RE CHUI TAK KEUNG DUNCAN

HCBI 2/2021

[2022] HKCFI 1024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS

INTERIM ORDER APPLICATION NO. 2 OF 2021

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D ECISION

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1.  By a summons of 10 January 2022 (“the Discovery Summons”), Zhongcai Finance Limited (“Zhongcai”) seeks discovery and production of a number of documents from Chui Tak Keung Duncan (“Mr Chui”).

A.     THE BACKGROUND

2.  On 10 November 2020, a bankruptcy petition was filed against Mr Chui in HCB 7518/2020.

3.  Before the petition was heard, on 4 January 2021, Mr Chui applied for an interim order pursuant to ss.20 and 20A of the Bankruptcy Ordinance (Cap.6) (“BO”).  He filed a supporting affirmation[1] on 4 January 2021 (“Chui 1st”) exhibiting a proposal for an individual voluntary arrangement (“the IVA Proposal”) in accordance with s.20A BO and r.122C of the Bankruptcy Rules (“BR”).

4.  Under the IVA Proposal, Mr Chui proposed $13m as a full and final settlement of 3.19% of all his indebtedness.  His debts were said to be in the region of $613.5m, of which $206.8m was said to be owed to family members and Coqueen Limited (“Coqueen”), a company owned by Mr Chui and family members. (These debts will be referred to as “the Family Debts”.)

5.  On 22 February 2021, the court granted an interim order.  Mr Alan Chung Wah Tang and Mr Kan Lap Kee were appointed as joint and several nominees (“the Nominees”) to act in relation to the IVA Proposal.

6.  On 4 March 2021, the Nominees filed their report in relation to their IVA Proposal.  Paragraph 8.1 of the report summarised Mr Chui’s debts as totalling around $614.3m.  Paragraph 8.18 of the report repeated Mr Chui’s indication that the Family Debts were in the amount of $206m.

7.  The creditors met on 24 March 2021 to consider the IVA Proposal (“the Meeting”).  The Meeting was chaired by Mr Kan Lap Kee (“the Chairman”).  The Report of the Chairman of the Creditors’ Meeting dated 31 March 2021 at paragraph 10 reported that the creditors’ claims received as at 24 March 2021 totalled some $904.4m.  The amounts of the claims had generally increased from the amounts originally given in Mr Chui’s statement of affairs.  The claims from family members and Coqueen totalled some $427.8m.  The IVA Proposal was passed by 79.38% of the vote by value of the creditors’ claims (“the Decision”).

8.  On 9 April 2021, Zhongcai issued a summons under s.20J BO to revoke or suspend the approval of the IVA Proposal (“the s.20J Application”).  The application was supported by the Affirmation of Lau Ip (“Lau 1st”) made by a director of Zhongcai Mr Lau, which explained that Zhongcai intended to challenge the Decision on the ground that there was a material irregularity at or in relation to the creditors’ meeting.  It was said that the significant increase in the amount of claims from Mr Chui’s family was sudden and unexplained, and without this increase, the IVA Proposal would not have been approved by the requisite majority.  Zhongcai questioned whether these claims were genuine and supported by evidence that had been properly or sufficiently verified, or was a manipulation of the voluntary arrangement regime.

9.  On 20 August 2021, Mr Chui filed his 2nd Affidavit (“Chui 2nd”) to oppose the s.20J Application.  He sought to explain the Family Debts, and exhibited a number of documents in doing so.  Some of these documents were redacted.

10.  Zhongcai responded to Chui 2nd by the 2nd Affirmation of Lau Ip (“Lau 2nd”) of 4 October 2021.  It then took out further applications on 5 October 2021.  The first application was to cross examine Mr Chui on Chui 1st and Chui 2nd.  The second application was for leave to appeal under r.122Q BR, out of time, against the Chairman’s decision at the Meeting to admit the claims of various family members and Coqueen, so that, inter alia, the votes of the family members and Coqueen could be declared invalid and the Decision revoked (“r.122Q Application”).  The parties then filed further evidence.

11.  On 10 January 2022, Zhongcai filed the Discovery Summons, essentially asking for certain of the documents produced in Chui 2nd to be disclosed in full, without redactions.  In support, Zhongcai filed the 4th Affirmation of Lau Ip (“Lau 4th”), saying that discovery was necessary for the fair disposal of the s.20J Summons and for saving time and costs.  In opposition, Mr Chui filed his 4th Affidavit (“Chui 4th”) and Zhongcai filed the 5th Affirmation of Lau Ip in reply.

B.    THE APPLICABLE PRINCIPLES RELATING TO DISCOVERY

12.  The principles applicable to the determination of the Discovery Summons were largely not in dispute.

13.  A party is entitled to seal up or cover up parts of a document which he claims to be irrelevant.  The test for whether, on discovery, part of a document can be withheld on grounds of irrelevance is simply whether that part is irrelevant.  See GE Capital Corporate Finance Group Ltd v Bankers Trust Co Ltd [1995] 1 WLR 172 at 174C, 175G.

14.  Relevant and irrelevant information may be contained in the same sentence.  Provided that the irrelevant part can be covered without destroying the sense of the rest of making it misleading, a party is permitted to do so: GE Capital Corporate Finance Group Ltd, supra, at 175H; applied in Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887 at [50].

15.  The burden lies on an applicant for discovery to show a prima facie case of relevance: see O.24 r.7(3); Jade’s Realm Ltd v Director of Lands, unreported, HCA 1509/2012, 10 June 2014 at [21].  The burden lies on the respondent to satisfy the court that discovery is not necessary for fairly disposing of the cause of matter or for saving costs: O.24 r.8(1).

16.  The burden lies on an applicant for production to show that the order is necessary for fairly disposing of the cause of matter or for saving costs: O.24 r.13(1).

17.  The oath of the party giving discovery is conclusive, including on the question of relevance, unless the court can be satisfied, not on a conflict of affidavits, but either from the documents produced or from anything in the affidavit made by him, or any admission by him in the pleadings, or necessarily from the circumstances of the case, that the affidavit does not truly state that which it ought to state: GE Capital Corporate Finance Group Ltd, supra, at 174D; Wong Kar Gee Mimi, supra, at [51].

18.  A heavy burden on a party who seeks to challenge the veracity of the other party’s oath regarding redaction: Wong Kar Gee Mimi, supra, at [51].

19.  The test as to relevance is not whether the redacted parts are potentially relevant, or whether they might provide material for cross-examination as to credit.  The test is whether it is not unreasonable to suppose that the redacted part does contain information which may, either directly or indirectly, advance the applicant’s case or damage the respondent’s case: Wong Kar Gee Mimi, supra, at [51].

20.  Whilst Peruvian Guano[2] is the test for relevance, fishing is not allowed: Jade’s Realm Ltd at [21(6)].  Fishing arises where what is sought is not evidence but information which may lead to a line of inquiry which would disclose evidence; it is the search for material in the hope of being able to raise allegations of fact, as opposed to the solicitation of evidence to support allegations of fact, which have been raised bona fide with adequate particularisation: C v C, unreported, CACV 410/2005, 28 July 2006 at [8].  It is not the purpose of discovery to give an applicant an opportunity to hunt around the documents in the hope that they will reveal some improprieties on the respondent’s part or will provide more information for him to pursue more enquiries: Annabell Kin Yee Lee and others v Lee Wing Him (May Lee) and others, unreported, HCAP 5/2003, 5 March 2003 at [16].

21.  Counsel for Zhongcai, Mr Lincoln Cheung, submitted that since discovery was being given in the context of the statutory scheme under the BO for voluntary arrangements, pursuant to which a debtor had to give full and frank disclosure of his affairs, the scope of discovery was not limited to simply documents which might support or not support a debtor’s case; “full information” had to be provided.  However, the limits of what such “full information” might be were not indicated; and Mr Cheung acknowledged that the applicable test for relevance was that in Peruvian Guano.  Furthermore, I note that the rules relating to discovery under the Rules of the High Court apply to proceedings under the BR: r.24 BR.  I therefore do not consider that the duty of candour of a debtor under the statutory scheme extends the scope of the discovery which Mr Chui is required to give in the present case beyond documents which may either, directly or indirectly, damage his case or advance Zhongcai’s case.  In other words, the question of relevance needs to be determined by reference to the issues arising in the s.20J Application.

22.  At one point, it was submitted that discovery and production was also being sought in aid of the r.122Q Application, since that was to be heard at the same time as the s.20J Application.  Whilst it may be the case that there is a good deal of overlap between the two applications, so that the same evidence may be relied on in both applications, it is necessary to bear in mind that the Discovery Summons has been issued and advanced on the basis that discovery and production of certain documents are being sought as they are relevant to the issues arising on the s.20J Application; and Mr Chui has responded to the summons accordingly.  I will therefore determine the Discovery Summons by reference to whether the documents sought are relevant to the s.20J Application.

23.  Mr Cheung also submitted that Mr Chui had applied a narrower test than Peruvian Guano when he exhibited the redacted documents in Chui 2nd, since he had indicated that the documents had been exhibited to support what was said in Chui 2nd, how the claims of the family members had come about, and how documents relating to the proofs of debt had been submitted to the Nominees.  It was submitted that certain paragraphs of Chui 4th suggested that Mr Chui redacted any information that was not a proof of debt or evidence of such debt.  However, in other paragraphs of Chui 4th (for example paragraphs 7 and 8), Mr Chui refuted the suggestion that he disclosed only those parts of the documents on which he sought to rely.  In my view, it would be a more fruitful exercise to consider the validity of redaction of each document by reference to the evidence specifically applicable to that document, rather than to make a general and sweeping finding as to whether or not Mr Chui applied Peruvian Guano when swearing Chui 2nd.  This is all the more so as it has since transpired that the redaction in some cases was carried out by the Nominees at Mr Chui’s request to redact irrelevant material, and in other cases by the family members who submitted the documents – in other words, not by Mr Chui or his (then) lawyers.  It is therefore important to assess the claim of relevance or irrelevance of each document by reference to the evidence given in relation to that document.

C.     THE DOCUMENTS WHICH ARE THE SUBJECT OF THE DISCOVERY SUMMONS

C1.    CTKD-6 – summary of audited accounts of Coqueen

24.  Mr Chui prepared this document, being a spreadsheet summarising some of the figures taken from the audited accounts of Coqueen for the years ending 31 March 2012 to 31 March 2018.  There are two redactions on the document, the first being a row labelled as “retained earnings”, and the second with no label.

25.  Mr Cheung submitted that the row labelled as “retained earnings” was relevant because Zhongcai wanted to calculate whether Coqueen’s retained earnings were correct, and whether Mr Chui had provided accurate figures.  It was said that one of the complaints in the s.20J Application is that Mr Chui has supplied false or misleading information in the IVA Proposal and his Statement of Affairs.

26.  However, the complaint of irregularity raised by Zhongcai in the s.20J Application is not that Mr Chui generally provided false information, but that the statement Mr Chui made in his IVA Proposal that he had borrowed over $206m from his family members, and that his total personal debts were in the region of $613.5m, were false, when the actual level of borrowings from family members was some $427m and his total personal debts were in the region of $904m.[3]

27.  It does not seem to me that what the retained earnings of Coqueen over the years may have been, or whether Mr Chui stated these correctly or not in his summary, would lead to a train of enquiry which could advance Zhongcai’s case that Mr Chui provided false information regarding the Family Debts, or damage Mr Chui’s case in this regard.

28.  As to the section which has been redacted without a label, Chui 4th has explained that this contains (1) Mr Chui’s notes to remind himself what other income Coqueen received, and (2) Mr Chui’s calculations of how the dividend from Coqueen was distributed between his father (“Father”) and mother (“Mother”), the two largest shareholders of Coqueen.

29.  The notes in (1) do not appear to me to be relevant to the issue of whether Mr Chui made a false statement as to the level of the Family Debts.  Again, they relate to Coqueen’s earnings, rather than Mr Chui’s debts.

30.  As to (2), part of the increases in the Family Debts of which Zhongcai makes complaint is said, in Chui 2nd, to be attributable to his parents forgetting to take into account their loan to him of their share of a $180m dividend declared by Coqueen for the financial year ending 31 March 2014.  Whilst Mr Chui says that the calculation was simply his own calculation and that the amounts allowed by the Nominees differed from his calculation, it was nevertheless a calculation which the Nominees may have taken into account, as Mr Chui accepted.  In the circumstances, this calculation may lead to a train of enquiry which could advance Zhongcai’s case that Mr Chui provided false information regarding the Family Debts, or damage Mr Chui’s case in this regard.  I consider that for the fair disposal of the s.20J Application, discovery and production of this part of CTKD-6 should be given.

C2.    CTKD-8 – management accounts of Coqueen for the year ending 31 March 2019; CTKD-9 – audited financial statements of Coqueen for the year ending 31 March 2018

31.  When Mr Chui prepared his Statement of Affairs, he based the amount owing to Coqueen on the amount in the management accounts of Coqueen for the year ending 31 March 2019.  He included both the amounts owed directly by himself and the amounts owed by his personal investment company Imperia Capital International Holdings Limited (“Imperia”). The total amount as shown by the management accounts was in the region of $167m.  The management accounts were exhibited as CTKD-8 but with information other than that relating to (1) dividends paid by Coqueen, (2) the state of Mr Chui’s director’s current account with Coqueen, (3) the loan receivables due from Imperia and (4) the interim dividend of $180m payable redacted.

32.  When the Nominees asked for documentary evidence of the amount owed to Coqueen, Mr Chui provided the audited financial statements of Coqueen for the year ending 31 March 2018.  These showed the amount owed by Mr Chui and Imperia to be in the region of $181m.  The audited financial statements were exhibited as CTKD-9, showing the directors’ report, auditor’s report, the amount due from directors as a whole, amounts due from a related company, the notes relating to the amounts due from Mr Chui and from Imperia.  Much of the rest was redacted.

33.  Mr Chui has since (in Chui 3rd) unredacted the information relating to the amounts due from Coqueen to directors, in order to address Zhongcai’s allegation that there might have been amounts due from Coqueen to Mr Chui.  He says that the amount due from Coqueen to its directors was in fact an amount owed to Father.

34.  Mr Cheung sought the disclosure of the management accounts in CTKD-8 on the grounds that “a main issue in the 20J Application is whether the Debtor gave full and accurate disclosure in his IVA Proposal and Statement of Affairs”.  It was said that the income of Coqueen was relevant because Mr Chui has a 1% shareholding in Coqueen, so the statement in the IVA Proposal that no value could be realised from Coqueen was doubtful.  Mr Cheung fairly accepted that this issue was not raised in the affidavits supporting the s.20J Application.  He further submitted that since the items relating to assets and liabilities of Coqueen had been redacted, it was not possible to see whether there might be other items involving Mr Chui.

35.  As to Mr Cheung’s first point, as the s.20J Application has not raised the issue of whether there is general non-disclosure in the IVA Proposal and Statement of Affairs, the request for disclosure and production of the redacted parts of the management accounts amounts to fishing.  As to the second point, no reason has been shown as to why I should disbelieve Mr Chui’s oath that the matters sought are irrelevant.

36.  At the hearing, Mr Cheung indicated that Zhongcai no longer pursued the disclosure of the audited financial statements in CTKD-9 as the information which they had sought in relation to the amounts due from Coqueen to its directors had been provided in the unredacted version in Chui 3rd.

C3.     CTKD-11 – relevant pages of audited financial statements of Coqueen for year ending 31 March 2014; CTKD-15 – ledger entries of Coqueen

37.  At the hearing, Mr Cheung indicated that Zhongcai’s request for disclosure and production of CTKD-11 was limited to the line relating to “interim dividend paid” for 2013 and 2014 in Coqueen’s income statement for the year ending 31 March 2014.

38.  As mentioned above, one of the reasons given for the increase in the Family Debts was that Mr Chui’s parents had forgotten to take into account a sum owed to them by Mr Chui arising from Coqueen’s declaration of dividends in the year ending 31 March 2014.  Coqueen had declared a dividend of $180m.  Father and Mother had lent their share of the dividend to Mr Chui.

39.  Mr Cheung submitted that the figure given for “interim dividend paid” for 2014 was relevant since this related to the claim that a dividend of $180m had been declared, with Father’s and Mother’s share of the dividend being lent to Mr Chui.

40.  Mr Chui accepted that the amount of the dividend in 2014 was relevant to the issues arising on the s.20J Application, but submitted that disclosure and production was not necessary, since a later page in notes to the financial statements had stated that the interim dividend paid was $180m.

41.  However, as there is no express link stated between the figure on page in the income statement and the note to the financial statements, I agree that it is necessary to give disclosure of the former so that Zhongcai can verify that it is the same figure.

42.  As for the figure in 2013, Mr Chui submitted that Coqueen did not declare a dividend in that year, and that the information was in any event irrelevant since it was the 2014 dividend that was loaned to Mr Chui, which debt formed part of the Family Debts.  However, in the ledger entries of Coqueen in CTKD-15, there is a statement that an interim dividend was paid in 2013; furthermore, in order to arrive arithmetically at a dividend of $180m from the ledger entries, it is necessary to take the figure stated for 2013 into account.  Mr Chui has said that the reference in the ledger to “2013” was a typographical error; the reference to “2013” should have been to “2014”.  That may well be so; but as the calculation of the $180m dividend for 2014 requires taking the figure stated, on its face, for 2013 into account, it is relevant to know what, if any, dividend was stated in the income statement as having been declared for 2013.

43.  Mr Chui further submitted that Zhongcai already had the information, since in Lau 2nd, Mr Lau stated that he had cross checked the redacted income statement of Coqueen for the year ending March 2013 and noted that no interim dividends were paid out in that year; it was therefore said that disclosure of the figure given in the income statement for 2014 was unnecessary.  However, since the declaration and calculation of the $180m dividend for 2014 took place in 2014, I agree that it is necessary to give disclosure of the figure as stated in the 2014 income statement.

44.  At the hearing, Mr Cheung indicated that Zhongcai no longer pursued discovery of the remainder of the ledger entries in

C4.    CTKD-16 – emails from Mr Chui to Nominees enclosing supporting documents; CTKD-18 – email from Mr Chui to Nominees enclosing summary of debts together with supporting documents

45.  At the hearing, Mr Cheung indicated that Zhongcai no longer pursued these items.

C5.    CTKD-19 – email from Mr Chui to Nominees enclosing supporting documents for Wife’s claims

46.  This item consists of an email sent by Mr Chui to the Nominees on 17 March 2021 which enclosed, inter alia, a table listing the cash advances made to Mr Chui by his wife (“the Wife”), and supporting documents such as cheque stubs, bank statements and transfer slips.

47.  At the hearing, Mr Cheung indicated that Zhongcai sought disclosure and production of (1) the redacted second paragraph of the covering email, (2) a transfer slip which had the entries for “REMARK”, “A/C No.” and the lower section redacted, and (3) a cheque which had the signature and account number redacted.

48.  I will first deal with the covering email.  There is no dispute that (as stated on the face of the email) it related to loans from the Wife.  Prima facie, the whole of the email is relevant to issues arising on the s.20J Application.  No explanation has been given on oath as to what the redacted part might relate to.  As to how the redactions came about, Mr Chui in Chui 2nd said that the email was redacted by the Nominees at his request.  In Chui 4th, he explained that his request to the Nominees was to redact any irrelevant content, and he simply adopted such redactions when swearing Chui 2nd.  Yet at the same time, he also said that the Nominees concurred with his (Mr Chui’s) views that the redacted information was irrelevant.

49.  Since it is not entirely apparent what criteria were applied by the Nominees in carrying out the redaction, and since there has been no further information on oath from Mr Chui as to why it is being said that the redacted part is irrelevant, I am not satisfied as to such irrelevance.  The redacted part of the email should be disclosed and produced.

50.  For the transfer slip and cheque, Mr Chui’s evidence in Chui 4th was that the redactions had been carried out by his wife, and that the unredacted copies had never been in his possession, custody or power.  He has therefore already answered paragraph 1 of the Discovery Summons in relation to these documents, and is unable to comply with any order for discovery or production of the unredacted copy.

C6.    CTKD-20 – copy of bank transfer receipt dated 13 June 2003 regarding In-Laws’ claims

51.  CTKD-20 is a bank transfer receipt which was submitted in support of the claim by Mr Chui’s in-laws (“the In-Laws”).  Mr Cheung sought to remove the partial redaction of the name of the remitter.

52.  As with CTKD-19, however, Mr Chui’s evidence in Chui 4th was that the redactions had been carried out by the In-Laws, and that the unredacted copies had never been in his possession, custody or power.  Again, therefore, he has already answered paragraph 1 of the Discovery Summons, and is unable to comply with any order for discovery or production of the unredacted copy.

C7.   CTKD-24 – copy of email from Mr Chui to Nominees regarding In-Laws’ claims

53.  CTKD-24 is a copy of a covering email from Mr Chui to the Nominees regarding the loans made by the In-Laws to Mr Chui.  He set out the loans and agreed interest rate, and referred to the supporting documents.  There is then a second paragraph which is entirely redacted.

54.  Mr Chui’s evidence in relation to CTKD-24 is the same as that given for CTKD-19.  For the same reason, I consider that the redacted part of the email should be disclosed and produced.

D.     DISPOSITION

55.  I therefore order that Mr Chui should give discovery and production pursuant to paragraphs 1 and 2 of the Discovery Summons of:

55.1    that part of CTKD-6 setting out Mr Chui’s calculations of how the dividend from Coqueen was distributed between his father (“Father”) and mother (“Mother”);

55.2    in CTKD-11, the line relating to “interim dividend paid” for 2013 and 2014 in Coqueen’s income statement for the year ending 31 March 2014;

55.3    in CTKD-19, the second paragraph of the covering email;

55.4    in CTKD-24, the second paragraph of the covering email.

56.  Zhongcai has achieved some success on the Discovery Summons, although the scope of what it has obtained is much less than what it originally sought.  In the circumstances, I make an order nisi that Mr Chui pay 40% of the costs of and incidental to the Discovery Summons.