OSMAN MOHAMMED ARAB AND ANOTHERS v. LAM YING HO

CACV 132/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 132 OF 2014

(ON APPEAL FROM HCB NO. 1873 OF 2010)

________________________

________________________

________________________

J U D G M E N T

________________________

Hon Cheung JA:

1. I agree with the judgment of Yuen JA and the orders she makes.

Hon Yuen JA:

2. This is an appeal by Mr Osman Mohammed Arab and Mr Stephen Wong, the Trustees in Bankruptcy (“the trustees”) of Mr Lam Ying Ho (“the Bankrupt”), against an order of Master S Lo suspending the Bankrupt’s discharge from bankruptcy for a period of 12 months from 25 May 2014.

Background

3. On 11 March 2010 a petition for bankruptcy was presented against the Bankrupt.  A Bankruptcy Order was made against him on 26 May 2010.  His debts amounted to more than $60m.  Assets recovered amounted to less than $100,000.

4.1.  By way of personal background, the Bankrupt returned to Hong Kong in February 1997 in his early 20's, after graduating from a university in the United States.  He worked in the family business. 

4.2.  The Bankrupt’s father Mr Lam Sai Ching (“the father”) had together with his brother(s) founded a successful business comprising a number of companies.  One of these was Hopewell Plastics Ltd, of which the Bankrupt was made a director. He was also made an employee of another family company which provided “management services”. 

The Bonham property

5.1.  On 7 January 1997, before the Bankrupt’s return to Hong Kong after graduation, a property in Bonham Road (“the Bonham property”) was acquired in his sole name for $10m.

5.2.  That was at a time when he had just finished university and had not started working.  Nevertheless the issue remains whether the provider of the purchase price (or part thereof) intended that the Bankrupt would beneficially own the property (or part thereof). 

5.3.  The property was mortgaged to the Sin Hua Bank by the Bankrupt as “beneficial owner” (cl. 5).  In the mortgage, the Bankrupt also declared that the property was occupied by himself alone (cl.22). 

5.4.  The Bankrupt lived in the Bonham property until 2003.  From 1998/1999 until 2002/2003, the Bankrupt deducted “home loan interest” in respect of the Bonham property in his tax returns. 

5.5  In 2003, he moved out of the Bonham property into an adjoining flat which had been acquired in the name of his younger brother.  The Bonham property was rented out.  The Bankrupt deducted “interest payable on properties let” in his tax returns from 2003/2004 to 2005/2006. 

5.6.  However from May 2002 to February 2006, the Bankrupt was the owner of another property in The Belcher’s (“the Belcher’s property”), and it is not clear from the materials before us whether the deduction for interest was claimed for the Bonham property or the Belcher’s property or for both.  Nor is there any banking evidence before this court to show who paid the mortgage instalments for the Bonham property.

5.7.  On 21 February 2005, the Bankrupt mortgaged the Bonham property to DBS Bank by way of first legal charge.  Again the property was mortgaged by the Bankrupt as “beneficial owner”. 

Bankrupt’s liability under personal guarantee

6.1.  On 30 May 2007 the Bankrupt gave a personal guarantee to secure the liabilities of a company called Rockway Technology Ltd (“Rockway”) and its subsidiary China Rockway Ltd.  The Bankrupt was not a director of these companies. However it was operated by his cousin Patrick Lam Ying Wai, whose father (the brother of the Bankrupt’s father) has interests in the family business.

6.2.  By April 2008, Rockway was in financial difficulties.  It was unable to pay staff salaries on time and was in arrears of rent for its office premises. 

6.3.  On 4 June 2009 a statutory demand was served on Rockway.  On 8 July 2009 a petition was presented for its winding-up and it was wound-up on 9 September 2009.

6.4.  Six months later, in March 2010 a petition for the Bankrupt’s bankruptcy was presented and a Bankruptcy Order was duly made.

6.5.  Before this court the Bankrupt alleged that he had not personally made use of any moneys for which Rockway was liable to its creditors.  Whether that is true or not is beside the point.  Having provided a guarantee, he has undertaken personal responsibility to the creditors, and when a Bankruptcy Order was made against him, he must comply fully with his duties under bankruptcy law, or face the consequences. 

Bankrupt’s execution of declaration of trust over the Bonham property

7.1.  Coming back to the facts, less than a week before the statutory demand was served on Rockway, on 29 May 2009 the Bankrupt signed a declaration of trust of the Bonham property in favour of his father.  In the declaration the Bankrupt stated that the money for the purchase price of the Bonham property and all incidental costs were moneys belonging to and provided by the father.

7.2.  Within 3 months of the winding-up of Rockway, on 1 December 2009 the Bankrupt signed a document vesting the Bonham property in favour of the father. 

7.3.  At his first interview with the trustees after the Bankruptcy Order was made, the Bankrupt said that the Bonham property was acquired in his name because he was returning to Hong Kong to work for the family and because it was not easy for his father to obtain a mortgage loan by reason of his (the father’s) age.  The father was 52 years old at the time and, as noted above, was a substantial businessman.  In fact he was the guarantor of the mortgage loan for the property. 

8.1.  On 13 April 2011 the trustees commenced HCA653/2011 against the father for recovery of the Bonham property.  A Defence was filed by the father on 30 May 2011. Somewhat surprisingly the action has not come on for trial.

8.2.  I will discuss the trustees’ complaints regarding the Bankrupt’s conduct in respect of the Bonham property, and the master’s treatment of them, later in this judgment.

The Bel-air property

9.1.  On 16 November 2004 the Bankrupt signed an agreement to purchase a property (a flat and a car parking space) in the development known as The Bel-air as joint tenants with his sister Helen Lam Suk Siu (“the sister”).  The purchase price was $12,655,800. 

9.2.  The day before, on 15 November 2004 an amount of $316,395 was paid from a joint account of the Bankrupt and his wife Ana Chong to the sister’s account.  Two weeks later the sister paid $656,040 to the developer.  The amount paid from the joint account to the sister was about 48% of the amount paid to the developer. 

9.3.  A few months later, in late May 2005 an amount of $328,050 was paid from the same joint account to the sister’s account.  Four days later the sister paid $1,312,080 to the developer.  The amount paid from the joint account to the sister was about 25% of the amount paid to the developer. 

9.4.  A few months after that, on 6 February 2006 an amount of $185,677 was paid from another joint account of the Bankrupt and his wife to the sister’s account.  On the same day the sister paid $382,707 to the developer.  The amount paid from the joint account to the sister was about 49% of the amount paid to the developer. 

9.5.  Yet again, on 3 April 2006 an amount of $445,400 was paid from that joint account to the sister’s account.  On the same day the sister paid $1,772,560 to the developer.  The amount from the joint account was about 25% of the amount paid to the developer.

9.6.  Three days later on 6 April 2006, the Bel-air property was assigned to the Bankrupt and the sister as joint tenants.  It was mortgaged to the Hang Seng Bank and the property was let out to tenants.

Bankrupt’s execution of declaration of trust over the Bel-air property

10. On 29 May 2009, some 3 years after the assignment and on the same day that the Bankrupt signed a declaration of trust of the Bonham property in favour of his father, the Bankrupt and the sister as “trustee” signed a declaration of trust of the Bel-air property in favour of the sister alone as “beneficiary”.  The declaration stated that “the money for the purchase price ... and all legal costs and disbursements incidental to the Assignment were in fact the moneys belonging to and provided by the Beneficiary”, in other words, the sister alone.

11. Six months later, on 31 October 2009 the Bel-air property was sold for $14,380,000.  Apparently no part of this money was received by the Bankrupt.

12.1.  After the trustees were appointed, they made inquiries with the sister, who instructed solicitors to reply on 28 June 2011.  The sister through her solicitors said:

-  the Bankrupt at all times acted as her trustee to hold the property for her benefit and he had “absolutely no beneficial interest” in the property;

-  she had nominated the Bankrupt to be her trustee as a joint tenant “with the sole purpose of trying to get finance from the mortgagee bank”;

-  she “did pay for ALL the down payment, deposit, legal costs, stamp duty and all mortgage installments from the date of the purchase to the time when the Property was sold” and “the Bankrupt did not pay for anything nor did he has contributed any funding for the purchase”. 

12.2.  No explanation at all was made by the sister for the four amounts (totaling more than $1,275,000) paid from the joint accounts of the Bankrupt and his wife into her account before each of her payments to the developer.

13.1.  On 28 December 2011 the Bankrupt attended a second interview with the trustees. He also alleged that he had no interest in the Bel-air property and that he had not paid any money for its purchase.  He also said that according to his recollection, his wife probably did not have any joint investment with the sister. 

13.2.  When the trustees confronted him with the payments from his joint accounts to the sister’s account, he said only that it was likely that the payments had been arranged by his wife and that he had no knowledge about them.  He also said that almost all of the monies and investments in the joint accounts belonged to his wife, and were derived from her salary and money given to her by her maiden family.

14.1.  The waters have been further muddied by subsequent allegations on the part of the sister (through new solicitors) who alleged in a letter to the trustees dated 27 March 2014 that the Bel-air property, far from being her sole property as asserted in the declaration of trust and her earlier solicitors’ letter, was “actually a joint investment” among four parties:

-  herself as to 25%,

-  her cousin Annie Lam (Patrick Lam’s sister) as to 50%,

-  the Bankrupt’s wife and her sister Elena Chong as to 25%. 

14.2.  It was now alleged that “in view that [the sister], Annie Lam and Ana Chong [the Bankrupt’s wife] did not have any salary/income record, [the sister] asked the Bankrupt to be one of the legal owners of [the Bel-air property] on paper for the sake of facilitating the application of the mortgage loan for the purchase of the [Bel-air property]”. 

14.3.  In this respect I note in passing that:

-  in fact the sister had asserted a monthly income of $116,000 as an accountant of Hopewell Plastics Ltd in the mortgage loan application form, and

-  it has not been alleged in the letter that Elena Chong did not have any salary/income record. 

14.4.  More importantly, this new allegation was completely contrary to:

-  the declaration of trust signed by the sister and the Bankrupt that “the money for the purchase price ... and all legal costs and disbursements incidental to the Assignment were in fact the moneys belonging to and provided by the Beneficiary”, in other words, the sister alone;

-  the sister’s allegations in the letter written by the first firm of solicitors she instructed that she “did pay for ALL the down payment, deposit, legal costs, stamp duty and all mortgage installments from the date of the purchase to the time when the Property was sold”; and

-  the statement of the Bankrupt at the 2^nd interview that his wife probably did not have any joint investment with the sister. 

15. In relation to the last point in para.14.4, it is significant to note that the picture painted by the Bankrupt is that in the 7 yearsfrom November 2004 (the date of the first payment from his joint account to the sister’s account) to December 2011 (up to and including the date of the 2^nd interview), he had never heard – whether from his wife, his sister, his sister-in-law or his cousin Annie Lam (who is now alleged to have been the single largest beneficial owner of the Bel-air property) – about their alleged joint investment, and he had no idea who was the owner of a substantial property of which he was registered as joint owner, and for which he was also liable for the mortgage.

Transferred assets

16.1.  It is convenient now to refer to another aspect of the trustees’ application.  As noted earlier, the Bankrupt alleged in the 2^nd interview that almost all of the monies in the joint accounts held by himself and his wife belonged to her, and was derived from her salary and money given to her by her maiden family.

16.2.  What he apparently failed to say in this connection was that when he sold the Belcher’s property in 2006 for $8.5m (having bought it in 2002 at $6,555,700), he had deposited the net proceeds of sale amounting to about $5.82m into the same joint accounts from which payments were made to the sister for the Bel-air property.

16.3.  Further the trustees have not found records in respect of the Bankrupt’s allegation that he and his wife had each deposited $3m into the joint accounts, and that his share had all been used up as household expenses after his wife stopped working in 2006.

Application for suspension of discharge

17. In view of the above, on 30 April 2014 the trustees made an application to the court for suspension of discharge on two grounds, first that the Bankrupt had failed to co-operate in the administration of his estate under s.30A(4)(c), and secondly, that his conduct, both before and after the commencement of the bankruptcy has been unsatisfactory under s.30A(4)(d) Bankruptcy Ordinance Cap.6. 

18. A detailed affirmation in support was filed which included the matters set out above.  Another ground advanced as post-bankruptcy unsatisfactory conduct was that the Bankrupt should have utilized his earning capacity better, instead of working for a company in the family business for RMB13,000 a month only.

19. The Bankrupt did not file any evidence, whether of himself or any other persons, although he provided skeleton submissions.

Principles

20. The principles guiding the court’s consideration of applications for suspension of discharge have been set out in a number of authorities.  It is a two-stage process:

-  in the 1^st stage, the court has to determine whether the ground(s) advanced by the trustees has/have been established;

-  if so, then in the 2^nd stage, the court would decide in the exercise of its discretion whether to suspend the discharge, and if so, for what length of time. 

Master Lo’s judgment

21. In the present application, Master Lo took the view that the only ground of unsatisfactory conduct established by the trustees was the Bankrupt’s failure to utilize his earning capacity, and in the exercise of his discretion the master suspended the discharge of bankruptcy by 12 months.  The trustees appealed. 

Grounds of appeal

22. Essentially there were two main points

-   first, that the master had failed to consider the s.30A(4)(c) ground, that the Bankrupt had failed to co-operate with the trustees, and had only considered the s.30A(4)(d) ground, that of unsatisfactory conduct, and

-   secondly, that the master had erred in finding that the Bankrupt had only been guilty of unsatisfactory conduct in failing to utilize fully his earning power.

Discussion

- s.30(A)(4)(c) ground considered?

23. Counsel for the trustees first submitted that the master had failed altogether to consider the s.30A(4)(c) ground, that the Bankrupt had failed to co-operate with the trustees.

24. Before I discuss the master’s judgment, it would first be noted that (presumably due to an error in formatting) the paragraph numbering in the judgment started from para. 1 again in the section entitled “Discussion”.  Therefore in this judgment I will identify the paragraph numbers in the master’s judgment by reference to their appearance in the “pre-Discussion section” or in the “Discussion section”. 

25. Counsel for the trustees in his very thorough submissions rightly pointed out that when the master recounted the legal principles in paras. 6-7 of the “pre-Discussion section”, the master referred only to unsatisfactory conduct, and not to failure to co-operate.  The master had also referred only to unsatisfactory conduct in paras. 1, 2, 4, 5 and 6 of the “Discussion section”. And when the master did refer to co-operation, it was only in para. 8 of the “Discussion section” when considering whether to suspend the discharge, ie when he was already at the 2^nd stage of the exercise.

26. With respect to the master, the manner in which the judgment has been set out does provide some support for the suggestion that he had only considered the “unsatisfactory conduct” ground and not the “lack of co-operation” ground, which are specified in the Ordinance as separate grounds.

27. However, I note that in para. 2 of the “pre-Discussion section”, the master had specifically referred to both grounds.  Moreover, in the present case the matters advanced by the trustees in support of each of the two grounds overlap, so it is not as if the matters advanced by the trustees for the s.30A(4)(c) ground have not been considered at all.  Further, the reference to co-operation in para. 8 of the “Discussion section”, albeit in the 2^nd stage of the 2-stage process, is an indication that the master had considered whether the Bankrupt had failed to co-operate.

28. Accordingly I take the view that the master had brought his mind to bear on both grounds advanced by the trustees.

-  Application of principles and approach to the evidence

29. The trustees’ more substantial contention before us was that the master had erred in applying the relevant legal principles and in his approach to the evidence.

30. It is particularly appropriate in the context of this case to remind ourselves first of the law as stated by this court in Re Leung Yat Tung (the Bankrupt) No. 2 [2007] 4 HKC 192 (para. 62):

“As the courts have said, a bankrupt is not permitted to adopt a ‘catch me if you can’ approach. He cannot wait and see if the trustee in bankruptcy manages to piece together the jigsaw of his financial affairs, and then when he is required to answer the trustee’s questions, try to get away with revealing as little as he can ... Instead he should pro-actively reveal the complete picture of his financial affairs to the trustee, and where pieces do not appear to fit, in that his conduct or transactions appear to be inconsistent, it is for him to explain the inconsistencies and convince the trustee of the true state of affairs. The more complex the bankrupt’s transactions, the more difficult the task of the trustee in bankruptcy, and so the more comprehensive the bankrupt’s disclosure should be”. (Emphasis added).

31. I would add that often trustees in bankruptcy work under stringent financial and time constraints,  and it is unfair to the creditors and contrary to the public interest for trustees to waste their resources and time on “wild goose chases” while the bankrupt sits on his hands keeping the knowledge of his own financial affairs to himself. 

32.1.   Earlier in this judgment, I have set out the facts in some detail to show what was the case that the Bankrupt faced in the application for suspension of discharge. In my view, the trustees have built up a forceful case in relation to the Bel-air property and the transferred assets revolving around the crucial issue:- what was the true nature of the substantial payments from the Bankrupt’s joint accounts to the sister, close in time to payments to the developer of the property of which he was joint owner? 

32.2.  In concentrating on the Bel-air property and transferred assets, I am not dismissing the trustees’ case regarding the Bonham property.  However it would appear that relevant materials eg banking evidence relating to payments of the mortgage instalments, have not been provided to the court. 

33. In relation to the Bel-air property and transferred assets, the Bankrupt has not been co-operative as he was not forthcoming with information and materials pertinent to this issue in the first place. 

-  He did not disclose to the trustees that he had deposited $5.8m into the joint accounts from which the $1.2m to the sister had been withdrawn, referring the trustees instead to a deposit of $3m of which there was no record. 

-  Over the years he had faced a statutory demand, followed by a petition for bankruptcy, followed by a Bankruptcy Order, followed by one interview with the trustees after another.  Any debtor in such circumstances should have reviewed – at some stage – the financial resources that were or had been available to him.  He could not then have failed to notice that more than $1.2m – moneys which would have been available to him – had been withdrawn from the joint accounts. If the Bankrupt did not know where the $1.2m from his joint accounts went, he did not bother to find out, and if he did know, he did not disclose it to the trustees.

34. Further the Bankrupt failed to file any evidence to meet the trustees’ points fully and satisfactorily. 

-  He professed complete ignorance of the use of the moneys in his joint accounts until the trustees confronted him with them, but has not come up with any explanation why his wife should have kept it a secret from him. And he has not come up with an explanation why his close family members would have kept the alleged joint investment a secret from him over the course of 7 years (up to and including the date of the 2^nd interview).

-  Further, if there was truly a joint investment between the sister and the Bankrupt’s wife (and others), the sister has failed to explain why she put forward another story in her first solicitors’ letter.  The Bankrupt cannot treat the inconsistency as only his sister’s business – not when $1.2m of the purchase price had come from his joint accounts into which he had made a sizeable deposit ($5.8m), nearly double that which he admitted to ($3m).  

These omissions of evidence on the part of the Bankrupt indicate that his story is one that strains credulity.  His persistence in such a story, notwithstanding the points raised by the trustees, is unsatisfactory post-Bankruptcy Order conduct.

35. I come now to the master’s treatment of the evidence.  In para. 4 “Discussion section”, the master referred to the statements made by the Bankrupt to the trustees which the latter had recorded in Mr Arab’s affirmation.  The master said:

“The bankrupt maintained no knowledge about the payment from the joint name account with his wife and the investment of his wife and his sister. I have to take the face value of it rather than doing a mini-trial on affidavit. I think, as the trustee has failed to provide more evidence to prove the bankrupt had knowledge about alleged payment and investment, I am not satisfied that the alleged explanation given by the bankrupt is unsatisfactory conduct within the meaning of the relevant section”. (Emphasis added).

36.1.   With respect to the master, there could not have been any “mini-trial on affidavit” in this case because no affidavits from or on behalf of the Bankrupt were filed at all. His statements to the trustees were not verified on oath.

36.2.  Further even if the Bankrupt had provided an affidavit along the same lines as his statements to the trustees, the court is not required to accept everything he says just because it is on oath. The trustees had provided ample evidence which raised a number of important issues relating to the true nature of the Bankrupt’s interest in properties in his name.  It was then incumbent on him to answer the questions raised in a full and satisfactory manner (Re Li Tat Kong [2000] 3 HKC 360, at 379E-F). 

36.3.  It would then be the court’s duty to examine the evidence adduced by the Bankrupt to see if the issues the trustees had advanced have been resolved.  It is only if the evidence throws up conflicts of plausible facts that the court should avoid conducting a “mini-trial on affidavits”. 

37. By reason of the matters set out in para. 33, I find that the Bankrupt has failed to co-operate pro-actively with the trustees under s.30A(4)(c) and by reason of the matters set out in para. 34, I find that the Bankrupt has been guilty of unsatisfactory conduct under s.30A(4)(d) after the making of the Bankruptcy Order.

38. I now come to the 2^nd stage.  Having taken into account the matters set out above, and considered the periods of suspension in the cases put forward by counsel for the trustees, I take the view that a suspension of discharge for a period of 24 months would be appropriate. 

Order 

39. The master’s order should be set aside and be substituted with the following order:

“The relevant period under section 30A Bankruptcy Ordinance for the discharge of the Bankrupt shall cease to run for a period of 24 months from 25 May 2014".

40. The parties having agreed that costs should follow the event, there will be an order that the Bankrupt is to pay the trustees’ costs of the appeal and the application below.

Hon Chu JA:

41. I agree with the judgment of Yuen JA.