SY CHIN MONG, STEPHEN v. XIAN KARKIU ELECTRIC POWER LTD CO

Date of Hearing: 7 July 2009

Date of Judgment: 7 July 2009

Date of Handing Down Reasons for Judgment: 14 July 2009

Date of Hearing: 1 April 2009

Date of Judgment: 1 April 2009

Date of Handing Down Reasons for Judgment: 13 May 2009

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the reasons given by Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal from an order of Poon J dated 13 January 2009 dismissing the application of Sy Chin Mong, Stephen (“Mr Sy”) to set aside a statutory demand dated 27 October 2006 served on him by the respondent Xian Karkiu Electric Power Ltd Company (“Karkiu”).  At the conclusion of the hearing the appeal was allowed with written reasons to be handed down which we now do.

Background

3.  Bel Trade Properties (China) Ltd (“BT China”) entered into a share equity transfer agreement (“the agreement”) and a supplemental agreement (“the supplemental agreement”) (collectively “the agreements”) with Karkiu on 29 and 30 March 2004 respectively.  BT China had a wholly-owned subsidiary (“BT Wuhan”) which owned a land development project in Wuhan.  Mr Sy was the chairman and legal representative of BT China.

4.  The effect of the agreements was summarised by Deputy Judge To in his judgment in HCCT 30/2005 (at § 30) in these terms:

“30.  …The Agreements were in reality a joint venture agreement between Bel Trade China and Xian Karkiu under which Xian Karkiu initially acquired 50% of the shares in Bel Trade Wuhan which was the owner of the Wuhan Project at a consideration of RMB 2.5 million and the remaining 50% of the shares in Bel Trade Wuhan upon certain conditions.  One of the conditions is that upon recovering a total of RMB 100 million from the income of the Wuhan Project, inclusive of the RMB 2.5 million paid by Xian Karkiu upon execution of the Agreement, Bel Trade China shall withdraw entirely from the joint venture by surrendering the remaining 50% of its shares in Bel Trade Wuhan to Xian Karkiu.”

5.  A dispute arose as to the performance of the agreements.  An arbitration ensued on Karkiu’s application.  The respondents were BT China, BT Wuhan and Mr Sy.  The Xian Arbitration Committee found Karkiu 20% responsible and BT China, BT Wuhan and Mr Sy 80% responsible for nonperformance.  The award dated 29 December 2004 ordered

(1)   the parties to continue to perform the agreements;

(2)   Mr Sy to process the transfer of 50% of the shares in BT China to Karkiu within 10 days;

(3)   the transfer of 50% of the shares in BT Wuhan to Karkiu and the change of its legal representative to be completed by the respondents within 10 days;

(4)   failing (3), the transfer and change of legal representative could be effected by Karkiu;

(5)   BT China to be responsible for RMB 3,587,267.20 (“the Sum”) of the RMB 4,484,084 injected into the Wuhan project by Karkiu;

(6)   Mr Sy to be jointly and severally liable together with BT China under (5) together with interest if not paid within 10 days; and

(7)   each of Karkiu and BT China to be responsible for RMB 35,200 in respect of the arbitration costs.

6.  Subsequent appeals by the parties from the award were dismissed.

7.  Karkiu sought leave to enforce the award in Hong Kong. On 5 May 2005, Karkiu took out an ex parte summons for that purpose.  It was supported by an affirmation from Mau Lam, the manager of Karkiu in Xian City which referred to enforcement proceedings being taken in the PRC in respect of paragraphs (3) and (4) of the award.  This was followed by a second affirmation dated 7 July 2005 confirming that BT China had not paid the Sum referred to in the award or any part thereof and further informing the court that BT China and Mr Sy had complied with paragraphs (3) and (4) of the award.  In other words, by 7 July 2005, 50% of the shares in BT Wuhan had already been transferred to Karkiu.  Nothing was mentioned about the fact that Karkiu had not made the payment of RMB 2.5 million required by section 1, clause 1 of the agreement.

8.  Further, prior to the date of Mr Mau’s second affirmation, Karkiu had obtained a Civil Award from the Hubei Wuhan Intermediate People’s Court.  Those proceedings had been instituted to enforce part of the award against the respondents to the arbitration, specifically, of the obligation to pay the Sum.  The Civil Award dated 15 June 2005 reads:

“Now, we have confirmed that [BT China] has no other properties in Wuhan except 50% share in [BT Wuhan].  In accordance with Article 223 …we hereby make an award as follows:

Seize 50% share of BT China in BT Wuhan valuing RMB 3,587,267.20 No random disposals of the above share shall be allowed during the seizure period.

This award shall take effect immediately after [service].”

The subject matter of the Civil Award thus concerned the remaining 50% of BT China’s shares in BT Wuhan, namely, the 50% that had not already been transferred to Karkiu.

9.  On 12 July 2005, in HCCT 13/2005 (“the Order”) Reyes J granted leave to Karkiu to enforce the award and entered judgment in terms of the award as follows: (1) Mr Sy do cause 50% of the shareholding of BT China to be transferred to Karkiu; (2) Mr Sy do pay the Sum to Karkiu provided that Mr Sy be credited with any payment by BT China to Karkiu of the Sum and interest was to run on the Sum at judgment rate from the date of the Order; and (3) Mr Sy and BT China do pay their share of the arbitration costs.  There was a proviso to the Order enabling the respondents to apply to set aside the Order within 14 days.  The transfer of the 50% of BT China’s shares in BT Wuhan was not part of the relief sought from Reyes J.  As noted in § 7 above, prior to the date of the Order, the respondents had already complied with that part of the award.

10.  BT China and Mr Sy applied to set aside the Order.  As is apparent from the judgment of Deputy Judge To dated 18 September 2006, the issues were (1) to determine the subject matter of the sale under the agreements; (2) if the shares in BT China itself (as distinct from those in BT Wuhan) did not form part of the subject matter of the sale, whether any ground had been made out to resist enforcement based on s.40E(2)(d) and/or s.40E(3) of the Arbitration Ordinance, and if so, (3) whether the court should exercise its discretion to enforce the award.

11.  The judge held that on the true construction of the agreements, the shares in BT China did not form part of the subject matter of the sale to Karkiu, that paragraph (1) of the award was erroneous, irrational and made in excess of jurisdiction.  He refused enforcement of paragraph (1) of the Order on the basis that it would be contrary to public policy to do so and set it aside.  As the objections against enforcement of paragraph (1) of the Order did not apply to paragraphs (2) and (3) of the Order, (viz. payment of the Sum and arbitration costs) those parts of the Order were affirmed.  An award of costs was made against Karkiu in favour of Mr Sy and BT China which were taxed at HK$728,009.90.

12.  Meanwhile, on 3 August 2006, after the hearing of the setting aside application but before Deputy Judge To’s decision was handed down, BT China placed itself in voluntary liquidation.

13.  On 27 October 2006, Karkiu issued a statutory demand on Mr Sy in the sum of HK$4,001,836.41, being the aggregate of the Sum and costs awarded by Reyes J.

14.  Mr Sy’s case below was that the statutory demand ought to be set aside under Rule 48(5) of the Bankruptcy Rules.  By letter dated 15 December 2008, Mr Sy had offered through his solicitors to pay Karkiu the sum of $146,788.06.  This was calculated on the basis that (1) the sum of RMB 2.5 million due from Karkiu to BT China should be set-off against the Sum reducing it to RMB 1,087,267.20; (2) as the set-off took place on 3 August 2005 (the date BT China went into liquidation), the amount of interest due was only RMB 369,575.69 and not that stated in the statutory demand; (3) Mr Sy was not responsible for the arbitration costs; and (4) the taxed costs in the sum of $728,009.90 awarded by Deputy Judge To should also be deducted.  The amount offered was increased at the hearing to take into account the arbitration costs which Mr Sy accepted was his responsibility.

This appeal

15.  The substantive issue on this appeal is whether the judge was correct in holding that Mr Sy was not entitled to the set-off of RMB 2.5 million.

16.  Mr Sy and BT China are joint and several debtors under the award in respect of the Sum.  The undisputed facts are that after the date of the award

(1)   50% of the shares in BT Wuhan were transferred to Karkiu;

(2)   Karkiu has not made any payment in respect of those shares to BT China; and

(3)   BT China went into voluntary liquidation on 3 August 2006.

17.  A preliminary matter is whether Karkiu was under any obligation to make payment for the BT Wuhan shares transferred to it pursuant to the award.  It is noteworthy that the award did not in terms relieve Karkiu of any of its obligations under the agreements.  Rather, paragraph (1) of the award expressly ordered both parties to continue to perform the agreements.  In so far as the parties had been in breach of the agreements prior to the arbitration, the arbitrators had addressed those breaches by apportioning blame between them.  Inasmuch as the respondents had been 80% responsible for nonperformance of the agreements, the award had compensated Karkiu by making BT China and Mr Sy responsible for the Sum which represents 80% of the amount Karkiu had injected into the Wuhan project by the time of the arbitration.  In the circumstances, there is no basis, much less any rational basis, for inferring into the award a requirement that the transfer by BT China of 50% of its shares in BT Wuhan to Karkiu was to be for no consideration, as it were, by way of gift.  In my view, when BT China went into liquidation, Karkiu was indebted to it to the extent of RMB 2.5 million.

18.  Thus upon BT China’s insolvency, the situation was that BT China was entitled to RMB 2.5 million from Karkiu while it was indebted to Karkiu for the Sum.  As between BT China and Karkiu, a set-off would have occurred.  The automatic and self-executing nature of set-off under the insolvency rules is “firmly established”, having been recognized and reaffirmed in In re Bank of Credit and Commerce (No. 8) [1998] AC 214 at 225B.  See Derham, The Law of Set-off, 3^rd edn, §§ 6.79-6.81.

19.  As BT China and Mr Sy were joint and several debtors to Karkiu in respect of the Sum, it is necessary to consider the effect, if any, of that automatic insolvency set-off on the other joint and several debtor.  That was considered in the following passage from Derham at § 12.21:

“In the case of a joint and several debt, each of the debtors is severally as well as jointly liable.  The creditor in such a case may sue all the debtors in the one action, or he may proceed against one or more of them separately.  The indebtedness of a truly joint and several debtor, and a debt owing by the creditor to that debtor, constitute mutual debts, and may be set off.  The occurrence of the set-off would bring about a pro tanto reduction in the joint and several debt, and would release the other debtors as well.”

20.  I consider that to be a correct statement of the law.  Thus, on BT China’s insolvency, there occurred an automatic set-off which had the effect of bringing about a pro tanto reduction in the joint and several debt.

21.  It would appear that in holding otherwise, the judge was focusing on a later passage in § 12.21 which dealt with the operation of the Statutes of Set-off (see § 23 of his judgment) rather than an insolvency set-off.  That passage reads:

“Insolvency set-off should be compared to set-off under the Statutes of Set-off, which is not automatic but rather it operates as a procedural defence to an action at law.  The creditor could sue whichever of the debtors he chooses.  In such a case the joint and several debtor being sued could not bring into account an indebtedness of the creditor to one of the other joint and several debtors.  The debts would not be mutual.  A right of contribution between the debtors does not justify a set-off in that circumstance.”

22.  It will have become apparent from the facts of the present case that the relevant set-off is insolvency set-off and not set-off under the Statutes of Set-off.  The statutory demand ought to have been set aside since the amount offered on 15 December 2008 and the additional amount offered at the hearing below (leaving on one side the question of what value (if any) ought to be ascribed to the Civil Award obtained by Karkiu in June 2005), were plainly sufficient to extinguish any debt owing to Karkiu.