RE CHIN WAI KAY GEORDIE

HCBI 1396/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS

INTERIM ORDER APPLICATION NO. 1396 OF 2008

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D E C I S I O N

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The Application

1.  This is an application by Mr. Mok Yu Hon and Garwin Engineering Limited challenging a decision of a meeting of the creditors of the debtor, Chin Wai Kay Geordie, held on 17 March 2009 under section 20E of the Bankruptcy Ordinance, Cap. 6 (“Ordinance”) at which a voluntary arrangement was approved.

2.  The amended notice of intention to challenge dated 25 June 2009 states that the applicants intend to challenge the decision pursuant to section 20J of the Ordinance.  At the hearing the applicants also relied on section 20L. 

Background

3.  On 17 July 2008 Mr. Lui Wing Sing Raymond, who supports the present application, issued a bankruptcy petition against the debtor.  The debtor responded to the petition by filing on 22 September 2008 both a notice of intention to oppose the petition and also an application for an interim order under sections 20 and 20A of the Ordinance.  The proposal dated 22 September 2008 produced by the debtor in support of the application for an interim order recorded him as having 3 unsecured creditors.  The application was supported by a nominees’ report dated 8 December 2008 as well as a supplemental proposal for a voluntary arrangement that had been filed on 5 December 2008.  The nominees are 2 certified public accountants, Leung Wing On, Louis and Cheung Hok Hin, Alan.  They were appointed by the debtor.  The petitioner and the applicants filed notices of opposition.  Master J. Wong granted an interim order on 9 December 2008.

4.  A meeting of creditors was summoned for 6 January 2009 pursuant to section 20E of the Ordinance.  At the time of the preparation of the nominees’ report the debtor apparently had told the nominees that he had total debts of $5,400,000 and they estimated that the recovery under the proposed arrangement would be 23.69%.  In paragraph 6 of their report the nominees state that they are satisfied that the proposal complies in all material respects with the Ordinance.  According to the Chairman’s report dated 23 March 2009 (the Chairman was Alan Cheung, one of the nominees) dealing with meetings on 6 January, 13 January and 23 March 2009 it was apparent that the requisite statutory majority of 75% in value of debts voted by creditors present in person or by proxy as required by rule 122Q of the Bankruptcy Rules would not be obtained at the meeting on 6 January if the proposed arrangement were put to a vote.  Six creditors attended that meeting in person or in proxy: (1) Lui Wing Shing Raymond (2) Reliable Cargo Agency Ltd. (3) Wong Ying Sheung (4) Mok Yu Hon (5) So Kam Hung (6) Garwin Engineering Limited.  The total value of the debt owed to these 6 creditors as estimated by the debtor was HK$9,599,861 and the amounts claimed by the creditors was HK$15,247,107.  The schedule to the report containing this information records, for reasons that are not apparent, how these creditors voted on the substantive resolution.  I assume that in fact what were recorded were the indications as to how they intended to vote.  Raymond Lui, Mok Yu Hon and Garwin, who represented 49.3% of the debtors, indicated that they would vote against the resolution.

5.  According to the report the Chairman adjourned the meeting.  It would appear that the meeting itself did not vote on the question of an adjournment as Rule 122S(2) requires.  The nominees did not report the decision of the meeting to the court as required by section 20G of the Ordinance until 23 March 2009.

6.  The adjourned meeting took place on 13 January 2009.  An additional creditor, Yip Wai Kuen, attended by proxy.  The resolution was put to a vote.  Mr. Yip voted in favour, but this was still insufficient to achieve the statutory majority.  Only 62.95% of creditors voted in favour of the proposal.  According to the Chairman’s report dated 23 March 2009 the debtor placed no value on Mr. Yip’s claim (as was the case with Garwin’s claim) but the amount of the claim voted was HK$5,083,014 and it increased the total claims to HK$20,330,121.

7.  On 20 January 2009 the debtor applied to extend the period of the interim order made on 9 December 2008.  The application was supported by the debtor’s 4^th affirmation and a supplemental report from the nominees dated 18 February.  The debtor stated in his 4^th affirmation, and this was confirmed by the nominees in their report, that a new creditor had come forward, Becentral International Limited (“Becentral”), with an estimated claim of HK$11,700,000.  Becentral supported the proposal, which meant that the statutory majority would be achieved.  Presumably in the light of this information on 23 February 2009 Master Wong ordered that the interim order be extended until 21 April 2009 to enable a further meeting of creditors to re-consider the debtor’s proposal.  The meeting took place on 17 March 2009.  Three new creditors attended this meeting in person or in proxy: (1) Becentral claiming HK$15,081,998 (2) Cheery Group Limited (“Cheery”) claiming HK$4,139,344 (3) Ng Tak Chi claiming HK$1,691,633.  Becentral and Cheery voted in favour of the proposal and Mr. Ng voted against.  As a result 78.75% of creditors voted in favour and the statutory majority was obtained.  I note that the debtor (once again according to the Chairman’s report dated 23 March) did not include an estimate for the claim of Mr. Ng but he accepted the claim of Becentral and Cheery in full.  This increased the debtor’s estimate of his debt to HK$33,002,898 and the amount claimed by creditors who voted at the meeting on 17 March to HK$94,400,696.

8.  The applicants (supported by Mr Lui) challenge the decision at the meeting on 17 March 2009 on the basis that the interim voluntary arrangement regime has been manipulated.  Rule 122C(2)(c) of the Rules requires a debtor to include in his proposal details of his creditors.  The way in which information about creditors has been revealed suggests that the debtor was deliberately withholding information about his creditors.  The implication is that the new creditors, in particular Becentral and Cheery with whom the debtor is connected, were only brought forward when they were needed to secure the statutory majority.  They point to the fact that in his first statement of affairs dated 22 September 2008 the debtor only listed 3 creditors, Mr. Lui (who petitioned for bankruptcy), Reliable Cargo Agency Limited and Wong Ying Sheung with total claims of HK$7,237,935.38.  In his 2^nd statement of affairs dated 5 December 2008 he added 2 more creditors: Mok Yu Hon and So Kam Hung.  This increased his estimated debt to HK$9,599,861.62.  On 19 January 2009 after the rejection of his proposal the debtor amended his statement of affairs again and added Garwin, Mr. Yip and Becentral thus increasing his estimated debt to HK$32,030,121,74.  This was increased again when during the hearing on 17 March 2009 Cheery and Mr. Ng submitted their claims increasing the debt to HK$43,400,696.  The applicants point to the massive increase in the debtor’s estimate of his debt that took place between 22 September 2008 and 17 March 2009 as demonstrating a troubling lack of candour in the way the debtor has approached the introduction of the voluntary arrangement.  They say that the debtor clearly did not comply with his obligation under Rule 122C(2)(c) and that the court should revoke the approval of the voluntary arrangement.

9.  Further they complain that the debtor failed to comply with Rule 122C(2)(c)(ii) and identify in the proposal a liability owed to an associate, in this case Cheery.  Section 51B(4), (6) and (8) of the Ordinance define associate as follows:

“(4)	A person is an associate of a debtor whom he employs or by whom he is employed and for this purpose, any director or other officer of a company shall be treated as employed by that company.
…
(6)	A company is an associate of a debtor if that debtor has control of it or if that debtor and persons who are his associates together have control of it.
…
(8)	For the purposes of this section, a debtor shall be taken to have control of a company if –
	(a) the directors of the company or of another company which has control of it (or any of them) are accustomed to act in accordance with his directions or instructions, but a debtor shall not be considered to have control of a company by reason only that the directors act on advice given by him in a professional capacity; or (b) he is entitled to exercise, or control the exercise of, 1/3 or more of the voting power at any general meeting of the company or of another company which has control of it, and where 2 or more persons together satisfy either of the above conditions, they shall be taken to have control of the company.”

10.  The applicants say that various matters demonstrate that Cheery is an associate of the debtor and that Cheery should have been identified as an associate of the debtor.  I summarise these below along with the debtor’s evidence in relation to them.

(1)	The registered shareholder of Cheery, which is a BVI company, is Miss Wong Po Chu Annike Rkina.  However, in an affirmation made on 27 June 2007 filed in proceedings in the High Court brought by the debtor against Mr. Lui she describes herself as the debtor’s secretary.  In paragraph 4 of his 5th affirmation and paragraphs 4 to 6 of his 6th affirmation the debtor describes Miss Wong and his relationship with her as follows:
	“4. To the best of my information and belief and as revealed from the certificate of incumbency dated 26th June 2007, Cheery Group Limited was owned by Ms Wong Po Chu Annike Rkina (“Ms Wong”). Ms Wong and I had business dealings from time to time. Due to our business relationships, Cheery Group Limited made various loans to me totaling HK$2.9 million in 2007 and 2008 as included in my Further Supplemental Proposal for Voluntary Arrangement (“My Proposal”). I also acted as guarantor for the loan of US$1.5 million made by Becentral International Limited to Cheery Group Limited in 2007 which was also included in My Proposal.” “4. As mentioned in my 5th Affirmation filed herein on 23rd July 2009, I had business dealings with Ms Wong Po Chu Annike Rkina (“Ms Wong”) from time to time. I have known Ms Wong since around 2004 when we both worked in the Dickson Group. In fact both Mr Lui Wing Shing Raymond and Mr Mok Yu Hon, one of the challenging creditors, worked in the Dickson Group at the material time and they both knew about Ms Wong. At the time when we worked at Dickson Group, I was the Chief Executive Officer, Mr Lui Wing Shing Raymond was the Contract Manager, Mr Mok Yu Hon was the Project Manager and Ms Wong was the Business Coordinator. Mr Lui, Mr Mok, Ms Wong and I were all colleagues and business associates. In about 2006, Ms Wong and I left the Dickson Group and started to work under Sky Holdings Group Limited (“Sky Holdings”), my present employer. Currently Ms Wong is a senior manager of Sky Holdings. She has been primarily responsible for business development and her duties also include providing secretarial assistance to me and another director of Sky Holdings. 5. Against this background, I made the application to authorize Ms Wong to appear for the hearing and making the application for adjournment on my behalf for the appeal case CACV 38 of 2006 in June 2007. Ms Wong also filed the affirmation to the court in the capacity of my secretary for seeking adjournment of hearing for the said case. 6. To the best of my information and belief, Ms Wong is a businesswoman and has engaged in various business activities besides her employment with Sky Holdings.”
(2)	Cheery purchased a property at Monte Carlton on 18 February 2008.  Although the debtor says he is in no way related to Cheery he was the person who signed the sale and purchase agreement.  The debtor’s evidence in relation to this matter is in paragraph 5 of his 5th affirmation and paragraph 7 of his 6th affirmation.
	“5. In about February 2008, Ms Wong informed me that Cheery Group Limited intended to make a property investment by purchasing the Property. Ms Wong also invited me to rent the Property at a favourable rental. I accepted Ms Wong’s suggestion. At the time of signing of the SP Agreement, Ms Wong was out of town and therefore she authorized me to sign the SP Agreement on behalf of Cheery Group Limited. After completion of the purchase of the Property, I rented the Property as agreed.” “7. As explained in my 5th Affirmation filed herein on 23rd July 2009, Ms Wong authorized me to sign the agreement for sale and purchase and the assignment in respect of “Flat A, 1st Floor, Block 7, Monte Carlton, No. 363 Tai Po Road, Kowloon, Hong Kong” (“Monte Carlton”) for convenience sake due to our working relationship. The property was purchased by Cheery Group Limited which was owned and controlled by Ms Wong.”
(3)	The debtor and his Family lived in the property purchased by Cheery, which is not in dispute.
(4)	Cheery mortgaged a property to a Mr Tang Tzu Kuang on 12 December 2008, but under the loan agreement the debtor is described as the borrower.  This was after the bankruptcy petition was issued on 17 July 2008.  The debtor’s evidence in relation to this matter is in paragraphs 6 and 7 of his 5th affirmation.
	“6. I refer to paragraph 3(b) of Mok’s Affirmation where it was mentioned that I entered into a Mortgage dated 12th December 2008 (“Mortgage”) as borrower, Cheery Group Limited as the mortgagor and Tang Tzu Kuang (“Lender”) as mortgagee. 7. The Mortgage was to secure a loan made by the Lender to Cheery Group Limited. The loan was arranged by me. Since the Lender did not know about Cheery Group Limited, the Lender insisted that I be added as a party to the transaction. Although I was named as “borrower” in the Mortgage, in fact the loan from the Lender were advanced to Cheery Group Limited for its use. It was intended that the Lender will go after Cheery Group Limited for repayment of the said loan. The Lender was aware of my application for interim order herein and agreed not to take any actions against me regarding the Mortgage. Therefore I did not include the Mortgage in My Proposal.”
(5)	On 6 June 2009 Cheery assigned the property to Wealthy Eagle Investments Limited (“Wealthy Eagle”) of which Miss Wong was the director and the debtor was the company secretary. On 15 June 2009 Wealthy Eagle purported to sell the property to Net Pacific Finance Limited (“Net Pacific”) for HK$2,800,000, but the completion date was 1 year after the date for the payment of the purchase price. Miss Wong and the debtor guaranteed Wealthy Eagle’s performance of the sale and purchase agreement and in particular repayment of the purchase price. The applicants characterise this transaction as being in reality a secured loan. The debtor comments on these transactions in paragraphs 8 and 9 of his 6th affirmation.
	“8. To the best of my information and belief, Wealthy Eagle Investment Limited (“Wealthy Eagle”) was also a company owned and controlled by Ms Wong. I was asked by Ms Wong to assist her by acting as the secretary of Wealthy Eagle. 9. I was further asked by Ms Wong to provide a guarantee in favour of Net Pacific Finance Limited (“Net Pacific”) for the performance of Cheery Group Limited’s obligations for the sale of Monte Carlton to Net Pacific. In view of my business relationship with Ms Wong, I agreed to provide such guarantee.”
(6)	The place of residence given by the debtor in his 5th affirmation is not Monte Carlton but another property at The Parcville, which is registered in the name of Miss Wong. The debtor says that Miss Wong rented this to him when Cheery sold Monte Carlton for HK$6,000 per month.
(7)	The information disclosed about the debts owed by the debtor to Cheery record him as having borrowed HK$2,900,000 between 18 July 2007 and 19 December 2007, but not repaying anything.
(8)	The debtor guaranteed a loan of US$1,500,000 by Becentral to Cheery; which is the loan that gives rise to Becentral’s claim against him.

11.  The applicants also complain that the debtor failed to disclose 2 liabilities, namely, that he had borrowed money secured on a property owned by Cheery and guaranteed a transaction between Wealthy Eagle and Net Pacific on 15 June 2009 in other words after the bankruptcy petition was issued on 17 July 2008.  Mr. Cheung who appeared for the debtor argued that as the debt arose after the presentation of the petition it did not have to be mentioned because if the creditor had notice of the petition by virtue of section 34(2) of the Ordinance he could not prove in the bankruptcy.  There is, however, no evidence that Net Pacific knew of the bankruptcy petition.

12.  In addition to the debtor’s failure to disclose all his liabilities the applicants also point out that he failed to disclose assets, namely, an overseas bank account with the United Overseas Bank in Singapore, through which he handled significant payments including those with Cheery and a membership of the Chinese Recreation Club.  The debtor’s response is that he forgot about the bank account because of lapse of time and the fact that it only had Sing $225 in it and that he had sold his membership of the Chinese Recreation Club to his present employer, Sky Holdings, for HK$600,000 with the continued right to use it and an option to buy it back at HK$360,000 or 60% of the market price, whichever is the higher.  Miss Wong also works at Sky Holdings.

13.  As I have mentioned above one of the debtor’s creditors is Reliable Cargo.  That debt arises under a deed dated 10 April 2008 guaranteeing a loan allegedly advanced to Zotos Investments Limited (“Zotos”) under a loan agreement of the same date.  However, Zotos has been in liquidation since 18 December 2007 and the liquidator, Stephen Liu of Ernst & Young, has confirmed that Zotos did not enter into any such arrangement after it was wound up.  The debtor’s explanation for this is that the payments were made in 2006, as demonstrated by cheques he has produced, and that he gave an oral guarantee at that time.  What is not explained is why he saw fit to sign a guarantee at a time when he must have known Zotos could not pay and it was likely to be called.  Neither has he explained why there was no apparent demand for repayment.

14.  Finally, the applicants have raised concerns about the claim by Madam Yip Wai Kuen under a guarantee given by the debtor of loans made by her to the Dickson Group Holdings Limited.  They had originally asked whether this is the same person (which it is now known she is) mentioned in an announcement by Dickson Group Holdings Limited, which is now in liquidation, signed by the debtor.  The concern was that the assessment of her claim ignored repayment of HK$454,500 made to her under a scheme of arrangement in respect of Dickson’s debt thus reducing the amount guaranteed by the debtor; which as it transpired it did.

15.  Mr. Lau argued that the court would properly interfere with the decision at the meeting in one of 3 ways.  First, under the court’s inherent jurisdiction the court could act to prevent abuse of the interim voluntary arrangement mechanism.  Secondly, it could do so under section 20J, which allows the court to revoke any approval if a material irregularity has been demonstrated to have occurred in relation to a meeting.  Thirdly, it could do so under section 20L, which allows the court to make a bankruptcy order even if creditors have approved an interim voluntary arrangement if it is satisfied that information, which was false or misleading in any material particular, was contained in a statement of affairs supplied by the debtor under sections 20 to 20K.  I shall deal with each of these arguments in turn.

Inherent Jurisdiction

16.  Interim voluntary arrangements and the bankruptcy regime generally are entirely creatures of statute.  In my view the provisions of the Ordinance and the Bankruptcy Rules govern the court’s powers in relation to the operation of the statutory regime and there is no inherent jurisdiction, which allows the court to make orders unless the Ordinance provides a basis for the court doing so.  This is made clear, at least in relation to section 20J, by the Ordinance itself, which provides in section 20J(8) that

“Except in pursuance of the preceding provisions of this section, an approval given at a creditor’s meeting summoned under section 20E is not invalidated by any irregularity at or in relation to the meeting”.

If the applicants cannot bring themselves within sections 20J or 20L there is no residual inherent jurisdiction, which allows the court to revoke the arrangement because the court concludes that it is desirable or right to do so.

Section 20L

17.  As I have already mentioned the present application challenges the decision of the meeting of creditors at the meeting on 17 March 2009 under section 20J of the Ordinance, but at the hearing Mr. Lau also sought to argue that the court could interfere with the decision under section 20L(1) and asked the court to make a bankruptcy order.  Section 20L(1) provides that:

“20L. Default in connection with voluntary arrangement
(1)	The court shall not make a bankruptcy order on a petition under section 3(1)(c) (nominee of, or person bound by, voluntary arrangement proposed and approved) unless it is satisfied –
	(a) that the debtor has failed to comply with his obligations under the voluntary arrangement; or (b) that information which was false or misleading in any material particular or which contained material omissions -   (i) was contained in any statement of affairs or other document supplied by the debtor under sections 20 to 20K to any person; or (ii) was otherwise made available by the debtor to his creditors at or in connection with a meeting summoned under those sections; or (c) that the debtor has failed to do all such things as may for the purposes of the voluntary arrangement have been reasonably required of him by the nominee of the arrangement.”

18.  Mr. Lau argued that the various matters that I have referred to above come within sub-section (1)(b).  For reasons that are explained in the next section of this decision in which I deal with the application under section 20J I agree and, but for the difficulty that I am about to explain, would have made a bankruptcy order.

19.  Section 20L(1) is engaged “on a petition under section 3(1)(c)”.  No such petition has been presented in this case.  Mr. Lau argued that as Mr. Lui had already issued a petition under section 3(1)(a) there was no need for a further petition under section 3(1)(c) to be issued.  I disagree.  Section 20L envisages a petition being issued after a voluntary arrangement is proposed or approved which identifies matters which it is alleged constitute false or misleading information or material omissions that justify the court interfering in the introduction of a voluntary arrangement.  The debtor will know from this what case he has to answer and the court will have identified for it the issues it is required to assess and determine.  It is not in dispute that the applicants have failed to issue a petition that comes within section 3(1)(c) and it follows that the court cannot make a bankruptcy order under section 20L.

Section 20J

20.  Section 20J of the Ordinance provides as follows:

“20J. Challenge of meeting’s decision
(1)	Subject to this section, an application to the court may be made, by any of the persons specified in subsection (2), on one or both of the following grounds –
	(a) that a voluntary arrangement approved by a creditors’ meeting summoned under section 20E unfairly prejudices the interests of a creditor of the debtor; (b) that there has been some material irregularity at or in relation to such a meeting.
(2)	The persons who may apply under this section are –
	… (b) a person entitled, in accordance with the rules, to vote at the creditors’ meeting
…
(4)	Where on an application under this section the court is satisfied as to either of the grounds mentioned in subsection (1), it may do one or both of the following –
	(a) revoke or suspend any approval given by the meeting; (b) give a direction to any person for the summoning of a further meeting of the debtor’s creditors to consider any revised proposal he may make or, in a case falling within subsection (1)(b), to reconsider his original proposal.”

21.  The applicants complain that the information that was provided in the statement of affairs and the proposal about the debtor’s creditors was incomplete.  There is no authority in Hong Kong on how these provisions should be interpreted or applied, however, section 20J(1) is the same as section 262(1) of the Insolvency Act 1986 and there is English authority in relation to that section.  In Re a debtor (No. 87 of 1993) (No. 2) [1996] 1 BCLC 63 Rimer J. in considering what was capable of constituting an irregularity said this at page 95g:

“… a material irregularity in a debtor’s proposal or statement of affairs is a material irregularity for the purposes of that subparagraph, and that upon being satisfied as to the existence of such an irregularity the court is entitled to exercise its jurisdiction under section 262(4) in whatever may be the most appropriate manner.”

22.  I accept that an irregularity in a statement of affairs or proposal is capable of constituting an irregularity for the purposes of section 20J(1)(b), but as the language of the sub-section expressly tells us it is not any irregularity that engages it, it is only one which is material.  Guidance as to how materiality should be assessed is to be found in the judgment of Robert Walker L.J. in Cadbury Schweppes Plc v Sonji [2001] 1 WLR 615 at [25]:

“In order to determine whether there had been a material omission [the deputy judge] asked himself whether, had the truth been told, it would be likely to have made a material difference to the way in which the creditors would have considered and assessed the terms of the proposed IVA. I consider that that is the correct approach, so long as the question is to be answered objectively, and so long as it is borne in mind that as well as the creditors which were represented at the meeting on 20^th December 1999, Mr Cooper held proxies for a number of creditors which were not presented by their representatives.”

23.  Generally an irregularity will not be material unless the court is satisfied that had it not occurred the result of the meeting would have been different.  As I have explained earlier the applicants argue that there are a number of different irregularities that have arisen in the present case, which can be divided into 3 categories.  First, a failure to provide accurate information in the statement of affairs and the proposal; secondly a failure to comply with Rule 122(2)(c)(ii) and identify a liability owed to an associate (Cheery) and thirdly a further failure to disclose liabilities arising after the presentation of the petition, namely, as a borrower of money secured on a property owned by Cheery and as a guarantor of a transaction between Wealthy Eagle and Net Pacific.  I accept that the debtor’s undisputed failure to include all creditors in the statement of affairs and proposal is an irregularity.  I also accept that Cheery is an associate of the debtor and that the failure to include this information in the proposal was an irregularity.  I have come to the latter conclusion for the following reasons.  In paragraph 10 I have listed the various matters on which the applicants rely as demonstrating that Cheery is an associate of the debtor.  Clearly Miss Wong and the debtor have had a close on-going relationship, which has resulted even on the debtor’s case in Miss Wong letting property to him and he assisting her with various transactions.  Section 51B defines various circumstances in which a creditor is to be treated as an associate of the debtor.  The relevant circumstance is to be found in sub-section (6):

“A company is an associate of a debtor if that debtor has control of it or if that debtor and persons who are his associates together have control of it.”

In my view the various matters referred to above, the underlying facts of which are not in dispute, allow me to infer that on the balance of probabilities Cheery is a company over which the debtor has control.  It was, therefore, an associate of the debtor and this should have been stated in the proposal.  This conclusion suggests that Cheery is the debtor’s nominee and that Cheery should have been included as an asset in his statement of affairs.

24.  I also find that as there is no evidence that Net Pacific knew of the petition that the liability to Net Pacific should have been included in the statement of affairs.

25.  As I have already explained generally materiality is to be assessed by reference to the likely difference, if any, that the absence of an irregularity would have made to the result of the meeting if the irregularity had not taken place.  The debtor has argued that it made no difference because even if the votes of Cheery, Reliable Cargo and Yip Wai Kuen are excluded the proposal still achieved a 75.83% majority.  This calculation is not in dispute.  The nominees, who were represented at the hearing by Mr. Tony Ko, also argued that such irregularities as might have taken place made no difference to the outcome of the meeting.  Mr. Ko also pointed out that in relation to Cheery even if it was an associate of the debtor it did not follow that it could not vote.  The only circumstances in which an associate creditor’s vote does not count is if Rule 112R(4) applies and there is no suggestion in the present case that it does.

26.  I accept that it has not be shown that it is likely that if the irregularities had not occurred the result of the meeting would have been different and that they are not material in the sense described in Cadbury Schweppes Plc v Sonji.  I do not think that “materiality” in section 20L can fairly be read as extending to more general considerations concerning manipulation of the statutory regime.  Section 20L provides a remedy in cases in which the court concludes, as I have, that a debtor has provided information which is false or misleading or which contains material omissions in the documents supplied by the debtor under sections 20 to 20K and consequently that it would be inconsistent with the provisions and intent of the Ordinance to allow the debtor to avoid bankruptcy and implement a voluntary arrangement.  The difficulty in the present case is that the applicants have not formulated their application properly and this is why, unfortunately, they must loose.

27.  As there are few cases in Hong Kong dealing with voluntary arrangements and because of the concerns that I have about the way in which this voluntary arrangement has been dealt with I will add some more general comments about the introduction of voluntary arrangements.  The statutory scheme for voluntary arrangements is an attempt to balance the rights of creditors and a more general social interest in debtors being given the opportunity to resolve their financial problems constructively.  There will be many cases in which viewed objectively creditors are not advantaged by a debtor being bankrupted as this may affect his ability to continue to work or to maximise the value of his assets.  It is undesirable in these circumstances both from the perspective of the bankrupt and his creditors for him to be bankrupted.  The voluntary arrangement regime allows 75% of creditors in value to accept a proposal from a debtor to avoid bankruptcy.  It prevents one creditor with a minority of the debt who could otherwise insist on bankruptcy, perhaps for no other reason than malevolence, insisting on a bankruptcy order being made.  It is, however, important that the regime is not abused.  It is important that creditors are not left feeling for legitimate reason that the process has been manipulated unfairly to relieve a debtor of his obligations and deprive them of their prima facie right to have a bankruptcy order made against him.  Most creditors will be dependant upon the good faith of the debtor and the diligence of the nominees to ensure that they are provided with all relevant information and that the regime is not abused.  They will normally have limited opportunity independently to scrutinise the veracity of the information provided to them and in my view there is no reason why they should be expected to spend much in the way of time and money doing so.  It also needs to be borne in mind in this context that the nominees are proposed by the debtor and have a financial stake in the process because they are paid if a proposal is adopted.  They must be scrupulous to ensure that they act fairly and properly.  In the present case they should have put the question of an adjournment of the first meeting to the creditors who were present.  They should have reported what would have probably been the rejection of the proposal to the court.  In my view their reports to the court should have clearly identified the unsatisfactory way in which the debtor had compiled his statement of affairs and proposals and that as a consequence it is uncertain, as in my view it is, whether he had been frank and revealed all his assets and liabilities.

28.  In my view it is quite understandable that the applicants in the present case feel disquiet about the way in which the debtor has gone about introducing a voluntary arrangement.  It does look like the debtor has added friendly creditors when he needed them to vote for the voluntary arrangement.  There does appear to be unanswered questions about the debtor’s financial interest in Cheery.  The evidence suggests that Ms. Wong has been acting at his behest and his use of Cheery’s assets and his involvement in its financial affairs suggests that he controls Cheery.  This and the generally unsatisfactory way in which the debtor has compiled his statements of affairs and proposal lead me to conclude that there is good reason to question whether he has dealt honestly with his creditors.  As I have explained if the application had properly been made under section 20L these considerations would have lead me to make a bankruptcy order and it is quite possible that I would have made an order that the nominees contribute to part of the costs of the application.  I expect the nominees to look closely into the relationship between Cheery and the debtor.  If they are not satisfied with the answers that they get to questions that they ask they should give due consideration to what action the Ordinance requires them to take.

29.  Given my concerns about the way in which the debtor and the nominees have dealt with this matter I think that the fairest costs order is that there be no order as to costs.  I, therefore, make a costs order nisi that there be no order as to costs.  The order will become absolute unless the court receives a written notice within 14 days of the handing down of this decision that a party wishes to challenge it.