RE TAM SZE LOK

HCB 1899/2020

[2021] HKCFI 815

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 1899 OF 2020

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JUDGMENT

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1.  Tam Sze Lok (“the petitioner”) presented a petition on 7 May 2020 (as amended on 31 August 2020) (“the petition”) for a bankruptcy order pursuant to section 10 (1) of the Bankruptcy Ordinance, Cap 6 (“the Ordinance”) on the ground that he is unable to pay his debts. The petition was opposed by Ma Sin Yee Ivy (“the respondent”), the petitioner’s former wife. At the conclusion of the hearing, judgment was reserved which I now give.

2.  Under a court order dated 14 November 2019 (“the Order”), upon the petitioner undertaking to pay the respondent $50,000 per month from the date of the decree nisi to be made absolute, during their joint lives or until the petitioner’s remarriage or upon the petitioner’s payment of all remaining balance on or before 31 December 2021, whichever is the earlier, by consent, the petitioner was ordered to pay a sum of $10 million in full and final settlement, to be paid by monthly instalments of $50,000.   

3.  The decree absolute dissolving the marriage was made on 29 November 2019. The petitioner ceased making monthly payments after January 2020, 3 months[1] after the date of the Order.  

4.  The respondent opposes the petition on the ground that the petitioner has failed to make full and frank disclosure of his assets and debts, that he has hidden assets and overstated his debts entitling the Court to draw an adverse inference against him. It is the respondent’s case that the petitioner is seeking to circumvent his obligation arising from the divorce proceedings and that the petition is an abuse of process.  

Applicable principles

5.  A convenient summary of the relevant principles that apply in cases where an abuse of process is raised may be found in Re Yiu Yuen Kwok HCB 2385/2015 at §7:

“(a) the burden of proving an abuse of process rests with the party making the allegation;

(b) although the standard of proof is the ordinary civil standard on a balance of probabilities, more compelling evidence will be required to satisfy that standard given the seriousness of the allegations;

(c) a litigant in a financial claim is under a duty to make full and frank disclosure to the court of his financial circumstances. Where he has wilfully withheld relevant information the court is entitled to draw adverse inferences against him.”

See also Re Li Kam Kwan; HTF v LKK [2006] HKCLRT 433; and Re Lam Yik Kai HCB 7865/2009, 8 June 2011.

The petitioner’s evidence

6.  According to the petitioner’s statement of affairs (as amended), he has assets of $253,949.41 and liabilities exceeding $70 million.

(A)    The shares in SPC (defined in §7 below)

7.  The assets disclosed in his amended list of assets (“List C3”) include Class A, Class B and Class C shares, (aggregating 2304.8638 shares in total) in the “Fixed Income Fund SP, One International SPC, a Segregated Portfolio Company Incorporated in the Cayman Islands” (“SPC”), all of which are ascribed a value of $0.

8.  In the petitioner’s 2^nd and 3^rd affirmations, the only reason given for ascribing a zero value to SPC shares was because “SPC has ceased operation in 2019”. 

9.  The respondent does not accept that the SPC shares have no value.   

10.  In the 4^th affirmation of the petitioner (“P 4^th”) (made in response to the respondent’s affirmation), the petitioner disclosed 4 share transfer agreements (“STAs”) dated 19 November 2018, 21 January 2019, 12 February 2019 and 7 March 2019 respectively made with different individuals (“the sellers”) to acquire their respective shareholdings in SPC.

11.  This disclosure was made in order to explain what the petitioner had done with sum of $36 million received under an agreement dated 27 February 2019 (“the Convoy agreement”) made between the petitioner and Leung Wai Hon (“Leung”) (collectively “the vendor”) as vendor and ConvoyFinancial Services Ltd (“Convoy”) as purchaser for the sale of GMD Holding Group Limited (“GMD”) to Convoy. GMD was the vehicle through which the vendor had carried on a successful insurance business. 

12.  According to the petitioner, the $36 million was shared with Leung such that each received $18 million, that he had applied the proceeds, inter alia, in investing in SPC shares through the STAs. However, all but one of the STAs pre-dated the receipt of the petitioner’s share of $18 million.

13.  The subject matter of the STAs comprised 1429.8734 shares in total and the aggregate consideration of $15.12 million comprised $12.52 million in cash and $2.6 million in cash equivalent (being shares of a VSG MLIA SPC – Gold Mine Fund SP).

14.  However, the names/identities of the sellers were partially, if not totally, blanked out. The STAscontained a confidentiality clause prohibiting disclosure without the consent of the other contracting party and 2 of them contained a further unusual provision to the effect that the parties guarantee not to disclose, of his own accord, any information relating to the SPC Fixed Income Fund “to any regulatory authority”.

15.  Extrapolating from the total consideration given for the SPC shares that constitute the subject matter of the 4 STAs, Mr Brian Lo, counsel for the respondent, demonstrated that the SPC shares averaged a little over $10,000 per share. Applying that average to the total number of shares disclosed in List C3, the petitioner’s investment into SPC would have been of the order of $23 million.

16.  Further, the petitioner did not provide any particulars as to when SPC ceased to operate: no date was given, no announcement was exhibited and no explanation was given concerning the nature of the investment[2]or the underlying business. Indeed, even as late as March 2019, the petitioner was investing in SPC shares but all the petitioner is able to state is that “as far as he knew”, SPC ceased operations on an unidentified date in 2019.

17.  Ms Katy Chung, counsel for the petitioner acknowledged that the evidence relating to SPC was unsatisfactory but sought to deflect blame by submitting that the criticisms only surfaced in the respondent’s submissions without the petitioner having an opportunity to answer them.

18.  That submission is misconceived: it overlooks the fact that the evidence concerning the STAs were only disclosed in P 4^th which was madein response tothe respondent’s affirmation. It is a matter for the petitioner to ensure that proper and adequate evidence is provided to support his application.

19.  The matrimonial proceedings for financial provision commenced on 14 December 2018 and it is a fact that the STAs were entered into after the commencement of those proceedings within the space of 4 months.

20.  The petitioner sought to distinguish the authorities referred to in §5 above (which concerned petitions presented for circumventing financial provision obligations in matrimonial proceedings), relying on 15 payments having been made pursuant to the Order.  That is not strictly correct as only 3 of the 15 payments are so attributable: under the terms of the Order, the obligation to pay only commenced with the date of the decree absolute.

21.  As earlier noted[3], in round terms the STAs concerned only about 1430 SPC shares out of the petitioner’s total holding of approximately 2305 shares. The evidence reveals that apart from the STAs, the petitioner contracted to acquire further tranches of SPC shares (approximately 670 shares in total) on 4 and 31 December 2018 respectively. Except for $0.5 million, the purchase price for those acquisitions came from financing provided by the relevant contracting party.

22.  Even after taking those tranches into account, there remains a shortfall of 205 SPC shares which are unaccounted for and in respect of which no information has been provided as to when and at what price they were acquired.

23.  The respondent submitted that she has not been able to verify the identity of the persons involved, their connections with the petitioner and whether (as the petitioner alleges) the investment of $23 million is worth nothing as a result of the lack of information disclosed by the petitioner and the concealment of the identity of the sellers and that in the circumstances the court should infer that the petitioner was attempting to transfer away and hide his assets in order to defeat the respondent’s entitlement. 

(B)    The Convoy agreement

24.  The consideration of $45 million for GMD was payable in stages. By mid/late April 2019, $36 million had been paid.  However it was subject to a clawback provision if the vendor failed to achieve agreed audited revenues and audited profit after tax over the period of 3 years ending 31 December 2021.  In that event, the vendor has to repay any shortfall arising upon completion of the 2021 audit.

25.  After carrying out the relevant calculations based on the 2019 financial reports, by an email dated 15 April 2020, Convoy informed the vendor (i.e. the petitioner and Leung) that their final consideration entitlement for that year was $98,981 and the final clawback amount was $34,560,074, with Convoy offering to ‘talk’.  This email was characterised in P 4^th as Convoy’s ‘request’ for an early termination of the Convoy agreement. It was nothing of the sort.

26.  On 28 April 2020, 2 weeks later, the petitioner through his solicitors sent a letter to Convoy stating that the petitioner (and not the vendor as such) would no longer perform the Convoy agreement and informing Convoy that the petitioner would be petitioning for his own bankruptcy.

27.  Based on that email, Convoy is shown in the petitioner’s amended list of liabilities (“List B”) as an unsecured creditor for $34,560,000. Not a word was said about Leung in the petitioner’s affirmations when Leung, together with the petitioner, constituted “the vendor”, they being jointly and severally liable under the Convoy agreement.

28.  Given the petitioner’s evidence that the $36 million was shared with Leung[4], his silence regarding Leung and his ready assumption of the entire clawback amount as his liability is baffling.  It is to be noted that the evidence does not exclude the possibility that the Convoy agreement may still be extant. 

(C)    Ding’s Kitchen Holdings Limited (“DKHL”) shares  

29.  The petitioner’s assets in List C3 include 10,000 shares in Hong Kong and Macau Food Holdings Limited (“HKM Food”) which, like the SPC shares, was said to be worth zero. HKM Food was the registered holder of 14,080 DKHL shares until they were sold in January 2020 for $1 per share. It is the respondent’s case that the sale was at an undervalue and that the petitioner failed to substantiate the downfall of DKHL’s business.

30.  The petitioner’s foray into the restaurant business started in 2017.  Having successfully opened a restaurant in Causeway Bay called Ding’s Kitchen in October 2017, he set up DKHL which he held through his wholly-owned company HKM Food.

31.  In the course of 2018, through DKHL and various subsidiaries established under DKHL,the petitioner operated a number of restaurants as well as a company selling deluxe food items, with further restaurants in upmarket areas already in the works.

32.  At that time (pre-September 2018), the petitioner was the sole director of DKHL and of its subsidiaries.  By October 2018, he had acquired a business partner, Cheung Yee Long (“Cheung”) but nothing was said about Cheung becoming a director.

33.  As at 28 May 2019, the petitioner (through HKM Food) held 9,600 shares in DKHL, representing 48% of the issued shares said to have a market value of $34.752 million (or $3,625 per share)[5] based on a conservative estimate. It is unclear whether Cheung owned the remaining 52% of the shares or whether there were other shareholders. Cheung became the chief operating officer at some point.

34.  The drop in business volume of 20-30% caused by the 2019 protests and demonstrations and an aggregate loss of $4 million in June and July did not deter the management team (whose members were not identified but necessarily included the petitioner) from planning a rights issue and an increase of capital in August/September 2019, with the new shares priced at $1,500 per share.

35.  The petitioner participated in the rights issue and paid $4.32 million for 2,880 shares.  As a result of that rights issue, the petitioner’s shareholding in DKHL increased to 12,480 shares. While  P 4^th §30 stated the share capital as comprising 23,150 shares, that appears to be a translation error given that the figure in the original Chinese text is 23,510[6]. Based on that figure, the petitioner owned approximately 53% of the issued capital.

36.  In October 2019, the petitioner arranged an external borrowing of $5 million which he “on lent” to DKHL said to forestall full business closure.  The identity of the lender was not disclosed nor was the loan itself in evidence.

37.  At about this time, the petitioner held discussions with a potential Macau-based investor but it was only on 25 December 2019 that the invitation to make a capital injection was declined.  At this point, the petitioner “decided” he could no longer save DKHL and resigned as CEO on 31 December 2019 but, seemingly, remained a director.

38.  In January 2020, DKHL decided to further increase its share capital of 23,510 shares to 1.5 million shares at $10 per share with a capital increase of $14,764,900. The petitioner exhibited an Agreement for Capital Increase and Allotment executed on 13 January 2020 (“TSL-12”) between DKHL and “Investor” whose name was blanked out and not identifiable.  

39.  The petitioner stated that in January 2020, he was certain he had no funds to continue participating in the rights issue. It would have the effect of diluting his shareholding to less than 1%. So, in late January 2020, he sold “the remaining” 14,080 shares to Cheung at a consideration of $1 per share, then resigned as director of DKHL and “completely withdrew from DKHL in the exchange of the creditors’ waiver of the debt of HK$5,000,000 that [he] owed in December 2019”: P 4^th §31.

40.  He explained that “[he] went from Founder to the Chief Executive Officer and ended up a minority shareholder, no interest could be further observed from [him] in this business.”

41.  As will become apparent, his evidence relating to DKHL is problematic, confusing and riddled with difficulties.

42.  In his narrative[7] of HKM Food’s holding ofDKHL shares totalling 14,080 shares, he accounted for 12,480 shares and omitted to narrate his acquisition of the remaining 1,600 shares.  Then there is a cryptic reference to the 14,080 shares being “the remaining” shares. That would suggest that he had more than that number of shares at some earlier point.

43.  The missing 1,600 shares is referenced in item 25 of the petitioner’s chronology which his counsel prepared for the hearing. That referred to a share transfer agreement of 6 November 2019 for the acquisition of 1,600 DKHL sharesby the petitioner from Tung Kam Yin Henley for $7.5 million.  The agreement itself was not exhibited in P 4^th. Instead, a “Receipt of Confirmation” generated and signed by the petitioner on behalf of HKM Food as transferee (and thus self-serving) was produced.

44.  That transaction (which remains uncorroborated) meant that on 6 November 2019, the petitioner was willing to pay $4,687.5 for each DKHL share, far exceeding $3,625 which was its value in DKHL’s heyday[8]. That transaction which, in the circumstances, was decidedly odd, if not incomprehensible, required explanation but there was none.

45.  That aside, List B shows Henley Tung to be a creditor for $7 million when the unpaid consideration was $7.5 million. §44 of P 4^th does not refer to any part of the amount due having been repaid.

46.  On 14 January 2020, DKHL acting by Cheung, said to be its “sole” director, passed a resolution approving the transfer by HKM Food of its holding of 14,080 shares to Cheung.

47.  The sale of the shares as well as the petitioner’s resignation as director was said to have taken place in “late January 2020”[9] but the resolution as well as the instrument of transfer and notes exhibited in support are all dated 14 January 2020.  Inexplicably, no document evidencing the petitioner’s resignation as director is before the court.

48.  The petitioner coyness as to the composition of the “management team” of DKHL from September 2018 onwards is to be noted.  For both rights issues (made in August/September 2019 and January 2020), the decision was attributed to management/management team without identifying its composition.

49.  As far as it is discernible, Cheung became the petitioner’s business partner in DKHL from about September 2018.  The resolution approving the sale of the 14,080 shares to Cheung was signed by Cheung “as sole director”. DKHL’s certificate of incumbency issued on 19 March 2020[10] states that Cheung was appointed its sole director on 14 January 2020.

50.  While the certificate of incumbency would suggest that prior to that date Cheung was not a director (because had he been a director together with the petitioner, there would have been no need to make the appointment), curiously, DKHL’s director who signed TSL-12 on its behalf was none other than Cheung and TSL-12 was signed on 13 January 2020, one day before his appointment as sole director.

51.  All this raises questions as to the identity(ies) of the persons constituting the controlling mind and will of DKHL during the period from August 2019 to January 2020.

52.  The respondent has raised legitimate criticisms concerning the lack of evidence to substantiate the downfall of DKHL. The absence of direct evidence of its financial health including financial reports, management accounts and bank documents relating to the business cannot be explained by the fact that the petitioner stepped down as CEO on 31 December 2019 because he remained a director at least until 14 January 2020 and was heavily involved in DKHL’s affairs throughout 2019. Decisions on rights issues are not taken in the absence of financial information.

(D)    The $5 million loan

53.  This loan (mentioned in §36 above) was said to have been ‘on lent’ by the petitioner to DKHL.  This would mean that DKHL became indebted to the petitioner for that amount.  However, that debt is not listed List C3 as an asset of the petitioner’s estate.

54.  Instead, as noted in §39 above, it was waived by his creditors in return for his withdrawal from DKHL.  But why (one might well ask) would an “external[11]” lender require his withdrawal from DKHL? 

55.  The identity of his creditors (described as ‘third party creditors’ in the petitioner’s written submissions) was never disclosed.

(E) The $2.44 million loan

56.  This loan was disclosed by the petitioner in P 4^th §48 directed at addressing the respondent’s criticism concerning the lack of information regarding his financial ability at the time of the January 2020 allotment.

57.  It transpires that on an unspecified date in November 2019, he had borrowed $2.44 million from Cheng Kai Tung (“Cheng”) to be repaid between December 2019 and January 2020. No document evidencing the loan and its terms was exhibited. The purpose of this loan is not apparent nor the date of any repayment other than the balance of $760,000 paid after completion on 28 February 2020 of the sale of a property.  

Whether abuse of process

58.  The right to petition for one’s own bankruptcy provides a means for the debtor who is merely unfortunate rather than dishonest to free himself from the accumulated burden of his debts and enjoy the prospect of a fresh start with the “clean slate”. As noted in Fletcher’s The Law of Insolvency 4th Edn., §6–082, this facility can obviously provide a means whereby the dishonest and undeserving may contrive to elude their creditors.

59.  What amounts to an abuse in a particular case is necessarily fact-sensitive.

60.  It is the respondent’s case that because of the petitioner’s failure to make a full and frank disclosure, she has not been able to verify the identity of the persons involved in the STAs, their connections with the petitioner and whether (as the petitioner alleges) his investment of $23 million is worth nothing.  

61.  There is a distinct possibility of the STAs being sham transactions given the evidence that has been presented and that they provided a means of enabling the petitioner to hide his assets such that one or more of the sellers could be holding the consideration paid for the SPC shares on the petitioner’s behalf. It is a concern that is real and a possibility that cannot be dismissed as fanciful.

62.  As earlier noted, the petitioner’s evidence relating to DKHL and the downfall of the restaurant business is also highly unsatisfactory. It leaves one with a great sense of unease as to whether the petitioner has been selective as to the matters he chose to disclose and even then their reliability and truthfulness are questionable. He has been evasive on issues that matter. To all intents and purposes, the petitioner gifted his DKHL shares to Cheung for reasons that are not convincing.

63.  All that is exacerbated by the petitioner’s general lack of candour and the almost flippant approach adopted with regard to the evidence he chose to adduce in support of his application.

64.  Counsel for the petitioner accepted that there are gaps in the petitioner’s evidence. She submitted that if the challenged debts are excluded from the List B, the unchallenged debts still amount to some $2.4 million.

65.  The petitioner is said to be unemployed, has no properties and lives in China and that there is no way in which he is able to pay those debts. In those circumstances, it was submitted that the bankruptcy order should be made.

66.  That submission misses the point because the SPC shares and the HKM Food shares constitute assets rather than challenged items of liability. The deficiencies identified in the evidence and the criticisms made cannot be gainsaid. They render unreliable the value the petitioner has attributed to them.

67.  It is incumbent on a petitioner who petitions for his own bankruptcy to make a full and frank disclosure of his assets and liabilities. For only he has the requisite knowledge. In the present case, the petitioner has fallen well short of his disclosure obligations.

68.  I take the view that the present application is an abuse of process.

Conclusion

69.  Accordingly, I do not consider it appropriate for the court to exercise its discretion in the petitioner’s favour to make an order pursuant to section 10 (1) the Ordinance.

70.  This petition is dismissed with costs to the respondent, to be taxed if not agreed with certificate for counsel.