HEALTHY WHARF LTD. v. LEUNG YAT TUNG

CACV 408/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 408 OF 2001

(ON APPEAL FROM HCBI 1 OF 2001 and HCB 2019 OF 2000)

_____________________

J U D G M E N T

_____________________

Hon Rogers VP:

1. This is an appeal from a judgment of Cheung J given on 1 March 2001.

2. The application before the judge was a combined application for an interim order under the provisions of sections 20 and 20A of the Bankruptcy Ordinance, Cap. 6 ("the Ordinance") and an application for the consideration of the nominees' report under section 20D with a view to requesting the court to express its satisfaction that a meeting of the debtor's creditors should be summoned. The hearing was also the resumed hearing of the bankruptcy petition presented by Healthy Wharf Limited. It was agreed between the parties that should an interim order not be made the bankruptcy petition would not be opposed.

Voluntary arrangements under the Ordinance

3. Amendments to the Ordinance made in 1996 introduced new provisions allowing for schemes to be put forward by debtors for the payment in whole or in part of bad debts. If a scheme is accepted by the requisite majority of creditors it becomes binding upon the debtor and his creditors. The effect of a voluntary arrangement which is accepted by the creditors and carried through to completion is that there is no bankruptcy.

4. Under section 20A, a debtor, or if he is an undischarged bankrupt his trustee or the Official Receiver, may make application for an interim order if he intends to propose a voluntary arrangement. Once an interim order has been made no bankruptcy petition may be presented or proceeded with and no proceedings or execution or other legal processes, including distress, may be commenced or continued against the debtor or his property without leave.

5. Central to the requirement that the debtor must intend to make a proposal is that the proposal must provide for a nominee to act in relation to the proposed voluntary arrangement. The nominee will either act as a trustee or otherwise for the purpose of supervising the implementation of the proposal.

6. Under section 20C(2) the court is given a discretion to make an interim order if it considers it would be appropriate to do so for the purpose of facilitating the consideration and implementation of the debtor's proposal.

7. Section 20D lays down statutory requirements in relation to the nominees' report which is required to be submitted to the court. Sub-section (2) requires that the debtor must submit to the nominee a document setting out the terms of the voluntary arrangement which the debtor is proposing. He must also submit to the nominee a statement of his affairs containing (i) such particulars of his creditors and of his debts and other liabilities and of his assets as may be prescribed and (ii) such other information as may be prescribed. Rule 122H of the Bankruptcy Rules provides regulations in respect of the content of the statement of affairs. Rule 122I gives the nominee power to call on the debtor to provide him with any further information with respect to his affairs which the nominee thinks necessary for the purposes of this report. The debtor is also required under this rule to give the nominee access to his accounts and records.

8. The nominee is required to submit a report to the court before the interim order ceases to have effect. Section 20D(1) requires that the report must state whether the nominee is of the opinion that a meeting of the creditors should be summoned to consider the debtor's proposal and secondly that if he is of the opinion that a meeting should be summoned when that meeting should take place.

9. When the matter comes before the court, the court is given power either to extend the period of the interim order, to enable the creditors' meeting to be held, or to discharge the interim order. Sub-section (5) gives the court discretion to discharge the interim order if it is satisfied, when it considers the application, either that the debtor has failed to comply with his obligations to provide information to the nominee, as required under sub-section (2) or if for any other reason it considers it would be "inappropriate for a meeting of the debtor's, creditors to be summoned to consider the debtor's proposal."

10. There is thus, it would seem, a two stage process: an application for an interim order followed by a consideration of the nominees' report by the court. Obviously, in situations where an interim order is urgently required, the two stage process may, in effect, be merged into one. That is what happened in this case. As will be referred to below, the bankruptcy petition had been presented some months prior to the proposal for the voluntary arrangement.

11. The provisions in the Ordinance to which I have referred, closely mirror the provisions in the Insolvency Act 1986 relating to what are termed individual voluntary arrangements. In the case of Re a debtor (No 140 IO of 1995) [1996] 2 BCLC 429 Lindsay J considered some of the provisions of the Insolvency Act 1986 and the Rules thereunder; these correspond to the Ordinance and the Bankruptcy Rules. He emphasised a number of points. Amongst those was the fact that the nominee would initially have to rely on the information provided by the debtor. The consequence of that was the need for complete candour by the debtor. Indeed, as Lindsay J pointed out, the nominee was entitled to petition for a bankruptcy order against the debtor, if the debtor should have supplied false or misleading information in the statement of affairs or such information was otherwise put by him to the creditors' meeting.

12. Lindsay J then went on to deal with the obligation on the nominee when considering the debtor's proposal. He cited at page 434 from a guidance note to insolvency practitioners, which had been issued by the Department of Trade and Industry (DTI). That note stated amongst other things:

"The nominee must ensure that the proposal meets the criteria set out in the legislation but this of itself is not sufficient reason for you to conclude that the proposal is fit to be put to creditors; you must also use your professional judgment to decide whether the proposal is feasible. Under section 256 of the Insolvency Act 1986 (corresponding to section 20D of the Bankruptcy Ordinance) it is the duty of the nominee to report to court on whether in his opinion a meeting of creditors should be summoned to consider the debtor's proposal. The clear implication is that as nominee you will consider the proposal, and make such enquiries as you consider necessary to satisfy yourself that the proposal ought to be put to creditors."

13. Lindsay J then went on to express the view that it would not be expected of the nominee, in every case, to verify every figure and test every part of the proposal personally. He considered that, in some cases, the funds in order to finance such an exercise might be limited or that the figures themselves might be plain. He went on at page 435b:

"But within the scheme of the 1986 Act as discernible from the powers and duties given to the nominee it is, in my judgment, to be expected, as a minimum, of the nominee, at least in those cases where the fullness or candour of the debtor's information has properly come into question, that the nominee shall have taken such steps as are in all the circumstances reasonable to satisfy himself and shall have satisfied himself on three counts."

14. Those three counts were:

(1) That the debtor's true position as to assets and liabilities does not appear to him in any material respect to differ substantially from that which it is to be represented to the creditors.

(2) That it appears to the nominee that the debtor's proposal to be put to the creditors' meeting has a real prospect of being implemented in the way it is to be represented.

(3) That the information that the nominee has provides a basis for considering that there is no prospective unfairness in admitting or rejecting claims to vote and in relation to agreeing values for voting purposes.

15. At the foot of page 435 Lindsay J said:

"If, for whatever reason, the nominee's inquiries in questionable cases have been so restricted or unsatisfactory that the nominee would be unable to assure creditors that he had satisfied himself that those three minima were met, then he should not unequivocally report, under s 256(1)(a), (corresponding to section 20D) that in his opinion a meeting of creditors should be summoned. Where such doubts have reasonably arisen it cannot be right for the nominee unquestioningly to accept whatever is put in front of him on the supposed basis that it is not for him but for the creditors to accept or reject the proposal; it is fundamental to the intended operation of IVAs that what the creditors vote upon is not the debtor's raw material but a proposal that, at least to the qualified extent I have described, has survived scrutiny and which, to at least that extent, has commended itself to an independent professional insolvency practitioner as proper to be put to, and capable of being not unfairly voted upon by, the creditors."

16. Lindsay J then turned to the court's role in relation to the creditors' meeting. He referred to the opening words of section 256(5) of the 1986 Act which corresponds to section 20D(4):

"If the court is satisfied on receiving the nominee's report that a meeting of the debtor's creditors should be summoned to consider the debtor's proposal ..."

17. Lindsay J stressed that the clear meaning to be derived from this sub-section and the succeeding sub-section showed that the court's satisfaction was not to be interpreted as meaning that the court was exercising a "rubber stamp" function. The court was not bound by the nominee's report and had itself to consider the matter and to be satisfied that the proposal was, in words used in previous cases, "serious and viable". After considering the court's function in relation to schemes of arrangement in relation to companies and bearing in mind that the statute did not lay down when the court might properly be "satisfied", it would be dangerous to lay down rules relating to when the court should be so satisfied. Nevertheless at page 437h Lindsay J said:

"For the moment, Parliament not having specified what is required before the court is to be satisfied within s 256(5), neither shall I even attempt to describe all circumstances in which a court may properly fail to be satisfied, but I see those circumstances as at least including cases where, the fullness or candour of the debtor's information having properly come into question, the court is able to see from material put in front of it that no reasonable nominee properly instructing himself could in the circumstances describe himself as having taken the reasonable steps and as having then satisfied himself with respect to the three minima as I have mentioned."

18. Lindsay J emphasised that for the proper administration of voluntary arrangements and to prevent the system of voluntary arrangements being damaged by abuses it was necessary that in appropriate cases the court should exercise its discretion to prevent abuse.

19. I have considered, at length, Lindsay J's assessment of the provisions relating to voluntary arrangements since I consider that his observations apply equally to the provisions of the Ordinance and Rules in Hong Kong. The only matter on which I would comment is in relation to the court's satisfaction that a meeting should be held. That is a positive requirement. On behalf of the Appellant, Mr Barma submitted that Lindsay J was indicating that the court would only exercise its discretion and declare itself not to be satisfied in circumstances where it was shown that the nominees' opinion that a meeting should be held was "Wednesbury" unreasonable. To put such a construction on the Ordinance is, in my view, wrong. As explained by Lindsay J, in most circumstances, the court will be satisfied by a nominee's report, but, in those circumstances where the conclusions of the report are called into question, the court's satisfaction will not be forthcoming upon mere unparticularised expressions of approval by a nominee.

The facts

20. The Appellant is the chairman of the UDL group of companies. He describes himself, in one of the affirmations, as the driving force behind the management of the UDL group. It emerges from the explanatory statement relating to the proposal for schemes of arrangement in relation to UDL Holdings Limited and other companies that, although the consolidated profit for the year ended 31 March 1997 for the group was $72 million, for the year ended 31 March 1998 there was a loss attributable to shareholders of $1,689,000,000. By that date, it was said, the total assets of the UDL group were little more than half the total liabilities of the group which by then were $2,294,000,000. It is said that in the following year the situation deteriorated further. As a result, a scheme of arrangement was devised for the UDL companies. The application in relation to the schemes was first made in January 2000. The matter was subject to extended litigation and eventually the schemes, which were approved by the shareholders, were sanctioned by the court in April 2000 and an appeal against that sanction was dismissed in December 2000.

21. In February 1998, the Appellant took steps to transfer his shareholding in Money Facts Limited to Harbour Front Limited. His shareholding represented 50% of that company. Money Facts Limited was itself the registered owner of 7,900 shares in Fonfair Company Limited. Fonfair Company Limited is and at all material times has been the owner of Yau Tong Marine Lots No. 2, 3 and 4 on which is located a shipyard which was held previously by the Appellant and his brother. The Appellant had a 33% direct shareholding in Fonfair Company Limited which was also transferred. There is evidence that the property alone is worth a considerable amount. Public documents, the accuracy for which the Appellant could be considered to have had some control over, indicated that the Appellant had, at the dates of those documents, the beneficial interest in these shares.

22. The estimates and other factors, from which indication of value can be derived, referred to in the judgment, would put the Appellant's interest in the property as being worth at least $60 million or more. As will be seen below, there is reason to consider that investigation is warranted to see whether the Appellant still retains any interest or control in these assets and whether their assignments are vulnerable to being set aside under the provisions of Section 49 of the Ordinance.

23. It remains to be said that the Appellant denies that he had a beneficial interest in the shares, although no documentary evidence has been produced to substantiate such allegation. The nominees now state, blandly, that they belatedly had investigations made from which they are satisfied that the transfers do not fall within the provisions of Section 49. The circumstances of this statement are far from satisfactory. The transfers in 1998 were at a time when the financial difficulties of the UDL Group must have been obvious to the management in view of the loss being made that year. They have all the hallmarks of a dealing with assets in a way that would prevent them from being used for the purposes of creditors.

The history of the present application

24. The history of the present application, in my view, demonstrates two things. First, that the procedure laid down in the Ordinance in respect of voluntary arrangements has not been properly complied with. Second, that this voluntary arrangement is not such as the court can express itself as satisfied that a meeting of the debtor's creditors should be summoned to consider it.

25. Judgment for the principal sum of $3,566,479.37 plus interest was entered against the Appellant in May 2000. On 22 May a statutory demand was served. An offer to pay the full amount, plus interest, by 10 June 2000 was made by solicitor's letter dated 25 May. That payment was never made. A bankruptcy petition was presented on 14 June.

26. On 2 August solicitors on behalf of the Appellant wrote that they were instructed that their client had the resources and means from which income or revenue could be derived to settle the judgment sum. A proposal was made to pay an initial sum of $1 million with the balance of the judgment sum to be paid by 12 monthly instalments.

27. Shortly thereafter the Appellant made an affirmation in the bankruptcy proceedings in which he protested that he did have the means to pay off the judgment debt in time. He referred in that affirmation to the back-up which he received from beneficiaries of the "Family Trust". He said that they were putting up $1 million in what he referred to as "relief effort". It might be noted that, according to a schedule exhibited to a more recent affirmation by the Appellant, at that stage he was receiving a salary of $1,300,000 per year from UDL Holdings Limited.

28. The first hearing of the bankruptcy petition took place on 21 August 2000. An offer was again made to pay the judgment sum by instalments. Upon the petitioner's request for disclosure of the Appellant's financial position it was agreed that the Appellant would give full disclosure within two weeks.

29. That disclosure was contained in a further affirmation of 31 August 2000 which was filed the following day. It suffices to say that the disclosure contained in that affirmation was, if anything, confusing. The Appellant said in the body of the affirmation that he was receiving remuneration from UDL Holdings of $63,000 per month. That was confirmed by a letter of 6 February 1998 which was stark in its contents and, perhaps, not altogether clear given the contents of the service agreement which the Appellant also exhibited to his affirmation. The salary which was referred to in the service agreement was $70,000 per month. However, there was also a management bonus of $2 million should the net profit, after taxation and extraordinary items but before minority interests, of the Group be $60 million or more. The service agreement was dated 1 April 1997. It is not clear whether the letter of February 1998 had the effect of removing the entitlement to the bonus. There was also an income of $27,000 per month for three months from July to September 2000 from another company.

30. Shortly after the filing of this affirmation the petitioner rejected the offer of payment of the judgment sum by instalments. Directions were given for the hearing of the petition. The date for the hearing was fixed for 20 February 2001.

31. In October 2000 the Appellant and his wife acting on behalf of Comstar Limited surrendered vacant possession of 20 units on the 7th floor of Chevalier Commercial Centre to Orix International Finance Limited.

32. The application for the present interim order was filed on 2 February 2001. The date for hearing was fixed for 15 February. Some discussion has been generated by the fact that notice of the application was not served on the petitioner until 7 February 2001. Although, of course, 2 February 2001 was a Friday and there was therefore a weekend following, in my view, given the shortness of time before the hearing of the Appellant's application for an interim order, the application should have been served without delay.

33. The application for the interim order disclosed a number of matters. In the first place Appendix I of the proposal for the voluntary arrangement revealed that, far from the Appellant having assets, his only realizable asset was a balance of $655 contained in a savings account. The shares which he still retained in his name were estimated to have no value although their purchase price was just under $8 million.

34. The Appellant, however, listed extensive liabilities which he totalled as $275,159,872 as at 23 January 2001. Of that the judgment debt which was the subject of the bankruptcy proceedings was by then $3,778,084. There were then personal debts and bank loans exceeding $24 million. Apart from the tax which was due, which was just under $400,000, the remainder of the liabilities were constituted by what was said to be liabilities under guarantees/undertakings to ten different companies. In respect of six of those they were said to be jointly and severally guaranteed by not only the Appellant but his spouse and other related companies.

35. It can be noted at this stage, that the liabilities listed as guarantees/undertakings were uncrystallised liabilities. No details other than the names of the parties were given. It was not, for example, revealed that the principal debtors in respect of those liabilities for which guarantees had been given, had provided security. At this point, it could be mentioned that it was ultimately disclosed that in at least two of the instances the security provided by the principal debtor was sufficient to cover the whole of the amount due.

36. Perhaps, even more significantly, one further matter to which I should draw attention is in relation to the bank loan and overdraft. It would seem from the presentation of this as a separate item under liabilities that this was a bank loan or overdraft of the Appellant personally. Whereas the amount was given as at 23 January 2001 of $766,007, in a revised schedule which was ultimately produced the amount was given as at 2 January 2001 as $1,274,664. Interestingly, however, it was said in that final document that there was collateral up to the full amount given for that bank loan or overdraft. What that collateral was and by whom it was provided does not seem to appear from the papers. Neither, I might add, was any indication given as to how or why the amount was reduced by more than $500,000 within the space of 3 weeks.

37. In paragraph 4.7 of the proposal the Appellant stated "my unsecured liabilities total HK$275,159,872." Apart from the security for his personal loan or overdraft; it is likely that the Appellant himself had not provided any security for these amounts. Nevertheless, this total figure did not represent his then current liabilities. At best it was a total of his contingent liabilities. I have to say, however, that the proposal and, indeed, the nominees' report, should have made reference to what were likely to be the amounts which the Appellant would be called upon to pay having regard to the securities which the principal debtors had provided and the existence of the other guarantors. Insofar, therefore, as the proposal and the nominees' report sought to give an estimate of the Appellant's financial position it was, regrettably, misleading.

38. As will be noted below, far later in the proceedings there was produced on behalf of the Appellant a revised schedule as of 2 January 2001 which included estimates of the value of the collateral which had been provided. Those estimates were said to have been made on the basis of an unfavourable market situation. Again, the estimates were challenged on the basis of other documentation including the scheme documentation for UDL Holdings Limited's scheme. Nevertheless, if the Appellant's own estimate of the value of the collateral which had been provided by the principal debtors was taken into account the liabilities were reduced to $123,832,648.

39. In his affirmation dated 21 February 2001, the Appellant exhibited what he said were 5 service agreements with 5 companies of which he was a director. There are a number of points that emerge from a consideration of those documents.

40. The first 2 agreements are in the form of employment contracts. The companies concerned were the North Lantau Dredging Limited and Harbour Front Limited respectively. Both agreements require the Appellant to work 8 hours per day between the hours of 8:30 a.m. and 5:30 p.m. for each of the companies. This was reinforced by the provision in each agreement that the Appellant should render his exclusive services to each of the companies.

41. This seemingly surprising feat of working identical hours for 2 masters simultaneously would appear even more surprising when the director's service agreements in relation to UDL Marine Assets (Singapore) PTE Ltd, UDL Holdings Ltd and UDL Marine Assets (Hong Kong) Ltd are considered. These 3 latter agreements were in similar form to each other. These provided that the Appellant should "devote his full time and efforts to the interests and affairs of the Company in the discharge of his duties in relation to the Company."

42. In paragraph 3.3 of the proposal the Appellant stated that his total annual remuneration from the various companies "of which I am a director is HK$6.25 million.".

43. The remuneration in the 5 agreements comes to a total of $6.2 million per year. The, small, but significant, discrepancy between that figure and that in the proposal, without any explanation, shows what would seem to be an inattention to detail on the part of the nominees, indicative of a lack of due and proper care on their part.

44. Importantly, it would have been expected of the nominees that they should have made further enquiries as to this approximately 6-fold increase in salary on the part of the Appellant. There was no explanation provided as to this sudden increase in salary that the Appellant now enjoyed. The increase is all the more curious in the light of the financial difficulties with which the Appellant's companies now found themselves. The nominees should have made enquiries as to how it came about that the increase was obtained and as to whether this was the limit of the amount that the Appellant could obtain. In view of the provisions as to the amount of service which the Appellant was required to provide to each company, the nominees would have been expected to make enquiries as to whether these agreements were indeed genuine and as to whether the Appellant could satisfy his obligations under them. In view of the fact that schemes were in place for UDL Holdings Ltd and other associated companies, questions could be expected from creditors and those administering the schemes as to whether the amounts to be paid to the Appellant were justified in view of his undertakings as to service to each company. They clearly could not all be fulfilled.

45. One further matter should be mentioned as arising from the proposal. The proposal referred to a Trust. That was defined as being the trust deed of the 747 Trust and the Harbour Front Unit Trust. The proposal contained the statement that the Appellant had been advised by junior counsel as follows :

"Any interest in the trust as, as advised by William Wong of Counsel, the trust is a discretionary trust, and as such no property and/or interest can be passed and/or vested with the trustee in bankruptcy in the event a bankruptcy order were made against me and there is no reason to believe that the position is any different under an individual voluntary arrangement. In any event, I am a Member of the Excluded Class under the Trust and as such, Counsel has confirmed that I have absolutely no interest under the Trust."

46. Later in the proceedings, after there had been considerable comment and discussion about the trusts, the trust deeds were eventually made available. The trust deeds are, no doubt, precedent based. They are lengthy but it is only necessary to make a few observations in respect of them.

47. They are BVI trusts. The trust deeds do not reveal the assets of the trusts, other than the initial capital. The 747 Trust is a trust clearly set up for the Appellant's immediate family. In respect of the 747 Trust the Appellant is an Excluded person, meaning that he cannot be a beneficiary of the 747 Trust.

48. In respect of the Harbour Front Unit Trust, however, the position is different. The trustee is Harbour Front Limited. The Appellant was, at the inception, the holder of 100 of the 101 units of the unit trust. Whatever other, documentation or arrangements exist in relation to these trusts is unknown. On the face of the documentation which was eventually revealed it would, therefore, appear that the Appellant thus has both control over the trustee and almost the entire beneficial interest in the Harbour Front Unit Trust.

49. The Appellant's application for an interim order was supported by a nominee's report made by Kennic Lai Hang Lui and Ms Lau Wu Kwai King, Lauren. A number of observations can be made upon that report.

50. In paragraph 4 of the report it is stated that the nominees had made "no independent investigation or verification of the Debtor's statement of net worth or the excluded assets ...". As a result it was said that the nominees were unable to state whether reliance could be placed on the value attributed to the assets or the estimates of the liabilities. Having said that the nominees indicated that they had reviewed various loan and guarantee documents in respect of the debtor's liabilities and that they considered that the debtor's position as to liabilities should not be materially different from that represented in the proposal. The report also contains the bland statement "we consider that the Debtor's Proposal has a prospect of being implemented in the way it is represented it will be."

51. Perhaps the most revealing statement is that contained in paragraph 11 "The Debtor has fully co-operated with us during our involvement in the preparation of the Proposal. He has supplied us with all information that we have requested."

52. In view of the dramatic turn around in the Appellant's fortunes between the previous summer, when he was apparently confident of paying the judgment debt, to the situation, which apparently pertained according to the proposal, whereby on a bankruptcy the debtor's creditors would receive virtually nothing and according to the proposal would receive 6.75 cents per $1 of the debts owed to them, the nominees were clearly under a duty to make considerable inquiries and investigations not only as to the Appellant's liabilities but as to his assets.

53. The report makes no claim that the nominees have made any inquiries as to the Appellant's assets, as to how it came about that he was in a position to sign the various guarantees and undertakings nor as to how it came about that previously the bankers had considered that he was a worthwhile guarantor. Still less is any indication given that inquiries were made as to what shareholdings the Appellant previously had and as to how they were disposed of. Even the inquiries in respect of the liabilities appear to have been perfunctory, at best.

54. The reference to "a prospect" of implementation does not, in the context of this case, appear to me to be a mere semantic difference from the "real prospect" referred to by Lindsay J. In summary, on the face of the report, particularly in the light of later events, it would seem that the nominees have not performed their duties in the way envisaged as set out above.

The proceedings below

55. The hearing of the application for an interim order came before Yuen J on 15 February. At the hearing application was made for adjournment in order to answer points which had been raised in the evidence filed on behalf of the petitioner and points made in the skeleton argument on behalf of the petitioner.

56. On 19 February the Appellant's second affirmation was served, the following day an affirmation of Ms Lau on behalf of the nominees was also served and filed.

57. The skeleton submissions which were before the court on 15 February attacked the proposal as not being a serious proposal. It went on to challenge the disclosure which had been made by the Appellant as not being full and candid. It criticised the nominees as having acted as a "post-box" and not having discharged their responsibilities. In particular it was said that the nominees had not taken steps to satisfy themselves that the Appellant had represented the true position of his assets and liabilities. One of the matters raised in the skeleton argument was that none of the liabilities under the guarantees had yet crystallised.

58. In his affirmation the Appellant sought to rely upon correspondence from Orix International Finance Limited in respect of the surrender of the Chevalier Commercial Centre Property. Even though that correspondence shows the Orix was selling the property for a price which was approximately HK$25.8 million less than the amount due from Comstar Limited, the letter of 15 February 2001, which was exhibited to the Appellant's affirmation, does not constitute a demand for payment. It is noteworthy too, that this was the first occasion when it was revealed that there was security in some form for the amount owing to Orix which the Appellant had guaranteed.

59. On this occasion the Appellant had not revealed any details as to his income or as to why it had increased so dramatically from the level at which it was in the previous summer.

60. In relation to the Family Trust which had also been the subject of submissions in the skeleton arguments the Appellant acknowledged the disposal of the shares to Harbour Front Limited in February 1998. However, apart from averring that "all relevant information" had been provided to the nominees to assist them in making their investigations as to his assets he said nothing. As indicated above, however, the nominees had been silent in their report as to any investigation of the Appellant's assets.

61. The Appellant then went on in the affirmation to say that Fonfair, in particular, belonged to the Family Trust and not to himself and that he could not expect the Family Trust to bail him out in respect of all his debts. Not only did the Appellant not produce the trust deeds at that stage but even up until that stage the nominees had apparently not even had sight of the trust deeds let alone any other documentation relating to the trust.

62. At the hearing of this appeal, Mr Barma said that there was little he could say about the Appellant's apparent interest in the Harbour Front Unit Trust. He indicated that there might be further evidence that might have been produced but, in view of the rules as to the introduction of evidence on appeal, he was not in a position to take the matter any further than emerged from the current evidence.

63. If Counsel's advice was that the Appellant retained his interest in the Harbour Front Unit Trust but that he had no property in the assets of the Trust and his interest in the Trust could not be of benefit to a trustee in bankruptcy, then it was all the more important that the nominees should have considered the matter themselves and put the full picture before the Court.

64. If indeed, the Appellant no longer had any beneficial interest in or to be derived from the Harbour Front Unit Trust, then there is no explanation either from the Appellant or from the nominees as to how he came to divest himself of the interest in the units which he had at the inception of the Trust.

65. It is not sufficient for the nominees to rely on the advice of counsel without satisfying themselves as to the documentation. Still less should the nominees have expressed themselves satisfied with the advice given by counsel, without seeing each of the following: the instructions to counsel, the documents and other materials on which counsel based his advice and the written advice of counsel. In view of the way the matter emerged during the course of the applications in the court below, more than a mere expression of satisfaction on the part of the nominees was requisite for the court to be satisfied that the proposal should be put to a meeting of creditors.

66. The nominees' affirmation sought to reaffirm the liabilities of the Appellant at $275 million. It made no reference to the security which the principal borrowers had provided.

67. When the hearing was resumed on 21 February a third affirmation on behalf of the Appellant was produced. In that affirmation it was indicated that the Appellant was prepared to produce the trust instruments in a sealed envelope which the court could inspect. The Appellant was unwilling to permit any other party to inspect the trust deeds.

68. The question of the Appellant's previous salary was briefly dealt with but the discrepancies arising from the previous evidence were not entirely clarified. The Appellant produced copies of his new service agreement with the 5 UDL companies.

69. It was not, apparently, until the afternoon of 21 February that it was revealed that security had been given in respect of the principal amounts owing for which guarantees had been given. Apparently on that occasion a schedule was provided which showed that in respect of two of the loans full security had been given by the principal debtor and also full security had been given for the bank loan/overdraft. When the security, as valued in that schedule, was considered the estimate of the total liabilities was reduced to $123,832,648.

70. The matter was then adjourned to 26 February. On that occasion one of the parties to whom the appellant had given a guarantee, GE(HK) Limited, filed notice of intention to appear. Indeed two other companies to whom the Appellant was indebted also filed similar notices. Each of the three companies had written demand letters the first on the 23 February and the remaining two on 26 February.

71. The hearing of the application was completed on 28 February. On that occasion the trust deeds for the Harbour Front Unit Trust and the 747 Trusts were disclosed.

72. It is noteworthy, however, that there was no disclosure of the nature of the collateral which had been given for the principal debts. In all probability, given the Appellant's position in UDL, he would have been aware of what the collateral was. Neither was there any indication as to the basis of the estimate of value. In this regard, our attention was drawn, on the hearing of this appeal, to discrepancies in valuations of the security which was held by two of the creditors as set out, for example, on page 25 of the explanatory statement of the scheme of arrangement in respect of UDL Holdings Limited and the valuations given in the revised chart which the Appellant had produced.

The judge's reasons

73. The judge below dismissed the Appellant's application for an interim order and made a Bankruptcy Order. The judge dismissed the Appellant's application for a number of reasons. The first was on the basis that there had been a misrepresentation of the Appellant's liabilities which was subsequently admitted because of the disclosure of the securities which had been provided to the creditors by the principal debtors. The judge considered that the Appellant himself was responsible for what he considered was a misrepresentation of the most blatant kind. The judge also considered that the nominees had not fulfilled their duties to ensure that all relevant information was provided to the court.

74. In respect of the Appellant's income the judge considered that the disclosure by the Appellant and his nominees did not explain the dramatic increase in disposable income which the Appellant now enjoyed. As regards the transfer of assets and the Appellant's interest in the trusts particularly the Harbour Front Unit Trust the judge considered that the matter called for investigation first as to whether there was a transfer which fell within the provisions of section 49 of the Ordinance and secondly as to whether the Appellant enjoys a beneficial interest in at least the Harbour Front Unit Trust.

75. In my view the judge's approach was correct. Insofar as criticism has been made that there is no obligation upon a debtor to make full and frank disclosure to the court, but that it is up to his nominee to do so, I would say that the point is semantic.

76. As explained by Lindsay J, it is the nominees' obligation, to make a full investigation and put all relevant matters to the court. The debtor is under an obligation to give the nominee every assistance. The debtor's duty is therefore one which is performed through the nominee. Whichever way it is looked at there must be full disclosure.

77. Whereas it might be said that an arrangement might still meet the court's satisfaction to the extent that the court would approve its submission to the creditors notwithstanding that the amount of liabilities might on the one hand be $256 million and on the other hand $124 million, nevertheless a full and fair picture must be given to the court. Insofar as a list of liabilities was provided in the original proposal, that was clearly given as a basis for the court to assess the Appellant's maximum liability. That had not been properly assessed by the nominee. Clearly as reference to the scheme documents in respect of UDL Holdings Limited shows a perusal of those documents, at the very least, by the nominee would have alerted the nominee to the fact that the principal debtors had provided security. In any event, the nominees should have made inquiries in this respect from the beginning.

78. In respect of the other matters I consider that no criticism can be made of the judge. Particularly in respect of the transfer of assets, namely the Fonfair Limited and Money Facts Limited shares, it seems to me, as mentioned in the course of argument, that it would be absurd for a court to express its satisfaction with the proposal without being fully informed as to the facts which lay behind nominees' apparent expression of satisfaction.

79. One matter to which I should refer is the question as to how the proposal would operate. As referred to above, the predominant liabilities which the Appellant said were involved were the guarantees which had not crystallised. In the proposal, at paragraph 4.9 it is stated that there would be an interim dividend distribution to the creditors in proportion to the amounts owed to them as soon as the debtor's liabilities under the various guarantees had crystallised. The paragraph then went on "no specific date can be given in this regard at this stage, as it is not possible to determine when or if those claims will crystallise."

80. The judge referred to this matter at the end of his judgment. He was clearly of the view that the matter was unsatisfactory because, as matters stood, it would not be unimaginable that there would be no crystallisation and no dividend, at least for a very long time. In argument, Mr Barma indicated that there would be crystallisation once the creditors had made claims. It was said that such claims would be made when the voting took place, should a meeting of creditors be called.

81. For my part, like the judge below, I find it unnecessary to determine this matter finally. Nevertheless I consider that it is wholly unsatisfactory for a proposal to be put forward which leaves it open in the way it was in paragraph 4.9. For a serious and proper proposal to be put forward it must, in my view, be clear as to when it is proposed that any dividends will be paid.

82. I would therefore dismiss this appeal, with an order nisi as to costs in favour of the petitioner and the Official Receiver.

83. I would mention that originally an appeal was brought as to the basis of costs ordered below. The Judge had ordered indemnity costs. In view of the way the matter had been presented to him and the way in which the application had been prepared both by the Appellant and the Nominees, I consider that the judge was amply justified in making his order on the basis which he did.

Hon Le Pichon JA :

84. I agree and only wish to add the following short observations.

85. In his judgment in Re a Debtor (No. 140 IO of 1995) [1996] 2 BCLC 429, Lindsay J took pains to set out the genesis of the IVA provisions of the Insolvency Act 1986 upon which our own provisions for voluntary arrangements were modelled. They stemmed from the proposals first made by the committee headed by Sir Kenneth Cork on Insolvency Law and Practice. As Lindsay J observed at 433B,

"The dependency foreseen by the committee upon both a full and candid disclosure by the debtor and the discharge by the relevant insolvency practitioner of heavy responsibilities cast upon him is carried into the statutory provisions." (Emphasis added)

These two factors can be said to underpin the whole framework for voluntary arrangements.

86. Where, as in the present case, "the fullness or candour" of the appellant's information has properly come into question (for example, the unexplained dramatic increase in earnings, his beneficial interest (if any) in the Harbour Front Unit Trust, the transfer of assets into that Trust and the true extent of his liabilities, etc.), it is not sufficient for the appellant to assert that he has disclosed all necessary information to the nominees and for the nominees to express satisfaction with the information provided without more. The reasons were succinctly stated in Re a Debtor (supra) at 436b as follows:

"It is fundamental to the intended operation of IVAs that what the creditors vote upon is not the debtor's raw material but a proposal that ... has survived scrutiny and which, to at least that extent, has commended itself to an independent professional insolvency practitioner as proper to be put to, and capable of being not unfairly voted upon by, the creditors."

87. Therefore in a case where the fullness and candour of the information provided by has properly come into question, it has to be apparent from the nominees' report that the information supplied has been subjected to proper scrutiny. It seems to me that that can only be achieved by the nominees highlighting the matters that required an explanation or further information, stating the further explanation/ information given and why the nominees consider those initial concerns to have been properly and adequately addressed.

88. To take a simple example, it is obvious from deed setting up the Harbour Front Unit Trust that the appellant was the sole beneficiary. If, as is asserted by the appellant, he is no longer a beneficiary under that Trust, nothing could have been simpler than for the nominees to have sought an explanation as to how the appellant came to divest himself of his beneficial interest. For example, it could have been as the result of an assignment. Rather, the nominees requested that counsel's opinion be obtained by the appellant. Although the nominees had access to this opinion, not only was it not exhibited, no explanation was given as to how the appellant managed to divest himself of his beneficial interest under the Harbour Front Unit Trust. The fact that the counsel's opinion had to be obtained suggests that the 'disposal' by the appellant of his beneficial interest might not have been a straightforward affair. Had it been an assignment by him of his beneficial interest to the 747 Trust, it would have been simple enough to have referred to and exhibited such an assignment.

89. This is but one instance of the nominees' failure to discharge the "heavy responsibilities" they undertook in agreeing to become nominees. Regrettably, they were several others as noted in the judgment of the Vice-President.

90. Counsel for the appellant referred to Lindsay J's judgment at 446F and submitted that it would be "unjust" to visit the deficiency of the nominees' report on the appellant. That remark by Lindsay J was made in the context of the initial report made by the nominee in that case being extremely short. It failed to touch upon the criticisms made by counsel for the creditors based on the immense body of evidence critical of the debtor and his earlier proposal and as to which the nominee gave the court no guidance. In those circumstances, Lindsay J granted an adjournment to enable the nominee to file a second report. It is difficult to see how that observation made in Re a Debtor can assist the appellant since both he and the nominees have had that further opportunity. In fact, further evidence was filed but the attempt to counter the criticisms that had been made by the petitioner's counsel proved to be both inadequate and unsuccessful.

91. I, too, would dismiss the appeal with an order as to costs as proposed by the Vice-President.