RE STANLEY CHANG t/a HONG KONG INSTECH TRADING CO

CACV 542/2021

[2023] HKCA 1029

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 542 OF 2021

(ON APPEAL FROM HCB NO 1454 OF 2015)

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and

HCA 2428/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2428 OF 2019

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J U D G M E N T

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Hon Yuen JA (giving the Judgment of the Court):

1.  This is an application for security for costs of CACV542/2021. On 12 November 2021, Recorder William Wong SC (“the Recorder”) gave a decision (“the Decision”) in HCB1454/2015 and HCA2428/2019.

2.  On 3 December 2021, Chang Stanley 張鴻元 (“Mr Chang”) trading as Hong Kong Instech Trading Company filed a Notice of Appeal against the Decision.  The Notice of Appeal was served on Jotron AS (“Jotron”) and on Mat Ng (“Mr Ng”) and John Lees (“Mr Lees”), the Joint and Several Trustees of Mr Chang’s property (“the Trustees”). 

3.  On 28 October 2022, Jotron filed a summons for an order that Mr Chang provide security for costs of the appeal.  This was supported by an affirmation of its solicitor Cheng Ka Lee Cathy (“Ms Cheng”) filed on 28 October 2022 (“Ms Cheng’s 2022 affirmation”).  Mr Chang did not file any evidence in opposition.

4.  On 22 September 2022, Jotron’s solicitors had filed an appeal bundle (“Appl B”) and on 8 December 2022, they filed an application bundle (“AB”) for the summons for security for costs.  

5.  Both parties have filed skeleton submissions for the application, which we have considered. As the background is quite complex, it would be helpful to set out a brief narrative.  

Background

Judgment debts (4 Costs Orders emanating from HCA378/2010)

6.1.  In DCCJ3369/2009, Jotron sued Mr Chang for the price of goods sold and delivered. Judgment on admission was entered on that claim, but Mr Chang filed a counterclaim against Jotron for libel.  The action was transferred to the High Court as HCA378/2010.

6.2.  On 19 February 2014, G Lam J (as he then was) handed down judgment in HCA378/2010¹.  Mr Chang’s counterclaim was dismissed with an order nisi that he pay a part of Jotron’s costs².  The costs came up to nearly $1.8 million³ (“the 1^st Costs Order”). 

7.  Mr Chang’s intended appeal from this judgment led to two other costs orders against him, one summarily assessed at $30,000⁴ (“the 2^nd Costs Order”), and the other summarily assessed at just short of $55,000⁵ (“the 3^rd Costs Order”).

8.  Jotron then took out charging order proceedings against Mr Chang in respect of a property which he owned as joint tenant.  On 10 December 2014, a master made a charging order absolute, with costs to be paid by Mr Chang, assessed at $7,000⁶ (“the 4^th Costs Order”).   

Bankruptcy Order (HCB1454/2015)

9.1.  As Mr Chang failed to pay the 4 Costs Orders, Jotron commenced bankruptcy proceedings against him in HCB1454/2015⁷.

9.2.  On 29 July 2015, a master made a bankruptcy order⁸.  On 13 November 2015, the Trustees were appointed Joint and Several Trustees of his property with immediate effect⁹.  Three creditors submitted proofs of debt, viz. Jotron, Orix Asia Ltd (“Orix”) and the Inland Revenue Department (“IRD”)¹⁰.  On 23 June 2021 Jotron submitted an amended proof of debt to include interest ¹¹. On the basis of the amended proof of debt, Jotron holds 91% of the total indebtedness¹². 

10.  Meanwhile, on 11 July 2016, the charged property was sold by the Trustees and the joint owner.  Mr Chang’s share of the proceeds amounted to $1.113 million, so (according to Jotron’s amended proof of debt) he remained indebted to it in the sum of about $980,000¹³, as well as to Orix and IRD.

The Property

11.1.  On 10 April 2018 (before his discharge from bankruptcy), Mr Chang became the owner of a flat (“the Property”) in a Housing Authority (“HA”) estate.

11.2.  The original purchaser of the Property was Mr Chang’s mother (“the Mother”) who had died on 25 June 2010¹⁴ without completing the purchase.  

11.3.  Some 7 years later, Letters of Administration to the Mother’s estate were granted to Mr Chang on 9 August 2017¹⁵.

11.4.  By a letter dated 15 March 2018¹⁶, the HA instructed WK To & Co to serve a final notice on the administrator of the Mother’s estate (Mr Chang) to complete the purchase, failing which the sale and purchase would be terminated and the intention money would be forfeited.  

11.5.  In a letter dated 28 March 2018 to the District Tenancy Management Office¹⁷, WK To & Co stated:

“We write to inform you that all beneficiaries of the estate of the [Mother], being [Mr Chang], Zhang Xiaoli (張小莉), Cheong Pak Iok (張白玉), Zhang Jingang (張金鋼) and Zhang Hongbo (張洪波), the lawful and natural sons and daughters of the [Mother], have executed a Deed of Family Arrangement [“DFA”]¹⁸ on 28 March 2018 whereby the said Zhang Xiaoli (張小莉), Cheong Pak Iok (張白玉), Zhang Jingang (張金鋼) and Zhang Hongbo (張洪波) respectively disclaimed their interest of and in the Property and they all agreed that ... our client [Mr Chang] be entitled to and shall have all the estate, right, title, benefit and interest of and in the Property absolutely. In the premises, [Mr Chang] is the only person entitled to acquire and take up the assignment of the Property from the [HA] and his capacity to take up the assignment of the Property is established.

We are further instructed to inform you that our client [Mr Chang] will be able to complete the purchase of the property on 10 April 2018”.  (Emphasis added).

The balance of purchase price for the Property (excluding interest) was $291,700.

11.6.  Mr Chang was assigned the Property on 10 April 2018 (before his discharge from bankruptcy).

Section 43A BO

12.  Pausing here, s.43A Bankruptcy Ordinance Cap. 6 (“BO”) provides (where material) as follows:

“43A. After-acquired property

(1) Subject to this section, the trustee may by notice in writing claim for the bankrupt’s estate any property which has been acquired by, or has devolved upon, the bankrupt since the commencement of the bankruptcy.

...

(3) ... upon the service on the bankrupt of a notice under this section the property to which the notice relates shall vest in the trustee as part of the bankrupt’s estate; and the trustee’s title to that property has relation back to the time at which the property was acquired by, or devolved upon, the bankrupt.

...

(6) For the purposes of this section, an undischarged bankrupt shall submit to the trustee on each anniversary of the making of the bankruptcy order against him, a statement of his earnings during the preceding year and details of any property he acquired during that period.

(7) A bankrupt who fails or refuses to comply with subsection (6) is guilty of an offence and is liable to imprisonment for 6 months.

(8) The court may refuse to discharge a bankrupt who has not complied with subsection (6)”. (Emphasis added).

Trustees’ claim for the Property

13.1.  n January 2019 (before his discharge from bankruptcy), Mr Chang applied for a loan from a finance company offering the Property as security.  When the finance company did a bankruptcy search on Mr Chang, they contacted the Trustees¹⁹.

13.2.  Accordingly, on 9 January 2019, the Trustees wrote to Mr Chang²⁰:

(a)  informing him that they regarded the Property as after-acquired property under s.43A BO;

(b)  demanding that he provide the title deeds and other relevant documents of the Property, information relating to (among other things) the source of funds for the purchase, and deliver up vacant possession thereof; and

(c)  requesting an interview with him.

13.3.  In the letter, the Trustees also warned Mr Chang that

(d)  they would consider taking legal action to take possession of the Property;

(e)  they would report his conduct to the Official Receiver who would take action against him; and

(f)  they would consider objecting to discharge of his bankruptcy upon the expiry of the 4-year period under s.30A(1) BO.

13.4.  At a meeting on 28 January 2019, Mr Chang provided the title deeds of the Property to the Trustees. 

13.5.  Subsequently, one Cheung Wai Ming 張惠明 (“CWM”), Mr Chang’s aunt, signed a declaration dated 11 March 2019²¹ which was provided to the Trustees.  In this declaration, she alleged that:

-  the Property was purchased with her funds;

-  the title deeds were in Mr Chang’s name primarily because of a judgment of the High Court of Hong Kong²² that the Property had to be purchased in his name;

-  as she provided the purchase price, the beneficial interest in the Property belonged to her.  

14.  Notwithstanding the Trustees’ indication that they would consider objecting to discharge of bankruptcy, Mr Chang was automatically discharged from bankruptcy on 29 July 2019²³.  Prior to this, the Trustees had already in January 2019 served the s.43A BO notice on him on the ground that the Property had been acquired by or devolved upon him before discharge.

15.  On 17 September 2019, Mr Chang filed a joint affirmation²⁴ (“the Joint affirmation”) in the bankruptcy proceedings together with CWM and Cheong Pak Iok (“CPI”) one of his siblings.  In the Joint affirmation, the following was alleged:

-  on 18 March 2018, Mr Chang received from WK To & Co a letter²⁵ indicating that the High Court had “agreed” to Mr Chang purchasing the Property, which purchase the HA stipulated had to be completed by 9 April 2018;

-  Mr Chang was unable to purchase the Property as he had not been discharged from bankruptcy, and he asked his siblings CPI and Zhang Hongbo (“ZHB”), who lived in Zhuhai, for assistance; 

-  as CPI and her husband considered that the Property was the “last property that Mr Chang owned”²⁶ and he would have nowhere else to live, CPI and her husband decided to mortgage their property in Macau to pay the purchase price of about $450,000²⁷ for the property;

-  however, as the mortgage process would take time, ZHB obtained a loan from his friend Cheung Fai Ming (張輝明);

-  on 20 March 2018, Cheung Fai Ming transferred RMB400,000 to ZHB, who converted the sum into HKD in tranches for transfer to CPI;

-  as CPI was a resident of Macau and could not open a bank account in Hong Kong, she brought $450,000 in tranches in cash to CWM, who deposited it into her Hong Kong bank account between 27 March 2018 and 6 April 2018;

-  on 9 April 2018, CWM paid the sum of $450,520 to the HA by way of a cashier order drawn on her Hong Kong bank account;

-  on 11 April 2018²⁸, a bank in Macau approved a mortgage loan to CPI and her husband; on 8 May 2018, CPI and her husband received a sum of $700,000 by way of the mortgage loan; and on 16 May 2018, CPI and her husband withdrew $500,000 which they brought in tranches in cash to Zhuhai for conversion into RMB for ZHB to repay the sum of RMB400,000 to Cheung Fai Ming.

16.  On 19 December 2019, DHCJ MK Liu heard Mr Chang’s application²⁹ to reverse the Trustees’ decision.  The deputy judge considered that as there were factual disputes which may require live evidence, it was appropriate for writ proceedings to be commenced.

HCA2428/2019

17.1.  Accordingly, on 31 December 2019, Mr Chang, CWM and CPI commenced HCA2428/2019 against Mr Ng

(1)  objecting to the Trustees’ sale of the Property;

(2)  requesting the Trustees to return the title deeds for the Property, and

(3)  demanding costs for each plaintiff in the sum of $20,000.

Mr Lees was not made a party.

17.2.  The Statement of Claim (“SOC”) contained allegations more or less similar to the Joint affirmation, with these additional allegations:

-  at a meeting in July 2015, Mr Chang had mentioned to (among others) Ms Chan Bo Mei from the OR’s Office that he was applying to purchase the Property, that Ms Chan had said that if the High Court agreed with his application, he would only need to inform the OR’s Office, and as long as he did not pay for the Property himself, the OR’s Office would not stop him acquiring it (§16 SOC);

-  Mr Chang had thought:

-  the bankruptcy period would expire in July 2018;

-  the purchase process would take a few months to complete and would only be finalized after July 2018;

-  the High Court judge³⁰ who had given the judgment³¹ agreeing to his purchase would have been aware of his bankruptcy and had taken into account the “few months” needed to finalize the purchase process, such that by that time, he would have been discharged from bankruptcy (§§16 - 17);

-  on 28 January 2019, Ms Heidi Li of Ernst & Young Transactions Ltd, a representative of the Trustees, had requested a declaration from CWM that she (CWM) was the beneficial owner of the Property, and informed Mr Chang that unless he obtained an order from the High Court to that effect, the Trustees would sell the Property to repay his debts (§20);

-  on 26 June 2019, he was informed that unless he provided documents showing he had made an application to the High Court, the Trustees would sell the Property to repay his debts (§21).

17.3.  The relief sought included an order that as the purchase price for the Property came from CWM’s bank account, she was the beneficial owner thereof during the period of his bankruptcy (§22(2))³².

18.  Mr Ng filed his Defence and Counterclaim in person on 10 March 2020, in which he pleaded (among other things) that:

-  Mr Chang had admitted in the SOC that the Property “is the last asset he [possesses]” (§6(b));

-  the Property was an after-acquired property within s.43A BO, for which the Trustees had served notice on Mr Chang in January 2019 (§6(c));

-  if Mr Chang had borrowed money from CPI during his bankruptcy period, it was not provable in the original bankruptcy under s.34 BO (§8(d)); and

-  as CWM merely acted as a channel for the funds for the purchase, Mr Chang was the owner of the Property (§8(f)).

Mr Ng counterclaimed for an order that Mr Chang deliver vacant possession of the Property to the Trustees so that they would realise the Property for the benefit of the creditors.

19.  In July 2020, the Trustees contacted Jotron asking if it would be interested in funding the litigation (HCA2428/2019)³³. 

20.  On 17 March 2021, Mr Ng sent a circular to the creditors copied to Mr Chang, stating that he has tendered his resignation and would be leaving his then firm on 31 March 2021. 

21.  On 7 June 2021, the Trustees reported to the court in a letter (copied to Jotron and Mr Chang) that as there were no funds in the bankruptcy estate to engage solicitors to handle HCA2428/2019, they proposed to settle the case with Mr Chang by returning the title deeds to Mr Chang and not proceeding with the Defence and Counterclaim³⁴.

Jotron’s summons under s.83 BO

22.1.  As Jotron did not agree with the Trustees’ proposed course of action, it issued a summons on 16 June 2021 under s.83 BO (which provides that if, among others, any creditor is aggrieved by any act or decision of the trustee in bankruptcy, it may apply to the court which may, among other things, reverse the act or decision and make such other order in the premises as it thinks just). 

22.2.  The summons sought an order allowing the Trustees to assign to Jotron their cause of action under s.43A BO and/or as pleaded in the Defence and Counterclaim in HCA2428/2019.  Ms Cheng’s 2021 affirmation was filed in support.   

23.1.  The matter was first heard by the Recorder on 30 June 2021.  Jotron, the Trustees and Mr Chang appeared. 

23.2.  The matter was heard by the Recorder again on 25 August 2021.  Mr Chang provided written submissions dated 22 August 2021³⁵.  The Recorder adjourned the matter but directed that a fresh summons be prepared.  On 3 September 2021, Jotron’s solicitors prepared a fresh summons in HCA2428/2019 under Order 15 rule 6 RHC³⁶, as well as in the bankruptcy proceedings under s.83 BO³⁷. 

23.3.  The matter was then dealt with by way of written submissions.  Mr Chang provided written submissions on 18 September 2021³⁸.

The Recorder’s Decision

24.1.  On 12 November 2021, the Recorder handed down his Decision which was in both HCA2428/2019 as well as the bankruptcy proceedings.  Since the Recorder referred to Jotron as holding 91% of the total indebtedness (§1), (a) the amended proof of debt must have been accepted by the Trustees, and (b) the Recorder obviously rejected Mr Chang’s submissions that there were other creditors than Jotron, IRD and Orix (see §30.1 below).  The Recorder decided to sanction the assignment for the following reasons:

(1)  a cause of action is assignable, the Trustees were willing to assign their rights (under the Defence and Counterclaim in HCA2428/2019) and Jotron was willing to take them over (§7);

(2)  as for the other creditors, the IRD had by letter indicated no comment³⁹, and there was no response from Orix (§§8-9);

(3)  Jotron has reassured the court that it would recognize the priority of the IRD as preferential creditor and would treat Orix pari passu with its own claim. 

24.2.  Accordingly, the Recorder ordered:

(1)  that the assignment from the Trustees to Jotron of the Trustees’ cause of action under s.43A BO and as pleaded in the Defence and Counterclaim in HCA2428/2019 be sanctioned;

(2)  the title deeds of the Property be delivered to Jotron upon execution of the Deed of Assignment;

(3)  Jotron be joined as an additional defendant in HCA2428/2019⁴⁰; and

(4)  Jotron do satisfy any orders or judgments for costs and damages or compensation to the plaintiffs (viz. Mr Chang, CWM and CPI) in that action incurred at any time (prior to and after the date of the Decision). 

Appeal from the Recorder’s Decision

25.  On 3 December 2021, Mr Chang (but not CWM or CPI) filed a notice of appeal in this Appeal (CACV542/2021).  The grounds of appeal may be summarised as follows:

(1)  Jotron was not holding 91% of the total indebtedness, as his other creditors included HSBC ($300,000), United Asia Finance Ltd ($200,000), Prime HK Investment Ltd ($100,000) and Hang Seng Bank ($25,000) (“the Other creditors”).  The reason for Jotron not mentioning the Other creditors was to increase its own proportion of indebtedness in order to obtain the assignment from the Trustees and the lion’s share of the proceeds of sale of the Property;

(2)  (according to Mr Chang), s.43A BO stipulated that the consent of 80% of the creditors was required, but Jotron held less than 50% of the total indebtedness if the Other creditors were included;

(3)  (according to Mr Chang), Mr Collins, Jotron’s solicitor, was disreputable;

(4)  the addition of Jotron as an additional defendant in HCA2428/2019 was not in the best interests of the administration of the bankruptcy.

Jotron’s Summons for security for costs

26.  In Jotron’s application for security, the amount of security in the draft bill is $197,416⁴¹.  Ms Cheng has in her 2022 affirmation in support referred to Mr Chang’s own allegations that he is impecunious. 

27.  Mr Chang has not made any affirmation to challenge Ms Cheng’s assertion. However, he has in his written submission dated 9 November 2022 alleged that the market value of the Property is $3.6 million which he said should cover the costs of the appeal should his appeal be unsuccessful.

Discussion

28.1.  Although Mr Chang has not provided any evidence that the market value of the Property is $3.6 million, we shall assume for present purposes that this is correct. However, his suggestion (not deposed to on affirmation) that the Property is available for enforcement of an order for costs against him is inconsistent with his own case as co-plaintiff in HCA2428/2019, and deposed to in his affirmation filed on 17 September 2019, that:

-  the beneficial owner of the Property is CWM;

-  the Property had been acquired with funds from CPI and her husband (thereby raising the possibility of a resulting trust argument in their favour).

28.2.  Further, it is undisputed that the Property originally belonged to the Mother, and unless the other beneficiaries of the Mother’s estate have disclaimed their interests, Mr Chang would not be the sole owner.  However, the DFA (under which the other beneficiaries purportedly disclaimed their interests) has not been provided.

28.3.  In light of the matters above, unless and until the court determines the beneficial ownership of the Property, it cannot be assumed that the beneficial ownership of the Property belongs to Mr Chang, such that Jotron can enforce a costs order against it.

29.  Secondly, as Mr Chang has not deposed to having any other assets, he would need to satisfy the court that the merits of his appeal are such that we should exercise our discretion not to order security for costs.  It is well-established that at this stage, a detailed examination of the merits is neither required nor desirable, and the court should form a preliminary, even instinctive, view⁴², which we set out below.

30.1.  In respect of Ground of appeal (1), the OR Office’s Proof of Debt Index dated 5 January 2017⁴³ shows that there were only 3 creditors in the bankruptcy HCB1454/2015, viz Jotron, IRD and Orix.  Mr Chang has not provided any evidence that the Other creditors had submitted proofs after January 2017 in relation to debts incurred before the bankruptcy order (which order had been made as long ago as July 2015), which would be an unlikely delay on the part of these financial institutions.

30.2.  As for Ground (2), contrary to Mr Chang’s submissions, s.43A BO does not stipulate an 80% requirement for any course of action.

30.3.  As for Ground (3), we do not see how the allegations relating to Mr Collins affect the merits of Mr Chang’s intended appeal against the Recorder’s Decision.  The Recorder did not rely on any act of Mr Collins in his Decision.

30.4.  As for Ground (4), we do not see how the addition of Jotron as an additional defendant in HCA2428/2019 was not in the best interests of the administration of the bankruptcy.  The Recorder’s decision to add Jotron as a defendant in HCA2428/2019 rather than to substitute it for the Trustees was to preserve the rights of the plaintiffs in case they had any personal claim against the Trustee(s).

31.For these reasons, at this stage we do not consider that the merits of Mr Chang’s appeal are so strong as to militate against an order for security for costs.

32.As for the quantum of costs, we have considered the draft bill and consider that $120,000 would be appropriate. 

Order

33.1.  We order that unless the appellant in CACV542/2021 (Mr Chang) pay into court $120,000 by way of security for the costs of the respondent Jotron AS within 28 days of the date of this Judgment, the appeal against Jotron shall stand dismissed without further order, with costs of the appeal to be assessed.

33.2.  As for the costs of the application for security for costs, we would make no order.  First, the AB contained irrelevant materials such as the 39-page Judgment of G Lam J, when all that was required was the 3-page sealed order.  Secondly, there was no reference in Ms Cheng’s 2022 affirmation or Jotron’s written submissions to the Appl B which contained many documents which were relevant to the court’s assessment of the merits in respect of the application for security.