RE CHU JIARU

HCB 8394/2020

[2026] HKCFI 1047

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 8394 OF 2020

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DECISION

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INTRODUCTION

1.  On 26 May 2021, a bankruptcy order was made against Ms Chu Jiaru (“the bankrupt”).  The bankruptcy petition had been brought by Madison Pacific Trust Ltd (“the petitioner”) based on a statutory demand for a debt of over €77 million.

2.  On 8 July of the same year, Mr Roderick John Sutton and Mr Chow Wai Shing Daniel were appointed as the joint and several trustees of the estate of the bankrupt (“the trustees”).

3.  Shortly after that, on 13 September, the bankrupt applied for the annulment of the bankruptcy order, which was opposed by the petitioner. 

4.  On 10 March 2023, Recorder Jin Pao, SC dismissed the application: see his decision at [2023] HKCFI 721.  I shall refer to the decision as “the annulment decision”.

5.  By summons dated 18 August 2023, pursuant to section 83 of the Bankruptcy Ordinance, Cap 6, the bankrupt seeks the following orders:

(1)     leave to use the names of the trustees to commence an action against the petitioner and Tor Asia Credit Master Fund LP (“Tor”) (“the intended action”) in respect of a guarantee signed by the bankrupt dated 29 October 2019 (“the 2019 Guarantee”) and a guarantee signed by her dated 27 June 2018 (“the 2018 Guarantee”); and

(2)     an order that the trustees’ decision on 23 May 2023 to refuse consent to the bankrupt to so use their names be reversed or modified.

6.  Both the trustees and the petitioner oppose the application.

7.  This is my decision on the section 83 application.

BACKGROUND

8.  I first set out the background facts leading up to the annulment application.  They are taken from the annulment decision: paras 4 to 29. 

The Fortune Fountain Group

9.  These proceedings stem from the acquisition of Baccarat SA, a world renowned crystalware manufacturer, by the PRC-based Fortune Fountain group of companies (“Fortune Fountain Group”) in 2017 and 2018.  At that time, Baccarat was listed on Euronext Paris.

10.  The bankrupt and her family were the indirect beneficial owners of the Fortune Fountain Group, and she was the Chief Executive of Fortune Fountain Capital Ltd (“FFCL”), a group holding company.

11.  FFCL owned Gainfull Wealth Management Co., Ltd (“Gainfull”).  FFCL and Gainfull collectively held a majority (70%) interest in New Anchor Limited (“NAL”).  NAL owned Fortune Fountain Holding Group Co., Ltd (“FFH”), which in turn owned Fortune Legend Limited (“FLL”).

12.  FLL is at the centre of the dispute.  It is a company incorporated in Luxembourg and was used by the Fortune Fountain Group as a special purpose vehicle to acquire the shares in Baccarat.  FLL’s sole asset of note was its shareholding in Baccarat.

The facility agreements

13.  On 19 October 2017, FLL entered into an agreement to purchase an 88.8% stake in Baccarat for about €164 million.  By June 2018, FLL had acquired more than 97% of the shares in Baccarat.

14.   On 12 June 2018, Tor, as lender, entered into a €22,500,000 facility agreement with Gainfull, as borrower, to provide a bridging loan for the purpose of the Baccarat acquisition (“the 2018 Facility Agreement”).  This was secured by various forms of security and the 2018 Guarantee.

15.  On 14 October 2019, a syndicate of lenders including Tor (“the Lenders”) entered into a facility agreement with FLL as borrower, and with the petitioner as security agent (“the 2019 Facility Agreement”).  The original principal amount of the facility was €75 million, which was later increased to €76 million on 29 October 2019.  

16.  The loan advanced under the 2019 Facility Agreement was secured by various forms of security, including:

(1)     a pledge by FFH (“the FLL Pledge”) of its entire shareholding in FLL (“the FLL Shares”);

(2)     a pledge of receivables under certain inter-company loan agreements, including an approximately €103 million loan (“the NAL Loan”) between NAL as lender and FLL as borrower (“the Receivables Pledge”); and

(3)     the 2019 Guarantee.

17.  Soon after the 2019 Facility Agreement was entered into, FLL defaulted on repayments.  Following defaults on 31 January and 29 April 2020, the petitioner issued an acceleration notice for the entire outstanding sum due under the 2019 Facility Agreement on 29 May 2020.  

The appropriation of the FLL Shares and the NAL Loan

18.  On 23 December 2020, the petitioner appropriated the NAL Loan and the FLL Shares under the Receivables Pledge and the FLL Pledge, respectively.  

19.  Grant Thornton was appointed as the independent external auditor to value the NAL Loan and the FLL Shares and issued two reports dated 21 December 2020 and 29 October 2021.  

20.  In summary, the Grant Thornton Reports concluded that:

(1)     the market value of the FLL shares as at the date of valuation was zero;

(2)     the market value of the Baccarat shares held by FLL (97%) was in the range of approximately €107.8 million to €128.2 million, with a midpoint value of around €118 million; and

(3)     the value of the NAL Loan was in the range of €27 million to €47 million, with a midpoint value of around €37 million.

21.  On the valuation of the FLL Shares, Grant Thornton concluded that:

(1)     FLL had total assets of around €135.54 million, comprising primarily its shareholding in Baccarat (around €118 million) and receivables from Baccarat (around €17.4 million).

(2)     FLL had total non-current liabilities of around €197 million.  These consisted of (a) €93.7 million, being the outstanding amount owed to the Lenders, and (b) €103 million under the NAL Loan.  FLL had other current liabilities of around €1.36 million.

(3)     Based on the above figures, FLL had a negative asset value of around €62.8 million.  Therefore, the equity value was nil.

22.  On the valuation of the NAL Loan, Grant Thornton concluded that its value was around €37 million, despite its book value of €103 million.

The bankruptcy proceedings

23.  By a statutory demand dated 29 May 2020, the petitioner demanded that the bankrupt make immediate repayment of €77,463,186.83, which debt was stated to have arisen under the 2019 Guarantee.  

24.  On 17 December 2020, the petitioner presented a bankruptcy petition based on the bankrupt’s failure to satisfy the statutory demand within 21 days of its service.

25.  On 26 May 2021, the court made the bankruptcy order.

The annulment application and the annulment decision

26.  On 13 September 2021, the bankrupt made the annulment application.  She submitted that there was a bona fide dispute on substantial grounds as to the existence of the debt under the 2019 Guarantee (“the 2019 Debt”).  She contended that the FLL Shares and the NAL Loan were substantially undervalued by the petitioner for the purposes of their appropriation and this was contrary to Luxembourg law, the governing law for both the FLL Pledge and the Receivables Pledge.  On a proper valuation, the value of the appropriated assets would have been more than sufficient to offset the 2019 Debt in whole.

27.  On the issue of valuation, she argued that:

(1)     The nil valuation of the FLL Shares was wrong because it took into account FLL’s indebtedness under the 2019 Facility Agreement in the amount of €93.7 million.  The valuation was performed for the appropriation of the FLL Shares to pay off the debt owed by FLL under a loan secured on those very shares, such that it was inappropriate for the same debt to be taken into account in the valuation of the FLL Shares.

(2)     The valuation of the NAL Loan at around €37 million was also wrong.  The valuation was significantly depressed, and was inconsistent with the full book value of €103.3 million given to the NAL Loan when valuing the FLL Shares.

28.  On 13 March 2023, the annulment application was dismissed.

29.  On the valuation of the FLL Shares, it was found that there was a reasonable argument open to the bankrupt that they were undervalued by reason of the inclusion of the €93.7 million figure in FLL’s net liabilities: para 76.  The Recorder added:

“Once again, I put it no higher than this because I appreciate that this is in ‘uncharted waters’ insofar as Luxembourg law is concerned and there is the competing opinion from Ms Waisse [ie the petitioner’s expert on Luxembourg law].”

30.  On the valuation of the NAL Loan, the Recorder considered that the bankrupt had demonstrated a reasonable argument to call into question the valuation: para 81.  He added:

“… I do not consider that this is a matter which is capable of summary determination or that I can dismiss the Bankrupt’s argument outright at this stage. It seems to me that this is a matter which is far from straightforward.”

31.  The Recorder concluded that the bankrupt had demonstrated that there was a bona fide dispute on substantial grounds of the debt claimed in the bankruptcy petition: para 86.  However, he refused to exercise his discretion to annul the bankruptcy order, as all the relevant discretionary considerations identified were against her: para 138.  He therefore dismissed her annulment application: para 139.

32.  The bankrupt lodged an appeal against the annulment decision.  The appeal is currently pending.

THE BANKRUPT’S REQUEST AND THE TRUSTEES’ REPLY

33.  By letter from the bankrupt’s solicitors to the trustees dated 24 March 2023, the bankrupt sought the trustees’ consent to commence an action in their names for a declaration that the 2019 Debt and the debt owed by the bankrupt under the 2018 Guarantee (“the 2018 Debt”) were not owed.

34.  As regards the 2019 Debt, relying on the Recorder’s finding that there was a bona fide dispute on substantial grounds on the debt, the bankrupt’s solicitors made the request as follows:

“9. … our client intends to commence an action against the Lenders seeking, inter alia, a declaration that the Alleged 2019 Debt is no longer owed.

…

12.     We would be grateful if you could indicate whether you would agree to permitting our client to use your names to commence the intended action.”

35.  As regards the 2018 Debt, the bankrupt’s solicitors made the request as follows:

“It is similarly our client’s position that the Alleged 2018 Debt is at least subject to a bona fide dispute on substantial grounds, and hence there is no basis to accept the proof thereof. Again, we would be grateful if you could indicate whether you would agree to permitting our client to use your names to commence an action seeking inter alia a declaration that the Alleged 2018 Debt is no longer owed.”

36.  This was followed by some correspondence with the bankrupt’s solicitors chasing for a reply and alleging lack of independence and conflict of interest on the part of the trustees if they were to have carriage of the intended action.

37.  Among such correspondence, the letter from the trustees’ solicitors to the bankrupt’s solicitors dated 3 May 2023 is worth highlighting.  The trustees’ solicitors wrote:

“… As regards your request for consent to use the name of the bankruptcy estate to commence the Intended Action, we are presently considering the same and require more time to take instructions and to review underlying documents in order to prepare a substantive response. We shall endeavour to provide a substantive response on or before 24 May 2023.” (original underline)

38.  Then, by letter dated 23 May 2023 (ie one day before the self-imposed deadline) to the bankrupt’s solicitors, the trustees’ solicitors stated that they were “unable to provide consent to [the bankrupt’s solicitors’] request regarding the Intended Action at this juncture”. 

39.  The letter is five pages long, in which the trustees made four contentions.  It is necessary to set out some of the contents of the letter here, as this forms the subject matter of the bankrupt’s present section 83 application.

40.  First, they pointed out that the bankrupt’s appeal against the annulment decision was pending.  In the event that the appeal was successful, the bankrupt would not need to seek consent of the trustees in order to pursue the intended action.  The trustees therefore contended that any consent at this stage would be moot.

41.  Second, the trustees expressed their concern that they were unclear what reliefs were being sought and precisely what arguments the bankrupt would raise:

“The Trustees cannot provide informed consent to a third party to use their names to initiate litigation without first knowing the precise terms and specific reliefs being sought. … The Trustees are unclear what are the specific reliefs being sought except for declaratory relief for debts that form the basis of the bankruptcy order.  It is also unclear the precise arguments the Bankrupt would raise save that the Intended Action will involve “difficult issues of accounting and foreign law” as you have suggested.”

42.  Third, the trustees complained about the lack of any offer of indemnity made by the bankrupt to cover the costs of the intended action:

“In your Letters, there has been no offer for indemnity, much less a full and effective one, to the Trustees. For this reason alone, the Trustees are entitled to withhold consent for their names to be used in the Intended Action. … For the Trustees to even consider the possibility of providing consent, the offer for a full and effective indemnity must be a prerequisite.” (original underline)

43.  Fourth, the trustees also expressed their serious concerns and reservations on the bankrupt’s ability to take carriage over the intended action in the trustees’ names.  The letter referred to the Recorder’s criticisms of the bankrupt’s conduct and non-cooperation.

44.  The trustees’ conclusion is to be found at paras 19 to 20 of the letter:

“19. In the circumstances, and after careful consideration, the Trustees are unable to provide consent to your request regarding the Intended Action at this juncture. The Trustees’ decision is based on the fact that (i) there is an ongoing appeal against the Decision which if successful will render the Trustees’ consent moot; (ii) the limited information provided on the details of the Intended Action; (iii) the lack of any full and effective indemnity essential to such an application; and the (iv) the general un-cooperative and obstructive conduct of the Bankrupt that raise legitimate concerns on her ability to take carriage over the Intended Action in the Trustees’ names.

20.  Insofar as the Bankrupt does not agree with any of our assessment above, please provide detailed explanations for our consideration. We also look forward to receiving substantive responses to the Requests as soon as possible.”

45.  In the discussion below, I shall call the letter from the bankrupt’s solicitors dated 24 March 2023 “the bankrupt’s request letter” and the letter from the trustees’ solicitors dated 23 May 2023 “the trustees’ reply letter”.

THE BANKRUPT’S SUMMONS

46.  Not satisfied with the trustees’ reply letter, the bankrupt took out the present summons seeking leave to use the names of the trustees to commence the intended action to claim the following orders:

(1)     a declaration that the 2019 Debt is not owed by the bankrupt to the petitioner, whether under the 2019 Guarantee or otherwise;

(2)     accordingly, the 2019 Guarantee be discharged;

(3)     damages and/or compensation from the petitioner or Tor for breach of duties, including any interest liability incurred, in respect of the 2018 Debt since 23 December 2020;

(4)     a declaration as to whether any amount is owed by the bankrupt (and if so, how much) under the 2018 Guarantee.

47.  In the summons, the bankrupt also seeks, insofar as is necessary, an order that the trustees’ decision on 23 May 2023 be reversed or modified in accordance with the above.

THE ISSUES

48.  Upon the making of a bankruptcy order, the property of the bankrupt vests in the trustee in bankruptcy.  Save for a limited number of exceptions, all causes of action which were vested in the bankrupt at the commencement of the bankruptcy vest in the trustee.  The bankrupt cannot commence any proceedings based upon such a cause of action.  However, in any case where the bankrupt is aggrieved by the trustee’s refusal to prosecute a claim, he may apply to the bankruptcy court to direct the trustee to bring the action, or to allow the bankrupt to conduct the proceedings in the name of the trustee: Heath v Tang [1993] 1 WLR 1421 at 1423A-C, G.

49.  Section 83 of the Bankruptcy Ordinance confers such power on the court. It provides:

“If the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the trustee, he may apply to the court, and the court may confirm, reverse or modify the act or decision complained of, and make such order in the premises as it thinks just.”

50.  In this application, the following issues fall to be resolved.

51.  First, did the trustees make a “decision” in the trustees’ reply letter which comes within the meaning of section 83?  The bankrupt contends that they did make a “decision” to refuse giving their consent to her to pursue the intended action.  On the other hand, the trustees say that they did not form any definitive or final view on whether their consent should be given, their assessment was only provisional, and hence they did not make a “decision” which can be challenged under section 83.  This raises a preliminary question which I need to resolve.  If I accept the trustees’ argument, the summons should be dismissed on this basis alone.

52.  Second, there is no dispute that the bankrupt has to give a “full and effective” indemnity to the trustees for bringing the intended action in their names: Dr Vincent Kay-Lo Ip v Dr Andrew Kee-Suan Koh FAMV 8/2001, 24 April 2001.  However, the parties disagree on what would count as a “full and effective” indemnity, and whether the bankrupt’s proposal would qualify.  This has been described as a threshold requirement.  If I find against the bankrupt on this issue, her summons should be dismissed for that reason alone.

53.  Third, does the bankrupt have standing to apply under section 83?  The standing requirement comes from the words “[i]f the bankrupt … is aggrieved by an act or decision of the trustee” in the section.  The position of the trustees and the petitioner is that in order to show standing, the bankrupt must prove that her estate would have had a surplus after paying all the debts but for the trustees’ decision, and the bankrupt has failed to discharge that burden.  On the other hand, the bankrupt submits that there is no need for her to show surplus upon her giving an indemnity and, in any event, there is likely to be, or at least there might be, a surplus in this case.  If I am with the trustees and the petitioner, then the summons should be dismissed for this reason alone.

54.  Fourth, if I find that the trustees had made a “decision” refusing to grant consent, the bankrupt has standing to pursue this application and she has given a “full and effective indemnity”, the next question is to consider whether this is a case in which the court can legitimately intervene in the trustees’ decision. 

55.  Fifth (and lastly), if the court is to reverse the trustees’ decision and hold that the bankrupt may use their names to pursue the intended action, is the bankrupt fit or suited to have carriage of the intended action?

FIRST ISSUE: DID THE TRUSTEES MAKE A “DECISION”?

56.  Did the trustees make a “decision” in their reply letter within the meaning of section 83?

57.  The trustees contend that they did not, as they did not form any definitive or final view on whether their consent should be given.  At that time, they were unclear about the details of the intended action, had no sufficient information to come to any informed decision, and were not in a position to properly consider the bankrupt’s request: see the quote in para 41 above.  In fact, they invited the bankrupt to provide further explanations for their consideration (see the quote in para 44 above).  They would not have done so if they had already formed a final view.  The following sentence in the reply letter is specifically highlighted to demonstrate that the trustees’ conclusion was provisional:

“In the circumstances, and after careful consideration, the Trustees are unable to provide consent to your request regarding the Intended Action at this juncture.” (underline added)

58.  Mr Alexander Stock, SC, appearing with Mr Cedric Yeung for the trustees, refers to the Court of Appeal decision in Re Tam Mei Kam CACV 197/2016, 20 January 2017 where it was held that the trustees did not make any “decision” within the meaning of section 83. 

59.  I have set out the relevant correspondence between the bankrupt and the trustees above.  In my view, when the correspondence is read as a whole, it is clear that the trustees did make a decision refusing to give their consent to the bankrupt to pursue the intended action in their reply letter.

60.  In their letter dated 3 May 2023, the trustees’ solicitors expressly stated that they were considering the request and required more time to take instructions and to review the underlying documents “in order to prepare a substantive response” by 24 May 2023.   It is clear that their reply letter dated 23 May 2023 was that “substantive response”.  There the trustees gave four concrete reasons before reaching the conclusion that they were unable to provide consent. 

61.  Mr Keith Chan, appearing for the bankrupt, submits that the fact that the trustees used the words “at this juncture” or that they invited further explanations from the bankrupt does not change the substance of the matter, which is that the trustees were not giving their consent.  I agree with that submission.

62.  Whether a decision was made in any given case must depend on the circumstances of that case.  The question must be approached as a matter of common sense.  The court is to arrive at an objective interpretation of the words used, the conduct of the parties and the surrounding circumstances in order to determine whether a decision was made (or not made). 

63.  In my view, the effect of the correspondence from the bankrupt’s request letter leading to the trustees’ reply letter is plain. In her request letter, the bankrupt sought the trustees’ consent.  Citing concrete and detailed reasons, the trustees refused to give it in their “substantive response”.  However, they were prepared to hear further from the bankrupt if the latter chose to supply more information, and to re-visit their refusal.  This is a case where a decision was made but the decision-maker was prepared to re-consider the issue upon receiving more information.  It is reasonably clear that it is in this sense that the trustees said they could not consent “at this juncture”.  Nevertheless, the refusal was a decision which they reached in the reply letter.  In the absence of any further information, the refusal would stand, and the decision would be final.  The refusal therefore cannot properly be characterised as provisional, as suggested by the trustees.

64.  On authority, I do not think that the trustees’ reliance on Tam Mei Kam advances their case.  The facts there are plainly different from the present case.  Also, the Court of Appeal did not seek to lay down any general principle on the issue.  The court ruled that the trustees did not form a definitive view and hence did not make a decision in that case by taking into account, among other things, that the trustees, when expressing their position, used phrases such as “may” and “may well” (para 9). That was a ruling made with regard to the factual circumstances of that case. It cannot be seriously suggested that whenever these or similar phrases appeared in the trustees’ correspondence, that would suggest that they did not make a decision. 

65.  On the first issue, I therefore find that the trustees did make a decision in their reply letter which comes within the meaning of section 83.  The bankrupt may therefore invoke that section to challenge the decision.

SECOND ISSUE: INDEMNITY

66.  There is no dispute that the bankrupt is required to give a “full and effective” indemnity to the trustees before the latter give their consent. 

67.  The bankrupt’s proposal is as follows.  She will pay into court HK$1 million as security, coupled if necessary with a personal indemnity by her husband Mr Sun Zhen (Jack), who is said to be the payer of her costs in these proceedings, to meet any costs order which may be made against her or her bankruptcy estate.  It is her submission that the sum of HK$1 million is plainly sufficient at the present stage and will cover the trustees’ costs at least up to the exchange of witness statements.  She is prepared to offer further indemnity at a later stage should the need arise.

68.  Mr Chan submits that there is no requirement that all the costs up to the trial in the intended action must be paid by the bankrupt upfront in order to obtain leave to commence the action.  In Dr Vincent Kay-Lo Ip, the Court of Final Appeal did not express the principle in a rigid manner and should not be read to have done so.  In any event, it would be difficult to estimate the entire costs of the action at this very early stage.

69.  In my view, one should go back to the rationale behind the requirement of indemnity in order to consider whether the bankrupt’s proposal is adequate.  The rationale is explained by the Court of Appeal in Koh Kee Suan v Ip Kay Lo [2001] 3 HKLRD 439.

70.  The effect of a bankruptcy order is that the bankrupt is divested of, and ceases to have any interest, in either his assets or his liabilities except insofar as there may be a surplus to be returned to him upon discharge.  His estate is vested in the trustee in bankruptcy, and is held by the trustee on trust for the creditors.  It is therefore the creditors’ interests and wishes which have to be considered. 

71.  The assets of the bankruptcy estate include things in action.  Save for certain causes of action personal to the bankrupt which do not vest in the trustee, all other causes of action do vest in the latter.  The bankrupt cannot pursue such causes of action.  However, if he is permitted to use the name of the trustee to bring proceedings, it is “only natural” and “essential” that the bankrupt must provide an indemnity to cover not only the trustee’s costs to be incurred in the intended action but also any adverse costs orders which may be made against the trustee in the event that the claim fails.  This is because without such an indemnity, where a costs order is made against the trustee, there would be a liability imposed on the assets of the estate to satisfy the award of costs.   This would be encumbering assets which are held for the benefit of the creditors, not for the bankrupt: see Koh Kee Suan at 441C-E, 442H-443F; see also Heath v Tang at 1423A-C, 1427A-B; Re Wan Po Jun Mary Pauline HCB 144/2011, 3 May 2013, para 9.

72.  Mr Chan is correct in saying that the Court of Final Appeal did not lay down any rigid rule as to what would qualify as a “full and effective” indemnity.  When one considers whether what is offered by the bankrupt is adequate, the focus should be on whether the proposal would serve the purpose of protecting the estate against unfavourable costs consequences arising out of the action intended to be pursued by the bankrupt.

73.  One special feature of the proposal in this case is that the bankrupt is only offering an indemnity in stages.  I do not propose to comment on whether it is permissible or desirable for her to do so.  But assuming that it is not objectionable, the indemnity must still be sufficient to cover both the trustees’ costs and the costs of the defendants in the intended action, in each case in full, up to the proposed first stage.  This is because, as submitted by Mr Stock, if the initial indemnity is exhausted and further indemnities are not forthcoming, the trustees would have to discontinue the action.  In that event, the estate would naturally have to bear costs of the defendants in the intended action. 

74.  What the bankrupt now offers is plainly insufficient for covering both the trustees’ costs and the other sides’ costs up to the initial stage.  This is because on the bankrupt’s own case, the sum of HK$1 million is an estimate of the trustees’ costs only.  It is therefore not even necessary to assess whether that estimate is a realistic one.    

75.  Insofar as the bankrupt is saying that the proposed indemnity by Sun can then be called upon to cover such potential costs liability beyond the sum of HK$1 million, the question is whether Sun’s indemnity will be good enough for that purpose.  On the materials before me, the bankrupt has plainly failed to demonstrate that to be the case.

76.  First, Sun himself has not made any statement to confirm that he will give the indemnity.  All that we have is the following in the bankrupt’s affirmation:

“If necessary, my husband and creditor Sun Zhen (also known as Jack Sun) is prepared to give a personal indemnity to meet any costs order which may be made against me or my bankruptcy estate in the Intended Action.”

77.  Second, the bankrupt has failed to show that Sun has the capability to honour the indemnity.  The only documentary evidence which has been produced is a bank statement purporting to show that he had a balance of about RMB18 million with Ping An Bank in May 2023.  Assuming that the statement is authentic, it only shows one thing.  That is, Sun held a bank balance of that amount as in May 2023.  It says nothing about Sun’s financial condition as a whole, including whether he has liabilities and if so how much, whether as of May 2023 or now.  In short, Sun’s financial standing is simply an unknown. 

78.  Third, even if he has the financial capability to honour the indemnity, the bankrupt has not shown that he will do so.  In the event that he refuses or fails to do so, the trustees will have to take action to enforce the indemnity.  It is unknown where his assets are.  And the trustees may face difficulties in trying to enforce the indemnity.  Why should the estate be exposed to the risk of not being able to enforce the indemnity against Sun?

79.  For the above reasons, on the second issue, I conclude that the bankrupt’s proposal does not amount to a full and effective indemnity.  The present application should be dismissed for that reason alone.

THIRD ISSUE: STANDING

80.  Section 83 provides that if the bankrupt “is aggrieved by any act or decision of the trustee”, he may apply to the court to challenge that act or decision. 

81.  Here, it is common ground that the bankrupt has to have the requisite standing before the court would consider her application.  But the parties disagree on what that entails.

Legal principles

82.  The trustees contend that the bankrupt needs to show that her estate would have had a surplus after paying all the debts but for the trustees’ decision, relying on the decision of the Court of Appeal in Re Tang Tim Chue (A Bankrupt) [2023] 2 HKLRD 1298, [2022] HKCA 909.  The petitioner takes the same position.  Mr José-Antonio Maurellet, SC, appearing with Mr Cyrus Chua for the petitioner, in addition cites the decision of the UK Supreme Court in Brake v The Chedington Court Estate Ltd [2023] 1 WLR 3035 in support of the same proposition.    

83.  The bankrupt contends otherwise.  Mr Chan makes three points:

(1)     The statute itself does not specify the requirement of surplus.

(2)     In Koh Kee Suan, Rogers VP appeared to have taken the view that the lack of any prospect of surplus is no impediment to the bankrupt making an application under section 83.  Mr Chan relies on what his Lordship said at 443D-F and, relying in particular on the words underlined below, submits that his Lordship appeared to have proceeded on the basis that the bankrupt has no interest in his assets, which necessarily presupposes that there is no prospect of a surplus.  The passage reads:

“That there must be an indemnity when the bankrupt is permitted to use the name of the trustee to bring proceedings seems to me to be essential. In the case of a creditor, it might even be said that he had an interest in the assets of the bankrupt. But a bankrupt has none. Without such an indemnity the rights of the creditors, for whose benefit the assets of the bankrupt have been assigned to the trustee, would be overridden. There would be a liability imposed on such assets to satisfy any award of costs in the proceedings which the bankrupt was authorised to take in the name of the trustee. It would in effect be affecting a right of property held for the sole benefit of the creditors. It would certainly be encumbering assets which had been assigned to the trustee for the benefit of the creditors absolutely.” (underline added)

(3)     As a matter of logic, if there is an indemnity, then the assets of the bankrupt, and thus the rights of his creditors, are not put at risk by the intended action.  There is no conceivable prejudice to them. Hence, irrespective of whether there is a prospect of surplus, the bankrupt should be able to bring the intended action provided that he gives a proper indemnity.

84.  I do not accept the bankrupt’s submissions, which go directly contrary to the authorities on the issue.  It is well-established that there is a requirement of surplus. 

85.  In Hong Kong, Re Tang Tim Chue is the latest authority from the Court of Appeal.  Chu JA, at para 15, referred to the surplus requirement as a “well-established” principle and cited a long line of authorities starting from Re a Debtor, ex parte The Debtor v Dodwell (The Trustee) [1949] 1 Ch 236, a well-known case on this point:

“… he must first prove that he has been “aggrieved” by the decision of the Official Receiver. A well-established legal principle is that unless a bankrupt can prove that his estate would have had a surplus after paying all the debts but for the decision of the Official Receiver, he will not be regarded as “aggrieved” by the decision of theOfficial Receiver: see Re a Debtor, ex p The Debtor v Dodwell (The Trustee) [1949] 1 Ch 236; Re Chu Wai Tung [2017] 4 HKLRD 610, [40]-[43]; Re Kwong Yuet Ping [2021] HKCFI 118, [11]-[14]; and Butterworths Hong Kong Bankruptcy Law Handbook (6th ed), para. 83.02.”

86.  In England, Brake similarly referred to Dodwell (which was said, at para 11, to contain “a robust exposition of the principle”) and confirmed the surplus requirement in the context of section 303(1) of the Insolvency Act 1986.  That section is the equivalent of our section 83 but the language is slightly different.   Section 303(1) refers to a bankrupt being “dissatisfied”, rather than being “aggrieved”, by a trustee’s act.  It was, however, confirmed, at para 6, that there is no difference between an “aggrieved” and a “dissatisfied” person.  Lord Richards JSC stated that the authorities have established that, subject to very limited exceptions (which are not applicable here), a bankrupt must show that there is or is likely to be a surplus of assets once all liabilities to creditors, and the costs and expenses of the bankruptcy, have been paid: at para 9.

87.  His Lordship explained the rationale, at paras 10 and 11 (and also 99), as follows.  The surplus requirement necessarily follows from the structure and purposes of bankruptcy and from the functions and duties of a trustee in bankruptcy.  The principle that a bankrupt is divested of an interest in his property and liability is fundamental.  He has only a contingent statutory right to participate in any eventual surplus after payment in full and with interest of all creditors in the bankruptcy and the payment of the costs and expenses of the bankruptcy.  With the prospect of such a surplus, the bankrupt is a person for whose benefit the estate is being administered by the trustee and therefore has standing in respect of his interests in the surplus.  On the other hand, without the prospect of a surplus, the bankrupt has no interest in how the estate is administered and has no say in the administration.  His Lordship said this:

“Unless, therefore, there is or is likely to be a surplus, the bankrupt has no legitimate interest in the administration of the estate. It follows that he lacks standing under section 303(1) to challenge the administration by the trustee of the estate. Parliament cannot have intended the bankrupt to be able to interfere in the administration of an estate in which he has no interest.”

88.  It would be plain from the above authorities that the bankrupt’s submissions must be rejected.

(1)     It is true that the statute does not specify any surplus requirement.  However, as Lord Richards explained in Brake at para 7, the section is not to be given a literal meaning and, on both principle and authority, there are limitations on the persons who have standing to apply under the section.

(2)     The reliance on what Rogers VP said is misplaced.  His Lordship’s remark addressed the need for an indemnity to prevent prejudice to creditors and protect them from the risks of an adverse costs order.  He was not discussing the issue of standing at all.

(3)     The argument that an indemnity displaces the need to prove standing is not tenable.  The argument is not supported by any authority and is directly contrary to the rationale for the surplus requirement as explained in Brake.

89.  In the present case, it is therefore incumbent on the bankrupt to demonstrate that there is or is likely to be a surplus in her estate if she is allowed to pursue the intended action: Brake at para 9.  In this regard, Mr Chan submits that the proper test is whether there is, or will, or might be a surplus, relying on the following statement in Dodwell at 240:

“The point, of course, can only arise where the bankrupt can show that there is, or will, or might (but for the trustee’s action or inaction), be a surplus in the trustee’s hands after satisfying in full all the claims of the creditors.”

90.  I do not think there is any material difference between the formulation in Brake (“likely to be”) and in Dodwell (“might be”).  Mr Chan seemed to be suggesting that the latter sets a lower bar than the former.  In his skeleton argument, he submitted that “there is likely to be, or at least there might be, a surplus …” (underline added).  I have to say I do not share that view if that was indeed counsel’s suggestion.  It would certainly not be sufficient if the bankrupt is only able to show that there might be a surplus in a remote or speculative sense.  I would therefore apply the threshold as formulated in Brake.

The evidence

91.  In her attempt to establish standing, the bankrupt says that, first, if her intended action against the petitioner succeeds, the 2019 Debt and the 2018 Debt, which together account for the bulk of the proofs of debt, would no longer be owed.  In that scenario, her estate would have a surplus.  Second, she also relies on her claim against the petitioner and Tor for damages for breach of duty owed to her.  Third, in any event, she has assets of substantial value, and when these are taken into account, her estate should have a surplus.

92.  In the intended action, one of the proposed causes of action is for a declaration that the 2019 Debt is not owed.  It is the bankrupt’s position that that is the case because the debt has been extinguished by FLL’s appropriation of the FLL Shares and the NAL Loan. The valuation of the FLL Shares was wrong as the debt under the 2019 Facility Agreement should not have been taken into account.  The NAL Loan valuation was also wrong as it was significantly depressed from its full book value.  For her arguments in the annulment application, see para 27 above.  In the annulment decision, the Recorder found that there was a reasonable argument open to the bankrupt on both valuations: see paras 29 and 30 above.  On a proper valuation, the 2019 Debt, the bankrupt argues, is not owed upon the enforcement of the security.

93.  It is further the bankrupt’s position that after discharging the debt under the 2019 Facility Agreement, there would be surplus from the appropriation of the FLL Shares of over €40 million which would have been accounted to FFH, the pledgee under the FLL Pledge, and would have been used to discharge the debt owed under the 2018 Facility Agreement in full, and after that, there would still be a surplus of around €4.7 million to €14.89 million, depending on whether one takes the pro forma mid or pro forma high valuation of the FLL Shares in the Grant Thornton reports. 

94.  Separately, the bankrupt contends that she has a claim against the petitioner for gross negligence and/or wilful default in that it failed to take reasonable care to ensure the enforcement of the FLL Pledge and the Receivables Pledge were in compliance with the applicable law and accounting standard.  She further says that Tor is liable for the petitioner’s breach of duties in that the petitioner was acting as Tor’s agent.

95.  In any event, the bankrupt says that the true asset position of the estate is such that there might be a surplus.  The trustees had concluded otherwise since they omitted to include assets of substantial value belonging to the bankrupt, including (1) her shares in what she has referred to as “the Hwabao Trust”, her interest being worth RMB 640 million, and (2) her interest in Zhong An Xin Technology shares (worth up to RMB 3.6 billion) as well as a RMB 1 billion debt. 

96.  In the annulment decision, the Recorder declined to take into account such assets on the basis that there was limited information about them.  However, Mr Chan submits, first, that this holding is currently under appeal and, second, there is at least some documentary evidence to show that the bankrupt owned these assets and there is therefore at least enough material to show that there might be a surplus.

97.  Both the trustees and the petitioner contend that the bankrupt has failed to show a surplus either on the strength of the intended action or based on the alleged substantial assets.  I agree with their submissions.

98.  I shall first deal with the contention in paras 92 and 93 above.  For present purposes, it is not necessary to go into detail the merits of the bankrupt’s case in the intended action or her calculations in arriving at the figure of the alleged surplus.  Assuming that her case has merits and taking the calculations at face value, the short point is that if there was indeed the alleged surplus from the FLL Shares after the debt under the 2019 Facility Agreement was paid off, that surplus would belong to FFH, not the bankrupt.  It will be recalled that it was FFH, not the bankrupt, who pledged the FLL Shares to secure the 2019 Facility Agreement. 

99.  The bankrupt has failed to identify any basis to say that FFH would have applied the surplus to discharge the debt under the 2018 Facility Agreement, which was owed by Gainfull.  There is no evidence adduced by the bankrupt to show that FFH would have been obliged under Luxembourg law to so use the surplus.  Nor is there any evidence from FFH’s shareholders or controllers (including NAL’s 30% shareholder which is not FFCL or Gainfull) that this would have been done.

100.  All that Mr Chan says in his submission is this:

“Even if FFH is not contractually obligated (e.g. by way of a guarantee) to apply any surplus to satisfy the debt owed by Gainfull (its indirect parent) to Tor under the 2018 Facility Agreement, this does not mean FFH could not or would not do so. The monies could move up the corporate chain by way of declaration of dividends. For the purposes of this threshold application, it is not necessary to demonstrate that FFH would certainly have done so.” (original emphasis)

101.  Applying Brake, the burden is on the bankrupt to show that there is or is likely to be a surplus.  Here, there is a complete lack of evidence coming from her showing why FFH would or would likely move the alleged surplus up the corporate chain with the result that Gainfull would have the money to make full repayment of the loan under the 2018 Facility Agreement.  With that missing evidential link, the bankrupt has failed to show surplus. 

102.  Both Mr Stock and Mr Maurellet cites the Court of Appeal decision in Re Tang Tim Chue in which the court rejected a similar argument regarding standing, but made in a different factual context.  There, the bankrupt claimed membership in a Tso (the first Tso), which held a piece of land through another Tso.  Alleging misappropriation of the land, he initiated an action.  When the trustee declined to pursue it, the question arose as to whether the bankrupt had the standing to challenge that decision.  He argued that he did as any damages recoverable from the action would have flowed to his estate and produced a surplus.

103.  The Court of Appeal disagreed, finding that any damages would be payable to the first Tso, not the bankrupt, and there was no evidence that the Tso would “inevitably distribute the money” to him.  It was for the bankrupt to provide evidence, information or ground to support his argument but he failed to do so.  His argument on standing therefore failed: see para 17. 

104.  The same can certainly be said of the present case.

105.  I next deal with the contention in para 94 above.  It would not advance the bankrupt’s case on surplus.  Under these causes of action, while any damages recoverable would be paid to the bankrupt personally, the short point is, as submitted by Mr Stock, that the bankrupt has not even quantified the estimated recovery.  It follows that there is no basis to suppose that such recovery would yield a surplus to her estate.

106.  Lastly, as regards the bankrupt’s assertion in paras 95 and 96 above that she had the alleged substantial assets, the Recorder found in the annulment decision that this was unsubstantiated by the evidence before him: see paras 127 to 136.  In the present application, Mr Stock highlights that the bankrupt has not even tried to improve her evidence in relation to the alleged assets.  For these reasons, evidentially, the court cannot take into account such assets in determining whether there would or would likely to be a surplus in the estate.

Summary

107.  On the third issue, I conclude that the bankrupt is required, but has failed, to show that there would, or would likely, be a surplus in her estate but for the trustees’ decision.  She therefore has no standing to pursue the present application, which should be dismissed for that reason alone.

FOURTH ISSUE: GROUND FOR INTERVENTION?

108.  In light of the above rulings on indemnity and standing, I do not propose to go on to discuss in detail whether there would be ground for intervening in the trustees’ decision if the bankrupt had standing and offered an adequate indemnity. 

109.  The legal position is clear.  The bankrupt is required to show that the trustees’ decision was perverse, clearly wrong or utterly unreasonable and absurd.  In other words, no reasonable trustee would have so acted.  Only then would the court interfere with his decision.  Such jurisdiction would have to be exercised cautiously: Re Tang Tim Chue at para 19.

110.  It is clear that the bankrupt has not surmounted that high threshold.

111.  The trustees’ decision is to be examined on the basis of the materials then placed before them.  I have set out the reasons which they put forward in their reply letter for refusing to give consent in paras 40 to 44 above.  Most notably, the bankrupt’s solicitors had not offered any indemnity at all in their request letter.  That reason alone would entitle the trustees to refuse request.  Equally importantly, the trustees correctly pointed out that the bankrupt had provided only minimal information on the intended action, and they were not able to make any proper assessment of it. Again, this reason alone would justify the trustees not giving their consent.

112.  I therefore take the view that the decision reached in the trustees’ reply letter was a decision which the trustees were entitled to reach on the basis of the materials made known to them at the time.  There is no room for intervention by the court.

113.  Even if one is to take a step further and look at the information which has been made available since, I similarly find that there is no room for the court to interfere with the trustees’ decision not to give consent.

114.  On the merits of the intended action, the bankrupt relies heavily on the Recorder’s view that there was a reasonable argument open to her to challenge the valuations of the FLL Shares and the NAL Loan.  However, as submitted by Mr Stock, that was only a summary determination and the Recorder in fact went on to remark that the valuation of the FLL Shares was in “uncharted waters” and there were competing expert opinions on Luxembourg law, and that the valuation of the NAL Loan was “far from straightforward”.   

115.  Further, as pointed out by both Mr Stock and Mr Maurellet, in this application, the bankrupt has not produced further materials in the form of proposed pleadings, expert analysis, counsel’s opinion on liability and quantum, calculations of expected recoveries, costs budget for the entire action or has not otherwise given proper information in order to allow the trustees to gauge the strength of her case or her likelihood of success in the intended action. 

116.  In the circumstances, the trustees are quite entitled to maintain their refusal to give consent.  This is hardly a decision which can be regarded as perverse, clearly wrong or utterly unreasonable and absurd. There is no room for the court to intervene.

117.  On the fourth issue, I find that the bankrupt has failed to surmount the threshold for the court to intervene in the trustees’ decision under section 83.  The present application should also be dismissed for that reason.

FIFTH ISSUE: CARRIAGE OF THE INTENDED ACTION

118.  As no leave is granted to the bankrupt to pursue the intended action, it is unnecessary to decide whether she is suitable to have carriage of the intended action.

CONCLUSION

119.  For the above reasons, I dismiss the bankrupt’s section 83 summons.

120.  I make the following costs order nisi.

121.  The bankrupt do personally pay the costs of the trustees and the petitioner of the summons, including all reserved costs, with a certificate for two counsel, to be summarily assessed on the party and party basis if not agreed. 

122.  The costs shall be first paid out from the bankrupt’s estate, but she shall reimburse all such costs after all her unsecured creditors have been fully repaid or upon her discharge from bankruptcy, whichever is earlier. 

123.  The trustees have already lodged a statement of costs in respect of both the section 83 summons and their summons filed on 24 July 2024 for an unless order: see the decision at [2024] HKCFI 2662 at para 37. 

124.  I direct that the petitioner do lodge its statement of costs covering both summonses, within 14 days from the date of this decision, and the bankrupt do lodge her list of objections within 14 days after that. 

125.  The costs will be summarily assessed on the papers after the deadline.