rule 1 of the Proof of Debts Rules provides that:

"Every creditor shall prove his debt as soon as may be after the making of a receiving order."

The failure to give notice of intended dividend or payment of dividend, to the creditors is, indeed, an irregularity as contravening rule 123(1). But the provisions in section 124 of the Ordinance as referred to earlier shows that the Court has a discretion. Further, rule 203 of the Bankruptcy Rules provides this:

"Non-compliance with any of these rules, or with any rule of practice for the time being in force, shall not render any proceeding void unless the court so directs, but such proceeding may be set aside, either wholly or in part, as irregular, or amended or otherwise dealt with in such manner and upon such terms as the court may think fit."

In the case of Re Pavyer ⁽⁸⁾, even a notice that was not received and delay to put in the claim was caused an extension of time was granted only because of the exceptional circumstances. That was the case when dividends had not been paid. Mr. Justice Farwell said at page 570:

In the present case what is still in the hands of the Official Receiver is a sum of $319,252.46 less than half of the firm's assets so far, collected by the Official Receiver. Section 70 of the Bankruptcy Ordinance provides that:

"Any creditor who has not proved his debt before the declaration of any dividend or dividends shall be entitled to be paid out of any money for the time being in the hands of the trustee any dividend or dividends he may have failed to receive before that money is applied to the payment of any future dividend or dividends, but he shall not be entitled to disturb the distribution of any dividend declared before his debt was proved by reason that he has not participated therein."

Thus clearly the applicant is not entitled to disturb the distribution of any dividends declared by virtue of section 70. There is certainly a conflict of interests between the creditors who have proved their debts but have not yet paid and the applicant who has not so far proved his debt. It has been cited to me the case of Re Birkbeck Permanent Benefit Building Society in which the liquidator was allowed to claim payment from those creditors who had been overpaid in order to pay the depositors of the Building Society. But that case was founded on the principle that it was an error of the Court that the depositors who had not been paid and were not qualified for dividend. At the time of the distribution the depositors were held by the Court not to be qualified and such a decision was reversed, after the distribution, by the House of Lords. For this reason the liquidator was subsequently allowed to recover a portion of the dividends overpaid to contributories in order to pay the depositors. Here, it is clear to the applicant that dividends would be payable. One year before the Notice of Intended Dividend was gazetted forms of proof were sent to his solicitors. Although there was no formal Notice sent to the applicant yet applicant had actual notice that the debt had to be proved and that there was a dividend payable at a later date. When I have to rule on the issue where one of the innocent parties has to suffer, the one that is least to blame should have to be protected, namely, the creditors who have not been complacent, who have not been negligent, should have their interests considered first. Despite the irregularity in the Official Receiver failing to serve the formal notice on the applicant I find that no substantial injustice had been done to the latter. I find that the present arrangement should not be disturbed. Accordingly, paragraphs 1 to 4 of the Notice of Motion are refused. Paragraphs 5, 6 and 7 are not of any assistance to the applicant in any way. Paragraph 8 of the Notice of Motion is refused. In any event, there is no point in going after the separate estate of the deceased because the debt to the applicant was not a separate debt. Paragraph 8A is refused. Paragraphs 8, 10 and 11 are also refused.

15. Costs to the Respondent.

Representation:

Mr. R. Mills-Owens (F. Zimmern & Co. ) for applicant

Mr. A.R. Dicks for the Official Receiver

(1) [1963] Ch. 502

(2) [1967] 2 Q.B. 729

(3) [1883] 22 Ch. D. 436

(4) [1900] 2 Q.B. 698.

(5) 31 Ch. D. 324.

(6) 25 Ch. D. 16

(7) 32 Ch. D. 447.

(8) [1936] 1 A.E.R. 568.