RE LEUNG YAT TUNG

HCB 2019/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 2019 OF 2000

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D E C I S I O N

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1.  This is a summons issued on 19 June 2008 by the Official Receiver and trustee in bankruptcy of the estate of Leung Yat Tung, a former bankrupt.  Mr Leung was discharged from bankruptcy on 1 March 2008, the Official Receiver continues to administer the bankruptcy estate.

2.  The summons was issued pursuant to section 82(3) of the Bankruptcy Ordinance, Cap. 6, which provides that the trustee may apply to court in the manner prescribed for directions in relation to any particular matter arising under the bankruptcy.

3.  The Official Receiver seeks an order in these terms in the summons:

(1)     notwithstanding the request by Windermere Pte Ltd (“Windermere”) by a letter dated 12 June 2008, the Official Receiver is not required to call a general meeting of creditors; and

(2)     the Official Receiver need not comply with the four proposed resolutions in the said letter of Windermere which had the support of a majority of the creditors.

4.  Windermere is a company associated with Mr Leung and is the assignee of a debt representing 32.34% of the overall indebtedness, although Windermere has not to date filed a proof of debt.

5.  By a letter to the Official Receiver of yesterday, Windermere stated that it withdraws its request to hold a general meeting of creditors to consider the proposed resolutions nos. 1, 3 and 4.  As for the proposed resolution in 2, Windermere stated this is to be revised as follows:

“That additional member or members be elected to the creditors’ committee to fill any vacancy or as is otherwise permissible up to the prescribed maximum.”

6.  That being the stance taken by Windermere, it will not be necessary for me to consider the resolutions proposed and withdrawn.

7.  The court has wide powers in the exercise of its jurisdiction in bankruptcy.  It has complete control over the administration of a bankrupt’s estate for the benefit of all persons interested, subject only to such express limitations as are found in Cap. 6.  Under section 82(3), the court has power to decline to order a trustee to carry out a creditor’s request to convene a general meeting of creditors pursuant to section 82(2), if the court considers that the holding of such meeting would serve no useful purpose and would only result in a useless waste of assets in the bankruptcy (In re J Burn, ex parte Dawson & Others [1932] 1 Ch 247 at 256 to 258, 260 to 261).  The court also has power, when the trustee applies for directions under section 82(3), to direct the trustee to disregard a resolution passed by the majority of creditors even though there was no fraud in the passing of the resolution, if there was impropriety or just cause for directing the trustee not to act in accordance with the creditors’ resolution (Ex parte Cocks, In re Poole (1882) 21 Ch D 397 at 402 to 403, 404 to 406).  As stated by Jessel, MR at 403, “the direction of the creditors is to be subordinate to the direction of the Court”.

8.  The relevant background matters may be stated as follows.

9.  The central issue for the Official Receiver in this bankruptcy is the transfer by Mr Leung of his shares in two companies, Fonfair Company Limited (“Fonfair”) and Money Facts Limited (“Money Facts”) into two family trusts.  Fonfair was held as to ⅓ by Mr Leung and ⅔ by Money Facts. Money Facts was owned equally by Mr Leung and his elder brother Leung Yuet Keung (“YK Leung”).  Mr Leung alleged he made two declarations of trust in 1991 declaring he held his shares in Money Facts and Fonfair as trustee on trust for Harbour Front Limited (“Harbour Front”), which in turn, in declarations signed by Mr Leung, declared it held them on trust for Harbour Front Unit Trust.  The Official Receiver maintains that such transfer of shares was not in fact made in 1991 but in February 1998, when Mr Leung executed bought and sold notes and instruments of transfer in favour of Harbour Front in respect of his shares in Fonfair and Money Facts, and such transfers fall foul of section 49 of Cap. 6 and are liable to be set aside as a transaction at an undervalue or is caught by section 60 of the Conveyancing and Property Ordinance, Cap. 219, or the principles on sham transaction.

10.  The Official Receiver obtained leave from Recorder Edward Chan, SC on 29 March 2006 to bring an action to set aside the transfer of shares in Fonfair and Money Facts by Mr Leung.  Proceedings were brought by a notice of application against Harbour Front on 22 February 2007.  This litigation is funded by Healthy Wharf Limited (“Healthy Wharf”) under a funding agreement entered into by the Official Receiver with leave of the court.  Healthy Wharf is the petitioning creditor and is controlled by YK Leung.

11.  According to the Official Receiver’s analysis, creditors holding 60.11% of the known debts of Mr Leung are related to him and the UDL Group of companies, of which Mr Leung was the former chairman.  Healthy Wharf and YK Leung hold about 12.8% of the overall debts.  In view of the composition of creditors, a resolution proposed by the camp of Mr Leung is likely to be passed at the creditors’ meeting.

12.  The bankruptcy order was made over 7 years ago.  The available assets to date are cash of $66,955.76.  There is no reasonable prospect of any dividend being paid.  The only hope of realising anything for the benefit of creditors is in the successful litigation of the section 49 proceedings.  The most important issues remaining in the administration of the estate are the section 49 proceedings and action relating to Mr Leung’s transfer of shares in Harbour Front after the presentation of the bankruptcy petition, in which serious allegations are made against Mr Leung.

13.  The creditors’ committee used to be made up of three members, Orix International Finance Limited (“Orix”), China Construction Bank (Asia) Corporation Limited (“CCBC”) and GE Capital (Hong Kong) Limited (“GE Capital”).  The composition has changed due to the assignment by GE Capital of its debt.  Orix and CCBC have confirmed in June 2008 they are prepared to continue to act as members of the creditors’ committee and they agree that the vacancy arising from the termination of membership of GE Capital should not be filled.

14.  Orix holds 14.97% of the total debts and CCBC holds 0.17% of the total debts.  They are independent creditors and Windermere has no objection to them remaining on the creditors’ committee.

15.  Windermere seeks to call a general meeting of creditors for the purpose of electing additional member or members to the creditors’ committee to fill the vacancy arising from the termination of membership of GE Capital.  It is not apparent from the proposed resolution how many additional members Windermere proposes to elect.  In the submission of Miss Lam for Windermere, she submitted that to address concerns that the two independent creditors might be out-voted, Windermere could propose that only one additional member is to be appointed to the committee.

16.  The purpose of appointing an additional member, as I understand from Miss Lam’s submission, is so that Windermere’s interest as a substantial creditor would be properly represented and looked after, and to ensure a balanced representation of creditors on the committee.  She submitted that creditors in general meeting enjoy an “overriding right” to resolve that a creditor be appointed to fill a vacancy in the membership of the creditors’ committee, by virtue of rule 122ZN(3) of the Bankruptcy Rules.  Furthermore, procedural safeguards could be put in place to ensure non-participation of the additional member in decision-making on any question in which he faces a conflict of interest.

17.  I do not agree with her submissions.  Rule 122ZN(3) must be read with sub-rule (2), which provides that “the vacancy need not be filled if the trustee and a majority of the remaining committee-members so agree, provided that the number of members does not fall below the minimum required by rule 122ZE(1)”, which is at least two members.  As mentioned earlier, Orix and CCBC have confirmed that the vacancy is not required to be filled.  The Official Receiver agrees with this.  In any event, even if a resolution were to be passed by the creditors that a particular creditor be appointed to fill the vacancy, the court may direct the trustee to disregard it, if just cause is made out.

18.  In this bankruptcy, the only meaningful business remaining that the Official Receiver is required to deal with are the section 49 proceedings and action relating to Mr Leung’s transfer of shares in Harbour Front after the presentation of the petition.  In view of the inherent conflict in the composition of interested creditors, the Official Receiver considers it necessary to seek direction for the future administration of the estate from the court.  No meaningful purpose would be served by having a creditor related to or associated with Mr Leung on the creditors’ committee, as such creditor would not be able to vote or be consulted upon in view of the potential conflict of interest.  If a resolution were to be passed appointing a creditor associated with Mr Leung or the UDL Group of companies as an additional member, I would direct the Official Receiver to disregard it.

19.  In her oral submissions, Miss Lam has taken a fallback position.  She asked the court to remove the creditors’ committee altogether if the court is not minded to direct the Official Receiver to hold a creditors’ meeting to consider the proposed resolution of appointing an additional member to the creditors’ committee.  Miss McKenna for the Official Receiver takes a neutral position.

20.  I am inclined to allow the creditors’ committee to remain.  As submitted by Miss McKenna, the members of the committee are independent creditors.  It may be that their views could serve as a guide for the court in any applications that might be made in future by the Official Receiver for directions concerning the remaining business in this bankruptcy.

21.  The order I make today is that notwithstanding the request by Windermere by letters dated 12 June 2008 and 10 July 2008, the Official Receiver is not required to call a general meeting of creditors, as it would serve no purpose to call a meeting if the court is only to direct the trustee to disregard the proposed resolution.

22.  I order the costs of the Official Receiver and trustee in this application to be paid by Windermere.