THE JOINT AND SEVERAL TRUSTEES OF THE PROPERTY OF SO CHING WAN v. ASSEN LTD AND OTHERS

HCB 4475/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4475 OF 2002

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D E C I S I O N

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Introduction

1. This is the application of the trustees-in-bankruptcy (“the trustees”) made pursuant to s 29(1), Bankruptcy Ordinance (Cap 6).  The relevant parts of that provision provide:

“The court may, on the application of the … trustee, at any time after a bankruptcy order has been made against a bankrupt summon before it … any person known or suspected to have in his possession any of the estate or effects belonging to the bankrupt or supposed to be indebted to the bankrupt, or any person whom the court may deem capable of giving information respecting the bankrupt, his dealings or property, and the court may require any such person to produce any documents in his custody or power relating to the bankrupt, his dealings or property.” (emphasis supplied)

2. The trustees were appointed as a result of the bankruptcy order dated 19 August 2002 (which was discharged in August 2010). The 2^nd to 4^th respondents are the shareholders and directors of the 1^st respondent (“Assen”).  The bankrupt is also (in effect) a 20% shareholder of Assen (although his current registered shareholding only amounts to 0.01%, the respondents do not object to “restoring” the bankrupt’s shareholding back to the original 20%).

3. In view of the above, it is understandable the trustees’ stated purpose of making this application is primarily to help them ascertain the real worth of the bankrupt’s said shareholding in Assen.  The respondents, on the other hand, contend that there is no valid ground for the trustees to make this application, because it is beyond doubt the said shareholding is worthless.

Background

4. The background summarized below is largely undisputed.

5. The bankrupt appeared to be an active real property investor (or speculator) before the Asian financial crisis (around 1997).  Assen appeared to be one of the corporate vehicles through which he acquired such properties (in the case of Assen, the properties were 3 land lots in Tuen Mun acquired for about $13 million (“the suit properties”)).

6. According to the documents, the suit properties were mortgaged to Kingston Capital Investment Ltd (“Kingston”) in July 1996.  Documents with later dates show that:

(a)   a mortgagee action was commenced by Kingston in October 2000 (against Assen, and two other of the bankrupt’s companies (respectively “Sky Fair” and “Chief Fine”));

(b)   an order dated 28 February 2001 entered monetary judgment of about $21 million with interest against the defendants, and Assen was to deliver possession of the suit properties to Kingston;

(c)   a writ of possession was granted in favour of Kingston in April 2001.

7. Government announced the resumption of parts of the suit properties.  Kingston claims that it has an interest in obtaining the highest compensation amount from Government, and that was reason why its representatives were appointed to Assen’s board of directors.  The 2^nd respondent (“Cheung”) claims:

(1)   Cheung was appointed in 2002;

(2)   the bankrupt has resigned in August 2002;

(3)   an allotment of shares in 2013 which diluted the bankrupt’s shareholding to 0.01% (as opposed to the pre-allotment’s 20%).

(the trustees unsuccessfully sought documentary records of the above resignation and share allotment from Cheung)

8. Further, the land search records show that the suit properties were still registered under Assen’s name.  In addition, the audited accounts of Assen for year-end 2008 to year-end 2013 (provided by Cheung in October 2015) and year-end 2014 (provided by Cheung in December 2014) state (among other things) in effect:

(a)   the suit properties were Assen’s assets with a net book value of about $7.8 million (after depreciation) against a long-term liability of $10 million;

(b)   debts due to unnamed shareholders amounted to about $2.9 million.

(the above long-term liability and unnamed shareholders’ debts add up to be precisely the price of the suit properties in 1992)

9. The auditors of the above audited accounts issued a disclaimer of opinion; namely, they could not express an opinion as to whether Assen’s financial statements gave a true and fair view.  They explained that this was due to their inability to obtain direct confirmations for the above two accounting items.

10. On top of the 2014 audited accounts, Cheung informed the trustees in writing in December 2014:

(1)   the unnamed shareholders’ debts were owed by Assen to Cheung;

(2)   the long-term liability was owed by Assen to Kingston;

(3)   an “expert valuer” valued the suit properties at no more than $10 million (less than the price paid in 1992).

(it should be noted that a valuation report dated 29 September 2015 referred to in the trustees’ 2^nd affirmation valued the suit properties at about $16 million)

11. I pause here to note that, other than Assen and Cheung, the other respondents were treated in this application as in the same position as Cheung (Cheung claims that they are his wife and daughter).  They will therefore not be given different treatment in this decision.

This application

12. The relevant legal principles are trite.  The purpose of s 29(1), Cap 6 is essentially to confer on a trustee-in-bankruptcy powers:

“… to discover the truth and circumstances connected with and to gather information about the bankrupt’s property, affairs and dealings, in order that the trustee may be able, as effectively as possible, and with as little expense as possible, to complete his function; to put the affairs of the bankrupt in order and to administer the bankruptcy in all its various aspects, including the getting in of any assets of the bankrupt”.

(Hau Po Man Stanley (in Bankruptcy) and Others v Joint and Several Trustees [2008] 1 HKC 256, para 20)

13. In relation to such powers:

(a)   a trustee-in-bankruptcy being usually a stranger to a bankrupt’s affairs, he has to rely on orders for examination and production so as to reconstitute the bankrupt’s affairs;

(b)   with such in mind, the powers are intended to be wide, general and unlimited (provided they are reasonably required (as stated above));

(c)   great weight should be given to the views of the trustee-in-bankruptcy;

(d)   a balance should be struck between the trustee-in-bankruptcy’s reasonable requirements and the need to avoid making an order which is unreasonable, unnecessary or oppressive to the affected party.

(Re Lee Priscilla Hwang (bankrupt) [2012] 4 HKLRD 581, para 20 and 21, citing Joint and Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766, para 25 to 30)

14. On the respondents’ case:

(1)   the suit properties are no longer owned by Assen, but already repossessed by Kingston (and partly resumed by government);

(2)   the resumption compensation should be (if not already) fully utilized to set off the judgment debt owed to Kingston;

(3)   because Assen no longer has assets, its shares (including those owned by the bankrupt) are worthless.

(it appears that the negotiation between Cheung and government concerning the resumption compensation (from 2002 to March 2010 (when the compensation was said to have been paid in full by government)) was conducted without the trustees’ knowledge)

15. It is obvious, in making this application, the trustees do not accept the respondents’ case to be necessarily true.  I agree with them that there are valid reasons for taking that view:

(a)   Assen appears to be a mere property holding company, with no other business operation;

(b)   according to the respondents, the relationship between Assen (before its demise) and Kingston was in the nature of a mortgagor and a mortgagee.

16. In view of para 15 above:

(1)   there was no apparent necessity for Kingston’s representatives to become Assen’s shareholders or directors (even up to the day of hearing).  This is because, according to the respondents, the only reason for Kingston (or its representatives) to be involved with Assen was to try to obtain the best resumption compensation from government.  Such involvement could be effected by Assen’s board of directors giving full authority to Kingston’s representatives for such specific purpose;

(2)   there was no apparent necessity for Kingston to allot additional shares in 2013 (irrespective of the mode of authorization (sub-para (1) above));

(3)   similar to sub-para (2) above, there was no apparent necessity for Kingston’s representatives to prepare Assen’s 2008 or 2014 audited accounts;

(4)   further to sub-para (2) and (3) above, there was no apparent necessity for Kingston’s representatives to state in Assen’s audited accounts that Assen still owned the suit properties after 28 February 2001 (in fact, this statement appears to be inconsistent with para 6 above).

17. In addition, in such circumstances, it is proper for the trustees to investigate into matters which include the following:

(a)   the circumstances under which Kingston and/or the respondents (besides Assen) became involved in Assen’s affairs, including how they became Assen’s shareholders and/or directors (supported by documents where available);

(b)   the circumstances under which the 2013 share allotments were approved and carried out (supported by documents where available);

(c)   the purported resignation of the bankrupt (and his wife) from Assen’s board of directors (supported by documents where available);

(d)   full and complete set of Assen’s books and accounts;

(e)   the dealings concerning the suit properties (including the circumstances under which they were acquired, encumbered (if encumbered) and disposed of (if disposed of)) (supported by documents where available).

Such investigation would help the trustees’ determination of (among other things) whether the suit properties still belong to Assen.

18. Other than contending that the above investigation would be irrelevant (which contention is rejected, for the reasons given above, as being groundless), the respondents have not argued that it would otherwise be unreasonable, unnecessary or oppressive.

19. In this connection, it is also noted that, despite having attended a meeting on 27 October 2015 (which was arranged with the parties’ agreement), the respondents refused to cooperate with the trustees’ investigation.

Conclusion

20. No issue has been raised as regards the individual items set out in the trustees’ list of questions (annex IIA, trustees’ skeleton submissions) or the list of requested documents (annex IIB, trustees’ skeleton submissions).

21. Those individual items appear to fall within the ambit of the trustees’ intended investigation.  There will accordingly be an order in terms of the trustees’ application (but as regards the items set out in annex IIA and annex IIB, instead of schedule A of the related summons).

Other matters

22. The trustees and Cheung both mentioned in the course of their submissions that the trustees should/could have acted in their capacity as a shareholder (or even a director) of Assen, rather than embark on an application based on s 29(1), Cap 6.

23. Without determining the correctness of the above alleged capacity, but assuming in the respondents’ favour, that they can exercise the rights conferred on a company’s shareholder or director to seek inspection of the company’s documents (by effectively stepping into the bankrupt’s shoes), I do not consider such rights to somehow curtail or extinguish the powers conferred on a trustee-in-bankruptcy by s 29(1), Cap 6 (which are wider than (and for a purpose different from) the right of inspection of shareholders/directors).

24. The bankrupt claimed to the trustees that the bankrupt was not present when the 28 February 2001 order was made (para 6(b) above).  To find out if the claim is genuine, the relevant court file has been examined.  The court records show that the Registrar’s clerk had apparently inspected the bankrupt’s identity card (and noted down the identity card’s number).  The bankrupt’s said claim thus lacks reliability or credibility. This drawback has been taken into consideration when considering the merits of this application.

25. Finally, the respondents have levied severe criticisms against the trustees for having made this application so late (some 13 years after the bankruptcy order).  The trustees have explained in their skeleton submissions that there was no delay (or at least no severe undue delay): para 8 to 10 thereof.

26. I accept the trustees’ said explanation.  Any alleged delay will hence have to be counted since 2011 (when the trustees were alerted to assets possibly owned by Assen).  There seems to be lengthy correspondence between the trustees and the respondents between then and the making of this application.  Looked at in such light, any delay on the trustees’ part would not be sufficiently lengthy to justify criticism or further action pursuant to the provisions of Cap 6.

27. The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs order

28. The parties agree to the usual rule that costs should follow the event, but disagree on the scale of taxation (the trustees seek indemnity costs).  There will accordingly be a costs order that the costs of this application are to be paid by the respondents.

29. There was however insufficient conduct (or other valid reasons) to justify the costs of this application to be taxed on indemnity basis.  Those costs should thus be taxed if not agreed on party-and-party basis.