Kamla Sujanani or Kamla Lavinia Sujanani v. Middle East Finance International Limited
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CACV000157A/1985
BETWEEN
Coram: Fuad, Kempster, JJ.A. & Penlington, J. Dates of Hearing: 23rd & 24th January 1986 Date of Delivery of Judgment: 18th February 1986 ___________ JUDGMENT ___________ Penlington, J. (read by Fuad, J.A.): 1. This is an appeal from a receiving order made by Mayo, J. against Madame Kamla Sujanani on the 8th of October 1985. 2. The appellant is married to Narain Sujanani (also known as Nick Hermandas) and between them they own all the issued shares in a Company called Mart Electronics Ltd. ("the company"). This company sold watches and other electronic products to overseas buyers and, according to the accounts of that company which have been exhibited, it incurred very substantial bad debts. The accounts show an accumulated loss as at 31st March 1983 of $2,371,173. The company apparently ceased active trading in July 1982. Its capital was $400,000 and the judgment debtor was registered as owner of one quarter of its shares. 3. The judgment debt arose because the appellant executed a personal guarantee of the company's account with the respondent. She was sued on that guarantee and judgment was entered against her for $U.S.84,732 and $H.K.514,334. However her total liabilities are $H.K.2,167,107 because she also executed a guarantee of the company's account with Lloyds Bank in the sum of $H.K.1,000,000. 4. The appellant has sworn two affidavits in opposition to the making of an order. The first simply set out her assets as cash of $H.K.2,200 plus jewellery and clothing, worth $H.K.30,000. She said she was employed as a clerk with a publishing company at $3,200 per month. In a second affidavit she amplified that considerably and refers to a property in Hawaii which was registered in the joint names of the appellant and her husband. An affidavit was filed exhibiting a valuation report which said the property, some 3 acres of vacant land, was worth about $U.S.10,000. 5. In the appellant's second affidavit she said that while one quarter of the company's shares were in her name she had never taken any part in the running of the business and knew nothing about it. Her husband had full control and had raised all the capital of $H.K.400,000. He had from time to time asked her to sign papers, including what she now realised was a guarantee of the respondent's loan, but she did not know then what a personal guarantee was. She took no part in the running of the company and the only business interest she has is as one of four Indian ladies who produced a small monthly Indian family magazine. She receives a salary of $3,200 a month from that source. 6. The appellant's explanation for her omission of the Hawaiian property from her first affidavit was that she considered that it had been sold to her father-in-law in 1980 for $U.S.5,000 in order to raise more capital for the company. A contract was exhibited and the father-in-law also swore an affidavit saying that he did provide the money but did not register the transfer as he hoped that eventually his son would repay him and take back the property. Documents were exhibited to support the $U.S.5,000 being so paid. The judge considered that this transaction was more of a pledge than a sale but even ignoring any question of interest for some five years, the appellant and her husband had at best a joint equity in the property of about-$U.S.10,000 at current valuation even if the father-in-law has no claim of any sort against it. 7. The appellant said that the valuation of her jewellery in her first affidavit, $H.K.25,000, was optimistic and should have been $H.K.14,000. Her clothing she valued at $H.K.5,000. Being part of an Indian family there was also "family" jewellery which she could use on occasion. It would not, however, form part of her estate. 8. The appellant and her husband have two children aged 12 and 14. Their combined income is now $8,200 per month and they live in her parents-in-law's flat in 5tubbs Road. They pay no rent or share of utilities but buy their own food and pay other expenses of which by far the biggest is school fees of $1,820 per month for each child. 9. There was no application to cross-examine the appellant and no affidavit was filed to rebut her evidence covering her role in the running of the company. 10. The attitude of the Official Receiver to the making of a receiving order is important as the 15% rule was introduced primarily to avoid his having to go to the trouble and expense of investigating a bankrupt's estate when there was no prospect of a reasonable dividend being paid. Here the Official Receiver's attitude is one of neutrality. Mayo, J. said he "did not appear to be particularly enthusiastic" at the prospect of an investigation. That attitude has not changed. 11. The learned trial judge was firmly of the view that as matters stood there was certainly not enough known assets to pay a dividend of 15%; there were some assets but they did not amount to very much. Nevertheless he held that even if that was the position the Court still had a residual discretion and he should exercise it in favour of making the order as thereby other assets might be discovered. 12. The English authorities are to the effect that there is a heavy burden on a debtor to show that an order should not be made due to lack of present or future assets. See In re Hecquard(1) and In re Field. (2)Moreover something more than the debtor's own uncorroborated evidence is required. They must however be considered in the light of the different provision in Hong Kong, which was introduced following comment by Gollan, C.J. in re Chan Tsz Cheuk(3) where he held that a possible 7% dividend did not justify making an order. In re Noel Lee,(4) also a case where the debtor guaranteed a company account, despite not being satisfied with the debtor's conduct and explanations Leonard, J. refused to make an order, though there the application was opposed by the Official Receiver. In re Anthony Lo, (5) the debtor had been a very substantial property developer and had large holdings in a group of companies all alleged to be insolvent. Some accounts were produced which were not satisfactory but for some of the companies there were no accounts. Jones, J. said:
He goes on to refer to the attitude of the Official Receiver, who supported the application for an order. Clearly in that case there were many matters involving very substantial sums of money indeed which deserved investigation. While the Court could not be satisfied that assets sufficient to pay a 15% dividend would become available it was a case where the discretion should be exercised in favour of making an order. Jones, J. went on to say:
He also referred to In Re Britain (6) and In Re Barakat(7) as support for the principle that the debtor's own uncorroborated affidavit is not enough to establish a lack of assets. 13. In this case there are three avenues from which Mayo, J. thought assets available for distribution might be discovered on investigation. 14. The first is the Hawaii property, which the learned judge said was his main reason for making an order. There the appellant's affidavit is corroborated grid at best she has a half equity with her husband, against whom a receiving order has also been made, worth $U.S.5,000 - approx. $H.K.38,000 - which would be less than 2% of the total debts. 15. Secondly the appellant has a quarter share in the company, which has not been wound up but has not traded since mid-1982. From the accounts produced there are very substantial bad debts and they seem to be the only prospect of substantial funds becoming available. The learned Judge said that there is a possibility that "a vigorous investigation in conjunction with winding-up proceedings the shares may be worth something but this is at best a remote possibility". Again the appellant's affidavit is corroborated by the company's accountants as to the state of its affairs. If there is a possibility of assets becoming available from that source winding-up proceedings would seem the logical method and indeed Mayo, J. seems to contemplate such proceedings, together with the receiving order. 16. The third possible source is joint family assets. Mayo, J. says he had regard in particular to jewellery but he had in mind that, living in Stubbs Road in the parents-in-law's flat the debtor enjoyed a high standard of living compared to the average citizen. I feel that there is no real evidence at all that assets may come from that source which would justify the cost of a receiving order. 17. In Re Noel Lee,(4) Leonard, J. in refusing to make an order where probably the facts were more favourable to the Petitioner than here, said:
18. Here there is no real possibility of assets becoming available which, after payment of costs, would enable any meaningful dividend being paid. The debtor was not herself involved in the affairs of the failed company. Her evidence is corroborated and the learned Judge said that there "is nothing very obvious on the evidence before me to indicate that the judgment debtor has been dishonest". 19. When Section 9(3) says that the Court, if not satisfied of assets enough for a 15% dividend "may refuse" an order, that does not mean "must refuse" and there are other factors to be considered. There must be some other such relevant factor. It may be failure to make full and frank disclosure or the risk of further credit being obtained. Here I do not see any such factors and indeed clearly Mayo, J. only made the order with considerable reluctance: he said "is it in the public interest that the affairs of the judgment debtor should be investigated. It would seem to be very much in balance in the present case". He goes on "There is nothing to indicate that if the Official Receiver undertakes an investigation there is any likelihood that further assets will be realised". To make an order on the findings of fact here seems to be wrong in principle. I would allow the appeal and rescind the order. Kempster, J.A.: 20. Subsection (3) of section 9 of the Bankruptcy Ordinance differs from the equivalent subsection of section 5 of the Bankruptcy Act 1914 in that it incorporates the further words "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." The like provision is to be found in section 10(1): again in contrast to section 6(1) of the Act. The words require the judge to be satisfied as to the result of any hypothetical investigation by the Official Receiver. 21. The Hong Kong legislature may well have been concerned not to burden the Official Receiver with fruitless investigations and certainly the words in question render English authorities on the equivalent section of the 1914 Act less than helpful. 22. It is apparent that the words "the court may dismiss the petition" which conclude the subsection must be construed in the same way in relation to each matter of which the fudge is required to be satisfied or not satisfied as the case may be and, accordingly, like the words "may make a receiving order in pursuance of the petition" in subsection (2), that they allow a discretion to do little more than adjourn the hearing of the petition unless, possibly, the judge has found that, though less than 15 per cent, the assets recoverable will be substantial or that there is a risk of the debtor continuing to obtain credit. As to the latter consideration Leonard, J. was unimpressed in Re Noel Lee.(4) Since in the instant case Mayo, J. did not find himself satisfied that a net 15 per cent would be payable a dismissal of the petition was to be expected but in the event he concluded that the public interest would best be served if he made a Receiving order; which he did. The debtor appeals. 23. The grounds given for the exercise of the residual discretion warrant examination. The learned Judge found that "the efforts of the Official Receiver to realise property might bear fruit" in relation to land in Hawaii and, indeed, his main reason for making the order he did was that he thought a further investigation concerning that land was required albeit "I do not hold out any great hopes that this will lead to any substantial gain to the estate". He found that the debtor enjoyed a half-share in property valued on behalf of the creditor at approximately US$10,000. 24. The learned Judge also thought that the debtor's shares in Mart Electronics Ltd. might be found worth some-thing "if the affairs of the company are duly investigated in accordance with possible winding-up proceedings. - I appreciate that this is at best a remote possibility - if a vigorous investigation is undertaken it may indicate that - some of the bad debts may not be bad debts at all." It seems that he thought that by making a Receiving Order he would somehow set in motion a petition for the winding-up of Mart Electronics Ltd. There would appear to be no foundation for such an impression. The next matter canvassed, in the context of Hindu joint family property, was "the general standard of living adopted by the judgment debtor and her family" on the footing that her "in laws" provided her husband and herself with accommodation in their house in Stubbs Road and that "family assets", such as jewellery, might be available for her creditors. 25. In summary the learned Judge concluded "there is also nothing to indicate that if the official Receiver under-takes an investigation there is any likelihood that further assets will be realized - there is also a possibility that if the Official Receiver does undertake his usual line of investigations - further property will come to light. I appreciate that this comes within the realms of speculation." The Official Receiver himself "adopted a very neutral stance." The evidence before the Court came from several sources. 26. In circumstances where the debtor claimed an overall deficiency of over HK$2 million the conclusion that a 15 per cent dividend would not become available for the benefit of the unsecured creditors was inescapable and the learned Judge took into account in so concluding all the considerations upon which he purported to rely for the exercise of his discretion to make a Receiving Order. Having found that the 15 per cent hurdle was not surmounted the learned Judge was, in my view, precluded from canvassing in the context of residual discretion the possibility that, for example, by making a Receiving Order the dividend might be increased from say, 5 to 6 per cent of the proved indebtedness. The use of the words "in the public interest" cannot disguise the fact that the discretion was exercised on irrelevant materials and in any event "a Court of justice ought not to take into consideration a possibility of which there is no probability." per Lord Esher M.R. In re Betts(8) at p.53. 27. The Receiving Order should be discharged. I would allow the appeal accordingly. Fuad, J.A.: 28. I agree that the appeal should be allowed. (1) 24 Q.B.D. 71 (2) [1978] 1 Ch. 371 (3) [1927] H.K.L.R.125 (4) [1974] H.K.L.R.313 (5) [1985] H.K.L.R.371 (6) (1896 III Manson 291) (7) (1920) N.Z.L.R. 134 (8) [1897] 1 Q.B. 50 Representation: Mr. Geoffrey Ma (Fairbairn & Kwok) for appellant/debtor. Mr. Winston Poon (Deacons) for respondent/creditor. Miss F. Woolley for Official Receiver. |