Re Lee Priscilla Hwang

HCB 7452 /2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCYPROCEEDINGS NO. 7452 OF 2009

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HCB 7453 /2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCYPROCEEDINGS NO. 7453 OF 2009

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Before: Hon Chung J in Court

Date of Hearing: 31 August 2009

Date of Judgment: 31 August 2009

Date of Handing Down Reasons for Judgment: 4 September 2009

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REASONS  FOR  JUDGMENT

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Introduction

1.Two bankruptcy petitions are involved.  The debtors therein are husband and wife.  The background facts leading to the petitions are identical.  It was undisputed the principal debt owed by the debtors to the petitioner amounted to US$10 million.  The amount of interest payable thereon was, however, disputed.  The petitioner claimed that it totalled about US$4.3 million whereas the debtors alleged it was only around US$2.1 million.  The amount of legal costs payable was also in issue.

2.Although technically the petitions were independent, because of the common factual background, and the same issues being raised by the debtors, both petitions will be dealt with in this reasons for judgment.

3.Usual bankruptcy orders together with costs were made in respect of both petitions at the end of the hearing.  The reasons for the orders appear below.

Amounts Outstanding

4.The principal loan relied upon in the petitions was US$10 million.

5.In the debtors’ affidavits, the debtors contended in effect that the rate of default interest should be 20% per annum (instead of 40% which must have been the interest rate used in the petitions).  The debtors also disputed the quantum of the legal costs claimed by the petitioner (US$45,151).

6.For the purpose of the hearing on 31 August, the petitioner was prepared to proceed on the basis of the lower rate of default interest and that the amount of legal costs be completely disregarded.

7.Further, the petitions also referred to security being held by the petitioner.  The petitions estimated its value to be US$10,000.  The debt relied on to support the petitions did not include the value of the security held.

S. 6D(3), Bankruptcy Ordinance (Cap. 6)

8.The debtors’ main ground of opposition is based on s. 6D(3), Cap. 6 which reads:-

“The court may dismiss the petition if it … is satisfied-

(a)  that the debtor has made an offer to … compound for a debt in respect of which the petition is presented;

(b)  that the acceptance of that offer would have required the dismissal of the petition; and

(c)  that the offer has been unreasonably refused, and, in determining for the purposes of this subsection whether the debtor is able to pay all his debts, the court shall take into account his contingent and prospective liabilities” (emphasis supplied).

9.The relevant legal principles are undisputed.

10.In Cheung Wah v. The China State Bank Ltd., HCB 659/1999 (20 August 2009), a case where a bankruptcy order was rescinded, Ribeiro J. (as he then was) made the following observations:-

“The reason why the offer of settlement was refused is, as I have said, the Bank's insistence on payment of HK$100,000 by way of legal costs. The key question therefore becomes whether such insistence made the refusal unreasonable.

In this context, Mr Nasir has helpfully cited the decision of Timothy Lloyd QC sitting as a Deputy Judge of the English High Court in Re A Debtor (No 32 of 1993) [1995] 1 All ER 628. That was a case involving section 271(1)(3) of the Insolvency Act 1986 which is in all material respects the same as the relevant provisions of our section 6D. The learned Deputy Judge there held (i) that the reasonableness or otherwise of the refusal was to be judged at the date of the hearing and (ii) that the test was :-

‘ ....... whether a reasonable creditor, in the position of this petitioning creditor, and in the light of the actual history as disclosed to the court, would have accepted or refused the offer.’

He added:-

‘However, I think it has to be borne in mind that there could be a range of reasonable positions on the part of the hypothetical reasonable creditors. In order to conclude that the refusal was unreasonable, it seems to me that the court has to be satisfied that no reasonable hypothetical creditor would have refused the offer, and that the refusal of the offer was therefore beyond the range of possible reasonable actions in the context.’

That is p. 69 of the Report.” (emphasis supplied) (para. 23 and 24 thereof).

(Cheung Wah was referred to by the debtors)

11.In re Lam Kwok Hing Wilfred, HCB 3560/2003 (21 November 2003), I said this in relation to s. 6D(3):-

“the following legal principles are undisputed:-

(a)  in determining whether a petitioner's refusal of the debtor's offer is unreasonable, the court has to be satisfied that no reasonable hypothetical creditor in the petitioner's position, and in the light of the actual history, would have refused the offer: Re a debtor (No. 32 of 1993) [1995] 1 ALL ER 628, 639d-f and 640a-b;

(b)  the position should be considered only as between the petitioner and the debtor without regard to the position of other possible creditors or the impact on the entire body of creditors: Re a debtor (No. 32 of 1993), p. 640g;

(c)  in considering the debtor's offer, the petitioner is entitled to have regard to his own interests and is not required to balance his interests against those of the debtor, or to take a chance, or to show patience or generosity, even though some creditors might do so. Acting reasonably is not the same as acting justly, fairly or kindly: IRC v. a Debtor [1995] BCC 971, 974B-F;

(d)  if a debtor wishes his proposals to be looked at with sympathy, it is incumbent on him to be full, frank and open with the petitioner in respect of his statements of his position: Re a debtor (No. 32 of 1993), p. 640a-c;

(e)  in considering a debtor's ability to repay the debt, no regard should be given to future contingencies such as profit or income from future contracts if he is permitted to carry on his business: Re: Phillip and Lion Far East Ltd, CWU No. 130 of 1991 (17 May 1991); Re: Lam Ngai Fung Tony, HCB No. 4641 of 2001 (3 December 2001);

(f)   future income may be relevant only as part of the total circumstances to be considered regarding whether a debtor's offer to secure or compound for a debt has been unreasonably refused by the petitioner: Re: Lam Ngai Fung Tony.” (para. 6).

(Lam Kwok Hing Wilfred was referred to by the petitioner)

Validity of the Debtors’ Case

12.The debtors’ case can be summarized as follows.

13.In mid-January 2009, the debtors invited the petitioner, and other creditors, to discuss a compromise or settlement of their claims.  According to the financial adviser’s report, the other creditors included Value Partners Strategic Equity Fund (the petitioner in HCB 6063 and 6064/2009) and Bank of China (HK) Ltd.  The total amount of debt owed to them was about US$53.3 million (US$21.8 + 22 + 9.55 million).

14.The debtors also engaged a professional financial adviser firm to review their assets and liabilities so as to provide the creditors with an updated assessment of their financial position.

15.The analysis of the debtors’ financial adviser concluded that, in the event of a contractual compromise, the estimated potential return to the creditors would be about 9.5% of their claims.  This compared a lot more favourably with a return which ranged between 0.5% to 2.4% before costs in the event of a bankruptcy.

16.In more concrete terms, the contractual compromise proposed by the debtors was:-

(a)  an upfront payment of US$1 million (1.17% return);

(b)  a total payment of US$4.5 million by 6 half-yearly payments of US$750,000 each (or 7.8% return).

According to the debtors’ financial adviser:-

“[the source] of funds [is] principally from future net cash inflow to be generated from the US properties, with an average of under US$1 million in every 6 month[s]”.

The above income was qualified by the financial adviser:-

“However, this income source could be significantly reduced or wiped out entirely if the US property market collapsed”.

17.A few words need to be spent on the US properties.  Again, according to the financial adviser:-

(1)  the US properties appeared to be held by US companies at least some of which the debtors have controlling equity interests;

(2)  these companies have been engaged mainly in property investments and leasing businesses in the US;

(3)  their key assets and liabilities were real properties which were securities for various mortgage loans;

(4)  any transfer of the equity interests by, or bankruptcy proceedings against, the debtors would constitute an event of default, which might lead to the foreclosure of the mortgaged properties;

(5)  in the event of a bankruptcy or “fire sale”, the US assets would not be sufficient to pay off the US liabilities.

The value of the US properties has not been clearly stated in the financial adviser’s report.  But the amount of personal guarantees for the US mortgage loans was put at US$219 million.

18.According to the debtors’ affidavits, after the meeting with the creditors, the creditors sought further background financial information.  The debtors supplied over 3 box files of information for their review.  However, the petitioner (and the other creditors) subsequently rejected the settlement proposal.

19.The debtors contended that the petitioner’s refusal was unreasonable and therefore s. 6D(3) was triggered.

20.The petitioner disagreed with the debtors’ above contentions.

21.First, the petitioner argued that the debtors’ proposal was so uncertain it did not amount to an “offer” within the meaning of s. 6D(3).  The uncertainties are related to:-

(a)  the source of funds.  In this connection, the petitioner relied on the qualification in the financial adviser’s report: “… this income source [net cash inflow to be generated from the US properties] could be significantly reduced or wiped out entirely if the US property market collapsed”.  The recent volatility of that market is well-known;

(b)  the creditors’ entitlement.  The proposal only laid down their maximum entitlement with no protection against market adversity at all.  Their entitlement in the event of a market rebound was not covered and required further discussion;

(c)  (as stated in para. 1 and 4 to 5 above) the disagreement regarding the amount of debt.  Further, the parties also differed as regards the value of the security held by the petitioner.

The financial adviser also recognised the uncertainties.  They qualified their proposal by statements such as “to outline the [debtors’] financial position”, “to explore the possibility of reaching a compromise”, “to discuss in broad terms”, “to agree the way forward” and “any discussion of settlement terms will be subject to contract”.

22.Second, and related to the first point above, if the proposal should somehow be regarded as an “offer” as defined by s. 6D(3), the “acceptance” of such an offer would only result in an adjournment of the petition hearing.  The petition could not properly be dismissed when the matter is still pending further negotiation.  The need for negotiation was acknowledged by the debtors during the hearing.

23.Third, because of the lack of full and frank disclosure by the debtors, and evidence of the debtors’ continuing luxurious lifestyle, the petitioner was entitled to doubt if they had used their best endeavours to provide the best debt recovery to the creditors: para. 12 to 16 and 18, Ma’s 2^nd affidavit.

Further Evidence

24.In relation to the question of full and frank disclosure, the debtors sought an adjournment of the hearing and leave to adduce further affidavit evidence.  I did not consider an adjournment should be granted; nor did I consider it appropriate to grant time for further evidence to be filed.

25.Ma’s 2^nd affidavit was filed about 10 days before the petition hearing.  There should be sufficient time to file any evidence in response before the hearing.

26.Further, the qualifying remarks of the financial adviser concerned future events (such as market movements or terms of negotiation) (see para. 16 to 17 and 21 above for details).  Additional evidence is unlikely to throw further light on such matters.

27.The petitioner’s rejection of the proposal fell within the “range of reasonable positions” which a reasonable hypothetical creditor could have adopted.  So was their conclusion regarding the debtors’ lack of full and frank disclosure.  There is no evidence of improper motive such as oppression or other ulterior purpose on the petitioner’s part: Re a Debtor (No 32 of 1993) [1995] 1 All ER 628, 640e-f.

28.Finally, it should be abundantly clear from the petitioner’s skeleton argument the petitioner wanted to seek a bankruptcy order forthwith.  Yet the debtors still “played the cards close to their chests” and did not respond (whether by way of affidavit or written submission) to that important aspect.

Conclusion

29.I agreed with the petitioner and disagreed with the debtors.  It was inappropriate to exercise the power conferred by s. 6D(3).  On the contrary, I considered it appropriate to grant the orders referred to in para. 3 above.

Mr Jonathan Wong, instructed by Messrs Deacons for the Petitioner in both cases

Mr William Wong, instructed by Messrs Joseph Li & Co., for the Debtors in both cases

Mr Benny Cheng of Official Receiver’s Office