IP PUI LAM ARTHUR AND ANOTHER (Joint and Several Trustees in bankruptcy) v. ALAN CHUNG WAH TANG AND ANOTHER

HCMP 450/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 450 OF 2016

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REASONS FOR JUDGMENT

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Introduction

1.  This is the sentencing hearing in relation to the defendants’ contempt of court for failing to produce documents pursuant to an order of this court made on 18 March 2015 (the “Order”).

Background

2.  The plaintiffs are the joint and several trustees in bankruptcy (the “Trustees”) of Ho Yuk Wah David (the “Bankrupt”).  The defendants, Tang and Wong, respectively, were partners of JBPB & Co (“JBPB”), an accounting firm formerly known as Grant Thornton.  On 26 March 2002, they were appointed as joint and several liquidators of CWT Textile Supplies Company Limited (in creditors’ voluntary liquidation) (“CWT”).  Shortly after that, JBPB collapsed and was split into two camps.  The defendants were in the minority partners’ camp.  Eventually, they left JBPB to join Shinewing (HK) CPA Limited.

3.  As a result of investigation into the financial affairs of the Bankrupt, the Trustees believed that the Bankrupt had operated a complex scheme using nominees and about 30 offshore companies (collectively, the “Bankrupt’s nominee companies”), one of which had some suspicious dealings with CWT. 

4.  On 5 November 2013, Deputy High Court Judge Le Pichon ordered the defendants in their capacity as joint and several liquidators of CWT to produce documents relating to three payments made by CWT; and also ordered JBPB by consent to produce supporting documents relating to twelve payments made to JBPB by the Bankrupt’s nominee companies.  Surprisingly, the defendants later denied JBPB’s solicitors, Messrs Chiu, Szeto & Cheng Solicitors & Notaries (“CSC”), had authority to enter into the order by consent on their behalf as minority partners and refused to comply with that order.

5.  To regularize the situation, on 7 February 2014 the Trustees applied by inter partes summons for orders that the defendants in their two different capacities do comply with the order of Deputy High Court Judge Le Pichon.  The defendants appeared in person.  Tang representing himself and Wong contested the application rigorously, as if the Bankrupt was standing in his shoes.  He raised every possible argument, most of which were technical and all were unmeritorious.  On 18 March 2015, I granted the disclosure order, paragraphs 3 of which required the defendants in their capacity as minority partners of JBPB to produce four categories of documents relating to the twelve receipts within 21 days (the “Disclosure Order”). 

6.  The time for providing disclosure expired on 8 April 2015.  On that day, the defendants sent a letter to the Trustees’ solicitors attaching correspondences between them and CSC.  Other than filing Tang’s 4^th Affirmation five months later in purported compliance with paragraph 4 of the Disclosure Order (which is irrelevant for the purpose of the present proceedings), they did nothing to comply with that order. 

7.  The Trustees commenced committal proceedings against the defendants. On 18 October 2016, I delivered judgment finding them liable for contempt for their breach of paragraph 3 of the Disclosure Order and adjourned the hearing to 28 October 2016 for sentence.  I indicated that this is a bad case of contempt and a starting point of six months’ imprisonment would be the minimum.

8.  At the hearing on 28 October 2016, the defendants produced 12 documents relating to the 12 receipts required to be produced under the Disclosure Order.  At the request of their counsel, I adjourned the hearing to 3 November 2017 to enable the defendants to purge their contempt.  On 3 November 2017, I further adjourned the sentencing hearing pending the Defendants’ appeal to the Court of Appeal.

9.  The appeal was heard on 24 January 2017. On 16 February 2017, the Court of Appeal upheld the finding of contempt in respect of one category of documents, ie invoices and receipts, but not the other three and allowed the appeal to the extent that the order for committal is set aside.  The Court of Appeal also made a costs order nisi that the defendants pay the Plaintiffs 80% of the costs of the appeal and below.

Principles on sentencing

10.  The court’s orders are made to be obeyed.  Civil contempt of court order is a serious matter.  The principles applicable to sentencing this type of offences have been usefully summarized by Au‑Yeung J in ArboitvKoo Siu Ying (No2)[1]as follows:

(1) A prime consideration of the court in sentencing contempt is to signal the importance of demonstrating to the litigants that the orders of the court are to be obeyed.

(2) The object of the sentence is both to punish the conduct in defiance of the court’s order and to serve a coercive function by holding out the threat of future punishment as a means of securing the protection which the order was primarily there to do: Crystal Mews LtdvMetterick[2]and Re Barrell Enterprises[3]. The court has to strike a balance between the two objectives.

(3) Imprisonment should be regarded as a sanction of the last resort.  Any custodial term should be as short as possible and consistent with the circumstances of the case.  The court has an absolute discretion to suspend a sentence of imprisonment for such period and on such terms as it deems fit.

(4) The court will have to consider all the circumstances of the contempt, including the nature of the order and extent of the breach; whether the contempt was contumacious or unintentional; the reasons, motives and state of mind of the contemnor; and whether the contemnor appreciates the seriousness of the deliberate breach. 

(5) The court will have to consider aggravating and mitigating factors, including whether any prejudice is suffered by the plaintiff; whether the prejudice is capable of being remedied; whether the contemnor has cooperated and purged the contempt; and the personal circumstances of the contemnor.

11.  Of all the factors listed above, the two most important ones are whether the contemnor has purged the contempt and whether the plaintiff has suffered any prejudice which is irremediable.  If the contempt has been purged, the coercive function of the sentence has been spent.  What remains to be addressed is punishment for the disobedience.  Purging the contempt may even affect the sentencing option.  While each sentence depends on its facts and circumstances, references may still be drawn from sentences passed the court in similar cases. 

Purging the contempt, whether contumacious and intentional

12.  At the hearing on 28 October 2016, Tang produced 12 documents which did not fall within the category of invoices and receipts.  Having retrieved the CWT case files, Tang produced six relevant receipts on 1 November 2016.  On 2 November 2016, he produced more documents to the Trustees including three vouchers and one receipt.

13.  In the meantime, he also liaised with the majority partners and agreed to pay the charge of $35,000 to cover the costs of the arrangement for examining JPBP’s records kept in the warehouse of Santa Fe.  Eventually, he produced a comprehensive reply to the Trustees on 7 August 2017.  But that exercise took nine months.

14.  Mr Chen, counsel for the Trustees, submitted that the steps taken by Tang were mere pretence and delaying tactics to buy time in the hope that they would not have to produce any more documents if their appeal was successful.  He referred to correspondences among the Trustees’ solicitors, Messrs Li, Wong, Lam & WI Cheung (“LWLC”), the defendants’ solicitors (“ONC”) and CSC.  On the other hand, Mr Siu, counsel for Tang, referred me to other correspondence to support his argument to the contrary. 

15.  A convenient starting point of enquiry is ONC’s letter dated 25 October 2016 to CSC seeking access to examine the records in the warehouse of Santa Fe.  CSC replied on 4 November 2016 that the majority partners have no objection, but imposed a condition that the Trustees or their representatives must be present during the inspection.  On 8 November 2016, ONC wrote to LWLC enquiring if the Trustees are agreeable to be present during the inspection.

16.  The matter sat there for about one and half months until 19 December 2016 when LWLC requested ONC for a copy of CSC’s letter requesting the Trustees’ presence during the inspection.  On the following day, ONC replied that their clients “do not agree that they are obliged to provide them”.  On 23 December 2016, LWLC replied alleging that the request for the Trustees’ presence during the inspection was only ONC’s “bare allegation”.  ONC took offence and retorted with some heated argument and demanded an answer to their request whether the Trustees will attend the inspection.  On 3 January 2017, LWLC wrote back indulging in the same argument and said it was unreasonable to request the Trustees to attend the inspection and to incur unnecessary costs.  On 6 January 2017, ONC wrote to CSC requesting if the majority partners would waive that particular condition.  On 11 January 2017, CSC replied and agreed to waiving that condition.

17.  Pausing here, my observation is that LWLC’s one and half months’ inaction and their request for proof from CSC were quite unnecessary.  There was no reason not to accept what was said by a member of the profession.  Afterall, what ONC asked for was a simple answer.  They could have replied “no” and ONC could have written to CSC to request a waiver.  LWLC is responsible for the two months’ time wasted from 8 November 2016 to 5 January 2017. That said, the defendants’ stance was unnecessarily antagonistic.  Probably, the acrimony created between the parties during the course of this series of litigation have overflowed to the parties’ solicitors.

18.  Again, the matter sat there for about two and half months until 31 March 2017 when ONC responded to CSC’s letter and provided a cheque of $35,000 and requested for arrangements to be made for the inspection.  It should be noted that on 16 February 2017 the Court of Appeal had delivered its judgment.  On 13 April 2017, CSC replied confirming that the earliest available inspection dates would be 27 or 28 April 2017.  Inspection eventually commenced in May 2017.  A comprehensive reply was furnished to the Trustees on 7 August 2017. 

19.  Mr Chen’s criticism is about the total inaction between 11 January and 31 March 2017.  During that period, there was an incident on 18 January 2017 in which Tang was assaulted causing injuries to his leg or legs.  It was not known if he was hospitalized and, if he was, for how long.  He said it affected his mobility, work and emotion.  Be that as it may, that cannot explain why ONC could not have started making arrangements with CSC for the inspection.  The inaction during this two and half months’ period is totally unexplained.  The only inference is that it was because the defendants did not give further instruction to proceed.  I agree with Mr Chen’s submission that the defendants were stalling for time pending the outcome of the appeal in the hope that they would not have to produce anything if their appeal was successful. 

20.  Mr Chen accepted that the contempt was purged.  However, it took more than nine months.  Discounting the time wasted by LWLC arguing about the requirement of the majority partners’ presence during the inspection and assuming in favour of the defendants that it took them a few months to comb through the files and records, there was a delay of two and half months on the defendants’ part, which I find was made with a deliberate intention to stall time pending the outcome of their appeal.  The contempt was contumacious and intentional.

Prejudice to the Trustees

21.  Mr Siu argued in his comprehensive reply of 7 August 2017 that Tang had given a detailed explanation as to how the documents disclosed are related to the 12 payments.  In his comprehensive reply, Tang said that he had given such explanation before in the proceedings under HCB 3819/2011. As Mr Chen confirmed that the documents produced could not assist the Trustees in their investigation into the affairs of the Bankrupt, Mr Siu argued that the Trustees suffered no prejudice as a result of the defendants’ non‑compliance with the Order. 

22.  That may well be the situation in an ordinary case involving ordinary contemnors.  However, there is another aspect in the present case.  The Trustees were investigating into the affairs of the Bankrupt who was reasonably suspected of being involved in a huge and complicated fraud.  Time was of the essence in such investigation.  Though Tang had given an explanation about the 12 payments in the HCB 3819/2011 proceedings, the Trustees were entitled to examine the documents to verify the veracity of the account given by them and to look for new lines of inquiry. Though the documents are proved to be not useful, the Trustees were made to incur unnecessary time and effort in pursuing the present course of action.  They were made to wait for more than two years for documents which he could have easily produced.  For reasons as given in the later part of this judgment, that category together with the other three categories of documents could have been easily produced in no time back in 2013 before the defendants’ partnership dispute escalated, if not in 2015.  Furthermore, by taking the exceptionally antagonistic and unusual course of resisting the discovery application, the defendants put suspicion on the Bankrupt, if not also on themselves.  They led the Trustees to the belief that they and/or the Bankrupt had something to hide, which is material to Trustees’ investigation.  The Trustees were made to direct their time, energy and resources to this futile exercise which might have also diverted their attention to other more important or likely more fruitful starting points for investigation. Evidence would also have become lost in course of time.  The efforts of the discovery proceedings commenced by the Trustees since 2013 were all spent for nothing.  In short, the Trustees were misled, their time and costs were wasted, and opportunities were lost.  In my view, the Trustees suffered prejudice which might even be irremediable.  As experienced professional accountants specialized in insolvency work who have been appointed as liquidators and trustees in bankruptcy, they knew of this likely risk of prejudice.  This is an aggravating factor.

Tang’s other mitigating factors

23.  Mr Siu invited the court to take into account the fact that the contempt finding itself has already brought severely adverse impact on Tang’s professional career.  Tang is a professional accountant specialized in insolvency work.  He said that following the finding of contempt, the Official Receiver’s Office indicated that they would not nominate him as a liquidator for any new “Panel A” cases; and Tang had indeed encountered difficulties in his proposed appointment in other cases. 

24.  I have no doubt about what Tang said.  The Official Receiver expects a high degree of professional integrity and competency of those whom he appoints as liquidators or trustees in bankruptcy.  Tang’s conduct of the disclosure application and his refusal to comply with the Disclosure Order not only fell far below the standard expected of a reasonable accountant but was also obstructive to the Trustees and counter‑productive to the function of the Official Receiver.  More importantly, a liquidator is an officer of the court.  How can Tang expect the Official Receiver will appoint as liquidator someone who has demonstrated such an obstructive attitude towards trustees-in-bankruptcy and liquidators in their investigation of a bankrupt’s or a company’s affairs and who has demonstrated wilful defiance of the court’s order?  The reaction of the Official Receiver is the natural consequence of his conduct.  It could not carry much weight for mitigation purpose. 

25.  Tang said that a bankrupt of whom he is the trustee‑in‑bankruptcy and whose investigations have spanned over 15 years cited the finding of contempt as the principal reason in their attempt to remove him as the trustee.  That was a separate matter which, in any event, was resolved in favour of Tang.  He suffered no damage.  That incident carries little mitigation value.

26.  Tang also mentioned about a complaint by Sun Legend Investments Limited to the Official Receiver.  He attributed this complaint and his assault to the bankrupt mentioned in the above paragraph.  For the same reasons these matters have no bearing on these proceedings.

27.  I shall, however, take into account his contribution in the insolvency profession, his social and church services.  But I must say such mitigating factors are mildly useful where a fine is to be imposed.

Wong’s other mitigating factors

28.  Wong filed two affirmations in mitigation and also referred to another affirmation filed in HCB 3819/2011. She was a partner of JBPB and became the head of the Corporate Finance Division of the Restructuring, Insolvency and Investigation Department in 2008.  Tang was the head of that department.  She and Tang were appointed as joint liquidators of CWT in 2003.  She said she and Tang would usually be named as joint and several liquidators such that one of them could take charge when the other was absent. She trusted Tang and had no doubt about the matters handled by Tang.  Since 2013, her involvement in the old liquidation cases was reduced as she had to look after her sick mother and brother.  She retired in June 2014 and since then had not visited the office of JBPB.  She took a passive role in those liquidation cases and left Tang to take up the leading role.  She was kept informed of important issues and the ways they were handled.

29.  I am unimpressed by her mitigation.  The theme of her mitigation is that she had performedher duty as joint liquidator of CWT properly.  There was no allegation that she and Tang had failed to comply with the obligations imposed on them as liquidators of CWT.  The contempt in issue is their failure to comply with obligations imposed on them personally as minority partners of JBPB who had handled the affairs of CWT.  Back in 2013, when Deputy High Court Judge Le Pichon made the order by consent requiring JPBP to make disclosures, she, along with Tang, took the position that CSC did not have authority to represent them as minority partners of JPBP.  That led to fresh applications for disclosure being made and the Disclosure Order was made against them personally in their capacity as minority partners of JPBP in March 2015.  She was required, as partners of JPBP, who had handled the affairs of the Bankrupt and CWT and who had possession, custody and control of the documents, to produce the documents. 

30.  In her affirmation filed in HCB 3819/2011, she put the blame on the conditions imposed by the majority partners for their access to the files.  Presumably she was referring to the inspection fee of $35,000.  But she did not explain why she was unable to put up with the funds herself or persuade Tang to contribute.  In court, she said that she offered to help Tang but Tang declined.  I understand that at the time the Order was made she had retired from JBPB and had personal problems looking after her sick mother and brother.  That does not relieve her of the obligation under that Order.  In essence, what she said in her three affirmations is that she trusted Tang and left it to Tang to perform.  The Order imposed a non‑delegable personal obligation on her as well as Tang to produce the documents.  She simply ignored the Order and did absolutely nothing.  She just stood by and left it to Tang to decide how to comply or not to comply with the Order. 

31.  Save for her personal circumstances at the time and the character references from her close friends, I do not consider there are any mitigating circumstances.

Tang’s sentence

32.  Tang is a professional accountant specialized in insolvency work and has much experience as trustee-in-bankruptcy as well as liquidator.  He ought to know that one of a trustee’s function is to investigate the affairs and properties of the bankrupt and to report any irregularities to the Official Receiver.  The discovery process is to enable the trustee to carry out his functions in gathering information about the assets, affairs and dealings of the bankrupt as effectively as possible, and with as little expense as possible.  He knew that the Trustees were investigating into the affairs of the Bankrupt who was reasonably suspected of having committed significant frauds.  The documents sought were to assist the Trustees in discharging their duty.  Tang was the partner in JBPB who had handled the affairs of the Bankrupt and CWT.  He was the most appropriate person to give discovery.

33.  If an accountant has acquired possession, custody and control of documents in the course of his professional practice is required to produce them to the trustee-in-bankruptcy to enable the trustee to investigate the affairs of the bankrupt, he should and would maintain a neutral position, except where such production would be in breach of his duty of confidentiality owed to his client. The majority partners, whom I presume to be reasonably competent accountants, saw no objection to produce the documents and consented to their production.  But, Tang took an inexplicable position of first objecting to the authority of CSC in representing them as partners of JBPB to enter into a consent order; and, second, contesting the discovery application rigorously as if he were the Bankrupt by raising every objection, however technical and unmeritorious.  Not only that such conduct fell far below that of a reasonable accountant, he created suspicion on himself by such conduct.  As result, the Trustees incurred enormous costs in pursuing the disclosure application and the contempt proceedings.  According to Wong, their own costs was $2.3 million with Tang acting in person in the disclosure application.  The Trustees’ costs were definitely much more. 

34.  Mr Siu submitted that Tang’s contempt was not intentional and that he was only being obstinate.  He referred to the following observations of the Court of Appeal[4]:

“In this case the breach of paragraph 3 is not casual or accidental. The defendants clearly knew that they had to comply with it but chose not to do so because they chose not to carry out the inspection of documents due to their own view (and I think, rather stubbornly) on the payment of charges and the efforts involved in such an exercise. They had ignored the bigger picture of their obligation to comply with paragraph 3.”

I am not in disagreement with that finding, but consider that was only one of the lesser reasons for his non-compliance.  Given his background, Tang ought to know that the court’s order was to be complied.  Given the background of this litigation, he ought to know committal proceedings would follow if he did not.  On the date due for production, he only sent a letter to the Trustees’ solicitors attaching a few correspondences between him and CSC. His refused to produce the documents was deliberate.  Back in 2013 or even 2014 before the partnership had completely broken down, there was no question of such payment.  Tang and Wong were minority partners of JBPB.  The majority partners on behalf of the entire firm instructed CSC to consent to the disclosure order to be made against the firm.  Had Tang not taken the peculiar and inexplicable position of denying CSC had authority to represent him and Wong, the order would have been made binding the entire firm including himself.  At the time, he had access to the documents and JBPB’s resource to locate them.  He could have instructed his staff in JBPB to do the search and produced not only the category of documents now concerned, but all four categories. But he was determined not to produce any of them.  He raised every possible argument, and I emphasise, as if the Bankrupt was in his shoes.  His position as I found in the disclosure proceedings was that he was to decide what was to produce, not the Trustee or the court.  He maintained that position even after he received the Disclosure Order.  I mentioned these factual background relating to the application for the Disclosure Order in HCB 3819/2011 and my adverse comments on Tang’s conduct in those proceedings only by way of background to support my finding of his mental state in not complying with the Disclosure Order.  However much I disapprove of his conduct in those proceedings, it has no bearing on the sentence that I am going to impose.  Tang is only to be sentenced for what he has failed to do since the date of the Order, ie 18 March 2015.  I find that his refusal to comply was not merely because of his obstinate view as to whether he should pay the charge, but was a determined and persistent refusal from the very beginning when there was no issue about those charges. He was determined that the court’s order was subject to his pleasure.  He deliberately treated the court’s order with the utmost contempt. 

35.  While I accept that Tang has purged the contempt, that was not a reflection of his remorsefulness.  There was an unexplained delay of about two and half months between the time when CSC waived the requirement of the Trustee’s presence during the inspection and his payment of the fees which I find was caused by Tang’s intention to adopt a wait and see attitude.  It was only a month and half after the Court of Appeal had handed down judgment that he resumed making arrangements with CSC for the inspection.  He knew he had exhausted all avenues to resist disclosure.  I find that he only made the disclosure for the purpose of mitigating the likely sentence he was going to receive and not out of remorsefulness.  This finding reduces the possible discount purging a contempt would have on sentence.

36.  Costs of the contempt proceedings is also one mitigating factor.  The Defendants will have to bear the costs of the proceedings on an indemnity basis.  Those costs are likely to be substantial.  I shall take that into account when determining the starting point of the fine I am going to impose.  

37.  Mr Chen suggested a fine of $400,000 for Tang and $200,000 for Wong.  Mr Siu referred me to Arboit in which the contemnors were fined $200,000.  He reminded me that the contemnors in that case were very rich and committed a wholesale breach of order whereas Tang was only found by the Court of Appeal to be liable for failing to produce one out of four categories of documents.  I agree with his observations, but precedents only have a referencing value. 

38.  Given its history, this is a very bad case of contempt.  It is an aggravating factor that the contemnor, being an experienced accountant and liquidator who is knowledgeable about the bankruptcy regime and liquidation regime, the purpose of the disclosure and that time is of the essence in any investigation into the affairs of a bankrupt suspected of having defrauded his creditors, was determined to obstruct the Trustees’ investigation.  It was against that background he made a determined refusal to comply with the Disclosure Order.  There is a public interest element in this case.  While Tang has purged the contempt, there was an unexplained delay of two and half months which indicated that he did so only for the purpose of reducing his sentence and less out of remorsefulness.  That reduces the discount which his purging of the contempt would otherwise have earned.  While the documents disclosed were not useful to the Trustees, there is nevertheless some prejudice suffered by the Trustees.  I can give little weight to this factor.

39.  Having regard to all the circumstances in this case, including the likely costs liability, I consider a starting point of $400,000 appropriate for the seriousness of this case.  I reduce it to $300,000.

Wong’s sentence

40.  As Wong adopted a negative role in complying with the disclosure order by leaving it to Tang to perform, what I have said about Tang applies equally to her.  This is because the duty of disclosure is a non‑delegable one.  Having regard to her passive role, her personal circumstances and the fact that she has retired, I consider a lower starting point of $300,000 appropriate and reduce the fine to $200,000. 

Costs

41.  I also make the usual costs order that the defendants shall pay the Trustees’ costs on an indemnity basis.