RE LEE PRISCILLA HWANG

HCB 7452/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 7452 OF 2009

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HCB 7453/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 7453 OF 2009

_________________________

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D E C I S I O N

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INTRODUCTION

1.  Under HCB 7452 of 2009, bankruptcy order was granted against Ms Lee Priscilla Hwang (“Priscilla Lee”) on 31 August 2009.

2.  Under HCB 7453 of 2009, bankruptcy order was granted against Mr Lee Raymond Cho-Min (“Raymond Lee”) on 31 August 2009.

3.  Raymond Lee and Priscilla Lee are husband and wife.

4.  Mr John Robert Lees (“Mr Lees”) and Mr Mat Ng were appointed as joint and several trustees (“the Trustees”) of the estates of Priscilla Lee and Raymond Lee respectively (collectively referred to as “the Bankrupts”) on 23 September 2009.

5.  For each case, there is an application on the part of the Trustees by way of summons filed herein on 26 July 2013 for an order suspending the running of the relevant period for the bankrupt’s discharge pursuant to section 30A(3) of the Bankruptcy Ordinance, Cap 6.  The grounds as stated in the respective summonses are that (a) the conduct of the Bankrupts before and after the bankruptcy has been unsatisfactory; and (b) the Bankrupts have failed to co-operate in the administration of the estate.

6.  Since the background and complaints against the Bankrupts are very similar, the summonses are heard together.

7.  While Mr Lees filed various affidavits in support and in reply under HCB 7452 of 2009, they referred to the contents of the 3^rd, 5^th and 6^th affidavits of Mr Lees filed under HCB 7453 of 2009 which were intended to be used in support of both applications aforesaid.  Similar approach was adopted by Priscilla Lee who relied on the 2^nd and 3^rd affidavits of Raymond Lee filed under HCB 7453 of 2009.

The Law

8.  There is no dispute as to the law applicable.  The difference between the parties is how the same should be applied.

9.  The Court should adopt a two-stage approach.  Barma J (as he then was) in Re Wong Hing Wah Michael[1] said at paragraph 14 of his judgment:

“… [There] are two stages involved when the court is considering the exercise of its powers under section 30A(3). It is first necessary to determine whether one or more of the grounds mentioned in section 30A(4) has been established. If this is done, the court then moves on to consider whether or not, in the exercise of its discretion, a suspension of the automatic discharge that would otherwise have been available to the bankrupt should be ordered. It will not be in every case where a ground for suspension is made out that a suspension will be called for or imposed. In determining whether or not a suspension should be ordered, the court will have regard to all the circumstances of the case, including the nature of the acts complained of and the post-bankruptcy conduct of the bankrupt.”

10.  As to what conduct is regarded as unsatisfactory, the learned judge explained at paragraph 16:

“However one regards the height of the threshold, it seems to me that the appropriate test for whether or not the conduct complained of is to be regarded as unsatisfactory is, as Deputy Judge A To put it (in paragraph 17 of his judgment), whether the conduct is such as society would be prepared to condone without any expression of disapproval. If it is not, the conduct in question will be unsatisfactory. In each case, the conduct complained of will have to be examined against all the relevant background facts, and consideration given as to whether or not the hypothetical reasonable man would regard it as unsatisfactory.”

11.  It should be borne in mind that no bankrupt has an unconditional right to an automatic discharge.  In order to obtain discharge, the bankrupt must abide by the requirements of the Bankruptcy Ordinance Cap 6 during the bankruptcy period.[2]

12.  Such requirements include doing all such acts and things in relation to his property and the distribution of the proceeds amongst his creditors as may be reasonably required by the trustees (s 26(2), Cap 6) and a bankrupt shall aid to the utmost of his power in the realization of his property and the distribution of the proceeds among his creditors (s 26(3), Cap 6).

The Trustees’ Complaints

13.  The Trustees’ complaints have arisen in relation to the following matters:

(a) in resisting the Trustees’ attempts to obtain control of assets belonging to the bankruptcy estates of the Bankrupts that are situated in the United States;

(b) in respect of monies owed by East-West Enterprises Co. Ltd. (“EWE”) to Raymond Lee;

(c) in relation to the debt owed by Oasis Consulting HK Limited (“OCHKL”) to Raymond Lee;

(d) in respect of monies advanced by Priscilla Lee to OCHKL;

(e) the delay by the Bankrupts in providing the Trustees with permission to access bank statements;

(f) Raymond Lee failed to provide settlement agreement to the Trustees; and

(g) the Bankrupts have failed to disclose various aspects of their salaries and benefits since 3 February 2012.

14.   Mr Patrick Fung SC and Mr William Wong SC, Counsel for the Bankrupts, classified the complaints under 8 headings (Items B1 to B8 of their skeleton submission).  In the course of the hearing, it has been made clear that the matters discussed under Item B1 (Failure to meet the Trustees in a timely manner) are not subject matter of the present applications.

Assets in the United States / Item B2

15.  It is a complaint against the Bankrupts.

16.  In the course of the administration of the estates of the Bankrupts, the Trustees came to know that the Bankrupts had extensive assets in the United States.

17.  According to the Statements of Affairs of Raymond Lee, he solely held a 33.33% interest in EWE.[3] He is the president of EWE.  The other 2 shareholders are David Lee and Karen Lee, being brother and sister of Raymond Lee, each owning one third of the shares.  EWE directly owned a portfolio of 5 commercial real estate properties.[4]

18.  The Bankrupts held a joint interest in 7 US corporations.  Upon the investigation of the Trustees, they discovered that these interests included, a 71.4% interest in Oasis Development Enterprises Inc (“ODE”) and a 71.4% interest in Oasis Consulting Inc (“OCI”).[5]

19.  ODE is a real estate investment and management corporation which is the managing entity of a group of real estate investment companies known as the Oasis Group, which owned 16 properties.  At the time of bankruptcies, Raymond Lee was the chairman, co-president and co-chief executive officer and Priscilla Lee was the co-president and co-chief executive officer.  Both of them together with Mrs Karen Hwang (the mother of Priscilla Lee), Mr Philip Lee and Mr Ivan Chow were the directors.[6]

20.  OCI provides employees and human resources, accounting and other services to ODE.  At the time of bankruptcies, Raymond Lee was the president and chairman.  The Bankrupts together with Mrs Karen Hwang and Mr Philip Lee were the directors.[7]

21.  On 24 November 2009, the Trustees made an application under Chapter 15 of the US Bankruptcy Code to have the Hong Kong bankruptcy proceedings against the Bankrupts recognized as “foreign main proceedings” and the Trustees be recognized as “foreign representatives” (“the Chapter 15 Application”).  According to the Trustees, these designations would allow for a moratorium on action being undertaken against the Bankrupts’ assets in the US similar to the automatic stay provided by section 12 of the Bankruptcy Ordinance, Cap 6.

22.  The Bankrupts opposed to the Chapter 15 Application denying that the bankruptcy proceedings in Hong Kong were “foreign main proceedings” and that Hong Kong was the “centre of main interest”.

23.  ODE, OCI, EWE and their 27 affiliated entities (the US Companies”) also filed an opposition.  In their opposition,[8] they stated that the US properties comprised of 16 commercial properties with more than 1,475,000 square feet leased to over 80 tenants and 2 undeveloped parcels (“the Oasis Group Portfolio”).  These properties are owned through a network of affiliated companies and most of them are directly owned by a single-asset special purpose entity (“SPE”) established as a limited liability company (“LLC”). ODE typically directly owns no more than one percent in the shares or membership interests of these affiliates but manage them through the terms of certain operating agreements executed by investors (known as members) in the various LLCs.  In most cases, ODE is the manager of its affiliated SPEs; some SPEs are directly or indirectly owned or controlled by ODE Asia, LLC, an investment vehicle (“ODE Asia”)[9].  Raymond Lee was the president and chairman of ODE Asia while Priscilla Lee was the vice chairman.  They together owned, directly or indirectly, a total of 45.26% of the membership interest in ODE Asia.[10]

24.  For the 5 properties owned by EWE, more than 150,000 square feet were leased to over 60 tenants (“the EWE Portfolio”).[11]  The EWE Portfolio and the Oasis Group Portfolio are collectively referred to as the US Portfolio.

25.  The Bankrupts’ ownership interest in each of the US Portfolio is comprised of their interests in ODE, ODE Asia and/or EWE and their direct or indirect ownership of membership interests in the SPEs which own the properties.

26.  There were 33 other individual and institutional investors who have invested in one or more of the companies in the Oasis Group[12].

27.  The Bankrupts owned a minority of the equity in 20 out of 22 real estate properties under the US Portfolio.  For the other 2, their combined interest is less than two-thirds.  In August 2009, the US Portfolio was valued at US$175,190,000.  The then current outstanding loan debt was around US$228 million. The equity attributable to the Bankrupts was around US$2,870,000.[13]  Although half of the properties were valued at less than the outstanding mortgage debt, the properties generated significant operating revenue.

28.  After the filing of the oppositions, there were negotiations between the Trustees, Bankrupts and the US Companies.  In February 2011, the Bankrupts and the US Companies withdrew their oppositions to the Chapter 15 Application on such terms as set out in the stipulation (“the Stipulation”) annexed to and as part of the order of the US court dated 28 February 2011(“the Chapter 15 Order”)[14].

29.  Paragraph 5 of the Chapter 15 Order provides that

“5. Pursuant to 11 U.S.C. §1520(a)(1) section 362 of the Bankruptcy Code shall be applicable to the Foreign Debtors such that all entities (as that term is defined in section 101(15) of the Bankruptcy Code), other than the Foreign Representatives and their expressly authorized representatives and agents, are hereby stayed from:

a) executing against the Foreign Debtors’ assets;

b) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the Foreign Debtors, or to recover a claim against the Foreign Debtors;

c) the enforcement of a judgment against the Foreign Debtors or against property of the Foreign Debtors’ estates;

d) any act to obtain possession of property of the Foreign Debtors’ or of property from the Foreign Debtors’ estates or to execute control over property of the Foreign Debtors’ estates;

e) any act to create, perfect, or enforce a lien or other security interest, set-off, or other claim against the Foreign Debtors or any of their property;

f) any act to collect, assess, or recover a claim against the Foreign Debtors;

g) transferring, relinquishing or disposing of any property of the Foreign Debtors to any person or entity other than the Foreign Representatives; and

h) the setoff of any debt owing to the Foreign Debtors against any claim against the Foreign Debtors;

provided, however, in each case, such injunction shall be effectively solely within the territorial jurisdiction of the United States.”

30.  In July 2011, the Trustees requested the Bankrupts to confirm that they would take all necessary action to transfer their shares in the US Companies (“the Equity Interest”) to the Trustees.  The Bankrupts refused on the ground that such transfer would be in breach of paragraph 9 of the Stipulation.  Thus, the Trustees applied for an order[15] directing the turnover of all assets of the Bankrupts in the US to the Trustees (“the Turnover Motion”) in September 2011.[16]  In the Turnover Motion, apart from the Equity Interest, the Trustees identified 4 other groups of assets, namely, (a) account assets valued at around US$500,000; (b) a real property at Brookline; (c) stocks in some United States companies (not the US Companies); and (d) timeshare interest.

31.  The Bankrupts opposed to the Turnover Motion. In relation to the Equity Interest, they adopted the arguments advanced by the US Companies which also opposed to the Turnover Motion to the extent of the turning over of the Equity Interest.  By then, the Oasis Group Portfolio comprised of 13 commercial properties with 1.2 million square feet leased to over 75 tenants and 1 undeveloped parcel.

32.  The US Companies argued that since 13 out of 16 of the properties under the Oasis Group Portfolio were subject to mortgage loan facilities, the turnover of the Equity Interest would trigger defaults under those loans and lead to severe consequences including the rights of the lenders to accelerate loan debts, to foreclose upon and sell the properties and pursuant to guarantees given by Raymond Lee, seek full recourse against him for loan debts around US$180 million.  Enforcement of their rights by the lenders would extinguish the Equity Interest and the equity interests of other investors or owners of the US Companies.  Therefore, the US Court should not grant the motion because it cannot be satisfied that “the interests of creditors and other interested entitles, including [the Bankrupts], are sufficiently protected”.[17]

33.  In February 2012, the Trustees and the Bankrupts resolved their differences under the Turnover Motion except the turnover of the Equity Interest and the real property at Brookline.  Subsequently in June 2012, the US Court granted the Turnover Motion. 

34.  The Trustees are of the view that the oppositions raised by the Bankrupts in respect of the Chapter 15 Application and the Turnover Motion as both non-cooperation and unsatisfactory conduct after the commencement of the bankruptcy.

35.  Counsel for the Bankrupts submitted that the Bankrupts are not required to comply with each and every of the Trustees’ requests regardless of the reasonableness of the requests citing s 26(2) of the Bankruptcy Ordinance, Cap 6 which only requires a bankrupt to “generally do all such acts and things in relation to his property and the distribution of the proceeds amongst his creditors, as may be reasonably required by the trustee.” Counsel submitted that it is not unreasonable to oppose the applications as the Bankrupts are entitled to have the issues between the parties, including what properties are to be included in the estates of the Bankrupts, to be determined under the US law.

36.  I do not accept this submission.  By virtue of s 58(1) and (3), Cap 6, on the making of a bankruptcy order, the property of the bankrupt shall vest in the trustee.  Under Hong Kong law, the Bankrupts are duty bound to co-operate with the Trustees for the administration of their estates.  Section 26(3) provides that “[a bankrupt] shall aid to the utmost of his power in the realization of his property and the distribution of the proceeds among his creditors.”  Raising the oppositions are clearly conducts against such duty.[18]  By so doing, the Bankrupts were trying to prevent the Trustees from reaching their assets, and most importantly, the Equity Interest, and that, if successful, may lead to severe adverse consequences to the administration of the estates of the Bankrupts and prejudice the interests of the creditors.  Without the Chapter 15 Application, proceedings against the Bankrupts in the United States may continue to proceed and any creditor of the Bankrupts may execute against the assets of the Bankrupts in the United States.  Without the Turnover Motion, the Trustees cannot have any control or effective control over the Equity Interest.   

37.  In the Memorandum of Judge Feeney on the Turnover Motion dated 4 June 2012, the judge pointed out that:

“Section 103(a) of the Bankruptcy Code provides in relevant part: “Except as provided in section 1161 of this title, chapters 1,3, and 5 of this title apply in a case under chapter 7, 11, 12, or 13 of this title, and this chapter, sections 307, 362(o), 555 through 557, and 559 through 562 apply in a case under chapter 15.” 11 U.S.C. §103(a). Accordingly, neither section 541(a) nor 541(c)(1) are applicable to a determination of property of the Hong Kong bankruptcy estates, and the determination of property of the estates must be made under Hong Kong law” [19](emphasis added).

It is crystal clear that such conclusion can be reached easily by a simple reference to section 103(a) and, in my view, any argument to the otherwise is bound to fail. As the estate of a bankrupt comprises of “all property belonging to or vested in the bankrupt at the commencement of the bankruptcy”[20], the Equity Interest must form part of the estates of the Bankrupts. It is also beyond argument.

38.  The only real issue is therefore whether the interests of creditors and other interested entitles, including the Bankrupts, are sufficiently protected.[21]  At page 44 of the Memorandum, the judge referred to In re Atlas Shipping A/S, 404 B.R. 726 (Bankr. S.D.N.Y. 2009):

“One court has described “sufficient protection” as embodying three basic principles: “the just treatment of all holders of claims against the bankruptcy estate, the protection of U.S. claimants against prejudice and inconvenience in the processing of claims in the [foreign] proceeding, and the distribution of proceeds of the [foreign] estate substantially in accordance with the order prescribed by U.S. law.”  In re Artimm, 335 B.R. at 160 (analyzing under §304(c) of the old Code, but notingthat the analysis would be “essentially the same” under §1521(b)).”

39.  At page 49 of the Memorandum, the judge observed that:

“[The] Hong Kong Bankruptcy Ordinance provides for the just treatment of holders of claims against the Foreign Debtors’ bankruptcy estate and for distributions of proceeds substantially in accordance with the Bankruptcy Code and that any U.S. claimants will not be prejudiced or inconvenienced because the Chapter 15 proceedings shall remain open.”

40.  At page 60 of the Memorandum, the judge opined that:

“[The] provisions of the Bankruptcy Ordinance also provide sufficient protection – indeed more protection than what would be available under the Bankruptcy Code.”

41.  The Bankrupts raised opposition to the Chapter 15 Application and subsequently acceded to it.  They raised opposition to the Turnover Motion and the US Court eventually ruled against them.  In my view, while the real intent on the part of the Bankrupts in raising oppositions may not be causing delay to and/or obstructing the administration of their estates, in reality, they did.  The Bankrupts have to face the consequences of their choice.

42.  Counsel for the Bankrupts referred me to various parts of the Memorandum of Judge Feeney where the judge commented that the Bankrupts have been “making cogent and sincere arguments” and their concerns were “valid” and submitted that the Bankrupts’ arguments were not wholly unmeritorious or made in bad faith.  While that may be so, it does not mean that the Bankrupts had acted satisfactorily or co-operatively.  In my judgment, the Bankrupts should have co-operated with the Trustees by voluntarily turnover the Equity Interest to the Trustees.  If for any reason they believed they cannot do so, they should have clearly explained to the Trustees.  They should not have actively opposed to the Turnover Motion. 

43.  It is my ruling that the Trustees have proved their case under this head.

Money owed by EWE to Raymond Lee / Item B3

44.  This complaint directs at Raymond Lee only.

45.  The Trustees complained that the conduct on the part of Raymond Lee was unsatisfactory because he failed to provide further information about the indebtedness owing to him by EWE as evidenced by the redacted balance sheet of EWE dated 30 September 2009 notwithstanding their request by letter dated 4 June 2013.[22]  The sum involved is around US$58,000.

46.  Raymond Lee submitted that since after the Turnover Motion, he was no longer a shareholder of EWE.  He can do nothing to entertain the request aforesaid.  The decision to provide information rested with the board of directors acting in accordance with legal advice. Indeed, he has abstained from voting in any resolution of the company on matters which relates to the bankrupt estate.[23]

47.  With the evidence now before me and in the absence of any evidence that Raymond Lee had acted improperly, for example, in influencing the other directors of EWE not to accede to the said request, I have to accept the submission of Raymond Lee.

48.  It is my ruling that the Trustees have failed to prove this head.

Loan owed by OCHKL to Raymond Lee / Item B5

49.  In the light of paragraphs 6, 55 to 68 of 3^rd Lees, I am of the view that the Trustees only complained against Raymond Lee though they, in these paragraphs, also set out the backgrounds leading to another complaint against Priscilla Lee to be discussed herein below.

50.  During the administration of the estate of Raymond Lee, the Trustees found that OCHKL owed certain sums of money to the Bankrupts, including a sum of around HK$986,058 as an “amount due to the Lees” which appeared in a draft unaudited balance sheet of OCHKL as at 30 September 2009.[24]

51.  In January 2011,[25] the Trustees asked Raymond Lee when the sum of US$79,500, being a sum owing to him by OCHKL as he stated in his affidavit,[26] dated 29 January 2010, filed under the Chapter 15 Application, would be remitted to the estate.  By another letter,[27] the Trustees asked Priscilla Lee when the sum of US$302,524 (around HK$2,361,072) being a sum owing to her by OCHKL as she stated in her statement of affairs dated 18 September 2009,[28] would be remitted to the estate.

52.  By a letter dated 14 February 2011,[29] Raymond Lee replied that since he was no longer a director of OCHKL, he was not in the position to comment and indicated that the Trustees should contact OCHKL direct.  Priscilla Lee replied in the same way as Raymond Lee did.

53.  By a letter dated 15 September 2011,[30] OCHKL through their solicitors, stated that:

(a) there was a sum due to Priscilla Lee in the amount of HK$2,361,072;

(b) there was no record due to Raymond Lee in the amount of US$79,500; and

(c) the sum of HK$986,058 was advanced by Raymond Lee in the nature of quasi-capital or loan capital and was non-refundable.

54.  A week later, by a letter dated 23 September 2011, Raymond Lee said that the sum of US$79,500 amounts to quasi-capital and non-refundable and, by September 2009, the amount owing to him was HK$986,000.

55.  In their letter dated 31 October 2011, the Trustees queried the answers given by OCHKL and demanded for payment of the sums owing to the Bankrupts.[31]

56.  Since OCHKL did not make any payment, the Trustees subsequently presented a winding up petition against OCHKL on 6 December 2012. OCHKL eventually repaid the debt owing to Priscilla Lee in the sum of HK$2,361,072.01 and the debt owing to Raymond Lee in the sum of HK$986,028.14[32] and the petition was dismissed by consent on 25 February 2013.

57.  The Trustees are of the view that Raymond Lee changed his stance in relation to the sums owed to him because he wanted to prevent the loan to become part of his estate.  This conduct is unsatisfactory and also shows that Raymond Lee fails to co-operate in the administration of the estate.

58.  It was submitted on behalf of Raymond Lee that there was no change of stance.  The words “quasi-capital” and “non-refundable” merely provide a more precise description of the nature of the debt owing to Raymond Lee.

59.  I do not accept the submission.  First, Raymond Lee did not mention that the sum owing to him was non-refundable until his letter dated 23 September 2011.  In fact, in his letter dated 14 February 2011, he said:

“As regard to when the approximate amount of US$79,500 will be available to be remitted to my estate from [OCHKL], you will appreciate that since I am no longer a Director of [OCHKL], I am not in any position to comment upon this. No doubt you will contact [OCHKL] directly, in need?”

It clearly shows that the sum owing to him is not non-refundable as otherwise he would have said so but not asking the Trustees to contact OCHKL.

60.  The only conclusion that I can draw from the change of position is that Raymond Lee tried to prevent the debt to form part of his estate.  This is unsatisfactory conduct and shows that he fails to co-operate with the Trustees in the administration of his estate. It is my ruling that the Trustees have proved this head.

Monies advanced by Priscilla Lee to OCHKL / Item B6

61.  The complaint under this heads concerns the Bankrupts.

62.  As mentioned above, OCHKL repaid the debt owing to Priscilla Lee in the sum of HK$2,361,072.01.  This sum is in fact the amount remaining from sums including a sum of HK$5 million that was transferred from the Bankrupts’ joint bank account by way of a cheque dated 25 February 2009. This is regarded as a loan and is documented by a promissory note issued by OCHKL to Priscilla Lee also dated 25 February 2009.[33]  The promissory note was signed by the Bankrupts, as directors of OCHKL.

63.  From a schedule provided by OCHKL on 13 August 2012,[34] the Trustees came to know that this loan was utilized to make various payments to different parties including the legal advisers and financial advisers of the Bankrupts for the period between 7 May 2009 and 31 August 2009.  On each occasion when a payment was made, the amount owing to Priscilla Lee was treated to have been reduced by the same amount. 

64.  On 30 April 2013 and 2 May 2013, Raymond Lee sent revised schedules to the Trustees.[35]

65.  The latest schedule shows that there were 2 deposits, to the credit of Priscilla Lee, back in July and September 2008 in the sums of HK$366,000 and HK$66,000 respectively.  Adding the HK$5 million loan, the total credit balance with OCHKL was HK$5,432,000 as on 25 February 2009.  OCHKL paid various expenses for and on behalf of the Bankrupts from 14 May 2009 to 31 August 2009. It should be noted that the bankruptcy petitions herein were filed on 27 May 2009 and bankruptcy orders were made on 31 August 2009.

66.  The Trustees are of the view that, by virtue of s 42(1), Cap 6, the expenses paid on behalf of the Bankrupts as from 27 May 2009 onwards are void.  The total sum involved is around HK$2.7 million.[36]  The payments included HK$850,000 and HK$500,000 to the legal advisers of the Bankrupts and HK$366,614 to their financial advisers.  Such pre-bankruptcy conduct was grossly unsatisfactory in that it preferred the payees to the general body of creditors.

67.  Raymond Lee, in 2^nd RL, explained that:

“ 45. The HK$5,000,000 was advanced by PHL[37] to OCHKL on 27 February 2009, 3 months before the filing of the bankruptcy petition by Winchesto on 27 May 2009, as a loan to OCHKL for the settlement of the personal expenses of PHL and me. At that time, PHL and I were heavily engaged in litigation, as well as the negotiation with creditors over IVA proposals. These professional charges were settled with PHL’s loan account with OCHKL.

46. At the time of the filing of the bankruptcy petition, we were was not advised that OCHKL could not repay PHL’s loan of HK$5,000,000 by settling our professional charges and making other payments on our behalf. PHL and I directed all these payments to be made out of PHL’s account with OCHKL without any knowledge of any legal requirement which imposed restrictions on such payments. We had not been advised by our then Solicitors Messrs. Joseph Li & Co. that the payments made after the date of filing of the bankruptcy petition against PHL (i.e. 27 May 2009) were void under Section 42(1) of the Bankruptcy Ordinance. However, I have now been advised by LCC[38] that PHL could have applied to court to seek validation or post-transaction ratification of most of these payments, since the bulk of the payments made after 27 May 2009 comprised payments for the settlement of professional charges, such as payments to Joseph Li & Co, Grant Thornton. I also note that these payments included donations to charities and churches (see “JRL-40”).”

68.  Counsel for the Bankrupts submitted that the Bankrupts had only made an honest and inadvertent mistake because the payments would not have been made had the Bankrupts been advised of the matter.  Further, the Bankrupts could have obtained validation or post-transaction ratification for most of the payments in question.

69.  I do not accept the submission.  The explanation of the Bankrupts is ambiguous and lacks particulars.  They claimed that they “had not been advised by [their] then solicitors Messrs Joseph Li & Co that the payments made after the date of filing of the bankruptcy petition against [Priscilla Lee] (i.e. after 27 May 2009) were void under Section 42(1) of the Bankruptcy Ordinance.”  Does it mean that they did ask Messrs Joseph Li & Co on this subject and they were told that the payments were valid?  Or it only means that the Bankrupts did not ask and thus they were not advised.  Assuming it is the former for the benefit of the Bankrupts, they said nothing about when did they ask, why did they ask and what exactly they were told.  Most important of all is that there is no evidence from Messrs Joseph Li & Co in this regard.

70.  Further, why should the Bankrupts make such a loan arrangement and let OCHKL pay their expenses.  From the letter to the Court dated 25 March 2014 in reply to my query made during the hearing, the Bankrupts told the Court that this was the first time such loan arrangement was made.  Since almost all the payments made by OCHKL were made by cheques, why didn’t the Bankrupts simply ask their staff at OCHKL to prepare cheques drawn on the Bankrupts’ bank account and arrange them to be signed by the Bankrupts to settle payments?

71.  Up till the hearing, there is no application to the Court to validate the payments and there is no plausible reason why that is not done.  The fact remains that the payments are void under s 42(1).  While Counsel for the parties submitted how the Court should or might deal with such application if made, I am of the view that I should not make any specific finding in this regard as so doing would simply be making speculation.  Indeed, there are over 50 payments[39] and there is simply no or very limited materials before me as to, for example, how to justify the need to spend or pay,[40] what is the payment for,[41] why the amount spent is appropriate[42] and so on, to make a specific finding for a particular payment.   

72.  It is my ruling that the Trustees have proved their case under this head.

The delay by the Bankrupts in providing the Trustees with permission to access bank statements / Item B7

73.  This complaint is against the Bankrupts.

74.  The Trustees complained that there was delay on the part of the Bankrupts in providing authorization letters to enable them to obtain bank statements from various banks in the US.  Such conduct is unsatisfactory.

75.  It is true that the Trustees requested for written authorization as early as in January 2012.  Raymond Lee replied on 5 April 2012, after a reminder of the same date from the Trustees, that he was still taking legal advice and said that he would revert shortly.  There was no reply from Priscilla Lee.

76.  On 5 April 2012, the US legal advisers acting for the Bankrupts wrote to the US legal advisers of the Trustees making enquiry if the Trustees still need the authorizations.

77.  By an email dated 18 April 2012, the Trustees informed their US legal advisers that they still required the authorizations.  There is however no evidence before me that such reply was related to the US legal advisers of the Bankrupts or the Bankrupts.

78.  Nothing happened until 8 April 2013 when the Trustees renewed their requests for the authorizations.  The Bankrupts provided the same on 2 May 2013.

79.  It appears to me that there was a communication problem and the Bankrupts should not be blamed.

80.  It is my ruling that the Trustees have failed to prove their case under this head.

Failure to provide settlement agreement to the Trustees / Item B7

81.  This complaint directs at Raymond Lee only.

82.  It concerns the Global Settlement Agreement dated 5 February 2004 (“the GSA”) between the Lee family and Samuel Tak Lee.  On 14 September 2010, the Trustees requested information about the GSA and payments made to Raymond Lee under the GSA. Messrs. Liu, Choi & Chan, solicitors acting for Raymond Lee, made a prompt reply that Raymond Lee was not entitled to any payment under the GSA and made reference to the confidentiality clause, which restrict the disclosure of the contents of the settlement agreement, in the GSA.  They also stated that Raymond Lee had received bonus payment for his contribution to the litigation and negotiation process.

83.  Further information and documents were provided to the Trustees upon request except a copy of the GSA.  Messrs Liu, Choi & Chan however refused to provide the same in the light of the confidentiality clause.

84.  As a result, the Trustees took out an application under s 29, Cap 6, against Mr Benjamin Choi, a partner of Messrs Liu, Choi & Chan. Eventually the Court directed Mr. Choi to provide a copy of the GSA.

85.  The Trustees submitted that Raymond Lee is a party of the GSA and is entitled to obtain a copy of the same, even if he did not have one in his possession, from his legal adviser.  Further, there is also no question of confidentiality as can be seen from the judgment of Mr Recorder A Chow, SC at paragraph 44,

“The Trustees have effectively stepped into the shoes of Raymond Lee by virtue of their appointment in relation to Raymond Lee’s estate in bankruptcy and thus there can be no question of any breach of confidentiality arising from the production of the GSA to the Trustees.”

86.  I accept the submission of the Trustees that Raymond Lee should have requested a copy of the GSA from his legal adviser and then provide the same to the Trustees.  Failure to do so is clearly unsatisfactory conduct.

The bankrupts have failed to disclose various aspects of their salaries and benefits since 3 February 2012 / Item B8

87.  This complaint is against the Bankrupts.

88.  The Trustees complained that Raymond Lee failed to give the exact value of his salary, or the housing allowance which he received as part of his salary from companies controlled by the Lee family in Hong Kong.  Further, he also failed to specify the exact salary that he and Priscilla Lee had received from the US Companies. On 5 August 2013, the US legal advisers of the Trustees wrote to the US legal advisers of the Bankrupts requesting for all income records from February 2012 to May 2013 but there was no reply up till the hearing.

89.  Counsel for the Bankrupts submitted that the Bankrupts are trying to trace the documents and would provide them to the Trustees once they are available.

90.  The Bankrupts ought to know that they have to disclose information about their income and salary to the Trustees.  They should have provided such information to the Trustees even if the Trustees did not make any express request.  The Bankrupts should also keep the related documents properly so that the same can be provided to the Trustees whenever they are in need.

91.  Obviously, the Bankrupts have failed their duties as aforesaid.  In the absence of any explanation as to why they cannot provide the information even up to the hearing, I can only conclude that their conducts are unsatisfactory. It is my ruling that the Trustees have proved their case under this head.

Exercise of Discretion

92.  In these matters, there were unsatisfactory pre-bankruptcy and post-bankruptcy conducts.  The Bankrupts also failed to co-operate with the Trustees in the administration of their estates.

93.  It is trite law that the Court should take an overall view of the matter when exercising its discretion under s 30A(3), Cap 6.[43]

94.  Unsatisfactory pre-bankruptcy conduct must be of exceptional gravity to warrant a suspension of automatic discharge.[44] Whether a suspension is merited depends on the nature of the conduct in question, whether the bankrupt has been cooperative with his trustees, whether he has complied with his obligations under the Bankruptcy Ordinance, and his conduct of his affairs during his bankruptcy. [45]

95.  In Re Tong Yuk Kin[46], DHCJ To (as he then was) held at paragraph 21:

“…[T]he court should take a balanced view. It should balance the interest of the bankrupt, the interest of his creditors, the public interest in the bankrupt’s rehabilitation and the demands of commercial morality underpinning the bankruptcy laws. It should take into consideration all the circumstances leading to the bankruptcy and not just the conduct complained of. It should consider the seriousness of the conduct, the bankrupt’s conduct after the commencement of bankruptcy, the degree of co-operation he has shown with the trustee during the relevant period and the effort he has contributed to repaying his debt. In an appropriate case, the court should consider the risk to the commercial community should the bankrupt be allowed to resume full commercial activity. The discretion to suspend the running of the relevant period should not be lightly exercised. But in its balancing exercise, the court should not allow the bankruptcy regime to be abused.”

96.  It should be noted that the unsatisfactory pre-bankruptcy conduct herein involves preference over certain creditors.  The unsatisfactory post-conduct involves preventing certain assets to form part of the estates of the Bankrupts.  As pointed out by DHCJ To in Re Tong Yuk Kin at paragraph 16:

“Preference over some creditors to the prejudice of the general pool of creditors, even if not fraudulent, is unforgivable and deserves some form of punishment to mark the society’s disapproval of such conduct. Concealing assets or putting one’s asset out of reach of the trustee in preparation for bankruptcy is not forgivable. Such conducts amount to abuse of the bankruptcy regime which the society would not condone.”

97.  For the reasons aforesaid, I am of the view that I should exercise my discretion in making a suspension order.

98.  It is a serious matter. Much time and legal costs (around HK$4.8 million just for the US legal advisers of the Trustees) had been incurred for the proceeding in the US. The value of the assets of the Bankrupts in the US and the payments made through OCHKL after the filing of the bankruptcy petitions herein are substantial. 

99.  In respect of Raymond Lee, I make an order that the relevant period do cease to run for a period of 18 months commencing 30 August 2013.

100.  In respect of Priscilla Lee, her case is relatively less serious.  I make an order that the relevant period do cease to run for a period of 15 months commencing 30 August 2013.

101.  I also make an order nisi (to become absolute 14 days after the handing down of this decision) that the Bankrupts do pay costs of the respective applications against them including all costs reserved to be taxed if not agreed with certificate to counsel.