HAU PO MAN STANLEY (IN BANKRUPTCY) 1 st Appellant HAU LUCITA O 2 nd Appellant HAU MICHELLE LYNN O 3 rd Appellant and JOINT AND SEVERAL TRUSTEES OF ESTATE OF HAU PO MAN STANLEY (IN BANKRUPTCY) Respondents

CACV 211/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 211 OF 2007

(ON APPEAL FROM BANKRUPTCY PROCEEDINGS NO. 924 OF 2002)

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And

CACV 225/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 225 OF 2007

(ON APPEAL FROM BANKRUPTCY PROCEEDINGS NO. 924 OF 2002)

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(Heard Together)

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J U D G M E N T

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Hon. Chung J (giving the judgment of the court):

1.  CACV 225/2007 is an appeal brought by Hau Po Man Stanley (“Stanley”) who, on his own petition, was adjudged a bankrupt in May 2002.

2.  CACV 211/2007 is an appeal brought by Stanley’s wife (“Lucita”) and his daughter (“Michelle”).

3.  Stanley, Lucita and Michelle are collectively called “the appellants” below.  The respondents in these appeals are the trustees in bankruptcy (“the trustees”).

4.  Two orders made by Poon J (both dated 26 June 2007) are the subject-matter of these appeals:-

(a)	(1)	the appellants do make discovery of items 1 to 4 and 6 to 9 in the Schedule to the trustees’ summons by way of affidavit;
	(2)	Stanley do make discovery of items 11 and 16 in the Schedule to the said summons;
	(3)	the appellants do attend before the Master for the purpose of giving evidence in an examination under s. 29, Bankruptcy Ordinance (Cap. 6);
	(4)	the trustees be at liberty to apply for directions;
(b)	the automatic discharge of Stanley from bankruptcy be suspended for a period of 3 years.

The appellants were also ordered to pay the costs of the trustees.

5.  The discovery and examination ordered by the learned Judge cover 4 areas:-

(1)	documents of one Novel Gain Enterprise Ltd. (“Novel Gain”) (para. 40 to 62, judgment dated 26 June 2007);
(2)	Stanley’s withdrawals of $3 million and $1.9 million (para. 68 to 73, judgment dated 26 June 2007);
(3)	Stanley’s payments (totalling about $4.24 million) to a Mr. Wong (para. 68 to 73, judgment dated 26 June 2007);
(4)	Stanley’s alleged gambling loss (para. 80 to 82, judgment dated 26 June 2007).

These will be dealt with in turn below.

Novel Gain’s Documents

6.  The background leading to this aspect of the orders can be summarized as follows.

7.  As stated above, Stanley petitioned for his own bankruptcy (in May 2002).  The trustees were appointed to their offices in September 2002.

8.  Between July 1995 and June 2000, Stanley and Lucita were Novel Gain’s two shareholders.  They were also its directors.  But Stanley allegedly ceased to be a shareholder in June 1999 (he also ceased to be its director in January 1999).

9.  Novel Gain’s only asset was a property in Shouson Hill Road (“the Property”).  In January 2000, the Property was sold for $18.5 million, out of which Novel Gain obtained a profit of about $11.148 million.

10.  Novel Gain was de-registered in January 2001.  Long before that, in December 1997, Novel Gain executed a Guarantee in favour of Ivy Hau, Stanley’s sister (“Ivy”), as security for Ivy’s $4 million loan to Stanley.  Out of the sale profits, Novel Gain repaid $4 million to Ivy.

11.  In December 2003, the trustees applied to set aside, as unfair preferential payments, some of Stanley’s pre-bankruptcy transfers of fund in favour of Ivy and her husband (including the said repayment of $4 million).

12.  The setting-aside application was dismissed by Lam J in July 2004 and no appeal was lodged as regards the validity of the repayment of $4 million.  The trustees’ appeal against the other parts of the judgment was however successful.

13.  The said part of Lam J’s decision was premised on:-

(a)	there was insufficient evidence showing Novel Gain was Stanley’s alter ego (or he otherwise controlled it, or was interested in it) after June 1999;
(b)	there was insufficient evidence to cast doubt on the validity of Stanley’s transfer of his Novel Gain shares to Michelle in June 1999.

Withdrawals of $3 million and $1.9 million

14.  Stanley withdrew $3 million from the HSBC account in February 2000.  Another $1.9 million was withdrawn by him by way of cash from his Dao Hang Bank account in October 2000.

15.  As regards the said $3 million, Stanley’s explanation in his 2^nd affidavit (4 July 2006) was in brief that it was lost in his stock trading transactions between February 2000 and January 2001.

16.  As regards the said $1.9 million, Stanley’s explanation in his 2^nd affidavit was that it was used to settle the debts he owed to a Mr. Wong in late 1999 (brought about by his earlier gambling in Macau).  Other cheque payments by him to Mr. Wong were also said to be for the same purpose.

Payment of About $4.24 million to Mr. Wong

17.  Between 29 February and 13 October 2000, Stanley made 8 cheque payments to Mr. Wong, totalling about $4.24 million.  He explained that they were for the settlement of earlier gambling debts.

Stanley’s Alleged Gambling Loss

18.  Powerworth Co. Ltd. (“Powerworth”) was another of the companies in which Stanley has had an interest.  The sums of $327,746.89 and $980,000 realized from the insurance policies held by Powerworth were claimed to have been used to settle Stanley’s gambling debts in Macau and horse-racing debts in Hong Kong.

S. 29, Bankruptcy Ordinance (Cap. 6)

19.  The two orders under appeal were made pursuant to the trustees’ summons which was taken out under s. 29(1), Cap. 6.  That subsection reads:-

“

(1)

The court may, on the application of the Official Receiver or trustee, at any time after a bankruptcy order has been made against a bankrupt summon before it the bankrupt or his spouse, or any person known or suspected to have in his possession any of the estate or effects belonging to the bankrupt or supposed to be indebted to the bankrupt, or any person whom the court may deem capable of giving information respecting the bankrupt, his dealings or property, and the court may require any such person to produce any documents in his custody or power relating to the bankrupt, his dealings or property.”  (emphasis supplied).

20.  It is common ground the power conferred by s. 29(1) is discretionary in nature.  Its purpose is to enable:-

“

… the court to help a trustee to discover the truth and circumstances connected with and to gather information about the bankrupt’s property, affairs and dealings, in order that the trustee may be able, as effectively as possible, and with as little expense as possible, to complete his function; to put the affairs of the bankrupt in order and to administer the bankruptcy in all its various aspects, including the getting in of any assets of the bankrupt” (emphasis supplied).

(para. 37 of the judgment below, citing Re Poulson, a bankrupt [1976] 2 All ER 1020; Williams and Muir Hunter in the Law and Practice in Bankruptcy, 9^th Ed., p. 113; Muir Hunter on Personal Insolvency, Vol. 1, July 2006, para. 3-2511 and Butterworths Hong Kong Bankruptcy Law Handbook, 3^rd Ed., para. 29-01 at p. 133).

21.  There is also no dispute regarding how the discretion should be exercised:-

(a)	the applicant must satisfy the court the essential condition that the provision of information or documents is reasonably required for him to carry out his functions;
(b)	the applicant must also establish a prima facie case that the respondent is able to provide such information or documents;
(c)	if the above criteria are met, the court must carefully strike a balance between the applicant’s reasonable requirements and the need to avoid making an order which is wholly unreasonable, unnecessary or oppressive to the person concerned.  The burden is on the applicant to satisfy the court, after balancing all the relevant factors, there is a proper case for such an order to be made.

The “applicants” for present purpose are the trustees.

Res Judicata

22.  The first ground advanced by the appellants against the two orders is that it is an abuse of the court’s process for the trustees to take out the summons.  This ground relates to the part of the orders concerning Novel Gain (see para. 6 to 13 above).  It has been labelled “res judicata” but, irrespective of the label, it is essentially an allegation there has been an abuse of process by the trustees.

23.  The appellants argue that, the trustees’ earlier application to recover the sum of $4 million paid to Ivy having been dismissed by Lam J, this part of the trustees’ summons is nothing more than an attempt to have that re-litigated.

24.  That argument was rejected by Poon J as being misconceived.  This court entirely agrees.

25.  As Poon J correctly observed in his judgment, new materials have been placed before the trustees since Lam J’s decision (in July 2004):-

(1)	according to Stanley’s answers given to the trustees’ questionnaire in April 2005, although his personal stock account showed a credit balance, the trustees must not overlook the loss recorded in Novel Gain’s share accounts.  Hence, he appeared to be implying that that loss should also be treated as his loss (despite the alleged severance from Novel Gain);
(2)	Stanley initially did not mention the transfer of his shares in Novel Gain to Michelle when he provided information to the trustees.  The details of the share transfer were given in his answers to the trustees in April 2005, and in Lucita’s answers given to the trustees in May 2005.

26.  The power conferred by s. 29(1), Cap. 6 can be exercised at any stage after a bankruptcy order has been made.

27.  It cannot be disputed that the investigative power conferred by s. 29(1), Cap. 29 includes a power to elicit information.  The existence of a valid judgment covering the same matter(s) of the intended investigation is of course a strong factor to be considered in the exercise of the discretion.  But there is no valid basis to conclude that this should, as a rule, constitute a bar to such power.

28.  For example, one can well conceive of a case where it is proper for the court to exercise its discretion to permit the applicant to elicit information with a view to setting aside an earlier judgment on the ground it might have been obtained by fraud.  What is important is that there must be a sufficient basis in support of the application.  Provided that is the case, s. 29(1) enables the court to permit the applicant to re-investigate matters which have been decided in a judgment.

29.  There is a major difference between Lam J’s judgment and the trustees’ s. 29(1) application.  That judgment determined the status of the affairs concerning the bankrupt’s properties.  Using the graphic description employed by the trustees, it was a “snap-shot” of the bankrupt’s affairs.  On the other hand, the s. 29(1) application is intended to be part of a continuing investigative process.

30.  Thus analysed, it is unnecessary to determine Stanley’s contention that the decision of Lam J was a judgment in rem (as opposed to a mere judgment in personam).  If it were necessary to do so, this Court is inclined to conclude that it was not a judgment in rem.  Lam J’s decision was only made in proceedings brought by the trustees under s. 50, Cap. 6 to set aside transactions made in favour of Ivy and her husband by reason of being “unfair preferences”.

31.  However, what has been said in para. 27 to 29 above should not be treated as a blanket licence for applications under s. 29(1), Cap. 6 to be made irrespective of costs or proportionality.  In this connection, this Court need not go beyond repeating the passage in Poon J’s judgment quoted at para. 20 above, as well as the court’s remarks in Re Peregrine Investments Holdings Ltd. [1998] 2 HKLRD 670 that:-

“	… It is not sufficient for office-holders [in insolvencies] to say that what they have done is within the scope of the duties or powers conferred upon them.  They are expected to deploy commercial judgment, not to act regardless of expense.”  (para. 22(3)(c) of the judgment).

32.  Thus, what clearly is not permissible under s. 29(1) is a mere “fishing” expedition on the part of the applicant.

33.  In the circumstances of this case, there is ample basis for the court below to properly exercise the discretion.  Apart from the matters summed up in para. 25 above, Poon J also correctly took into account:-

(a)	Lucita only received $2 million from the sale proceeds on sale of the Property.  This does not tally with Lucita’s claim (which was not always consistent) that in effect she owned all of the interest in Novel Gain;
(b)	further to (a) above, Lucita’s said claim is unsupported by documentary evidence.

34.  Once it is concluded that the court below has adopted the correct approach and taken into account relevant matters when exercising its discretion, this Court should not interfere.

35.  For completeness, the other matters relevant to this aspect which have expressly been referred to in Poon J’s judgment were:-

(1)	in relation to the withdrawal of $3 million in February 2000, he noted the inconsistency in Stanley’s 1st affidavit and 2nd affidavit regarding the disposal of that sum;
(2)	in relation to the cash withdrawal of $1.9 million in October 2000, he noted these oddities:  Stanley deposited $1 million into same bank account on the same day; further, Stanley seemed to suggest that the $1 million came from the sale of the Property;
(3)	he noted that of the various cheque payments to Mr. Wong totalling about $4.24 million between 29 February and 13 October 2000, 5 cheques were for exactly the same sum (up to the decimals) when Stanley claimed they were repayments of gambling debts;
(4)	he also noted that the insurance policy payments were disposed of without supporting documentary evidence.

Delay and Oppression

36.  The appellants’ complaint relating to delay on the trustees’ part and oppressiveness to them have been considered by Poon J (see also para. 25 to 29 and 33 above).  These matters fall within the province of his discretion; it is not for this Court to interfere unless his approach plainly was erroneous.  Because there is nothing to show he acted wrongly, there is accordingly no room for intervention in these appeals.

The Case of Lucita and Michelle

37.  Lucita and Michelle contend in addition that:-

(a)	it is futile to examine them because the trustees never challenged Lucita’s standing as Novel Gain’s shareholder (holding at least 50% of its shares);
(b)	in any event, not only have they cooperated with the trustees, they already have deposed that they no longer had the financial documents of Novel Gain, and that Michelle had no knowledge of the matters involved in the intended investigation.

38.  There is no need to deal with these points in detail; suffice it to say Poon J has also considered them.  Further, it is undisputed that the appellants are members of a close-knit family and there is ample basis to infer that Stanley has had the cooperation of Lucita and Michelle in his arrangements and/or relationship with companies (or at least most of them) which might have been under his control.

39.  In these circumstances, Poon J’s decision to make the orders fell well within his discretionary power.

“Extension” of the Disqualification Period

40.  Pursuant to the power conferred by s. 39(3), Cap. 6, Poon J ordered Stanley’s disqualification period to be “extended” for 3 years.

41.  In his judgment, he expressly took into account:-

(1)	s. 30(1), Cap. 6 is enacted to enable a bankrupt to be “rehabilitated” after the expiry of the disqualification period in the sense of allowing him to resume a normal life thereafter;
(2)	accordingly, the disqualification period should only be prolonged by the bankrupt’s own failings;
(3)	a bankrupt does not enjoy an unconditional right to a discharge.  He must abide by the requirements of Cap. 6 in order to obtain a “release” from disqualification;
(4)	a bankrupt’s duty to cooperate with the trustee in bankruptcy involves making a full and frank disclosure of his assets and financial dealings; merely adopting a passive or reactive role is insufficient.

42.  Poon J “extended” the disqualification period for 3 years for the following reasons:-

(a)	Stanley has failed to provide full and frank disclosure to the trustees;
(b)	certain important aspects of what Stanley had said in his affidavits were self-contradictory and unsatisfactory;
(c)	Stanley had made an unwarranted complaint against the manner of the trustees’ investigation;
(d)	to discharge Stanley at that stage would prejudice the administration of his estate (this apparently is related to Poon J’s view that further investigation is still needed for this purpose);
(e)	Stanley’s heavy speculation and gambling before his bankruptcy should be regarded as unsatisfactory conduct falling within s. 30A(4)(d), Cap. 6.

43.  The lower court’s power to “extend” the disqualification period is again discretionary in nature.

44.  Counsel acting for Stanley has diligently cited a number of earlier decisions on this aspect, and has argued with eloquence with a view of showing that the period ordered is excessive.

45.  Without disrespect to counsel’s efforts, these decisions all turn on their own facts.

46.  Despite Stanley’s argument to the contrary, the period ordered falls well within the realm of the lower court’s discretion.  There is no room for intervention here either.

47.  The parties also raised interesting arguments concerning s. 30A(4)(a) (likelihood of significant contribution to the bankrupt’s estate).  These arguments centre around the decision of Lam J in Fred Lee (Trustee in Bankruptcy) v. Liu Man Hoo, HCB 11719/2002 (14 September 2007).

48.  The last-mentioned aspect appears to form but one of the factors in Poon J’s decision.  Further, this court considers Poon J’s decision to be otherwise justified by the matters referred to in para. 42 above.

49.  For these reasons, this Court sees no necessity to consider (the correctness of the decision in Liu Man Hoo until an occasion) when plainly it is appropriate and necessary to do so.

Conclusion

50.  The appeals are dismissed.

Costs Order Nisi

51.  There will be a costs order nisi that the costs of the appeals (including any reserved costs) be paid by the respective appellants to the trustees, such costs to be taxed if not agreed.