Re Fan Hung Sang

HCB000007/1983

Bankruptcy Ordinance (Cap.6), Section 9(3), 15 per cent dividend provisions - onus upon petitioning creditor to displace power to dismiss - factors to be considered by the court in exercising discretion whether to dismiss creditor's petition.

IN THE HIGH COURT OF JUSTICE

IN BANKRUPTCY

No 7 OF 1983

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Coram: Hon. Clough, J

Date: 26 JUL1983

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REASONS FOR JUDGMENT

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1. On the 8th July l983 I dismissed the petition of Mr. Li Siu-ling (treading as Tin Shing Company) for a receiving order against the above-named debtor (trading as Yue Sun Polyethylene Products Factory) and made no order as to costs. The proceedings concluded late in the day and I indicated that I would hand down written reasons at a later date. I now do so.

2. The petitioner is an unsecured creditor in respect of a judgment for $67,486.00 with interest and costs obtained in the High Court on the 4th October 1982. He presented his petition on the 11th January 1983 founded primarily on an act of bankruptcy by the debtor under Section 3(1) (e) of the Bankruptcy Ordinance (Cap.6) in that the debtors goods had been the subject of execution in two High Court actions. within the 3 months period prescribed by Section 6(1) (c).

3. On the 10th January 1983 the petitioner's verifying affirmation was filed pursuant to Section 9(1) and this was followed on the 21st January 1983 by the filing of an affirmation of the petitioner's manager Mr. Chau Ho asserting that his investigations into the affairs of the debtor led him to believe that the assets of the debtor Would enable him to pay "at least 15% of the debts as required by Section 9(3) of the Bankruptcy Ordinance."

4. On the 2nd February 1983, pursuant to rule 68 of the Bankruptcy Rules, the debtor gave notice of his intention to show cause against the petition, specifying the ground that he intended to contend that his. assets available for division among the unsecured creditors would not be sufficient to pay a dividend of 15 per cent in accordance with the provisions ("the 15% provisions") of Section 9(3) of the Ordinance. and that in all the circumstances the court should exercise its discretion under that subsection and dismiss the petition.

5. On the 3rd January 1983 the debtor filed an affirmation alleging facts which he claimed established that he was "totally unable" to pay his debts let alone come within the 15 per cent. provisions.

6. On the 3rd February 1983 the petition came on to be heard before Liu J. who gave directions regarding the filing of further evidence, discovery and cross-examination of all deponents and adjourned the hearing to a date to be fixed.

7. On the 4th March 1983 the hearing of the petition. began before me. After the cross-examination of the petitioner's witness Mr. Chau Ho had begun it became apparent that counsel for the debtor was seeking in cross-examination to adduce documentary evidence of soave complexity concerning the debtor's affairs through Mr. Chau Ho who had no knowledge of most of the clatters being put to him.

8. When I raised with counsel for the debtor the propriety of this course of action he applied for leave to file further evidence which I granted on the footing that the petitioner was given leave to file evidence in reply and that the debtor was to pay the costs of the petitioner and the Official Receiver in respect of the abortive f first day of the hearing.

9. The effective hearing of the petition eventually took place before me on the 7th and 8th July 1983 by which time the debtor had filed further affirmations on the 12th April 1983 and the 24th June 1983 respectively, containing detailed and documented evidence of his affairs. No evidence in reply was filed on the petitioner's behalf.

10. It was common ground between the petitioner and the debtor that the only issues between them was whether the power to dismiss the petition under the 15 per cent provisions of Section 9(3) arose and whether that power should be exercised. On these issues counsel for the Official Receiver reserved his position until he had heard all the evidence and the submissions of counsel for the petitioner and the debtor.

11. The debtor not having sought to challenge any of the facts alleged in the petition and verified in the petitioner's verifying affidavit and not having raised any issue on service, I found that the petitioner had discharged the onus which the Ordinance places upon him to prove the matters mentioned in Section 9(2). Accordingly under the circumstances of this case the petitioner had established his right to the making of a receiving order subject only to the issues arising under the 15 per cent provisions of Section 9(3).

12. In considering the effect of those provisions and the related provisions employing the 15 per cent formula in Sections 10(1) and 33(1) I have borne in mind that no such provisions are to be found in the English Bankruptcy Act 1914 and the 15 per cent provisions are not taken from any English legislation. In particular Section 5(3) of the 1914 Act (which corresponds with Section 9(3) of the Ordinance) contains no provisions in pari materia with the 15 per cent provisions of Section 9(3) of the Ordinance and so there are no English authorities decided on statutory provisions expressed in the same tennis. The provisions of Section 9(3) are as follow: -

13. In my judgment it is clear from the words "If the court........is not satisfied that the assets for division ....... will be sufficient to pay a dividend of 15 per cent ... the court may dismiss the petition." that the power of the court to dismiss a creditor's petition arises and the court has a discretion to exercise that power unless the petitioning creditor satisfies the court that the available assets of the debtor will be sufficient, after the stipulated deductions, to pay the stipulated 15 per cent dividend. The same position pertains under the proviso to Section 10(1) of the Ordinance where a similar burden is placed upon a petitioning debtor.

14. I felt constrained by the terms of the 15 per cent provisions to adopt this interpretation of the provisions in Section 9(3) despite the fact that tire burden thus placed on a petitioning creditor must be very heavy and in many cases impossible to discharge. Counsel for the Official Receiver referred to Rule 70 of the Bankruptcy Rules on the question of onus. I do not regard the rule as capable of governing the interpretation of the Ordinance, but Rule 70 certainly seems to be consistent with the interpretation of the 15 per cent provisions I have adopted.

15. Accordingly at the hearing I considered the evidence on the footing that the power of the court to dismiss the. petition would be exercisable unless the petitioning creditor satisfied the court on the balance of probabilities that the assets of the debtor available for distribution Would be sufficient to pay the stipulated dividend.

16. The evidence in Mr. Chau Ho's affirmation filed on the petitioner's behalf on the 21st January 1983 was to the effect that he was the manager of the petitioner's business and that his investigations into the debtor's financial position led him to believe that the debtor would be able to pay at least the 15 percent dividend required by Section 9(3) of the Ordinance. Mr. Chau gave no evidence regarding the debtor's liabilities but affirmed to the following alleged assets of the debtor:-

17. Mr. Chau also affirmed his belief that the Official Receiver might be able to dig out more valuable assets of the debtor and avoid certain transactions not completed bona fide and for value. No particulars were given in this respect

18. As to the debtor's machines referred to in paragraph (a) above, counsel for the petitioner informed the court on the 7th July 1983 that he accepted the evidence of the debtor in his several affirmations to the effect that they had all been disposed of by sale, seizure in execution or re-possession by hire purchase creditors or mortgagees and that where sales had been effected the proceeds had been applied in payment of wages to the debtor's employees, payment of rent or discharge of creditors.

19. Counsel for the petitioner also accepted the affirmation evidence of the debtor to the effect that the fire insurance money referred to in paragraph (c) above amounted only to $105,812.43 and that of this sum $29,458.75 was paid out as outstanding insurance premium and the balance was paid as wages to the debtor's employees.

20. As to the debtor's shareholding in the limited company ("Hip Cheong") referred to in paragraph (b) above, the debtor affirmed and Mr. Chau admitted under cross-examination that the debtor only owned one share in Hip Cheong. It was put to Mr. Chau in cross-examination that, as the debtor had affirmed in paragraph 4 of his affirmation filed on the 3rd February 1983, Hip Cheong had closed down because of heavy indebtedness.Mr. chau  replied lied that he only knew that Hip Cheong had dealings with the debtor's firm and so he was not in a position to know the situation of Hip Cheong.

21. When cross-examined about the sum of $288,000 referred to in paragraph (d) above as allegedly representing the proceeds of sale of sub-standard bags and scrap over a period of 4 years, Mr. Chau said he was-familiar with the pr process of making plastic bags and he had supplied the debtor with plastic materials. He added that a factory of the kind owned by the debtor had scrap and sub-standard products amounting to 2 per cent of its total products.

22. However he admitted that he had only done business for 2 years with the debtor, from 1980 until the debtor's business ceased, arid he further admitted that he could not tell how much scrap would be produced from the plastic material he supplied to the debtor together with other suppliers of material and that he did not know what the debtors turnover of plastic bags had been during the 2 years when he had been dealing with him.

23. I considered Mr. Chau to be an honest witness but much of his evidence had been demolished either by the concessions of counsel for the petitioner or by his own frank admissions under cross-examination referred to above. Indeed when he was cross-examined by the Official Receiver he was reminded of his reference in paragraph 6 of his affirmation to other valuable assets and voidable transactions of the debtor and asked what he had in mind and he replied to the effect that he had already disclosed the debtor's transactions in his affirmation. He added that the information in his affirmation was complete as far as he anew.

24. The debtor's evidence in paragraph 6 of his affirmation filed on the 3rd February 1983 regarding the sub-atandard bags and scrap materials was to the effect that the value received for these items was not "regular" Initially the value. Had been in the range of a few hundred dollars and before his factory closed the value obtained was in the region of $2,000.00 odd per month. These sums were kept by his wife to be used as petty cash and fees for repairs of machinery and tools and for purchasing spare parts for the factory. This evidence of the debtor was not challenged in cross-examination.

25. In his first affirmation the debtor had affirmed that he was a broken man and that he estimated his liabilities amounted to about 4 million dollars. He had been arrested and imprisoned at the instigation of the petitioner for 2 months. He affirmed that he was totally unable to pay his debts.In his supplementary affirmation filed on the 12th April 1983 he particularised 14 actions against him (excluding 3 actions where the claims had been satisfied by payment or execution) for a total sum in the region of about $3,500,000. In addition he gave particulars of further claims on him amounting to a total of about $557,000. He was cross-examined at length for at least a day but I concluded after seeing and hearing him under cross-examination during all that time that he was an honest and credible witness who was not attempting to conceal anything from the court or his creditors.

26. It emerged in his cross-examination that he had not kept ledgers and that there had been minor transactions, (including the lending of his labour and supply of his materials) between his business and Hip Cheong of which he was a director but not an active one. These transactions had not been recorded by him because he considered that they were too trivial.

27. He insisted that transactions of substance between him and Hip Cheong had been recorded but said they were complex transactions involving unfinished products and materials, that had gone on for some years, and it had not been possible to strike a balance or get Hip Cheong to agree with his contention that about $200,000 was owing by Hip Cheong to his business.

28. He was pressed about this debt and it was suggested that he had told his creditors that it was about 1 million dollars but I accepted his evidence that it was not such a sum. I also accepted his evidence that no amount of pressure from him could result in payment, partly because of the confusion in the records and partly because Hip Cheong was itself insolvent. Its workers had gone on strike and in early October 1982 it had gone out of business after selling all its machinery. In re-examination he said that he had been informed whilst in prison that after Hip Cheong had applied upwards of $100,000 in paying arrears of rent and wages the balance of the proceeds of sale had been the subject of execution proceedings by one of Hip Cheong's creditors.

29. The debtor admitted under cross-examination that his records were incomplete and that he had had a succession of inexperienced accounts clerks. However he said that the absence of ledgers did not create a danger of debts due to his business being overlooked because he kept a cash book, sales book and a book for transactions between his company and banks.

30. He said everything was put down in these books and apart from the debt of about $200,000 owing to him by Hip Cheong there was only one other outstanding debt amounting to $3-4,000 which he had written off after his customer had refused to pay having complained of the quality of the goods supplied by him. He was unable to produce complete records of all his transactions because execution had been levied in his premises in his absence and documents had been scattered all over the place.

31. He admitted that at one of the creditor's meetings in October 1982 he informed his creditors that he had unfinished products worth about 1 million dollars in his factory. About half of these products were finished and sold for about $500,000 but payment for the products was made by the two purchasing companies in the form of payment of his workers I wages direct and payment of his electricity bill and the cost of materials. He did not himself receive any of the money. The remaining half of the unfinished materials were seized by the bailiffs in the factory.

32. Under cross-examination by counsel for the Official Receiver the debtor indicated that he lived in a Government flat in Choi Hung Estate and owned no property. Neither he nor his wife had any assets of substance. He had 4 children aged 21, 19, 18 and 14 respectively. The eldest child, a son, is now working. Three of his children had had to leave school because of his business failure.

33. Asked by counsel for the Official Receiver how he was going to pay his solicitor's bill the debtor replied that his friends and relatives were very sympathetic and were doing their best to make contributions. He attributed his failure in business to "over trading" resulting from in undercapitalized business with high overheads ,incurred to purchase expensive machinery on credit terms resulting in cash flow problems followed by insufficient business and workers strikes. Eventually with the assistance of the Labour Department he had made an agreement with his workers under which they received only 45 per cent of their arrears of wages.

34. Having heard all the evidence I considered that Mr. Chau's evidence had been demonstrated to be inaccurate whereas I concluded that the debtor's evidence was credible, detailed and candid and largely supported by documents. Furthermore counsel for the Official Receiver informed the court that he had information of further claims amounting to about $1,100,000 in addition to the claims previously mentioned by the debtor.

35. It followed that the debtors liabilities were probably in the region of 5 million dollars and that, as counsel for the Official Receiver aptly submitted, his only assets were a disputed book debt of about $200,000 (claimed against Hip Cheong, a Limited Company which is probably insolvent) the debtor's domestic chattels and one of the 6,000 shares issued by Hip Cheong which is probably valueless.

36. Accordingly I was not satisfied that the petitioner had proved on the balance of No probabilities that the dividend had proved in the 15 per cent provisions of Section 9(3) would be payable and I went onto consider whether to exercise the power to dismiss the petition on that ground. When the court has to decide whether to exercise its power to dismiss a creditor's petition under Section 9(3) it clearly has a discretion to be exercised judicially in the light of the circumstances of the case before it.

37. Thus in Re Noel Ernest Lee (1974) HKLR 313 Leonard J. dismissed a creditor's petition case where only the debtor filed evidence and was cross-examined. Leonard J. was not satisfied that there were assets to enable a dividend of 15 per cent to be paid and he was also persuaded that it was unlikely the Official Receiver (who had opposed the making ,210 . a receiving order) would discover any worthwhile assets not already disclosed. He commented that the pet1liby creditor had not done so. In those circumstances the learned learned I judge pointed out that the only public benefit from the making of a receiving order would be to prevent the debtor under pain of criminal penalties from obtaining further credit. On the facts found by Leonard J. he clearly did not consider that the public interest would by making a receiving order to set off the ponderous and expensive machinery of bankruptcy in a situation where to do so would be (as the official Receiver had contended) using a sledge  hammer to break a nut.

38. On the other Band in the recent case of Re Ho Sum (Bankruptcy No.143 of 1982) Mayo J. made a receiving order in a manifestly different situation where the debtor did not appear to oppose the petition, the petitioning bank had, filed unchallenged evidence affirmed by one of indicating grounds for supposing that the debtor might be, possessed of concealed assets which the Official Receiver  could discover, and the Official Receiver r did not oppose the petition.

39. In considering whether to exercise the power to dismiss the petition I have borne in mind that in most cases the petitioning creditor cannot reasonably be expected to, adduce informed and reliable evidence of the debtor's assets and liabilities. Such matters are peculiarly within the debtor's knowledge and the machinery of the Bankruptcy Ordinance which a receiving order activates is intended to enable the Official Receiver to ascertain the true state of the debtor's affairs.  Accordingly, in my judgment, the fact that a petitioning creditor is not able to adduce evidence to satisfy the court regarding the requirements of the 15 per cent provisions is not by itself a factor of decisive weight when the court is considering how to exercise its discretion.

40. Matters which are more significant include, but clearly are not confined to, the attitude of the Official Receiver, for whose benefit the 15 per cent provisions are primarily intended, the nature and effect of the evidence, if any adduced by the debtor concerning his own affairs, and the likelihood or otherwise of further investigation of the debtor's affairs in the process of bankruptcy bringing to light the existence of assets of the debtor which have not been disclosed at the hearing of the petition.

41. As Mayo J. pointed out in Re Ho Sum it is usually not possible at the hearing of a petition for the court to form anything but a tentative view regarding the true state of a debtor's affairs. Furthermore if a receiving order is made and the Official Receiver's investigations satisfy him that there will not be a 15 per cent dividend in accordance with Section 9(3), it is open to him to invoke Section 33(1) and apply for the annulment of any adjudication.

42. However in the present case, as in the case of Re Noel Ernest Lee (Supra), the debtor's affairs have been the subject of comprehensive and detailed evidence. Moreover I have found the debtor to be a credible witness. Despite his inability to produce complete records of his affairs, I accepted the submission of the Official Receiver's counsel that there was no reason to suppose, after a hard fought contest between the petitioner and the debtor, that there would be any realisable assets brought to light if a receiving order were made. I also accepted the submission of counsel for the Official Receiver that in any event if a receiving order were made the petitioner's costs, if awarded, would probably absorb a substantial proportion of anything recovered. Furthermore the Official Receiver would require a deposit of at least $20,000 under Rule 52(l) to cover his costs and expenses if a receiving order were made.

43. As counsel for the Official Receiver pointed out the debtor had been through a series of probes and examinations. He had been arrested by the police, submitted to the inter-vention of the Labour Department, the bailiff, his creditors in creditor's meetings and finally, after being released from prison as a committed debtor, he had been exhaustively cross-examined in these proceedings.

44. Asking myself what benefit there would be likely to accrue to the petitioning creditors and the other creditors of the debtor if a receiving order were made in this case. I concluded that the strong probability would be none and that the activation of the full rigors of the bankruptcy machinery against the debtor would be a sterile exercise of the nature which the 15 per cent provisions are intended to avoid. Weighed against this consideration the inhibitions which the bankruptcy law would impose in the public interest upon the debtor's trading activities if a receiving were made seemed to me to be insufficient to justify the making of a receiving order. I accordingly dismissed the petition.

Representation:

Mr. Stephen Chow instructed by Hastings & Co. for petitioner.

Mr. C.H.Allison for Official Receiver.

Mr. Ronald Tang instructed by Cheung, Chan & Chung for Debtor.