RE LEUNG YAT TUNG

HCB 2019/2000

[2023] HKCFI 1279

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 2019 OF 2000

_________________

_______________

DECISION

_______________

INTRODUCTION

1.  This is an application for joinder taken out by Harbour Front Limited (“Harbour Front”), made by virtue of a summons filed on 19 April 2022 (“the Joinder Summons”), for the purpose of opposing the application of the petitioning creditor (Healthy Wharf Limited (“Healthy Wharf”)) to remove the Official Receiver as the trustee-in-bankruptcy of Leung Yat Tung (“the discharged bankrupt”) and appoint two professional accountants in private practice as joint and several trustees-in-bankruptcy in her place.

BACKGROUND

2.  As indicated by the case number, this bankruptcy case has a long history, and the Court of First Instance has handed down quite a number of decisions in this case.

3.  As far as this joinder application is concerned, the background facts summarised by Ng J in Re Leung Yat Tung [2016] 4 HKLRD 462 are relevant and I respectfully adopt the same as follows:

“5. In February 1998, the Bankrupt, Leung Yat Tung (“B”) transferred to Harbour Front Limited (“Harbour Front”) certain shares owned by him allegedly at a gross undervalue. These shares consisted of:

(a) 50% of shareholding in Money Facts Limited (“Money Facts”);

(b) 32.96% of shareholding in Fonfair Company Limited (“Fonfair”).

6. Money Facts held 65.79% of Fonfair and Fonfair holds a valuable piece of land in Yau Tong, valued at around HK$464m to HK$500m in September 2015, according to a valuation report. On that basis, B’s direct and indirect shareholding of Fonfair would be worth around HK$300m. The figures are confirmed by the OR at the hearing to be more or less correct.

7. In March 2001, B was adjudicated bankrupt on the petition of the Petitioning Creditor for his failure to pay a judgment debt in the sum of HK$5,182,519.93. The OR was appointed trustee of the bankruptcy estate.

8. Thereafter, a total of 39 proofs of debt were received by the OR. Most of them were received in 2001, 2002 and 2003; 9 were received between March 2010 and December 2014.

9. B denied he had any beneficial interest in the shares in question. The Petitioning Creditor said investigation was called for as to whether the transfer of the shares by B to Harbour Front fell foul of section 49 of the BO. For reasons not entirely clear to this court, the OR did not see fit to bring proceedings to recover the shares from Harbour Front.

10. On 13 September 2005, the Petitioning Creditor applied to court to reverse the OR’s decision and for an order directing the OR to enter into a funding agreement with the Petitioning Creditor to enable the OR to proceed with the so-called ‘Avoidance Proceedings’. By Order dated 29 March 2006, the application was allowed by Recorder Edward Chan SC. Costs of the Petitioning Creditor (as well as the OR) were ordered to be borne out of the bankruptcy estate. The Petitioning Creditor’s costs were about HK$452,000. This sum forms part of the subject matter of the 1^st summons.

11. In September 2006, the Funding Agreement was formally executed by the Petitioning Creditor and the OR.

12. Under the Funding Agreement,

(1) At Clause 2, the Petitioning Creditor undertook and agreed with the OR that whatever the outcome of the Avoidance Proceedings, it shall indemnify the OR against all judgments and orders (including adverse costs orders) made against the OR as well as all costs, expenses and liabilities made against or incurred by the OR in the Avoidance Proceedings.

(2) At Clause 3, the Petitioning Creditor gave an indemnity to the OR if it shall be held personally liable for any costs or other form of liabilities arising out of or in connection with the Avoidance Proceedings.

(3) Under Clause 4, the Petitioning Creditor agreed to provide security for its obligations in the form of an irrevocable bank guarantee in favour of the OR in the sum of HK$1.2 million. Subsequently, in September 2011, the bank guarantee was replaced by a cashier order of HK$1.2m. This is the subject matter of the 2^nd summons.

13. In February 2007, the OR eventually lodged the Avoidance Proceedings to set aside the transfer of the shares and for an order that the shares be vested in the bankruptcy estate. A solicitors firm, Messrs Ho & Ip, were engaged by the OR to conduct the proceedings. Counsel and experts have also been engaged.

14. In the course of the Avoidance Proceedings, the Petitioning Creditor directly paid Messrs Ho & Ip’s bills of costs and disbursements incurred. The total amount so paid by the Petitioning Creditor comes to slightly over HK$3m. This sum also forms part of the subject matter of the 1^st summons.

15. Trial of the Avoidance Proceedings was scheduled to commence before Madam Justice Au-Yeung on 7 January 2015. In December 2014, Harbour Front proposed to settle with the OR and sent it a cheque of around HK$5.18m. On 8 January 2015, a settlement was reached between Harbour Front and the OR.

16. On 13 January 2015, Au-Yeung J directed and authorized the OR to settle the Avoidance Proceedings.

17. On 12 February 2015, the OR and Harbour Front executed the Settlement Agreement. The terms were highly favorable to the bankruptcy estate.

(a) Under Clause 1, Harbour Front agreed to make full payment to the OR for the satisfaction of all proved debts and interest, together with all costs, fees, expenses and disbursements that the OR was entitled to receive under the provisions of the BO.

(b) Under Clause 3, Harbour Front’s previous payment of HK$5.18m to the OR should be treated as part payment under Clause 1 and the OR should be at liberty to use such funds for such purposes as it saw fit.

(c) Under Clause 4, Harbour Front agreed to charge the shares in favour of the OR as security of its payment obligations under Clause 1.

(d) Under Clause 5, as further security of its payment obligations, Harbour Front agreed to tender a cheque of HK$15m to the OR. The cheque was subsequently replaced by a bank guarantee of the same amount.

18. By an Order of this court in September 2015, RSM Nelson Wheeler Corporate Advisory Ltd was appointed to assist the OR in the adjudication of the proofs of debt submitted. The adjudication was completed in May 2016. 9 proofs of debt were admitted, including part of the Petitioning Creditor’s proof of debt to the extent of HK$4.26m. The total amount of proofs so admitted was in the region of HK$149 million.”

4.  Unfortunately, the execution of the Settlement Agreement (referred to in paragraph 17 of Ng J’s Decision quoted above) (“the Settlement Agreement”) was not the end of the saga.

5.  It has since then been alleged by Healthy Wharf that the Official Receiver has, among other things, failed to properly administer the estate of the discharged bankrupt (“the Estate”) and to enforce the Settlement Agreement, and that as a result, none of the key milestones, including (i) the completion of adjudication of proved debts; (ii) issuance of written demand to Harbour Front for settlement of the adjudicated proved debts, interest and costs; and (iii) provision of a bank guarantee by Harbour Front, was achieved within the stipulated time.

6.  For the above reasons, Healthy Wharf, by a summons filed on 21 January 2022 (“the Removal Summons”), applied to remove the Official Receiver from the office of trustee-in-bankruptcy of the discharged bankrupt, and to appoint two professional accountants in private practice in her place.

7.  At around the same time, on 19 January 2022, the Official Receiver issued a written demand to Harbour Front for payment of HK$22,456,000 pursuant to the Settlement Agreement (“the Written Demand”).

8.  Harbour Front takes issue with some of the items claimed in the Written Demand. It has therefore taken out an Originating Summons (HCMP 400/2022) on 19 April 2022 (“the Originating Summons”) to seek the Court’s determination of the disputes, as well as a summons in the said proceedings for leave to pay HK$16,920,000 into Court as substitute security in return for the discharge of the share charge and the release of its obligation to provide the Bank Guarantee[1] (“the Payment-in Summons”).

9.  On the same day, Harbour Front also took out the Joinder Summons and sought to be joined as a party in the removal application for the purpose of opposing the same, which is the subject matter to be resolved in this Decision.

THE LEGAL PRINCIPLES

10.  The applicable legal principles are trite.

11.  Order 15 rule 6(2)(b) of the Rules of the High Court (“RHC”) provides that:

“(2) Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application—

(a) […]

(b) order any of the following persons to be added as a party, namely—

(i) any person who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(ii) any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

12.  In Man Whi Chung v Man Ping Nam [2003] 1 HKC 549, DHCJ A Cheung (as the Chief Justice then was) explained the operation of the said rule as follows:

(1) The applicant must show that he is sufficiently interested in the proceedings to which he or she wishes to be joined as an additional party. Under Order 15 r.6(2)(b)(i) (“the Necessity Limb”), a person “who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon” may be added as a defendant: [14];

(2) Adopting what Lord Diplock said in Pegang Mining Co Ltd v Choong Sam [1969] 2 MLJ 52 at 56, a party might be added under the Necessity Limb if his rights against or liabilities to any party to the action in respect of the subject matter of the action be directly affected by any order which may be made in the action: [20];

(3) An alternative basis for joinder is set out in Order 15 r.6(2)(b)(ii) (“the Just and Convenient Limb”), which confers on the Court a wider jurisdiction to allow joinder. There must exist an issue common to (a) the applicant and any party to the cause or matter and (b) the parties to the cause or matter, which is “just and convenient to determine”: [21] – [22];

(4) The Court has a discretion to exercise even if a case falls within the provisions. But the fact that a case falls within either limb is by itself a strong reason for allowing the joinder. The rules of natural justice require that a person who is “affected” (in the sense of either the Necessity Limb or Just and Convenient Limb), or is potentially affected, by a decision of the court be given a proper chance to be heard: [43] (“the Discretionary Limb”).

13.  Counsel have also referred this Court to the case of Chen Hongqing v Liu Yiu Keung Stephen & Others [2021] HKCFI 440, in which the applicable principles have been set out by K Yeung J as follows:

“26. […]

(a) A liberal approach should be given to this rule so as to ensure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of legal proceedings with respect to any of those matters is avoided;

(b) Under Limb 1, a party might be added if his rights against or liabilities to any party to the action in respect of the subject matter of the action will be directly affected by any order which may be made in the action;

(c) Specifically, under Order 15 rule 6(2)(b)(ii), the intervener is required to show that he has some interest which in some way directly related to the subject matter of the action. A mere commercial interest in its outcome, divorced from the subject matter of the action is not enough;

(d) Whilst some interest which in some way directly related to the subject matter of the action is necessary, the existence of a cause of action between the intervener and one of the parties is not a necessary perquisite for the purpose of joinder;

(e) Even where the interest in the subject matter alleged by the intervener is doubtful, the court is nevertheless prepared to exercise its discretion to allow the joinder so that the alleged interest could be properly tested at trial.

27. […] whilst the Court will not at the joinder stage engage itself in a scrutiny of merits or an adjudication of facts, it does not mean that the Court would take an intervener’s assertion of sufficiency of interest at face value and ignore any obvious legal impediments to its claim […] it will disallow a joinder application if it is “plain and obvious” that there can be no claim between the original parties and the party proposed to be joined […]

28. […] the Court will not exercise its discretion in favour of joinder if it is plain and obvious that the joinder of the proposed intervener would be pointless and futile. This is not unlike the approach which the Court adopts when approaching an application for amendment of pleadings.”

14.  In Yip Lai Fong & Another v Sin Tung Hng & Others (HCMP2423/2002, unreported, 20 March 2003), Chu J (as Chu VP then was) also had the following to say:

“In Wong Chun Loong Tony v. Ada Ltd [1991] 1 HKC 86, the Court of Appeal, applying the English case of Sanders Lead Co. Inc. v. Entores Metal Brokers [1984] 1 WLR 452, held that Order 15 rule 6(2)(b)(ii) requires the would-be-intervener to possess some interest which is in some way directly related to the subject matter of the action, and that a mere commercial interest in its outcome, divorced from the subject matter of the action, is not enough. The Court of Appeal further held that there must exist between the would-be-intervener and any party to the cause or matter a question or issue arising out of, or relating to, or connected with any relief or remedy claimed in the cause or matter, which the court considers it just and convenient to determine as between the would-be-intervener and that party, as well as between the parties to the cause or matter.”

DISCUSSION

15.  Under Clause 1 of the Settlement Agreement, Harbour Front is contractually liable to pay, inter alia, all costs, fees, expenses and disbursements that the trustee-in-bankruptcy is entitled to receive under the Bankruptcy Ordinance. Further, under Clauses 4 and 5 of the Settlement Agreement, it has provided and is still providing a bank guarantee in the sum of HK$15 million (“the Bank Guarantee”). It is paying finance costs to the bank from time to time to maintain the same.

16.  Against the above background, Harbour Front asserted that it has a direct pecuniary interest in the Removal Summons in that:

(1) The Official Receiver has been acting as the trustee-in-bankruptcy of the Bankrupt since 2001, and the administration of the Estate has reached its concluding stage. Replacing the Official Receiver now would inevitably increase the costs of the administration, as the new trustees would need to incur time and costs to review the materials concerning the administration of the Estate in the past 20 odd years, particularly for the purpose of defending the Originating Summons. Harbour Front may have to “foot the bill” pursuant to Clause 1 of the Settlement Agreement should there be any increment in costs as a result of the change of the trustee-in-bankruptcy;

(2) Any change in the trustee-in-bankruptcy may result in delay in the progress of the Originating Summons and the Payment-in Summons, which in turn would lead to much finance costs payable by Harbour Front in respect of the Bank Guarantee;

(3) The aforesaid delay might also result in the accrual of much interest which is payable by Harbour Front.

17.  It was further submitted by Ms Ho and Mr Lam that by reason of Harbour Front’s direct pecuniary interest in the Removal Summons:

(1) The Official Receiver or Healthy Wharf ought to have joined Harbour Front upon the taking out of the Removal Summons;

(2) Harbour Front’s presence before the Court in the Removal Summons hearing is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon. The issue concerned is “whether the change of trustee would increase Harbour Front’s liability under the Settlement Agreement”;

(3) Between Harbour Front and the Official Receiver, there exists an issue (which relates to the amount of costs and finance cost, etc.) arising out of or relating to or connected with the relief claimed in the Removal Summons which would be just and convenient to determine as between Harbour Front and the Official Receiver as well as between Healthy Wharf and the Official Receiver.

18.  Heavy reliance had been placed on the case of Chen Hongqing v Liu Yiu Keung Stephen & Others (supra), in which it was said in [26(b)] that a party might be added if his rights against or liabilities to any party to the action in respect of the subject matter of the action will be directly affected by any order which may be made in the action.

19.  Harbour Front also relied on, inter alia, Chu Yuen-wah v Lee Kwok-kee & Another [1995] 2 HKLR 280, in which it was held that the jurisdiction under Order 15 rule 6(2)(b) of the RHC is wide enough to permit the joinder of a party whose liability to pay is contingent not only upon the outcome of the proceedings which it seeks to join but also upon any other event or proceedings.

20.  With respect, I do not accept Harbour Front’s arguments.

21.  While I accept that it is likely that any replacement of the Official Receiver as trustee-in-bankruptcy would lead to increment of the total amount of money payable by Harbour Front pursuant to Clause 1 of the Settlement Agreement, I do not accept that either the Necessity Limb or the Just and Convenient Limb under Order 15 rule 6(2)(b) is satisfied:

(1) It is not necessary for Harbour Front to be joined as a party to the Removal Summons to ensure that all matters in dispute in that application may be effectively and completely determined and adjudicated upon;

(2) At most Harbour Front only has a mere commercial interest in the outcome of the Removal Summons, which is divorced from the subject matter of the same, and this is not enough;

(3) As pointed out by Mr Lee for Healthy Wharf, the subject matter of the Removal Summons is all about the complaints of Healthy Wharf as a creditor of the discharged bankrupt on the Official Receiver’s fitness to continue to serve as trustee-in-bankruptcy in administering the Estate. This has nothing to do with Harbour Front which is not a creditor as such.

22.  As aforesaid, Harbour Front relied heavily on the case of Chu Yuen-wah (supra). In that case, the plaintiff wife claimed damages for serious injuries she suffered as a passenger in a car driven by her husband. She claimed that her husband drove negligently. The husband had purchased an insurance policy issued by the applicant insurer, who had given notice to the husband informing him that it would avoid the policy on the ground of misrepresentation and non-disclosure. Be that as it may, the insurer applied to be joined in the personal injuries claim commenced by the wife. It was held by the Court of Appeal that if the insurer did not intervene, the husband and the wife would collude in that the husband would admit liability and take no issue on quantum of damages claimed by the wife, and on this basis, the real issues in the trial would not be “effectively and completely determined and adjudicated upon”. It was further held that even though the insurer was only under a contingent liability to pay any damages that the wife might recover (depending on the outcome of its proceedings to claim for a declaration that the insurance policy was avoided), that would not affect the Court’s jurisdiction to make an order of joinder in favour of the insurer.

23.  It can therefore be seen that the factual background of the Chu Yuen-wah case is totally different from the present case, and therefore Harbour Front’s reliance thereon is misplaced. In my view, the focus should not be placed on the contingent liability on the part of Harbour Front, but rather on whether it is necessary to join Harbour Front in the first place so that all matters in dispute in the Removal Summons may be effectively and completely determined or adjudicated. I do not agree that it is necessary.

24.  The situation of Chu Yuen-wah is similar to the case of Gurtner v Circuit & Another [1968] 2 QB 587 which was another case relied on by Harbour Front. In this case, the plaintiff pedestrian was injured by a motor-cycle driven by the defendant. When the plaintiff commenced legal proceedings against the defendant, the writ could not be served on the defendant because he had emigrated to another country and could not be traced. The plaintiff subsequently obtained an order of substituted service of the writ on the defendant. The Motor Insurer’s Bureau then applied to be added as a defendant because it might be liable under the terms of its agreement with the Minister of Transport to satisfy any damages awarded to the plaintiff.

25.  It was against the above background that Lord Denning M.R. stated, in relation to the Necessity Limb, that:

“It seems to me that when two parties are in dispute in an action at law, and the determination of that dispute will directly affect a third person in his legal rights or in his pocket, in that he will be bound to foot the bill, then the court in its discretion may allow him to be added as a party on such terms as it thinks fit. By so doing, the court achieves the object of the rule. It enables all matters in dispute to ‘be effectually and completely determined and adjudicated upon’ between all those directly concerned in the outcome.” (at 595D – F)

26.  His Lordship continued at 595F:

“I would apply this proposition to the present case. If the Motor Insurers’ Bureau are not allowed to come in as defendants what will happen? The order for substituted service will go unchallenged. The service on the defendant Circuit will be good, even though he knows nothing of the proceedings. he will not enter an appearance. The plaintiff will sign judgment in default of appearance. The judgment will be for damages to be assessed. The master will assess the damages with no one to oppose. The judgment will be completed for the ascertained sum. The defendant will not pay it. Then the plaintiff will be able to come down on the Motor Insurers’ Bureau and call upon them to pay because they have made a solemn agreement that they will pay. They made an agreement with the Minister of Transport on June 17, 1946, by clause 1 of which they agreed that if a judgment for an injured person against a motorist is not satisfied in full within seven days, the Motor Insurers’ Bureau will pay the amount of the judgment to the injured person […]

It is thus apparent that the Motor Insurers’ Bureau are vitally concerned in the outcome of the action. They are directly affected, not only in their legal rights, but also in their pocket. They ought to be allowed to come in as defendants. It would be most unjust if they were bound to stand idly by watching the plaintiff get judgment against the defendant without saying word when they are the people who have to foot the bill. […]” (at 595F – 596E)

27.  It was in the above factual scenario that the Master of the Rolls used the term “foot the bill” – the intervener was required to pay damages as if it was liable as a defendant. I do not agree that Harbour Front will have to “foot the bill” of the Removal Summons in the same sense, despite the fact that the outcome of the removal application may have an impact on the amount of money payable pursuant to Clause 1 of the Settlement Agreement. As mentioned, in the present case, it can only be said that Harbour Front has a commercial interest in the outcome of the Removal Summons, but that is insufficient to constitute an interest directly related to the subject matter of the Removal Summons, which concerns the fitness of the Official Receiver to continue to be the trustee-in-bankruptcy of the Estate.

ORDER

28.  By reasons of the aforesaid, I dismiss the Joinder Summons.

COSTS

29.  I make a costs order nisi that Harbour Front shall bear the costs of the Joinder Summons.

30.  The above order nisi shall become absolute in the absence of application to vary (which, if any, shall be made by letter, and will be disposed of on paper) within 14 days hereof.

31.  The costs of the Joinder Summons of Healthy Wharf, the discharged bankrupt and the Official Receiver respectively shall be summarily assessed in lieu of taxation. Unless any application for variation of the aforesaid costs order nisi is made within time, they shall lodge and serve their respective statements of costs within 7 days after the expiry of the said 14-day period. Harbour Front shall lodge and serve its statements of objection within 7 days thereafter. Summary assessment of the costs of the Joinder Summons will be conducted on paper (no matter whether all statements of objection have been lodged within time) thereafter. The costs assessed shall be payable by Harbour Front within 14 days after assessment.