IP PUI LAM ARTHUR AND ANOTHER v. ALAN CHUNG WAH TANG AND OTHERS

HCB 3819/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 3819 OF 2011

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REASONS FOR DECISION

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1. This is an application by the trustees (“the Trustees”) of the estate of the bankrupt (“the Bankrupt”) for:

(a)  discovery against 6 banks (“the Banks”) under section 29 of the Bankruptcy Ordinance (Cap 6) (the “Production Application”);

(b)  the release of their implied undertakings (“the Release Application”) in respect of information and documents obtained in these proceedings for the purpose of answering the enquiries made by the trustees in bankruptcy in the United Kingdom of Jade Ho, the Bankrupt’s sister (“the UK Trustees”).

2. In the hearing on 22 April 2015, I allowed the application.  I now give my reasons.

3. On 2 August 2011, a bankruptcy order was made on the Bankrupt’s own petition.

4. After the making of the order, the Trustees had to investigate the financial affairs of the Bankrupt which was not an easy exercise.  As observed by To J in his decision in a related application[1]:

“The Bankrupt declared negligible assets. To investigate the financial affairs of the Bankrupt, the Trustees successfully obtained a number of disclosure orders against third parties pursuant to section 29 of the Bankruptcy Ordinance. As result of the investigation, the Trustees believe that the Bankrupt has been operating a complex scheme using about 30 offshore companies and nominees to conceal his assets; carry on his business ventures and litigations; and pay his personal and family expenses. The investigation also revealed that through those offshore companies and his family members the Bankrupt had diverted significant amount of funds out of reach of his creditors.”

5. By the Production Application, the Trustees are asking the Banks to produce the documents listed in the “Schedule” to the Summons dated 3 October 2014.

6. By the Release Application, the Trustees are seeking a release of their implied undertakings in respect of all information and documents obtained in these proceedings for the limited purpose of answering the specific queries made by the UK Trustees in a letter dated 30 October 2014.

7. The 2 applications have the ultimate purpose of ascertaining the whereabouts of those funds of the Bankrupt that have been allegedly dissipated away through the assistance of his sister, Jade Ho.  The Trustees believe that Jade Ho had been assisting the Bankrupt in his scheme of asset dissipation and concealment, and in doing so she had even enlisted the assistance of her mother-in-law and her family.

The law on section 29 application

8. The principles applied in applications under section 29 of the Bankruptcy Ordinance (Cap 6) have been set out by To J in Re David Ho Yuk Wah[2] at §17:

(1)  the power conferred by the section is general, wide, unlimited, and discretionary in nature;

(2)  to invoke the court’s exercise of this discretion, the trustee bears the burden of proving:

(i)  that the provision of information or documents is reasonably required for him to carry out his functions; and

(ii)  a prima facie case that the respondent is able to provide such information or documents;

(3)  in considering the issue of reasonable requirement, great weight should be given to the views of the trustee;

(4)  the court must carefully strike a balance between the trustee’s reasonable requirements and the need to avoid making an order which is wholly unreasonable, unnecessary or oppressive to the person concerned;

(5)  the burden is on the trustee to satisfy the court, after balancing all the relevant factors, it is a proper case for such an order to be made; and in this balancing exercise, the court may consider these factors[3]:

(i)  the case for making an order against the bankrupt is usually stronger than in respect of a stranger;

(ii)  there is an element of oppression in requiring a party to provide information which exposes him to potential liability;

(iii)  an order for oral examination is likely to be more oppressive than an order to produce documents;

(iv)  it is oppressive to require a person suspected of wrongdoing to prove the case against himself on oath;

(v)  an order is not necessarily oppressive because it is inconvenient for the party subject to it or causes him a lot of work or may make him vulnerable to future claims;

(vi)  in the light of the summary nature of the procedure and the need for expedition, the court cannot be expected to indulge in fine judgments as to the precise width of the order; and

(vii)  the court must take care not to cut down the width of the order sought in a way which would risk making it ineffective.

9. Further, a trustee needs far wider discovery to enable him to discharge his functions than what is permissible in an ordinary discovery.  He is necessarily engaged in a “fishing” or speculative expedition and the purpose of the statutory power is to enable him to carry it out effectively.  Indeed, “public policy requires that the trustee in bankruptcy be given a ‘fishing license’ for the benefit of the creditors”[4].

The asset concealment scheme

10. The background of the case has been set out in the 17^th Affirmation of Lam Siu Chun Dennis (“Dennis Lam”)[5].  Such evidence has been accepted by the court on a prima facie basis in numerous applications under section 29 of the Bankruptcy Ordinance.

11. For the purpose of this Reasons for Decision, I would adopt the same abbreviations Dennis Lam had used in his 17^th Affirmation.

12. The Trustees believe that the Bankrupt was operating a complex scheme using about 30 offshore companies and nominees to conceal his assets, to carry out his business ventures and litigations and to pay his personal and family expenses.

13. The starting point is the litigations which the Bankrupt lost in the past decade.  He previously deposed that he had lost a number of legal battles between 2001 and 2004, and that it was in that period he started selling his assets and group companies.  He explained that this was why he applied for a stay of execution in HCA 14674/1999 in 2005, and he claimed on oath that he “did not own any valuable assets or shares”[6].  This is now shown to be untrue.  In fact, the Bankrupt transferred HK$30 million from his personal bank accounts to Top Adventure and immediately thereafter to other offshore companies in 2005 and 2006, ultimately for his personal benefit up to this very day[7].

14. Thereafter, the Bankrupt held his assets through nominees and offshore companies.  The Trustees believe that the following family members and associates of the Bankrupt are his nominees and are central to his asset concealment scheme, including Jade Ho, Brian Chan, Fong King Yiu, Kellie Chan, Jeff Li, Peter Lo, Yu Yang and Pei Xin Yu[8].

15. The Bankrupt had created various sham transactions to hide his beneficial interest in his assets.  Though the Bankrupt alleged that he had disposed of his entire interest in APIDL in 2004 and that there was another re-capitalization in 2007 which further distanced him from APIDL, the Trustees have demonstrated prima facie that the disposal in 2004 was a sham[9] and the issues of new shares to Ontrade and King Ocean under the re-capitalization scheme in 2007 were also shams.  The Trustees entertain a reasonable belief that these disposals were made to create a façade to cover up the Bankrupt’s substantial beneficial interest in APIDL[10].

16. The Trustees have also demonstrated substantial fund flows between the Bankrupt and various BVI companies.  As To J found in Re David Ho Yuk Wah[11], what appeared to be the Bankrupt’s HK$20 million return for his investment in a distressed asset was transferred to Topmark Asia and Sun Ascent, which was then siphoned off to APIDL or to Grand Asia, Hawthorn, Mainwell and DH China to be applied to settle the Bankrupt’s personal or family expenses, litigation costs and payments to his ex-wife.  The Bankrupt used the funds of these companies as if they were his own.  The natural persons in DH China, Topmark Asia and Grand Asia who effected or authorised the transfers were his sister Jade Ho and his secretary Kellie Chan.  In such circumstances, it is reasonable for the Trustees to believe that the Bankrupt is the beneficial owner of these four companies.

Documents required under the section 29 application

17. The Trustees believe that, through Jade Ho, the Bankrupt has dissipated his assets to the persons against whom the present Production Application is targeted.

18. Jade Ho is a central player to the Bankrupt’s asset concealment scheme, and the Trustees believe that she is still holding assets on his behalf.  There is strong evidence of the Bankrupt having transferred assets for Jade Ho to hold on trust for him.  It is no coincidence that in 2004-2005, when the Bankrupt was losing his legal battles and preparing to siphon off HK$30 million to Top Adventure, that he sold his Firm to Jade Ho. Brian Chan, who worked at the law firm at the time, confirmed that despite the sale, the purpose of the Firm was still to assist the Bankrupt in his litigation matters relating to his lawsuits.  In fact, when the Firm ceased business in 2007, the Bankrupt himself asked Brian Chan to continue to assist him in his lawsuits for a few more months.

19. In the Production Application, the bank account records of the following persons need to be obtained and investigated.

20. The first one is Rubya Gafoor (“Rubya”).  She is the mother-in-law of Jade Ho.  Rubya had received HK$8,931,779 from Faith Overseas, Grand Asia, Hawthorn and Mainwell (companies known to be beneficially owned by the Bankrupt) from 2005 to 2010.  After receiving the substantial sums from the Bankrupt’s companies, Rubya had remitted large sums to the accounts of Jade Ho and Dr Michael Kuo (“Dr Kuo”) in the UK and Switzerland.  Dr Kuo is Jade’s husband and Rubya’s son.  Since Rubya had mixed her own funds with those of the Bankrupt, the Trustees are entitled to trace backwards from these payments to see if they originated from the funds of the Bankrupt.

21. Another illustration of Rubya processing funds by receiving from the Bankrupt’s corporate vehicles can be found in §§25-33 of the 17^th Affirmation of Dennis Lam.

22. In light of the above, the Trustees find it necessary to obtain further bank account records of Rubya to ascertain the whereabouts of the HK$8 million transferred to her by the Bankrupt’s companies. Given Rubya’s important role in the Bankrupt’s asset dissipation scheme, the Trustees submit that the records of all her bank accounts should be disclosed.  I agree.

23. The second person is Dr Kuo.  He had received significant sums from Rubya sourced from the Bankrupt’s companies.  Those sums were used to acquire landed properties in Switzerland.  In such circumstances, I agree with the Trustees that the records of his bank account in HSBC should be disclosed.

24. The third person is Abdul Gafoor (“Abdul”) who is Rubya’s brother.  After receiving payments from the Bankrupt’s corporate vehicles, Rubya transferred some of the funds to Abdul.  Further, he played a vital role in moving funds away from one of the bank accounts of Rubya, the Premier Account in HSBC (“the Premier Account”).  During the private examination of Rubya, she confirmed that: (i) Abdul had the authority to operate the Premier Account; (ii) Abdul looked after the Premier Account for her and was responsible for withdrawing moneys from and depositing moneys in the Premier Account.

25. The Trustees also discovered complex dealings carried out by Abdul and his relatives transacted for no apparent legitimate purpose[12]. The reasonable inference is that the complex and roundabout transactions were implemented by Abdul for the purpose of hiding the source of funds or the whereabouts of funds.  Thus, the purpose of seeking disclosure against Abdul’s bank accounts is to trace the moneys withdrawn from the Premier Account of Rubya which in turn was paid by the BVI companies owned by the Bankrupt[13].

26. Abdul holds 21 bank accounts with the 6 Banks.  Each of these bank accounts has been shown to have had dealings with Rubya’s Premier Account[14]. In such circumstances, production of the banking records relating to these accounts are necessary for the Trustees to carry out the investigation works.

27. The 4^th group of persons are Cynthia Lai Gafoor (“Cynthia”) and Lam Yim King (“YK”). Cynthia is Abdul’s wife and YK is his mother-in-law.  Their bank accounts had processed funds paid to and from Rubya’s Premier Account as controlled by Abdul[15]. Some of these payments were made by cashier’s order, which is odd in light of the parties’ relationship as relatives.  Again, the production of the relevant banking records is necessary.

28. The 5^th group of persons are Kellie Chan (“Kellie”) and Wendy Yim (“Wendy”).

29. Kellie was the executive secretary of the Firm.  She was a bank account signatory and recipient of funds of the Bankrupt’s corporate vehicles.  Substantial funds of the Bankrupt’s corporate vehicles were processed through her personal bank accounts[16].

30. Wendy was an account clerk at the Firm.  Her personal bank accounts processed substantial funds of the Bankrupt’s corporate vehicles[17].

31. The bank accounts of Kellie and Wendy presently sought in the Schedule to the Production Application are the personal accounts disclosed by them and claimed to have been used by them to process the funds of the Bankrupt[18]. Kellie indeed admits that the Bankrupt had “borrowed” their personal accounts for urgent transfers.  Hence, the production of the relevant banking records should be ordered.

32. The Trustees are duty-bound to unravel the network of companies and nominees used by the Bankrupt to conceal his assets.  This is a complex tracing process.

33. Since the Bankrupt and his associates have (as borne out by the evidence) deliberately set up hurdles in the way of his creditors and the Trustees to trace his assets.  The tracing process reasonably requires the co-operation of the Banks to produce documents which relevance to the Bankrupt’s assets may not be immediately apparent.

34. The present scope of the Production Application is wide.  But this is reasonably required by the Trustees given the complex dealings relating to the Premier Account controlled by Abdul.  Since the funds of the Bankrupt may have been mixed with those of Abdul and Rubya, production of records in the full spectrum of the relevant period which moneys were paid to Rubya by the Bankrupt’s companies (i.e. 2005-2010) is necessary.

The respondents’ stance and the notifications to the account holders

35. The respondents, i.e. 6 Banks, have no serious objection to the Production Application.  The 3^rd and the 6^th respondents have been excused from attending the hearing.

36. The Trustees have requested the various records from the account holders, but with no avail.  The Trustees have given notice of the present hearing to all the account holders except YK.  The Trustees do not have the personal particulars of YK, but they believe that the relevant Bank had already informed YK of the Production Application.

37. An order for inspection of bankers books may be obtained without notice to the party whose account is to be inspected[19].

38. Such practice was noted by Kekewich J in Arnott v Hayes[20]. The learned judge refused to discharge the inspection order on the basis that it was made ex parte.  His decision was upheld by the Court of Appeal, which held that the court has power to make the order ex parte, though under ordinary circumstances it would be better that the person whose account is to be looked at should be served[21].

39. In the present case, all the accounts holders except one have been informed of the Production Application.  In such circumstances, lack of notification to the interested parties is not a reason to deny the granting of the production order.

40. Further, the order sought by the Trustees is not unreasonable, unnecessary or oppressive to the persons concerned.  For all these reasons, I allow the Production Application on the terms proposed by the Trustees.

Merits of the Release Application

41. The general rule is that there is an implied undertaking not to use information or documents obtained by the liquidators or trustees by the use or under the threat of the exercise of their statutory powers (such as private examinations) other than for the purposes for which their powers were conferred[22].

42. However, the implied undertaking can be released by the court.  It is for the applicant to demonstrate cogent and persuasive reasons why it should be released.  Each case turns on its own facts and no general principle can be formulated beyond stating that the court will not release or modify the implied undertaking save in special circumstances and where the release will not occasion injustice to the person giving discovery[23].

43. The following proposition is to be applied in the context of the release of the implied undertaking by liquidators or trustees in bankruptcy[24]:

“the duty of confidence imposed upon those who obtain information by … can, if the court is satisfied that either it is for the purposes of the office which the officeholders who seek to disclose the information hold, or is otherwise justified by the balance of considerations of how justice is properly to be attained, be waived by the court.”

44. The courts have thus released office-holders from their implied undertakings for the purposes of proceedings brought by creditors that are beneficial to the winding up or the public interest.  The implied undertaking is often waived on the ground that the creditor of the insolvent company has claims closely analogous to those of the office-holders of the company, such that if the creditor succeeds he may give credit to the company or reduce his proof of debt made in the liquidation of the company[25].

45. Similarly in Re Esal (Commodities)[26], Dillon LJ held it would be fully open to liquidators of a parent company to make the documents available to liquidators of subsidiaries.  While there may be potential conflicts of interests, these “do not in practice give rise to any serious difficulty because they are well known to the experienced insolvency practitioners”.

46. From the above, it is obvious that the transactions relating to the Bankrupt and Jade Ho above are closely intertwined, as the Trustees believe that Jade Ho has acted as the Bankrupt’s nominee all along.

47. Baker Tilly, the UK Trustees, have by letter dated 30 October 2014 made a request for specific information regarding Jade Ho. The information sought includes:

(i)  details relating to the 2010 payments regarding the 83 Farquhar Road property; and

(2)  Rubya and Abdul’s contribution to various properties of Jade Ho in the UK and Switzerland.

48. Jade Ho’s evidence to the UK Trustees is that her rights in almost all of those landed properties have been transferred away to Dr Kuo prior to her bankruptcy.  She has claimed relatively negligible assets.

49. The Trustees themselves are investigating these transactions on the basis that the moneys may have been sourced from the Bankrupt’s funds.  In other words, the UK Trustees and the Trustees may have competing claims over the various UK and Switzerland properties.  However, as requested by the Trustees, the implied undertakings imposed on the Trustees relating to these properties and the information sought by the UK Trustees should be released in order to allow a free-flow of information between the trustees of Jade Ho and the Bankrupt.  This would in turn allow both sets of insolvency practitioners to find out the truth as to the situation.

50. Mr Yu, counsel for the Trustees, refers me to the decision of Jacob J (as he then was) in Re Omar’s Trustee v Omar[27].  On the facts, the administrators of the deceased commenced two actions against his mistress, the second of which was to claim moneys that the mistress held on trust for the deceased.  The mistress later made herself bankrupt.  An important question was whether the moneys claimed in the second action were part of her estate.

51. The trustee in bankruptcy of the mistress sought an order permitting him to disclose her confidential documents to the administrators for use in the second action.  The mistress argued that the use of documents by the administrators might operate unfairly against her other creditors, as to the extent that the administrators proved that the moneys were held on trust for the deceased’s estate, the moneys could not form part of her estate.  Such argument was rejected.  Jacob J said the following[28]:

“I do not accept this argument. The trustee needs to know whether this money, if it can be found, is or is not part of the estate - he needs to know the truth. His function is directly affected by what happens in the second action. Moreover, there is a possibility of the administrators joining him as a defendant in that action. He would then have to give disclosure which could well be an immensely costly task, eating up the estate.… It is entirely in the interests of the administration of the bankruptcy that the disclosure be made. I am far holding that the trustee’s judgment on this point is wrong. Indeed I think it is right.

Moreover, even if the ‘second-action-purpose’ is outside the trustee’s functions I would hold that the exceptional circumstances here justify disclosure. That disclosure may be permitted in exceptional circumstances is supported by [Re Esal (Commodities) Ltd (No. 2) [1990] BCC 708] …

In this case the trustee says that the disclosure is for that purpose - it is to enable him to find the truth.  As I have indicated it is not for the court to overrule such a claim unless it is manifestly untenable which it is clearly not here.”

52. Importantly, Jacob J held that it was for the trustee, and not the court, to form a view on whether the disclosure was for the purpose of carrying out his duties as trustee[29]:

“Who is to be the judge as to whether a particular course of action is within a trustee’s duties? Prima facie, it seems to me, that it is for the trustee to form a view on the position. He can come to court for guidance if he has some doubt but if he expresses his view to the court, the court should be slow to say he is wrong. After all, the administration of the estate is very much a matter for the trustee to handle using his own discretion and judgment.”

53. Applying such reasoning, I agree that the information should be released to the UK Trustees.

54. Firstly, the Bankrupt’s Trustees need to know the truth as to what happened with the moneys sourced from the Bankrupt’s companies.  While Jade Ho’s UK Trustees may claim that those moneys were in fact Jade Ho’s salaries and therefore belong to her, there is a prima facie case either way and prior to the court’s determination as to which estate should take the benefit of Jade Ho’s UK and Swiss properties, it would clearly be beneficial to the estates of both bankrupts that there be a reciprocation of information relating to the Bankrupt and Jade Ho’s affairs to determine the truth as to what had happened.

55. Secondly, Jade Ho’s major creditors, the New World entities are owed a judgment debt of over HK$14 million or GBP1.255 million under FACV 14/2010.  The New World entities are also the second largest creditor of the Bankrupt, being owed the same judgment debt by the Bankrupt.  If the UK Trustees succeed in recovering the UK and Swiss properties resulting in the New World entities obtaining a substantial dividend that repays the judgment debt, this may be beneficial to the liquidation of the Bankrupt’s estate for the reasons set out in §44 above.

56. For the above reasons, I allow the Release Application on the terms suggested by the Trustees.