ALAN CHUNG WAH TANG AND OTHERS v. LEE SIU FONG AND ANOTHER

HCB 345/2001

[2020] HKCFI 176

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 345 OF 2001

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D E C I S I O N

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1.  This is an application by the two respondents (both sisters the Bankrupt, the “Sisters”) for stay of execution pending appeal against the judgment of this court dated 21 September 2017. By that judgment this court made an order under s 29 of the Bankruptcy Ordinance (Cap 6) for the private examination of the Sisters (including both oral examination and production of documents).

2.  The circumstances of this application are unusual in that although the order for examination was made on 21 September 2017 and a notice of appeal was served on 19 October 2017 (CACV 236/2017), the Sisters failed to procure that their appeal be set down for hearing and to take out an application for stay pending appeal until nearly two years later on 15 and 23 October 2019 respectively.  Meanwhile, they have been in default of compliance with paragraph 2 of the order which requires the production of documents within 21 days of the date of the order and paragraph 4 of the order which requires an affidavit or affirmation to be made if they cannot provide the documents.

3.  On 6 November 2019, when the parties by consent sought directions from this court for the application for stay to be dealt with on paper, the appeal had been fixed to be heard on 1 April 2020, whereas the Sisters were due to be orally examined on 24 March and 23 April 2020 respectively.  Given the proximity of those dates, I suggested at that directions hearing that the parties might wish to consider whether a pragmatic way of resolving the matter by agreement could be found.  In the end no agreement was reached, and while it might be tempting to say that since the appeal will be heard in less than 3 months’ time and so a stay would not impose a great deal of delay, ultimately the application falls to be determined on the basis of established principles under Order 59 rule 13 as set out in cases such as Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84.

4.  In the context of the present case, under those principles, which underscore the rule that except otherwise directed, an appeal does not operate as a stay of execution (see Order 59 rule 13), it is necessary to see whether there are reasonable prospects of success of the appeal.  If not, it is not necessary to consider whether without stay of execution, the appeal would be rendered nugatory: Lee Theatre Realty Ltd v Tong Wah Jor & Others (unrep, CACV 279/2009, 2 March 2010).

5.  The decision being appealed was an exercise of the discretionary power of the court under s 29 of the Bankruptcy Ordinance (Cap 6) to order private examination for the purpose of enquiring into a bankrupt’s conduct, dealings and property: see, by analogy, The Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766, at §§4, 18, 28, 29, 31, 45.  In relation to the equivalent statutory power in company liquidation, it has been said that the court has a “general” or “unfettered” discretion, although well‑established principles have been laid down in the cases over the years to guide the exercise of that power: Cloverbay Ltd (Joint Administrators) v Bank of Credit and Commerce International SA [1991] Ch 90, 99B, 105B‑D, 106E.  On this basis it seems to me that the Court of Appeal will not lightly intervene on appeal except where this court has proceeded on wrong principles or the exercise of discretion has been plainly wrong.

6.  Turning to the grounds of appeal, on Ground 1(i), it is difficult to see how imposing a monetary and temporal limit in favour of the Sisters could negative the conclusion that the Trustees had shown a reasonable requirement for the information.  As to the question of oppressiveness, this has been addressed by this court on a balancing exercise, leading to the conclusion that the examination should be confined to transfers over HK$100,000 each (or equivalent) from 1996 onwards. Lee Siu Fong’s affirmation used at the hearing merely said that they would be in a greatly difficult position in retrieving documents and that memories faded.  It does not seem to me that this ground shows any error in principle or that this court was plainly wrong in the exercise of discretion.

7.  As to Ground 1(ii), it is not disputed that Lee Siu Fong had been used by the Bankrupt as a conduit in respect of the sum of $11m.  There is no suggestion that this was a one‑off incident.  The Insider Dealing Tribunal had found that the Bankrupt “was prepared to use his family members … to execute his dishonest schemes” including feathering a nest offshore to avoid creditors.  The Trustees’ suspicions cannot be said to be unjustified.

8.  Ground 1(iii) contends that this court should have imposed on the Trustees a requirement to show a “strong prima facie case” that the Sisters will be able to provide the information sought.  Section 29 of the Ordinance refers to any person “the court may deem capable of giving information respecting the bankrupt, his dealings of property”.  In Hau Po Man Stanley (in bankruptcy) v Joint and Several Trustees [2008] 1 HKC 256 at §21, the Court of Appeal stated that one of the requirements placed on an applicant for an order under s 29 was to “establish a prima facie case that the respondent is able to provide such information or documents”, which was quoted in paragraph 9 of this court’s judgment on the application for private examination of the Brother and the Son of the Bankrupt dated 21 September 2017.  The Sisters did not submit at the hearing in August 2017 that that decision of the Court of Appeal should not be followed.  The case of Re Saunders, ex parte Leigh (1896) 13 TLR 108 referred to in the Notice of Appeal was not cited to this court.  In fact there was no doubt in that case that the relevant person had the documents; the question there was whether the documents related to the debtor, his dealings property.  It was in that context that the court said the trustee had to make out a strong prima facie case that the documents met that description.  Furthermore, doubt has been expressed in Butterworths Hong Kong Bankruptcy Law Handbook at §29.06 as to whether it can be said that a “strong prima facie case” is required, in light of subsequent authorities which speak of a prima facie case.  As pointed out in Joint and Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766 at §§59 & 60, the courts have never made it a condition of granting an order for production under s 221 that the liquidator should establish that the documents actually exist, and that a court could properly order the production of a category of documents, even though it recognised that there would “probably [be] no documents”, in case “any such documents should turn up”.

9.  Ground 1(iv) seems to me to be a thoroughly bad point.  The purpose of the application under s 29 was to seek information that the Trustees did not already have.  HCA 779/2013 was a simple action for the recovery of the known sum of $11m.  How some other transfers which the Trustees did not know about but wish to find out through private examination can be said to be matters that could and should have been litigated in the earlier action of HCA 779/2013, is beyond comprehension.  Further, as Mr Siu points out on behalf of the Trustees, this argument, which might have had an impact on the evidence, was not raised before this court in the hearing in 2017, and should not therefore be entertained now: Flywin Co Ltd v Strong & Associate Ltd (2002) 5 HKCFAR 356, §37.

10.  As to Ground 2(i) which concerns the allotment of 3.2m SFPH shares to Lee’s Machinery Ltd, the details of the transactions raising suspicions have been set out in paragraphs 11‑22 of my judgment on the Trustees’ application for private examination of the Brother and the Son of the Bankrupt dated 21 September 2017.  It should be borne in mind that the allotment was at par value, that the Sisters thereby acquired 50% of SFPH the business of which subsequently became the business of a listed vehicle (LPHL).  The concern is that, as stated in paragraph 14 of that judgment:

“ In short, on the face of this series of transactions, after the Group began to face financial difficulties, a pharmaceutical business which was held as to 75% by the bankrupt as at 1996 became the business of a listed company in which the bankrupt had ostensibly no interest, and all that the bankrupt had apparently obtained in return was HK$2.”

There can be no dispute that the Sisters were closely involved in the Bankrupt’s disposal of his 75% interest in SFPH.  It was against this background that this court considered that they should be able to and be required to provide information.

11.  Ground 2(ii) is difficult to understand.  This court did apply the requirements stated in Hau Po Man Stanley including a prima facie case that the Sisters were able to provide the information sought.

12.  Grounds 3(i) and (ii) miss the focus.  As Mr Siu submits, the Trustees’ suspicion is not only that the Sisters funded the Bankrupt’s living expenses with his own money in offshore accounts, but goes further.  The suspicion, which was indeed the conclusion of the Insider Dealing Tribunal, is that despite his bankruptcy, the Bankrupt had himself remained in control of substantial assets on which he relied for his living, contrary to the allegation that the Sisters paid for his living expenses.

13.  As to Ground 4(i), this court accepted that the case for examination of the bankrupt is usually stronger than that against third parties.  This court took into account the roles and involvement of the relevant third parties, and said at the end of paragraph 22 of the judgment that the Sisters were not entirely independent, commercial third parties vis‑a‑vis is the Bankrupt.  I fail to see how this can be faulted.

14.  As for Ground 4(ii), the issue of the time elapsed has been expressly considered by this court in the balancing exercise.  It seems to me that the question of how much weight to give to a matter is generally not a ground for appeal against an exercise of discretion.

15.  The proposition in Ground 4(iii) that the purpose of examination pursuant to s 29 is solely confined to the recovery of assets is in my view incorrect.  As submitted on behalf of the Trustees, pursuant to s 138 of the Ordinance the court may order a bankrupt to be prosecuted upon a report by the trustee.  Counsel for the Sisters have raised doubt about the legitimacy of s 138, based on the commentary in Butterworths Hong Kong Bankruptcy Law Handbook (6^th ed) at §138.03.  The part of the commentary relied upon by the Sisters is based on the first instance decision in Re Chu Wai Ha [2005] 2 HKC 36, which however was reversed on appeal in Re C (a bankrupt) [2006] 4 HKC 582.  In any event, this ground does not seem to me directly relevant to the appeal by the Sisters.

16.  Grounds 5(i) and (ii) contend that all possible causes of action that the Trustees may have against the Sisters or their associates would be time-barred.  This contention is simply incorrect.  Where a bankrupt has, prior to bankruptcy, placed assets in others’ hands as nominees (including but not limited to for the purposes of putting them beyond the reach of his creditors), an action by the trustee‑in‑bankruptcy, who steps into the shoes of the bankrupt, to recover such assets, would be an action by a beneficiary to recover trust property from his trustee.  Such an action is not subject to any statutory period of limitation: see s 20(1)(b) of the Limitation Ordinance (Cap 347); Liu Wai Keung v Liu Wai Man [2015] 1 HKLRD 490 (CA).  Moreover, and in any event, as submitted on behalf of the Trustees, the private examination in question is not sought only for the purposes of claims against the Sisters but for the purposes of the bankruptcy more generally including investigating potential claims against other parties such as the Bankrupt himself or his nominees.

17.  The allegation of ulterior motive on the part of the Trustees has been dealt with in paragraph 29 of this court’s judgment.  Ground 6 is nothing more than a repetition of the allegation without identifying any relevant error in the judgment.

18.  Grounds 7 and 8 simply state generally that private examination can be an onerous burden on a third party and that the court has to be mindful of the need to avoid oppression.  These are matters that were expressly taken into account by this court in the balancing exercise.  These grounds do not identify any relevant error in the judgment.

19.  As for Ground 9, there is undisputed involvement by the Sisters in the BSW matter.  As to Re Saunders, ex parte Leigh, it has been dealt with above.

20.  The last ground, Ground 10, appears to be a general conclusory averment and identifies no specific alleged error in the judgment.

21.  In these circumstances, there are in my view simply no sufficient prospects of success in the appeal to warrant a stay of execution.  It seems to me the Sisters’ application should be dismissed for this reason alone.

22.  Insofar as the Sisters contend that their appeal would be rendered nugatory without a stay of execution, the 2^nd respondent’s oral examination is scheduled to take place more than three weeks after the appeal.  It is not apparent that her appeal in relation to oral examination would be rendered nugatory without a stay.  As for the orders for production of documents or the making of an affirmation, it has not been established why the appeal would be rendered nugatory without a stay, which is a matter that needs to be supported by proper evidence: see Re Ho Yuk Wah David (bankrupt) (No 4) [2019] 4 HKLRD 379, §§12-14, per Linda Chan J.

23.  Although the appeal will be heard in April this year, there has already been, in my view, inordinate delay by the Sisters in prosecuting the appeal and having it fixed for hearing, and in issuing an application for stay.  Meanwhile, they have ignored the order for production of documents and the making of an affirmation.  I do not think that in these circumstances the imminence of the appeal is something that significantly weighs in their favour.

24.  For these reasons, the application is dismissed.  There will be an order nisi that the Sisters do pay the costs of the Trustees forthwith to be taxed if not agreed.