Re Madam Yau Chuk Ying

HCB000073B/1981

Bankruptcy and involvency - s.s.17 and 22 of Bankruptcy Ordinance - resolution that debtor should not be adjudged bankrupt is not one that a creditors' meeting has power to make - an invalid resolution does not preclude an application for adjudication in terms of s.22 - debtor adjudged bankrupt.

IN THE HIGH COURT OF HONG KONG

IN BANKRUPTCY

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Coram: Fuad, J.

Date: 22 January 1982

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ORDER

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1. This is an application by the Official Receiver to adjudicate a debtor (who traded as "The Kwok Fu Restaurant") bankrupt under S.22 of the Bankruptcy Ordinance. Since it is opposed by the debtor it is necessary to go into the history of the matter in some detail.

2. On the 15th July 1981 a petition was presented by certain workers of the restaurant. The Court appointed the Officer Receiver as Interim Receiver on the following day; and a receiving order was made on the 15th September 1981. The first meeting of creditors was held on the 2nd October 1981. The minutes show the following. 66 creditors were present, either in person or by proxy, representing total claims of $1,755,410, under the chairmanship of an officer from the Official Receiver's Office. The chairman outlined the position regarding the debtor's assets and liabilities and explained why it was not possible to give definite figures although he was able to state that the debtor's total liabilities due to unsecured creditors was in the region of $5.7m.; however on the information at hand, this amount might well have to be increased. The purpose for which the meeting had been convened was explained and the chairman commented on the debtor's written proposals for a scheme of arrangement or composition. One of the creditors inquired whether since some of the creditors appeared to be prepared to reduce their claims as stated by the debtor, the Bank which was owed a mortgage debt would do the same. The Bank's representative said he would need to take instructions on the matter. Another of the creditors present suggested there should be an adjournment for the reasons fully set out in the minutes and a majority of those present resolved that the meeting be adjourned to the 9th October 1981.

3. The meeting duly resumed on that date with 49 creditors present (in person or by proxy), the total of the claims represented being $1,652,643. According to the minutes, the chairman reported on the then current position and said that on the information available to the Official Receiver, liabilities of $7.2m. were involved. The chairman told the meeting that he understood that the debtor had circulated certain written proposals to those attending and explained that the proper procedure under the Ordinance was that before any proposal for composition could be made the debtor had to submit her statement of affairs. At the present time her liabilities were still unknown and he could not conjecture when the debtor would be in a position to submit her statement. When she did so, then the debtor could put forward a proposal to the Official Receiver which would be circulated to creditors by him together with his report. A meeting of creditors would then be convened to consider the proposal, at which it would need to be approved by a majority in number, representing 3/4 in value of all proving creditors. If such approval were given the sanction of the Court would have to be sought. It was further explained that the Court would not accept any proposal if any reduction in claims had been procured by the debtor, nor would conditional reductions be acceptable - i.e. any reductions could not be conditional on the proposal being accepted. In reply to questions from the chairman, three creditors stated that they had not in fact agreed to reduce their claims. The chairman then remarked that this indicated that what the debtor had told the earlier meeting about the reductions, as reflected in her written proposals, was incorrect. The chairman then answered a number of questions from the floor and proposed that the debtor be adjudicated bankrupt, a motion which was defeated by a majority "in value" of those present. The meeting was thereupon declared closed.

4. On the 21st October 1981 the Official Receiver filed his report and applied for adjudication under S.22 of the Ordinance and the application was set down for hearing on the 30th October. On that day the application was adjourned by consent to the 27th November and it was further adjourned, again by consent, on the 27th November and then to the 18th December. The matter was eventually heard by me on the 19th January 1982.

5. In her affirmation filed in opposition to the application to adjudicate her bankrupt, the debtor says as follows. Having submitted her statement of affairs, she prepared a proposal for a scheme of arrangement with her creditors. The Official Receiver gave due notice to the creditors of a meeting to be held on the 17th December 1981 for them to consider her proposal. Almost all the creditors (to the best of her knowledge and belief) attended that meeting, and as far as she could recall there were "about or over" 140 creditors present. The creditors accepted her proposal for a scheme of arrangement. A certain Mr. Ngan Kin Tai (one of the creditors) proposed that she not be adjudicated bankrupt and this was also agreed to by the creditors.

6. On the 19th December 1981, another notice was sent to the creditors in identical terms to the previous notice. It was a notice to convene a meeting for the 23rd December to consider her proposal for a scheme of arrangement (which had previously been considered and accepted). She thought that the notice had attached to it her list of those who were prepared to act as trustees. Not unexpectedly, there was a comparatively small attendance at that meeting "as presumably, the creditors having previously accepted my proposal, they were not too concerned with who would be the trustees." On the 7th January 1982 another notice was sent to the creditors of another meeting, again in indentical language. It was not surprising, therefore, that the number of persons in attendance at this third meeting diminished considerably, "as it would appear obvious to the creditors that they apparently saw that no purpose would be achieved by their attendance". At this third meeting approximately 40 creditors were present. For reasons unknown to her, at this third meeting the creditors were then asked to vote on whether they wanted her adjudicated bankrupt. Again the creditors voted that they did not wish that to happen. She was therefore surprised that an application was now being made to have her adjudicated bankrupt. It was her case that on the 17th December the creditors by an overwhelming majority both in number and in value had accepted her proposal for a scheme of arrangement. It was neither just nor equitable that "by convening further meetings for the same purpose the unfair advantage taken of waiting until there are insufficient creditors at a meeting to put a second and similar proposal which, though again accepted by the creditors present at the meeting is to be treated as non-acceptance".

7. An affidavit in reply, filed on behalf of the Official Receiver and sworn by the officer in his department who chaired the three meetings of which complaint is made, is to the following effect [the deponent exhibited copies of the minutes of the meetings convened to consider the debtor's proposal under S.20 of the Ordinance]. At none of the meetings were the creditors present requested to vote whether or not the debtor should be adjudicated bankrupt. No vote was taken at the meeting of 17th December. As chairman, he had asked informally for a show of hands in order to have a rough idea whether those present were, in principle, for or against the debtor's proposal. No attempt was made to count the number of creditors in favour or to calculate whether they represented a 3/4 majority in value of proofs of debt lodged. Since the number of proving creditors was 339, there was in any event no question of an overall majority of creditors being present and in favour of the debtor's proposal. The notice of 19th December had been despatched with a copy of the debtor's further proposals regarding the depositing of money in the Official Receiver's hands, the proposed trustees and a certain proposed guarantee. In his view it was inconceivable that the creditors present at the meeting of 17th December were under the impression that the debtor's proposal had been accepted by the meeting. In any event the attendance at the meeting of 23rd December 1981 had not been significantly smaller. It was significant, however, that the debtor had omitted from her affirmation the fact that the creditors present at the meeting of 13th January 1982 had voted on her proposal, and the fact that on that occasion a record had been taken of the identity of the creditors voting in favour (and of the amounts of their claims) in order to ascertain whether or not the requisite majorities under S.20(2) of the Bankruptcy Ordinance had been attained.

8. The minutes of the 17th December 1981 meeting indicate that approximately 120 creditors were present but only 35 signed the attendance sheet despite requests from the Official Receiver's staff. The Official Receiver's Report dated 11th December 1981, which included the debtor's proposal in full, was translated into Cantonese. The debtor produced a further proposal wherein five proposed trustees were listed and it was stated that a Mr. Lai Kwong gave guarantee for $80,000. Mr. Lai Kwong himself indicated that he would be prepared to guarantee one % over and above the 40% mentioned in the debtor's proposal to the unsecured ordinary creditors, but then said he wanted to know how much one % would amount to. The debtor was not in a position to guarantee payment of the 40%. The chairman pointed out that the debtor's proposal as amended contained no machinery for its implementation and that it would be necessary for the meeting to be adjourned to give the debtor an opportunity of submitting a further amended proposal to the meeting. The creditors present indicated that they were largely in favour of approving the debtor's proposal, in principle. The meeting was then adjourned to the 23rd December.

9. The minutes of the meeting held on the 23rd December record that approximately 90 creditors were present but only 39 signed the attendance sheet despite requests to do so. The chairman opened the meeting by reviewing what had transpired at the meeting of 17th December, and the debtor had no further amendment to make to her proposal. Mr. K.K. Ho, a Treasury Accountant, commented at length on the figures contained in the debtor's proposal and cast doubt on a number of them. A solicitor present, who said he represented the trustees proposed by the debtor and a number of creditors, was permitted to address the meeting. After reading the Official Receiver's report dated 11th December 1981 and hearing Mr. K.K. Ho's comments, he said, he had some reservations about the debtor's proposal. At his request those present agreed that the meeting should be adjourned until the 13th January 1982 to enable the solicitor to consider the debtor's proposal in detail on behalf of his clients.

10. At the resumed meeting on that date, according to the minutes, approximately 50 creditors were present of whom only 19 signed the attendance sheet. The chairman opened the meeting by reciting the most recent occurrences of note, namely the withdrawal of instructions from the solicitor who had spoken at the second meeting and the falling through of the sale of one of the debtor's restaurants as a going concern. Further, the meeting was informed, the five persons who had previously indicated that they were willing to act as trustees in respect of the debtor's proposed composition or scheme of arrangement, had now declined so to act. The debtor had produced a written proposal that five other persons who were willing to act as trustees should do so. The chairman pointed out that since they were creditors the Court was unlikely to approve their appointment because of a possible conflict of interest. The chairman then explained to the meeting that since the number of creditors who had lodged proofs of debt was in excess of 300 there was no question of the debtor's proposal being approved that day in the absence of an overall majority in number of all the creditors. However, should a * majority of the value of all claims submitted vote in favour of the debtor's proposal, he would be prepared to adjourn the meeting for a further week. It is recorded that the debtor's proposal was then read out to the meeting in Cantonese and then put to the vote. Thirty creditors voted in favour of it. They represented total claims of $2,114,847.52. Nine other creditors voted in favour of the debtor's proposal, but were subsequently found not to have submitted proofs of debt in respect of their claims amounting to $170,600. Since the total amount of proofs of debt lodged to date was $5,486,480.48 the requisite three-quarters majority had not been attained.

11. The chairman then declared that the debtor's proposal had failed to be approved by the creditors and announced his intention of applying for the adjudication of the debtor.

12. Mr. Remedios began his submission on behalf of the debtor by pointing out that although S.22 of the Ordinance used the word "shall" the Court has a discretion in the matter. I would here accept that in certain circumstances the Court is not bound to accede to the application even though the provisions of S.22 are satisfied. He said that the 9th of October 1981 meeting had clearly resolved that the debtor should not be adjudicated bankrupt and so it could not be said that no resolution had been passed. There were no adequate grounds put forward to justify the debtor's proposals not being put to the vote - the reasons given by the Official Receiver were invalid. At the meeting of the 17th December 1981 the creditors were not asked whether they accepted the proposal; it was not for the Official Receiver to decide that it should not be accepted. As regards the number of creditors present, the preferential creditors (employees) should be counted as one since they could join together in their claim. At the 13th January 1982 meeting a resolution had been passed accepting the debtor's scheme. The scheme was one which would readily be approved by the Court. The Official Receiver had no right to bring the application under S.22, and the Court no right to accede to it.

13. Section 22 of the Ordinance sets out the four alternative grounds upon which an order for adjudication can be made; if -

14. The statute makes provision for other grounds - if the debtor fails to comply with the requirements regarding his statement of affairs (s.18(3)); where default is made in paying an instalment due under an approved composition or scheme, or where difficulties supervene so that the composition or scheme cannot be carried out without causing injustice or delay to the creditors, or if the court's approval was obtained by fraud (all in subsection (16) of s.20). It is to be noted however, that unlike the English Bankruptcy Rules 1952, our Rules do not make additional provision for adjudication (see rr. 217 to 220 of the English Rules). Rule 219 would be particularly apt for the situation here for it expressly provides that the debtor may be adjudicated bankrupt on the application of the Official Receiver or an interested party where a composition or scheme is not accepted by the creditors at the first meeting or one adjournment of it.

15. Mr. Brown, for the Official Receiver, who relies squarely on s.22 of the Ordinance, contends that the Court has power to make the order he seeks because the creditors passed no resolution within the meaning of that expression as used in the section. It will be recalled that at the meeting of creditors held on the 9th October 1981 a motion put by the chairman that the debtor be adjudicated bankrupt was defeated by a majority "in value" of the creditors present. It seems to me that the result of this application will turn on whether that decision was a resolution so as to remove the sole basis on which the application is made. Does the fact that the creditors rejected the proposal that the debtor be adjudicated bankrupt mean that they thereby resolved that she should not be so adjudicated? While it might be said that to hold that in such circumstances no resolution to that effect had been passed is conceptually possible, I think it would, perhaps, be unrealistic to reach such a conclusion.

16. I think it is now necessary to consider s.17(1) of the Ordinance which is in the following terms:-

"As soon as may be after the making of a receiving order against a debtor a general meeting of his creditors (in this Ordinance referred to as the first meeting of creditors) shall be held for the purpose of considering whether a proposal for a composition or scheme of arrangement shall be accepted, or whether it is expedient that the debtor shall be adjudged bankrupt, and generally as to the mode of dealing with the debtor's property."

In my view that subsection gives the creditors the right to choose between two alternative courses of action - either to accept a composition or scheme or to resolve that the debtor be adjudicated bankrupt. It does not seem to me that the creditors are given a third option i.e. to refuse to accept the composition (it should be noted that no concrete proposals had yet been made by the debtor and she could have made none because she had yet to file her statement of affairs) and yet resolve against adjudication. It follows therefore that if the decision made by the creditors on the 9th October 1981 could properly be regarded as a resolution (about which I maintain some lurking doubts) in my judgment it was not a resolution that the meeting had power to make. It seems clear to me that the words "or pass no resolution" in s.22 must be read as embracing a resolution that the meeting had no jurisdiction to pass. Otherwise the section could be circumvented by the passing of a wholly irrelevant resolution. The legislature could not have intended that.

17. I formed the opinion that the staff of the Official Receiver have conducted all the creditors' meetings that were held, with perfect propriety - in accordance with the law and carefully balancing the rights respectively of the creditors and the debtor. The progress of the bankruptcy must not be allowed, without good cause, to drag on indefinitely. The debtor's firm proposals for a composition were fully canvassed at the meetings of the 17th and 23rd December and the 13th January. At the conclusion of the last meeting the chairman declared, perfectly properly, that the debtor's proposals could not be accepted in accordance with the requirements of the statute. No request was made for an adjournment for further consideration of the proposals and no resolution passed to that effect, and so I can find no valid reason why the proceedings in bankruptcy should not now be taken further - the interests of all the creditors must be safeguarded.

18. I conclude that none of the complaints made by the debtor in her affirmation were well-founded. I would mention, too, that none of her allegations of fact can stand in the face of the minutes of the various meetings in view of the provisions of subsection (2) of s.116 of the Ordinance.

19. For the reasons I have given, and because I can find no valid cause to exercise the discretion I apparently have to adjourn the matter, I grant the application and adjudge the debtor bankrupt.

Representation:

Mr. L.J. Remedio of D'Almada Remedios & Co. for Debtor.

Mr. Brown for O.R. with Mr. Robertson

Mr. L. Kong of Louis Kong & Co. for 87 Creditors.