Re Bhagohand Kishinchand Khemlani

HCB000269/1985

IN HE SUPREME COURT OF HONG KONG

IN BANKRUPTCY

NO. B269 OF 1985

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BETWEEN

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Coram: Hon. Jones, J. in Court

Date of hearing: 17th January 1986

Date of delivery of judgment: 17th January 1986

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JUDGMENT

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1. This is a petition for a receiving order.

2. The petitioner obtained a judgment against the debtor on the 28th July 1983 for $1,482,426.45 plus interest and costs. A bankruptcy notice based upon this judgment was served upon the debtor on the 11th April 1985, but was not complied with with the result that the petition was presented on the 26th June 1985.

3. The debtor opposes the grant of a receiving order on the grounds that he has insufficient assets after appropriate deductions to pay a dividend of 15% in accordance with the provisions of section 9(3) of the Bankruptcy Ordinance. The burden of proof does not arise in this case as I have been i vited by the parties to exercise my discretion upon the evidence as to whether or not a receiving order should be made. The debtor has filed two statutory declarations and one affirmation which was made on the 15th January 1986. In paragraph 2 of the statutory declaration made on the 16th July 1985 he says that the debt due to the petitioner was incurred under a guarantee which. involved the purchase of a property by the company which he was operating under the name of R.K. Trading Company Ltd. The purchase price was $1,854,000. The property has since been sold by the petitioner for the sum of only $205,000. The debtor says that he is still a director of this company in which he holds 2,700 shares which have a nominal value of $100 per share. He contends that the shares have no value whilst the company had a total indebtedness of over $4,000,000 as at the 31st March 1985. He also refers to a sum of $633,000 which he had in credit on the 31st March 1985. This sum has been lost and is owed to him by the company. The debtor has been employed by a company called Venture Trading Co., since the 1st April 1985 with an income of $4,000 per month. He lives with his wife and three daughters, who are all of school age, with his widowed mother at an address in Chatham Road which is owned by her. The debtor makes no contribution towards the rent.

4. In his affirmation of the 15th January, the debtor exhibits the accounts of R.K. Trading Co. Ltd. for the years 1983, 1984 and 1985. Apart from the monies which he says are owed to him by the company, he also refers to a substantial sum of almost $1,000,000 that is still owed to his mother

5. Enquiries were made by the petitioner, with regard to the Venture Trading Co. for whom the debtor states that he is now working. It was ascertained that the company is owned by the debtor's wife and was formed in September 1982 which was after the date when the writ was issued for repossession of the property the subject matter of the guarantee. The petitioner therefore contends that the Venture Trading Co. is the alter ego of R.K. Trading Co. and that the Venture Trading Co. is in fact benefically owned by the debtor. However, this allegation is denied by the debtor. He claims that Venture Trading Co. was started with a capital of $50,000 but that he made no contribution towards this sum which was provided by his wife from her own personal savings and those of his three daughters. He states that the company has since been wholly managed and run by his wife, and he has taken no part in the day to day running of the company. He says that he has no source of income other than the $4,000 which he draws from the Venture Trading Co. and he also states that R. K. Trading Co. Ltd. is no longer doing any active trading. His wife does not draw anything from the Venture Trading Co. so that the $4,000 is the sole income of his family. Apart from a sum of just over $240 in a bank account the debtor claims he has no assets.

6. It is significant when perusing the accounts which have been exhibited that certain comments have been made by the auditors. In particular in exhibit BKK2 in their report dated the 25th October 1983 the auditors state: "We have been unable to obtain independent confirmations from some debtors and creditors as at the 31st March 1983, due mainly to currency control problems in overseas countries. " Accordingly they are unable to express an opinion on a sum of $321,584 for accounts receivable, the recoverability of bills receivable in a sum of $315,090 and to the existence and correctness of accounts payable amounting to $580,337. This qualification by the auditors is maintained in the following year's report dated the 4th September 1984 exhibit BKK3 where they are unable to express an opinion on the recoverability of bills receivable and on collection of an amount of over $140,000 and to the existence and correctness of a sum of over $790,000. Further significant comments were made by the auditors in the 1985 accounts exhibit BKK4 which was dated the 10th July 1985 and in particular the paragraphs which read as follows :-

"In common with many businesses of similar size and organization the company's system of control is dependent upon the close involvement of the directors who are major shareholders. Where independent confirmation of the completeness of the account records was not available we have had to rely on assurances from the directors that all the company's transactions have been reflected in the records.

No supporting documents have been available for inspection relative to many items and because of the significance of these matters we are unable to form an opinion as to whether the financial accounts set out on pages 4 to 9 give a true and fair view of the state of affairs of the company as at 31st March, 1985 and of its loss and changes in financial position for the year ended on that date. "

The balance sheet for the 31st March, 1985 shows that the current assets of the company at that time amounted to over $193,000 and the current liabilities exceeded $4,200,000.

7. It is significant as submitted by Mr. Wong who appeared for the petitioner that the statement for current assets in 1983 under the heading for cash and bank deposits, the sum of $988,999 is shown whereas for the following year 1984, the figure has decreased to $51,510. No explanation has been given by the debtor on affirmation to explain that difference. The debtor also failed to explain the recurring figure of $240,000 as the dividend payable for the three years in question. As was submitted by Mr. wong, one wonders why the company has not been wound up. No explanation has been given by the debtor.

8. Mr. Elrington who appeared for the Official Receiver supported the petitioner's application that a receiving order be made.

9. It is clear from the evidence that the debtor has not given a full explanation of his affairs. His assets may be less than the statutory figure of 15%, but the situation can only properly be assessed after a full and thorough investigation into his financial affairs. In my judgment, the opposition by the debtor to the making of a receiving order in this case was wholly unmeritorious. I am quite satisfied upon the evidence before me and in the exercise of my discretion that a receiving order should be made together with the usual order as to costs.

Representation:

Mr. H.Y. Wong (Johnson, Stokes & Master) for Petitioner

Miss B. Chainrai (M.K. Lam & Co.) for Debtor

Mr. Elrington for Official Receiver