Re Ng Kong Chau

HCB000149/1983

HEADNOTE

Bankruptcy Ordinance Cap. 6 Section 9(3). Fifteen per cent rule - matters to be considered. Receiving order refused.

IN BANKRUPTCY

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Coram: The Honourable Mr. Justice Jones in Court.

Date of hearing: 6 January 1984

Date of delivery of judgment: 13 January 1984

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JUDGMENT

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1. The debtor and his brother Noel Ng Kwai Tung were the only shareholders in Bestoom Investment Limited (the company) a commodity trading company. On the 2nd July 1982 the petitioner obtained judgment in the High Court against the debtor, his brother and the company for the sum of $3,113,138.29 interest and costs. The company has since been wound up by an order of the Court.

2. A bankruptcy notice was issued on the 13th July 1983 against the debtor, and was served on the 26th August 1983, after its validity had been extended by an order dated the 16th August 1983. Upon the debtor's failure to comply with the bankruptcy notice the petition was filed on this ground on the 28th September 1983 under s. 3(g) of the Bankruptcy Ordinance. The petition was subsequently amended by reducing the amount of the debtor's indebtedness in the sum of $559, 680. 44. This amount had been realised by the petitioner by exercising a power of sale under a mortgage with the company, but had been inadvertently omitted from the petition. The amended petition was served on the debtor on the 5th November 1983.

3. The debtor opposed the application for a receiving order on the grounds that his assets will be insufficient to pay a dividend of 15% as required by s. 9(3) of the Bankruptcy Ordinance.

4. Section 9(3) provides: -

9(3)      "If the court is not satisfied with the proof of the petitioning creditor's debt or of the act of bankruptcy or of the service of the petition, or is satisfied by the debtor that he is able to pay his debts, or is not satisfied that the assets for division among the unsecured creditors, after payment of all costs, charges and expenses, and the debts which are preferential under this Ordinance, will be sufficient to pay a dividend of 15 per cent, or considers that for other sufficient cause no order ought to be made, the court may dismiss the petition.''.

The power to dismiss a petition on this ground is discretionary.

5. The debtor, who admits his indebtedness, filed evidence of his means on the 25th November 1983 which revealed that he has no substantial assets and has liabilities amounting to over $300,000.00 in addition to the sum due to the petitioner.

6. On the 28th November 1983 the case was adjourned to a date to be fixed and leave was granted to the petitioner to file an affidavit in reply. However, no further affidavits were filed nor was any order sought for discovery.

7. The petitioner's solicitor wrote to the debtor on the 4th January 1984 requesting him to produce at the hearing all relevant documents referred to in his affirmation. The debtor complied with this notice. No evidence was called by the petitioner with regard to the means of the debtor. At the hearing I gave leave to the petitioner to cross-examine the debtor.

8. The debtor gave evidence that he is now employed as the manager of an import export company at a salary of $3,000.00 per month with a bonus which is unknown at the present time. The amount due to the petitioner is in respect of a guarantee that the debtor entered into for a loan made to the company. During the period that the company was trading the monthly expenditure was about $1,200,000.00, and the highest turnover in one month was $2,000,000.00. The company employed about one hundred employees. The debtor's house and car were purchased in the name of the company. There was no evidence that the debtor personally possessed any substantial assets when the company was trading. Although the debtor gave the impression of being evasive when he was cross-examined about his liability under the guarantee I am satisfied that what he intended to convey was that he did not anticipate that the company would ever be wound up so that it was very unlikely that he would be called upon under the guarantee.

9. The beginning of 1981 was a time of euphoria in the property and commodities market in Hong Kong. Credit was given in many cases without too many questions being asked and without adequate security or even with no security being given. In my judgment this was one of those cases. I am therefore unable to accept the proposition of Mr. Tang who appeared for the petitioner that the debtor was a person with substantial assets in 1981. I found nothing in the debtor's evidence to indicate that he was not an honest witness. On the evidence he is in no position to pay a dividend of 15%

10. However, Mr. Tang submitted that if a receiving order is made the Official Receiver may be able to uncover assets during the course of further investigations and in a public examination. He cited Re Ho Sum (Bankruptcy 143/1982) where Mayo, J. said:-

"All of this leads me to the conclusion that when a judge is exercising the discretion which is reposed in him in relation to the 15 per cent rule he should take a tentative view of the matter and should onlv be satisfied that there are insufficient assets if there is definite evidence to this effect. It goes without saving, that the Official Receiver is much more likely to be a reliable source of information than the debtor is himself".

In that case the petitioners gave evidence that they believed the debtor, who did not appear at the hearing, was possessed of assets which he had concealed. The Official Receiver did not oppose the application for a receiving order which was granted.

11. In Re Noel Ernest Lee (1974) H.K.L.R. 313 Leonard, J. as he then was, was not impressed with the debtor as a credible witness. However, he dismissed the petition, which was opposed by the Official Receiver, on the grounds that there were no assets to pay a dividend of 15% and the public interest would not be served by making a receiving order for it was unlikely that the Official Receiver would discover any worthwhile assets not already discovered.

12. Clough, J. considered the 15% rule in Re Fan Hung Sang (Bankruptcy 7/1983) when he said:-

"         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.

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.

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 percent dividend in accordance with Section 9(3), it is open to him to invoke Section 33(l) and apply for the annulment of any adjudication.".

In that case the petition was dismissed after the debtor had been subjected to a lengthy cross-examination. Clough, J. found the debtor to be an honest and credible witness.

13. My attention was drawn by Mr. Osborne who appeared for the Official Receiver to the consequences applicable if a receiving order is made. They include restrictions upon credit, engaging in business other than under the debtor's own name, acting as a director, and engaging in trading under the Commodities Trading Ordinance. However, these factors have little significance in bankruptcy proceedings.

14. In the instant case the attitude of the Official Receiver to the making of a receiving order has been neutral.

15. The burden is upon the petitioner to prove that the debtor can pay a dividend of 15%. No evidence was produced by the petitioner with regard to the debtor's financial position nor did they avail themselves of the invitation which I gave during the hearing to adjourn the case for discovery. They elected to rely upon the debtor's evidence. There was no suggestion that the debtor had concealed any assets.

16. Leonard, J. in Re Noel Ernest Lee commented on page 318 of his judgment as follows:

''... the bankruptcy law does not exist to safeguard innocents who neglect to make elementary enquiries as to credit worthiness before granting credit.".

Those words in my opinion equally apply to this case.

17. The petitioning creditor will inevitably be at a disadvantage when he is confronted with opposition to a receiving order being made on the grounds of the 15% rule. Nevertheless the rule forms part of the law of bankruptcy in Hong Kong primarily for the benefit of the Official Receiver. In order to establish that a dividend of 15% can be paid I consider that there should be poiitive evidence placed before the Court to this effect. Each case will necessarily depend on the evidence adduced and particularly the impression created by the debtor. The views of the Official  Receiver will always carry great weight. Here the Official Receiver stood on the sidelines with the result that the whole of the circumstances must be taken into consideration. I formed a favourable impression of the debtor. There was no evidence that the debtor can pay any dividend let alone one of 15%.Further it is most unlikely that the Official Receiver will discover any other assets. No useful purpose would be served by invoking the machinery of bankruptcy in this case for it will not be in the public interest.

18. Accordingly the application for a receiving order is refused, and the petition is dismissed. Petitioner to pay Official Receiver's costs agreed at $1,500.00.

Representation:

Mr. Ronald Tang (Tang & So) for Petitioner.

Mr. Osborne for Official Receiver.

Debtor in person.