RE LUU HUNG VEIT DERRICK

HCB 4776/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4776 OF 2011

____________

____________

_____________

D E C I S I O N

_____________

1. By a summons dated 19 June 2013, Mr Luu, a bankrupt, seeks an order to remove “RSM Nelson Wheeler Corporate Advisory Limited” as his trustee in bankruptcy and an order to direct the Official Receiver to remove one Mr Christian Emil Toggenburger from the creditors’ committee. In fact, the trustees in bankruptcy are not the company known as RSM Nelson Wheeler Corporate Advisory Limited but two individuals who are its directors, namely, Mr Wong Tak Man Stephen and Mr Osman Mohammed Arab. The application has accordingly been treated as one seeking the removal of Mr Wong and Mr Arab as trustees.

2. Mr Luu was adjudged bankrupt on 8 February 2012 following a contested hearing of the petition presented by one Mr Zhang Liyuan as a creditor.  A notice of appeal was filed by Mr Luu on 28 February 2012 in CACV 41/2012 but no further step has been taken by Mr Luu to prosecute the appeal.  The trustees have taken the view that Mr Luu has abandoned the appeal.

3. The trustees were appointed on 18 April 2012 at the first creditors’ meeting.  A resolution was passed at that meeting that a creditors’ committee be formed comprising the petitioner and two other persons, namely, Mr Toggenburger and one Mr Lam Ching Kui.

4. Mr Luu had argued at the creditors’ meeting that Mr Toggenburger should not be permitted to vote as he had not been “confirmed” as a creditor.  Mr Toggenburger had sued Mr Luu in High Court Action No. 815 of 2009.  He claimed against Mr Luu damages in the amount of over HK$118 million or a sum of approximately HK$107 million as money had and received.  The action was tried in the Court of First Instance in 2011 and the first creditors’ meeting took place during the time when judgment was pending.  Nevertheless, the Official Receiver’s representative who presided as chairman of the creditors’ meeting admitted Mr Toggenburger’s proof for voting purposes, though she recorded Mr Luu’s objection.  In addition, she recorded that “Nevertheless, the bankrupt confirmed that he had no objection to the appointment of the joint and several trustees”.

5. On 31 July 2012, Chung J handed down a judgment dismissing Mr Toggenburger’s claims against Mr Luu in their entirety.  On 26 September 2012, Mr Toggenburger obtained leave to proceed with an appeal against that decision notwithstanding Mr Luu’s bankruptcy.  The appeal was heard by the Court of Appeal on 20 June 2013.  The trustees, in whom Mr Luu’s rights relating to those proceedings had vested, did not take any substantive part in the appeal.  The Court of Appeal has recently handed down judgment dated 6 September 2013, allowing Mr Toggenburger’s appeal in part.

6. The court has jurisdiction to remove trustees in bankruptcy pursuant to s 96(2) of the Bankruptcy Ordinance (Cap 6) (“the Ordinance”), which provides as follows. 

“(2) If the court is of opinion-

(a) that a trustee, other than the Official Receiver, is guilty of misconduct or fails to perform his duties under this Ordinance; or

(b) that his trusteeship is being needlessly protracted without any probable advantage to the creditors; or

(c) that he is by reason of lunacy or continued sickness or absence incapable of performing his duties; or

(d) that his connection with or relation to the bankrupt or his estate or any particular creditor might make it difficult for him to act with impartiality in the interest of the creditors generally; or

(e) that the interests of the creditors require it,

the court may remove him from his office and appoint another person in his place.”

7. According to the summons, the application to remove the trustees is based on alleged “wrongful conduct” of the trustees in permitting Mr Toggenburger to continue to be a member of the creditors’ committee even after his claim in HCA 815/2009 was dismissed by the Court of First Instance on 31 July 2012.  The two affirmations filed by Mr Luu for his application in the main amplify this point.  In addition, Mr Luu complains that the trustees have ignored his question whether Mr Toggenburger has paid any money to them, that they did not take a neutral stance on Mr Toggenburger’s appeal, and that their letter sent to the Court of Appeal shortly before the hearing of that appeal was misleading.  The statutory grounds for removal being relied upon by Mr Luu appear to be those specified in s 96(2)(a), (d) and (e). I shall deal with Mr Luu’s complaints in turn.

8. The main complaint, as I see it, is that despite that his action against Mr Luu was dismissed by the Court of First Instance on 31 July 2012, Mr Toggenburger had been permitted to remain a member of the creditors’ committee.  On 6 September 2013, however, as mentioned above, the Court of Appeal allowed Mr Toggenburger’s appeal in part, ordering that judgment be entered in his favour against Mr Luu for the sum of HK$37,702,670.40. It is therefore clear that Mr Toggenburger is a creditor of Mr Luu. 

9. Nevertheless, Mr Luu contends the Court of Appeal’s decision does not exonerate the trustees in relation to their conduct prior to 6 September 2013.  I shall examine the question whether any misconduct has been made out from the fact that Mr Toggenburger had continued to be a member of the creditors’ committee from the time of the Court of First Instance’s judgment up to the Court of Appeal’s judgment.

10. The role of the creditors’ committee in the statutory scheme is dealt with in a number of provisions of the Ordinance and the Bankruptcy Rules.  Thus s 82(1) of the Ordinance provides:

“… the trustee shall, in the administration of the property of the bankrupt and in the distribution thereof amongst his creditors, have regard to any directions that may be given by resolution of the creditors at any general meeting or by the creditors’ committee, and any directions so given by the creditors at any general meeting shall, in case of conflict, be deemed to override any directions given by the creditors’ committee.”

11. The creditors’ committee also have powers over, among other things, the remuneration of the trustee in bankruptcy (s 85 of the Ordinance) and the allowance to the bankrupt out of his property for the support of the bankrupt and his family (s 63 of the Ordinance). 

12. Further, under r 122ZF of the Bankruptcy Rules, subject to certain qualifications,

“it is the duty of the trustee to report to the members of the creditors’ committee all such matters as appear to him to be, or as they have indicated to him as being, of concern to them with respect to the bankruptcy.”

13. It can be seen therefore that membership of the creditors’ committee is a position of some significance in the context of the administration of a bankruptcy.  It should be noted, however, that a trustee has no power to change the composition of the creditors’ committee.  It is the court which has this power.

14. Under s 100E(1) of the Ordinance:

“(1) The court may on application being made by the Official Receiver or trustee by order appoint such qualified persons as it thinks fit as a creditors’ committee for the purpose of superintending the administration of the property of the bankrupt by the trustee, remove any member thereof and fill any vacancy therein.”

15. The power of the court to remove a member of the creditors’ committee is exercised on application, which may be made by both the trustee and the Official Receiver.  In this case neither the trustees nor the Official Receiver have applied to the court for Mr Toggenburger’s removal.

16. A member of the creditors’ committee may also be removed by resolution at a meeting of creditors: r 122ZM of the Bankruptcy Rules.  No meeting for the purpose of considering such a resolution has been proposed or convened.

17. Furthermore, under r 122ZE(2) of the Bankruptcy Rules, members of the creditors’ committee must be creditors of the bankrupt.  Under r 122ZL(1)(c) of the Bankruptcy Rules, a person’s membership of the creditors’ committee is “automatically terminated if … he ceases to be, or is found never to have been, a creditor”.  It follows that, on Mr Luu’s case, the trustees need not even apply to the court, or ask a meeting of creditors, to remove Mr Toggenburger from the committee: his membership was automatically terminated when his claim against Mr Luu was dismissed by the Court of First Instance.  The complaint against the trustees, in essence, is therefore that they had, after 31 July 2012, wrongly allowed Mr Toggenburger to continue to act as a member of the creditors’ committee.

18. Solicitors for the trustees, relying on In re a Debtor, ex parte The Debtor v Dodwell [1949] 1 Ch 236, submit that Mr Luu as the bankrupt has no locus standi to challenge any act or decision of the trustees, unless he can show that he would be entitled to a surplus but for the trustees’ act or decision.  I have some doubt whether that is not too wide a proposition.  Dodwell was a case that concerned the management and disposition of assets in the estate.  The trustee’s duty in relation to such assets is owed to the creditors; he is not accountable to the bankrupt unless there is a surplus.  This does not imply, in my opinion, that a bankrupt has no standing to challenge any decision of the trustee at all unless he can demonstrate there would be a surplus in the estate but for the trustees’ decision.

19. There may be an argument that, given that s 100E(1) only provides for an application to be made by the trustee or the Official Receiver for the removal of any member of a creditors’ committee, the bankrupt has no standing to complain about the composition of the committee.  It is unnecessary however to deal with this question since, as I shall explain below, I am satisfied that, on the facts, Mr Luu has failed to make out any ground for removing the trustees on the basis of Mr Toggenburger’s continued presence on the creditors’ committee.

20. There is no dispute that the trustees had continued to treat Mr Toggenburger as a member of the creditors’ committee despite Chung J’s judgment.  The trustees’ explanation is that they believe that Mr Toggenburger is in any event a creditor of Mr Luu because Mr Toggenburger is the assignee of a claim by First Federal Capital LLC (“First Federal”).  The trustees say that there are documents that show Mr Luu confirmed in writing that he personally received HK$500,000 from First Federal out of a larger sum of money to be advanced to a company associated with him.  None of the money was repaid, and First Federal assigned its claim to Mr Toggenburger.

21. However, it seems to me these documents simply show that Mr Luu’s personal bank account was the agreed destination for part of the loan proceeds in the sum of HK$500,000 borrowed by Sinoglobe Worldwide Ltd from First Federal.  The sum was acknowledged to be part of the loan to that company. There is no explanation as to how this made First Federal a creditor of Mr Luu.  The trustees say that the borrower is a company associated with Mr Luu.  That is highly probable, but does not in itself mean that Mr Luu is personally liable on the loan.

22. Moreover, no written notice of the assignment had been given to Mr Luu.  That means the assignment to Mr Toggenburger could not have taken effect at law but could only have been an equitable assignment, there being no evidence that the proper law is other than Hong Kong law or that, if the proper law is foreign law, such foreign law is different from Hong Kong law.

23. The trustees submit that upon a challenge of a trustee’s act or decision for the purpose of removal, by analogy with a challenge pursuant to s 83 of the Ordinance, the test is whether the act or decision of the trustee is utterly unreasonable or absurd.  In support of this proposition, the trustees refer to Re Chung Kau, HCB 581/2003, 23 February 2004, para 13.  There Deputy Judge J Poon (as he then was) said:

“When an application is brought under section 83, it would be inappropriate and unjust for the court to interfere with the decision of the Trustee unless it is shown that the Trustee’s actual decision was perverse or clearly wrong. In other words, unless the Trustee’s act or petition was utterly unreasonable and absurd and that no reasonable Trustee would so act, the court would not interfere.”

24. The trustees’ proposition seems to me to be too wide and based on reading Re Chung Kau out of its proper context.  The phrase “utterly unreasonable and absurd” came from the decision of Jessel MR in Re Peters, ex parte Lloyd (1882) 47 LT 64.  There, offers were made to purchase from the trustee in bankruptcy a reversionary interest which was the only asset of any value in the bankrupt estate.  When the trustee declined to accept any of the offers or to offer the reversionary interest for sale by auction, a creditor moved for an order for the trustee to realise the asset by sale by auction or private contract.  The Court of Appeal’s decision which, rejected the application, was based on s 20 of the Bankruptcy Act 1899, which provided as follows:

“The trustee shall, in the administration of the property of the bankrupt and in the distribution thereof amongst his creditors, have regard to any directions that may be given by resolution of the creditors at any general meeting …

Subject to the provisions of this Act, and to such directions as aforesaid, the trustee shall exercise his own discretion in the management of the estate, and its distribution amongst the creditors. …

  The bankrupt, or any creditor, debtor, or other person aggrieved by any act of the trustee, may apply to the Court, and the Court may confirm, reverse, or modify the act complained of, and make such order in the premises as it thinks just.  …”

25. It is in that context that Jessel MR said:

“… there is no locus standi for any one creditor to interfere and ask the court to order a sale, except on the ground that the trustee has not exercised his discretion bona fide. Here the appellant says that the refusal to sell is an absurd exercise of the discretion of the trustee. But the court will not interfere unless the trustee is doing that which is so utterly unreasonable and absurd that no reasonable man would so act.”

26. It can be seen that the decision was directed at an exercise of discretion by the office-holder in the management of the estate.  So also was the subsequent decision in Leon v York-O-Matic Ltd [1966] 1 WLR 1450, where an individual creditor complained that a liquidator was selling the company’s assets at an undervalue.  Plowman J refused to interfere with the liquidator’s decision under ss 245 and 246 of the Companies Act 1948 [1], stating (at p 1455C) that he was not satisfied that the liquidator had acted in a way in which no reasonable liquidator could have acted.  Re Chung Kau itself concerns a challenge against the Official Receiver’s demand for an indemnity for costs as a condition for allowing the bankrupt to continue certain legal proceedings.  It is in these contexts that the courts based the proper approach to a challenge of the office-holder’s decision upon reasonableness.

27. As Hunter JA pointed out in Eagle Queen Co Ltd v Thai Mercantile Development Finance Ltd [1989] 2 HKLR 71 at 73-74:

“Read in its context and in the light of the helpful UK authorities upon the corresponding provision in the UK, and its fore-runner, section 80 of the Bankruptcy Act 1914, it seems to me that the court under this sub-section will interfere only in two categories of case.

First in the language of Harman J in re a Debtor [1949] Ch 236, 241:

‘Administration in bankruptcy would be impossible if the trustee must answer at every step to the bankrupt for the exercise of his powers and discretions in the management and realization of the property’

To bring itself within this sub-section an applicant has to show exceptional behaviour e.g. that the liquidator ‘has not exercised his powers in good faith or has acted in a way in which no reasonable liquidator could have acted’ (Palmer Company Law, 24th edition, vol 1, para 88-38, and in Re Peters, ex p Lloyd. 1882 47 LT, 64, 65 per Jessel MR).

  The second category arises when in the course of his administration the liquidator is called upon to give a ruling or to make a decision which directly affects a party’s rights.  Examples of such decisions are conveniently collected in Halsbury Law of England, 4th edition, vol 7(2), paragraph 2035.  They include such matters as decisions upon the voting rights of creditors or contributories and upon the admission and rejection of proofs.  It is significant that when considering and ruling upon such matters the liquidator must act even-handedly as an impartial neutral; Re Exchange Securities and Commodities Limited [1983] BCLC 186.”

28. In the present case, I see nothing discretionary in r 122ZL(1)(c) of the Bankruptcy Rules, which provides that a person’s membership of the creditors’ committee is “automatically terminated if … he ceases to be, or is found never to have been, a creditor”.  The question is whether the person is a creditor of the bankrupt.  It is not a matter depending on the trustee’s discretion.  It is not a matter that calls for a commercial decision involving balancing considerations of cost and benefit and practicalities.  It is a legal question, albeit one that may turn on facts.  The trustee will no doubt take a view, but that view does not bind the court.  Nor do I think that on such a question the circumstances in which the court may intervene depend on whether the trustee’s decision can be described as absurd.  That is certainly not the test when the court adjudicates on whether a proof of debt should be admitted or rejected under r 117 of the Bankruptcy Rules: cf Louis Lo v Toohey [2005] 1 HKC 51.

29. On the materials available, it appears that the trustees had continued to regard Mr Toggenburger as a creditor, after Chung J’s judgment and before the Court of Appeal’s judgment, on the basis of the assigned claim from First Federal. I am not sure that was a correct decision in law given the matters I have referred to above.  In any event, however, even if their decision was based on a mistaken view of the effect of the assignment, I am not satisfied that the trustees’ decision to continue to treat Mr Toggenburger as a member of the creditors’ committee is so egregious as to constitute misconduct on their part, much less that it constitutes such misconduct that they ought to be removed pursuant to s 96(2)(a) of the Ordinance.

30. Nor do I think that the trustees’ decision shows that they have such a “connection with or relation to” Mr Toggenburger as might make it difficult for them “to act with impartiality in the interest of the creditors generally”, within the meaning of s 96(2)(d) of the Ordinance.  A significant reason against finding such lack of impartiality is the fact that, as I shall refer to below, the other major creditors fully support the actions of the trustees.

31. Mr Luu also complains that the trustees have failed to take a neutral stance on Mr Toggenburger’s appeal and wrote a misleading letter to the Court of Appeal shortly before the appeal was heard.

32. I find no substance in these complaints.  The Court of Appeal’s recent judgment demonstrates that the trustees had taken no part in that appeal.  The letter from the trustees’ solicitors to the Court of Appeal dated 18 June 2013 was in part written in response to Mr Luu’s criticism against the trustees that they did not take a more active part in opposing Mr Toggenburger’s appeal.  Mr Luu says that it was misleading for the trustees to say in that letter that part of the funds provided by Mr Toggenburger for investment had been put to Mr Luu’s personal use.  I do not accept that there was any attempt to mislead the Court of Appeal.  In their own conclusions based on the evidence before them, the Court of Appeal came to the view that various payments were made by Mr Toggenburger to Mr Luu’s agents, to whom Mr Luu gave instructions as to how to deal with the funds, in respect of which Mr Luu was liable to make restitution.

33. Finally, Mr Luu complains that the trustees have ignored the question he asked them whether they had been paid by Mr Toggenburger.  The trustees have written to Mr Luu on 17 June 2013 seeking clarification of the question.  In any event, the trustees have stated in their affirmation dated 10 July 2013 that funding had been obtained from creditors subject to the court’s approval and only for the purpose of the proceedings in HCA 1055/2012, which is an action brought by the trustees in Hong Kong against Mr Luu, his wife and various parties including a company called Fortune King Trading Ltd for a proprietary claim that that company was the alter ego of Mr Luu and that its assets were held as nominee for Mr Luu.  Funding arrangements such as that are generally confidential in nature and I see no reason why the trustees should disclose them to Mr Luu, particularly given that he is the defendant in that action.  I do not think the conduct of the trustees in this respect gives rise to any ground for their removal at all.

34. So far as the creditors’ interests are concerned, which are referred to in s 96(2)(e) of the Ordinance, the two members of the creditors’ committee other than Mr Toggenburger, who are also major creditors of the bankrupt, have confirmed in writing that they have found nothing wrong in the actions of the trustees to date and have expressed their full support for both trustees continuing to act as such.

35. In my view, no ground for the trustees’ removal has been made out.  The application for removal of the trustees is therefore dismissed.

36. There is also in Mr Luu’s summons an application for an order to direct the Official Receiver to remove Mr Toggenburger from the creditors’ committee.  As stated above, the power to remove members of the creditors’ committee lies with the court under s 100E(1) of the Ordinance (exercisable upon application by the trustee or the Official Receiver) and with the meeting of creditors under r 122ZM of the Bankruptcy Rules.  For the reasons already explained, there is no ground on which to impugn the Official Receiver for not taking steps for the removal of Mr Toggenburger.  This part of the summons is therefore also dismissed.

37. There will be a costs order nisi that Mr Luu pay the trustees the costs of his application.