LI XIAO YI AND ANOTHER v. ALAN CHUNG WAH TANG and HOU CHUNG MAN (JOINT AND SEVERAL TRUSTEES OF THE PROPERTY OF THE BANKRUPT)

HCB 345/2001

[2018] HKCFI 939

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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Background

1.  There are before the court 2 summonses for discovery both issued on behalf of Mr Li Xiao Yi and Mr Lelalertsuphakun Surasak (“Applicants”)[1], who are respectively the younger brother and son of Mr Lee Siu Fung Siegfried, a discharged bankrupt (“Siegfried Lee”). One summons is for specific discovery against the trustees in bankruptcy, Mr Alan Tang and Ms Anita Hou (“Trustees”).  The other summons is for non‑party discovery against Mr Ip Pui Lam Arthur and Mr Ip Pui Sum (“Messrs Ip”) in their capacity as trustees in bankruptcy of Ho Yuk Wah David in HCB 3819/2011.  Both applications have been made for the purpose of obtaining documents to be used for an application brought by the Applicants for removal of the Trustees (“removal application”).

2.  The background to the bankruptcy of Siegfried Lee has been set out in my decision dated 12 October 2016 ordering his examination under s 29 of the Bankruptcy Ordinance (Cap 6) (“Ordinance”) and will not be repeated here.

3.  The Trustees also sought an order for the examination of the Applicants under s 29.  That summons, so far as concerned the Applicants, was adjourned on 28 September 2016 for substantive argument, which was later fixed to be heard on 7 July 2017.  Meanwhile, on 1 February 2017, Siegfried Lee issued a summons seeking an order under s 96(2) of the Ordinance and the court’s inherent jurisdiction for the removal of the Trustees.  On 27 March 2017, the Applicants themselves took out a similar summons for an order to remove the Trustees.

4.  The grounds of the Applicants’ removal application, as stated in paragraphs 19-24 of Li Xiao Yi’s 3^rd affirmation dated 27 March 2017 filed in support of that summons, may be summarised as follows:

(1)  that Mr Tang had been convicted of contempt of court in HCMP 450/2016 on 18 October 2016 and that he had disobeyed court orders and made vexatious applications in HCCL 17/2012;

(2)  that in these proceedings (HCB 345/2001) there was a tendency for the Trustees to “initiate unmeritorious investigations and take unreasonable and unjustified positions in Court applications” (such as Mr Tang’s objection to the automatic discharge of Siegfried Lee from bankruptcy);

(3)  that Ms Anita Ho should also be removed because she does not and cannot act independently and in fact simply acts on the instructions of Mr Tang; and

(4)  miscellaneous grounds including:

(a)  HSBC’s claims against Siegfried Lee had been assigned a number of times and most recently to China New Investment Ltd whose identity was opaque;

(b)  that Mr Tang had been the subject of two bankruptcy petitions namely HCB 4397/2013 and HCB 1097/2014 which were withdrawn or dismissed in August 2013 and June 2014; and

(c)  the Trustees commenced an action against Siegfried Lee’s sister namely Lee Siu Fong Alice in HCA 779/2013 but subsequently applied for leave to withdraw the action.

5.  The Applicants applied for a direction that the Trustees’ application for their private examination should not be heard or determined until after their removal application was dealt with, but I declined to accede to that suggestion and the application for private examination was duly heard on 7 July 2017. On 21 September 2017, I handed down my decision making an order for their examination under s 29 of the Ordinance; see §28 of that decision.[2]

Applications for discovery

6.  Meanwhile, on 12 April 2017, the Applicants had taken out a summons for an order requiring Messrs Ip to give non‑party discovery (“non‑party discovery summons”).  On 14 July 2017, the Applicants took out a further summons for specific discovery against the Trustees (“specific discovery summons”).  After an amendment of the former summons, the documents or classes of documents sought in the 2 summonses are now identical and are as follows:

“1. All documents disclosed in HCB 3819/2011 and/or HCMP 450/2016 showing that any sum of money:

1.1 recovered during the course of the liquidation of CWB Textile Supplies Company Limited (in creditors’ voluntary liquidation) by its liquidators; or

1.2 paid to Grant Thornton (subsequently known as JBPB & CO),

was at any time diverted for the use of the “Lee Siu Fung Matter”, as further elaborated in the Affirmation of Hung Hoi Chun dated 12 April 2017 (the “Diverted Funds”);

2. All documents disclosed in HCB 3819/2011 and/or HCMP 450/2016 showing the payer and payee of the Diverted Funds;

3. All documents disclosed in HCB 3819/2011 and/or HCMP 450/2016 showing the date of diversions in relation to the Diverted Funds;

4. All documents disclosed by the Applicants to the Joint and Several Trustees in Bankruptcy of the Property of Ho Yuk Wah David (whether pursuant to the Order of the Honourable Madam Justice Au‑Yeung on 7 April 2017 or otherwise) in HCB 3819/2011 which make reference to the proceedings herein, the Bankrupt herein or the “Lee Siu Fung Matter”.”

In fact, it is clear from the description that the documents sought, insofar as they exist, would be in the possession of both the Trustees and Messrs Ip.  

7.  In fact, it is clear from the description that the documents sought, insofar as they exist, would be in the possession of both the Trustees and Messrs Ip.  The request for these documents came about in this way.  David Ho was an undischarged bankrupt in HCB 3819/2011, having been adjudicated bankrupt on 2 August 2011.  Messrs Ip were his trustees in bankruptcy. In that capacity, they obtained under s 29 of the Ordinance an order against JBPB & Co (an accountants’ firm formerly known as Grant Thornton), of which Mr Tang and Mrs Alison Wong (“Mrs Wong”) were minority partners, requiring the production of 4 categories of documents, namely (i) agreements, (ii) correspondence, (iii) minutes of meetings, written resolutions and court orders, and (iv) invoices and receipts, relating to 12 payments and a cashier’s order.

8.  Mrs Wong retired in 2014 or 2015.  Mr Tang and Mrs Wong failed to produce the documents to Messrs Ip within the time prescribed which prompted an application for committal for contempt in HCMP 450/2016.  On 18 October 2016, To J found Mr Tang and Mrs Wong in contempt for having breached the order in relation to all 4 categories of documents.  On appeal (CACV 214/2016), on 16 February 2017, the Court of Appeal held that contempt was not proved in relation to the first 3 categories of documents because it was not shown to the requisite standard of proof that they existed, but that it was proved beyond reasonable doubt that the fourth category was within the power of Mr Tang and Mrs Wong, even if not in their custody.  The majority partners of JBPB & Co (with whom they were in dispute) had informed them that the invoices might be found in the 130 boxes which could be inspected at a charge.  They chose not to carry out the inspection and obtain the documents because they “stubbornly”[3] “considered that they did not need to pay for the costs of inspection and that the process of retrieving the documents was too onerous”.[4]  The Court of Appeal set aside the order for committal.  On 11 October 2017, on re‑sentencing them for breach in relation to the fourth category of documents, To J fined Mr Tang $300,000 and Mrs Wong $200,000.

9.  After becoming aware of the fact that Mr Tang had been found in contempt of court in HCMP 450/2016, the Applicants’ solicitors sent a trainee to the sentencing hearing and heard submissions being made by counsel for Messrs Ip to the effect that (1)  David Ho was involved in various funding agreements for the distribution of monies recovered in the liquidation of CWT, and (2) such funds were used by the Trustees towards the administration of the bankruptcy herein (with references being made to the “Lee Siu Fung matter”).

10.  This has given rise to a suspicion on the Applicants’ part that the administration of Siegfried Lee’s bankruptcy (HCB 345/2001) had been and is still being funded by David Ho, using corporate vehicles, as an investment in distressed assets.  On this basis it is said that the documents sought are “relevant to the question of whether Mr Tang had permitted (or facilitated) funds which originated from David Ho, an undischarged bankrupt who had declared negligible assets, to be used to fund the administration of the estate of Lee Siu Fung”.[5]

11.  In the 2^nd Applicant’s reply affirmation on the removal application filed on 3 August 2017, reference was made to these matters and it was said that the Applicants’ concerns about the opaque nature of the funding of the bankruptcy administration were fortified.

Interest of the Applicants

12.  The documents sought are said to be intended for use in the removal application[6], which is based on s 96(2) of the Ordinance and the inherent jurisdiction of the court.  S 96(2) 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.”

13.  The ground for the removal application to which the documents sought relate is the allegation that funds of another (undischarged) bankrupt had been used in the administration of this bankruptcy.  On the view that I take, it is unnecessary to go into the question whether the documents sought are relevant or whether, as Mr Siu submitted for the Trustees, this is a fishing expedition.  Nor is it necessary to refer to the explanation of the funding arrangement in the respondents’ affirmations.  I consider that the discovery summonses should both be dismissed because of lack of legitimate interest on the part of the Applicants.  Their interest in the matter is, in my view, exiguous in the extreme.  They are not creditors of Siegfried Lee but his relatives.  Being the brother and son of the bankrupt does not afford them any standing in the bankruptcy.  They were the subjects of an application for private examination under s 29, but it has already been determined in the Trustees’ favour.  Even assuming there is an extant appeal, I do not see how the discovery summonses can relate to it, nor did Mr Man SC (who appeared for the Applicants) contend that the documents sought would be relevant to such an appeal.  Further, neither Applicant is a defendant in any on‑going action brought against him in relation to the bankruptcy of Siegfried Lee, but even if there is such an action, I am doubtful if it would afford standing to the Applicants in these discovery applications.

14.  In Deloitte & Touche AG v Johnson [1999] 1 WLR 1605, a case in which the defendants to an action instituted by a company in liquidation sought an order to remove the liquidators of the company pursuant to s 106(1) of the Companies Law (1995 rev) of the Cayman Islands, Lord Millett said (at p 1611C‑F), giving the opinion of the Privy Council:

“ Where the court is asked to exercise a statutory power or its inherent jurisdiction, it will act only on the application of a party with a sufficient interest to make it. This is not a matter of jurisdiction. It is a matter of judicial restraint. Orders made by the court are coercive. Every order of the court affects the freedom of action of the party against whom it is made and sometimes (as in the present case) of other parties as well. It is, therefore, incumbent on the court to consider not only whether it has jurisdiction to make the order but whether the applicant is a proper person to invoke the jurisdiction.

Where the court is asked to exercise a statutory power, therefore, the applicant must show that he is a person qualified to make the application. But this does not conclude the question. He must also show that he is a proper person to make the application. This does not mean, as the plaintiff submits, that he “has an interest in making the application or may be affected by its outcome.” It means that he has a legitimate interest in the relief sought. Thus even though the statute does not limit the category of person who may make the application, the court will not remove a liquidator of an insolvent company on the application of a contributory who is not also a creditor: see In re Corbenstoke Ltd. (No. 2) [1990] B.C.L.C. 60. This case was criticised by the plaintiff: their Lordships consider that it was correctly decided.”

15.  This decision was applied by Chu J (as she then was) in Wang Din Shin v Nina Kung alias Nina T H Wang (unrep, HCAP 8/1999, 20 August 2004).  There, the defendant applied for an order to remove the administrators pendente lite of the estate of the late Mr T H Wang, on the grounds, inter alia, that they had misused their position as shareholders and directors of companies in which the estate was interested, and had intervened in the management of the companies in an abusive and offensive manner.  On the administrators’ application for a direction limiting the capacity in which Mrs Wang could make the application for removal, Chu J held, applying Deloitte & Touche AG v Johnson:

“ 28. …even if the Administrators do, as the defendant contends, owe her a duty of care by reason of proximity of relationship (a contention that the Administrators do not accept and I need not decide in this application), it does not mean that she is entitled to bring the Removal Application in reliance on, or to protect, her separate personal interests. This is because in that separate capacity, the defendant is a stranger to the estate and she has no right or interest in the identity of the administrators of the estate. If indeed her separate interest as a shareholder or partner had been harmed, her remedy would be in damages or in an order of injunction. But she cannot in that capacity apply in the administration proceedings for a removal of the administrators.

…

37.   The fact that the defendant’s separate personal interest is opposed and adverse to that of the estate is an important reason that dis‑entitles her to bring the Removal Application in pursuit of that separate interest.  In the capacity as shareholder or partner, the defendant does not have any legitimate interest in seeking the removal of the Administrators from the administration.  Accordingly, the defendant cannot bring the Removal Application in any capacity other than as a potential beneficiary of the estate.”

16.  In seeking to remove the Trustees on the allegation that they had employed funds that originated from an undischarged bankrupt, the Applicants seem to me equally to be strangers to the estate concerned.  Insofar as the Applicants fear the Trustees might bring claims against them, they would in such claims be alleged to be debtors of, or nominees holding assets for, the estate.  Their interest is not aligned with that of the estate, but is opposed to it.  Their representations concerning the Trustees’ conduct are inherently coloured by their position by reason of which it enures to their advantage to cause maximum obstruction and disruption to any proceedings that might be brought against them.

17.  If and when a claim is actually brought by the Trustees against the Applicants, the Trustees would be in the same position as an ordinary litigant.  The Applicants would have the same protection and remedy that all litigants in these courts have against frivolous and vexatious claims.

18.  It is said that the discovery applications concern two matters raised in the removal application: first, the alleged diversion of funds from the CWT Textile liquidation to the administration of Siegfried Lee’s bankruptcy estate; secondly, the suspected funding of the administration of Siegfried Lee’s bankruptcy estate by David Ho, another bankrupt.

19.  It is difficult to see what legitimate interest the Applicants have in investigating the funding of the bankruptcy administration.  “It has never been a defence to an action nor a ground for a stay to show that the plaintiff is being supported by a third person in an arrangement which constitutes maintenance or champerty”: Unruh v Seeberger (2007) 10 HKCFAR 31 at §95, citing Martell v Consett Iron Co Ltd [1955] Ch 363 at 421‑422 and Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 80 ALJR 1441, §82.

20.  It was submitted for the Applicants that it would be improper for the Trustees to receive money from an undischarged bankrupt (David Ho) to fund the administration of the bankruptcy estate of Siegfried Lee.  Let it be assumed that this would indeed be improper.  Still I find it difficult to see why the Applicants, as strangers to the estate, should be allowed to impugn the Trustees on this ground, still less why they should be allowed to probe into the Trustees’ funding via compulsory orders of this court for discovery against the Trustees and third parties.

21.  Mr Man SC submitted that even if the Applicants had no standing to apply for removal, such lack of standing is no answer to the present discovery summonses because there is no application to strike out the removal application.  It is unnecessary for me to say here that the Applicants have no standing in the removal application altogether; what I do say is they have no legitimate interest in relation to removal on the ground concerning the source of funding.  But in any event I reject the submission which, with respect, is most unattractive.  Surely if the Applicants have no relevant legitimate interest, then the documents sought are not necessary for the fair disposal of the matter.

22.  Mr Man SC also sought to distinguish Deloitte & Touche AG v Johnson. He pointed to the fact that the ground relied upon by the plaintiff in that case was that the liquidators had a conflict of interest and duty, not that they were guilty of misconduct.  He pointed out that Lord Millett said there (at p 1612A):

“ The plaintiff’s case is not advanced by alleging that the liquidators have a conflict of interest. This is not the same as impropriety or want of probity. Their Lordships observe that the expression ‘conflict of interest’ is an abbreviation for ‘conflict of interest and duty’. The rule is that a fiduciary may not without the informed consent of his principal place himself in a position where his interest may conflict with his duty to the principal. The danger is that his interest may affect him in the discharge of his duty to the prejudice of his principal. The only persons with a legitimate interest in complaining of a breach of the rule are the persons to whom the duty is owed; and they may waive the breach. The plaintiff does not allege that the liquidators have an interest which conflicts with any duty owed to it. It does not plead any such duty. It alleges that the liquidators have an interest which conflicts with their duty to the company and its creditors. If such a conflict exists, it is for the creditors alone to decide what if anything to do about it.”

23.  This passage set out the precise basis for the decision on the facts of that case but it does not follow, nor in my view did Lord Millett intend to say, that if impropriety or want of probity is alleged, then a person such as the Applicants here necessarily has sufficient legitimate interest in seeking the removal of liquidators and trustees.  It should be noted that the court held in Wang Din Shin, supra, that Mrs Wang had no standing to complain that the administrators misused their power or behaved in an abusive and offensive manner.  The principle is not confined to a complaint about conflict of interest and duty. 

24.  This is not to say the court is not interested in or may not inquire into the conduct of its officers, but that a stranger to the estate has no standing to impugn the way in which its administration is funded and, a fortiori, to obtain orders requiring trustees or third parties to produce documents to enable him to probe into the funding arrangements.  To hold otherwise would in my opinion be a dangerous precedent.

25.  Since the documents sought from the Trustees are all also in the possession of Messrs Ip, there is no reason to think that no action will be taken if they do indeed reveal that funds had flown from David Ho while an undischarged bankrupt.

Jurisdiction under s 42 of the High Court Ordinance

26.  I should mention there was a question, which I confess was first raised by me, as to whether s 42 of the High Court Ordinance (Cap 4), which empowers the court to make orders for discovery by third parties, applies in relation to the removal application at all because under the section the power is conferred on the court “[o]n the application … of a party to any proceedings in which a claim is made”.  It was not clear to me what kind of “claim” was envisaged and whether the removal application qualifies as proceedings “in which a claim is made”.

27.  Prior to the Civil Justice Reform in 2009, s 42 was confined to “proceedings in which a claim in respect of personal injuries to a person or in respect of a person’s death is made” (italics added).  As a result of the recommendation in the reform to make non‑party discovery applicable to “all types of cases (and not merely to personal injury and death claims)”[7], the words italicised in the quotation above were removed.  The section was therefore not enacted with a view to distinguishing between proceedings in which a claim is made and proceedings in which no claim is made.  Rather, it was amended with the object of extending its scope from proceedings in which claims for damages for personal injury and death are made to all types of proceedings.  With this object in mind I think there is no reason not to attach a wide meaning to the word “claim” which ought to encompass any case in which relief is sought from the court.

Conclusion and orders

28.  For these reasons both summonses for discovery are dismissed, with costs on a nisi basis.