Kwong Cheung (A Firm) v. Chan Yuen t/a Chan Yuen Kee

DCCJ001622/1970

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT VICTORIA

CIVIL JURISDICTION

ACTION NO. 1622 OF 1970

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Coram: N.B. Hooper, D.J. in Court

Date of Judgment: 15 July 1970

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RULING

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1. The parties have agreed that this Court should determine first of all the following issue:-

"Whether the alleged agreement by the creditors on the 29th August, 1969, to accept 42 per cent of their claims in full and final settlement should preclude the plaintiff from recovering the amount claimed in this case, assuming for the moment that that sum was owed by the defendant to the plaintiff at that particular time."

2. It is common ground in this case that on the 29th August, there was a meeting of the defendant's creditors at which meeting the plaintiff and the defendant were present. It is further common ground that at this meeting all the creditors present, including the plaintiff, agreed to accept a payment of 42 per cent in full and final settlement of the trade debts registered by them.

3. It is the plaintiff's case that, because he did not register a particular debt at this meeting, he is not limited in his claim against the defendant by the agreement to accept only 42 per cent. He claims that prior to the meeting he had made a secret arrangement with the defendant, whereby the defendant promised that he would pay this unregistered debt in full.

4. It would appear from the evidence of the plaintiff that he had also prior to the creditors' meeting, with the full approval of the defendant, repossessed himself of goods which he had previously sold to the defendant. He was obviously out to reduce as far as possible before he went to that meeting, the debts which the defendant owed his firm.

5. Now it is true to say that the plaintiff has been at pains to point out to this Court that this was not a properly constituted creditors' meeting, and that no statement of account showing the defendant's assets and liabilities was ever produced. He testified in respect of the percentage of 42 per cent, "It is not derived by calculation, it was a mere mental statement by all of us."

6. This is a very difficult statement to accept and it is clear to me that the plaintiff is not being truthful in this respect, for in answer to the Court earlier on the question as to whether the agreement to accept 42 per cent was agreed by all the parties present, that is the defendant and all the creditors, he said, "Yes, this is calculated from the individual figures reported by the various shops."

7. Obviously, there would have to be some calculation and furthermore there must have been some knowledge of the defendant's financial position for how could a figure of 42 per cent be calculated from the registered loans if the defendant's financial position was not known as well. The plaintiff was furthermore being deliberately evasive when he was asked whether he agreed that a private agreement such as he had made would have given him an unfair advantage over the other creditors. He stated that at the meeting he did not believe that the defendant was insolvent, and he further stated that it was up to the individual as to the figure of the loan which was registered at the association.

8. He would therefore have the Court believe that a meeting of creditors was called where the creditors could register only a percentage of their full claims on the defendant, and that with no calculations of any sort, the parties inexplicably agreed to accept a figure of 42 per cent in full and final settlement of their registered claims (and in at least two cases very substantial claims), even though the defendant was known by at least one of them to be solvent. This is obviously unacceptable.

9. There can be no doubt that at the meeting of creditors, by agreeing between themselves and the defendant that they would accept 42 per cent of their claims, the creditors were binding themselves to limit their claims on the defendant to 42 per cent. It would clearly be a fraud upon the other creditors if the plaintiff were to recover a larger percentage of the debt owed to him than the other creditors.

10. In the case Ex Parte Milner⁽¹⁾, Lord Justice Bowen stated the position as follows,

"I think this case must be decided on the settled principles of the common law. A man who is insolvent may enter into any arrangement he pleases with his creditors, provided that he does not infringe the provisions of any statute or the rules of ordinary good faith. But in any ordinary case, what does a simple composition mean? It means that each of the creditors agrees to forego a part of his debt, the consent of each creditor who comes into the arrangement being a consideration for the consent of the others. It follows that it is of the very essence of the transaction that the creditors who take part in the scheme act upon the good faith and understanding that they are all coming in upon terms of equality, and if a deed is prepared to carry out this equal distribution, every creditor who executes it does so on the faith that there is no private bargain with any of the other creditors which will destroy this equality. If there is any private agreement that one of the creditors is not to be dealt with upon this equal footing, that is to receive a preference, that is a breach of faith, and if the debtor is aware of it, it strikes at the root of the deed, and entitles any creditor who has been thus deceived to treat it as void."

11. It would therefore appear that if there was a secret agreement such as the plaintiff has described, any of the creditors, the parties to the composition agreement, could treat the composition agreement as void and sue for the full amount of their claims. The question arises whether the plaintiff is in a similar position.

12. In this connection I would refer to a passage from Halsbury's Laws of England⁽²⁾

"In such a case not only is the creditor who has entered into the secret agreement with the debtor unable to enforce this stipulation for his benefit, but the deed remains operative against him, so that he loses both the right to the composition and his original debt which has been released."

13. Reference is made here to the following cases:

14. In the last mentioned case reference to the previous cases is made by Bigham J. at page 945,

"In the cases which were referred to in argument - ex parte Oliver, in Re Cross and ex parte Philips - it was held that a creditor who executed a composition deed, upon the face of which he was to be paid pari passu with the other creditors, and at the same time secretly stipulated for a preference, upon discovery of the fraud, was not entitled to prove even for his original debt, which by the terms of a composition deed he had released."

15. The learned judge went on to say later on in his judgment,

"..........The effect of the present transaction is this: I release the debt you owe me provided you pay me that which will be a larger proportion of what you ought to pay than any other creditor will get. Such a condition is tainted with illegality, and it can make no difference that, instead of being expressed in the deed, it was come to by a secret arrangement. The result is that the release of the debt remains absolute, and the condition which creates a fraudulent preference, is void."

16. It will be appreciated that by entering into the secret arrangement in the present case, not to register the full amount of the debt which the defendant owed his firm, the plaintiff was obtaining an unfair advantage over the other creditors and the effect was precisely the same as in the above passage.

17. I appreciate that according to his intention the release which the plaintiff gave when he consented to the composition to receive only 42 per cent related only to the debt which was registered at the wholesalers Association, nevertheless I am satisfied that on the above authority, the plaintiff cannot enforce the secret arrangement that he should be paid on certain cheques in full.

18. In determination of this preliminary issue, I would hold that by agreeing with the other creditors to the composition on the 29th August, 1969, to accept 42 per cent in full and final settlement of his debt registered at the Association, the plaintiff has precluded himself from recovering the amount of the debt which was not registered at that meeting.

19. Since this ruling is fatal to the plaintiff's claim, I would dismiss the plaintiff's claim with costs.

20. Certificate for counsel.

Representation:

Mr. Y.L. Yeung (L.S. Shum & Co.) for plaintiff.

Mr. Wesley Wong (instructed by F. Zimmern & Co.) for defendant.

(1) (1885) 15 Q.B.D. page 615

(2) Halsbury's Laws of England, 3rd Edition, Vol.8, page 129, para.223