Securing bankruptcy order against debtor alleging that petition debt is fully secured

In Re Ma Ting Hoi Albert [2024] HKCFI 3460, the Court of First Instance granted a bankruptcy order against a debtor contesting a bankruptcy petition on the ground that the petition debt is fully secured. DLA Piper represented the Petitioner, won a bankruptcy order against a debtor for a USD389 million debt involving complex security. The DLA Piper team was led by Harris Chan (Partner), assisted by Sandy Au (Of Counsel), Matthew Tam (Associate), Winsome Lai (Associate).

 

Background 

The petition debt consists of investment loans advanced by the petitioner to the debtor to fund a Taiwanese property development project (the Project). The debt is secured by a share charge over the entire shareholding of one of the top holding companies in a multi-layered and multi-jurisdictional corporate structure which is ultimately has a majority interest in the Project (the Security). In other words, the Security represents an indirect interest in the Project.

At the time the statutory demand was issued, the petitioner estimated the value of the Security at around USD26 million. Following commencement of the bankruptcy proceedings, given various new discoveries concerning the value of the Security (including the fact that the debtor had procured various share transfers in the corporate structure of the Project to take place, with the effect of stripping the Security of its indirect interest in the Project), the petitioner amended the bankruptcy petition to revise the value of the Security to nil. The reduction in the value of the Security has resulted in the debt claimed in the amended petition being higher than the amount of debt claimed in the statutory demand.

The debtor does not dispute the petition debt but sought to resist a bankruptcy order on the grounds that:-

1. The Court has no jurisdiction to make a bankruptcy order if the amount stated as outstanding in the petition is not the same as the amount claimed in the statutory demand.

2. The value of the Security equals or exceeds the petition debt.

To support his contentions regarding the value of the Security, after the lapse of the unless order deadline for the debtor to file his evidence in opposition to the bankruptcy petition but before the substantive hearing of the petition, the debtor made an application to adduce a valuation report which purports to identify a value for the Project on the basis of it being completed and achieving certain income streams by 2027.

 

The Decision

The Court rejected both grounds of opposition mounted by the debtor and granted an immediate bankruptcy order against him.

In rejecting the debtor's first ground of opposition, the Court rejected the debtor's submissions that it has no jurisdiction to make a bankruptcy order if the amount stated as outstanding in the petition is different from the amount claimed in the stature demand, holding that:-

1. Reading the relevant statutory provisions under the Bankruptcy Ordinance (Cap. 6) and the Bankruptcy Rules (Cap. 6A) as a whole, properly analysed, the correct requirement for the petitioner is that the debt claimed in the bankruptcy petition must be based on the same obligation as that contained in the statutory demand, even if the amount of debt may change between the statutory demand and the date of the petition.

2. In any event, the Court has the discretion to make a bankruptcy order on a petition based on a statutory demand notwithstanding that there was a misstatement as to the amount of debt in the statutory demand, having regard to the question of whether injustice would be caused to the debtor.

3. In any event, the difference in amount of debt stated in the petition and that claimed in the statutory demand does not cause any prejudice to the debtor. Amongst other reasons, there is no question that the debtor knew the debt which was to be paid and no evidence that the debtor would have paid any of the debt had the amount claimed in the statutory demand been the higher amount stated in the amended petition.

In rejecting the debtor's second ground of opposition, the Court upheld the established principle that the Court would not inquire into the correctness of the estimate of the value of security provided that it was genuine, unless the debtor proves on a balance of probabilities that the value of the security equals or exceeds the full amount of debt. The burden of proof is on the debtor. In circumstances where the Court has not been provided with any reliable evidence as to the forced sale value of the Security, the Court sees no evidential basis to find that the true value of the Security equals to or is in excess of the petition debt on the balance of probabilities.

 

Key Takeaways

The Court's judgment in Re Ma Ting Hoi Albert [2024] HKCFI 3460 is a welcomed decision which makes good practical sense.  

In particular, the Court's clarification that a difference in the amount of debt stated in the statutory demand and the bankruptcy petition does not deprive the Court of jurisdiction to grant a bankruptcy order is an important one. Indeed, if such a legal position is to prevail, it would follow that a creditor must issue a new statutory demand and wait for the debtor's non-compliance to issue a petition every time there is a re-valuation of the security. This would be odd and non-pragmatic, especially in cases where the value of the security is variable and fluctuating (e.g. where the security is a publicly-listed shareholding and the value is readily ascertainable).

It is equally significant that the Court has upheld the established principle that the debtor bears the burden of proof for proving on a balance of probabilities that the value of the security equals or exceeds the petition debt is equally significant. In cases involving security which is less straightforward, such as the Security in the present case, this principle acts as an important safeguard to ensure that insolvent debtors are not able to starve off a bankruptcy order in a prolonged manner or successfully resist a bankruptcy petition unless they have cogent evidence to substantiate their assertions regarding the value of the security.  The principle also ensures that the resources of creditors and the Court are not to be lightly wasted. After all, it would not be fair for petitioning creditors to be compelled to incur significant time and costs to engage in a battle of valuation experts if their debtors are unable to adduce any credible evidence to support their ground of opposition in the first place.