CHINA MERCHANTS BANK CO LTD v. CHENG CHAO MING

HCB 18932/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY NO. 18932 OF 2002

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D E C I S I O N

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Introduction

1.  This is an application on the part of the China Merchants Bank Company Limited (“the Applicant”) by way of summons filed herein dated 11^th November 2008 for an order suspending the running of the relevant period for the Bankrupt’s discharge pursuant to section 30A(3) of the Bankruptcy Ordinance, Cap 6 (“ the Application”). The grounds as stated in the Summons are that (i) the discharge of the Bankrupt would prejudice the administration of his estate; (ii) the Bankrupt has failed to co-operate in the administration of his estate; and (iii) the conduct of the Bankrupt, either in respect of the period before or the period after the commencement of the bankruptcy, has been unsatisfactory.

2.  The Bankrupt opposed the application while the Trustees adopted a neutral stance.

3. The Bankruptcy Order against the Bankrupt was made on 4^th  December 2002.  On 11^th November 2006, the Trustees of the estate of the Bankrupt (“the Trustees”) took out an application pursuant to section 30A of the said Ordinance to object to the automatic discharge of the Bankrupt. Master Yu granted the application on 25^th July 2007 and ordered that the relevant period do cease to run for a period of 2 years commencing 3^rd December 2006. In other words, but for the present application, the Bankrupt would have been discharged from bankruptcy on 4^th December 2008.

4. In support of this Application, the Applicant has filed 3 affirmations of Mr. GAN Kun dated 11^th November 2008, 19^th January 2009 and 18^th February 2009 respectively.  The Bankrupt relied on his two affirmations dated 27^th November 2008 and 12^th March 2009. Mr. Alan Tang, one of the joint and several trustees, also filed an affirmation dated 10^th December 2008 to provide some background information of this matter.

5. At the conclusion of the hearing on 7^th May 2009, I made an order suspending the running of the relevant period for 18 months and said that reasons be given later.  I now give my reasons.

Preliminary Issue - Jurisdiction

6. This Application was first heard before me on 13^th March 2009. The Bankrupt raised a preliminary issue that the Court does not have jurisdiction to entertain this Application. Mr. To, Counsel for the Bankrupt, submitted that  s30A did not permit multiple applications. Since the Trustees had objected to the discharge once, the Applicant was not entitled to bring this Application. I rejected his submission. There is nothing in the legislation stating that the provision can only be relied on once throughout the bankruptcy period. If Mr. To’s submission is right, it would mean that once the Court had suspended the running of the relevant period, the Bankrupt can freely ignore his duties as a bankrupt for the rest of the bankruptcy period without any fear of any adverse consequences.

Applicant’s Complaints

7. Mr. Liu, Counsel for the Applicant, identified 6 categories of complaints. They are:

(i)  The Bankrupt failed to inform the Trustees of the transfer of his interests or rights in 西安秦都酒店 (“Xian Hotel”).

(ii)  The Bankrupt failed to disclosed what consideration he had received in such transfer and to remit such consideration to the Trustees.

(iii)  The Bankrupt failed to disclose and remit an account to the Trustees of remunerations he received from Xian Hotel and 西安城市酒店 (“Xian City Hotel”) by reason of his office as legal representative of these two hotels.

(iv)  The Bankrupt did not disclose his benefits received from Xian Hotel to the Trustees in that the hotel paid interest in the sum of RMB 290,000 to 通惠公司 on behalf of and for the benefit of the Bankrupt.

(v)  The Bankrupt did not disclose his benefits received from Xian Hotel to the Trustees in that the hotel paid legal fee in the sum of RMB 120,000 to 康達律師事務所 on behalf of and for the benefit of the Bankrupt.

(vi)  The Bankrupt failed to co-operate in the administration of the estate in respect of the land use rights of 北京城市賓館 (“Beijing City Hotel”) in that the Bankrupt failed to procure a settlement agreement with the Military Police and refused to accept service of certain legal documents in relation to certain legal proceedings in the Mainland.

 The 1^st and 2^nd Complaint

 8.   There is no dispute that the Bankrupt, through a company known as King Yuen (香港京遠投資發展有限公司), had beneficial interest in the Xian Hotel.  According to the minutes of the first creditors’ meeting, the Trustees noted that the Xian Hotel is a joint-venture project owned by King Yuen and 西安通惠實業公司.  King Yuen has 2 shareholders: Wonderwide Consultants Limited (99%) and Madam Cheung Lai Na (1%). The Trustees believed that Madam Cheung was the girlfriend of the Bankrupt. Wonderwide Consultants Limited is a BVI company with Jenson International Inc (“Jenson”), once a listed company in the USA, as its sole shareholder. The Bankrupt owned 22.5% interest in Jenson. It should be noted that while there is no independent evidence to support the above, the Bankrupt did not deny this.

9.  According to the minutes of the second creditors’ meeting, the Trustees noted that the Bankrupt did tell the Trustees that his interests in the Xian Hotel had been transferred from King Yuen to Jenson in 1998. There was however no mention of how the interest was transferred to Jenson and for what consideration. In the same minutes, the Trustees further noted that the Bankrupt informed the Trustees that his interest in King Yuen had been transferred to another party in 2002. There is, once again, no mention of how the interest is transferred. There is also no mention of the identity of the transferee.  In the Bankrupt’s 2^nd affirmation, he said that all of his shareholdings in the Xian Hotel were injected into Jenson in 1998 and he had explained that to the Trustees. The Bankrupt did not raise any issue in relation to the contents of these two minutes. In other words, there is no dispute that all along the Bankrupt had and still has interest in the aforementioned companies as noted in the said minutes.

10.  In a letter from the Xian Hotel (produced as exhibit CCM-1 to the first affirmation of the Bankrupt), it was stated that at early 2003, the Bankrupt “將秦都酒店徹底移交給中方 - 通惠實業公司后就再也不是酒店的股東”.  Mr. Liu submitted that, in the light of the letter, the Bankrupt, to say the least, retained his interest in the Xian Hotel until early 2003. It contradicted his version given to the Trustees that he disposed of his interest in 1998.

11.  Mr. Liu also referred the Court to a transaction in 2005 between King Yuen and 2 companies in the Mainland. Under this transaction, King Yuen sold its interests in the Xian Hotel for not less than RMB 8.5 millions.  

With this, Mr. Liu submitted that it was until 2005 that the Bankrupt disposed of his interest in Xian Hotel.

12.  The Bankrupt, in his 2^nd affirmation, explained that the letter referred to final transfer of the management rights conferred upon the Bankrupt by Jenson but not transfer of shares. Further, such transfer took place in early 2002 but not in early 2003. He went on to explain that after the transfer of shares in 1998, Jenson conferred upon himself and other persons the right to continue to manage the Xian Hotel. Nevertheless, he received nothing for managing the hotel except that he was allowed to use the hotel facilities when he went back there to work.  Apart from these, the Bankrupt did not explain anything about the 2005 transaction. It should be noted that it is not the Bankrupt’s case that he does not have any interest in Jenson or other companies aforesaid and thus he has no interest in the Xian Hotel. Of course, even if the Bankrupt runs his case in this way, he still has to produce documents to substantiate his version.

13.  I do not accept the explanation of the Bankrupt. If what the Bankrupt had said were true, it is not difficult at all for him to produce documentary evidence to support his version. He can also ask the Xian Hotel to write again to explain the situation. However, there is not even a single sheet of paper from the Bankrupt on this issue.  The 2005 transaction clearly shows that the Bankrupt is telling a lie as to when he disposed of his interest in the Xian Hotel. It is my ruling that he disposed of the said interest in 2005 as evidenced by the transaction record produced as exhibit GK-17.  

14.   It is also clear that the Bankrupt failed to disclose this transaction to the Trustees and failed to account for the consideration he had received under the 2005 transaction. I found that the Applicant has established these complaints.

The 3^rd Complaint

15.  I do not accept the explanation of the Bankrupt that he did not receive any remuneration to manage the hotels. There is no explanation as to the relationship between him and Jenson (though he did not dispute his interest in Jenson); no explanation why Jenson conferred management rights to him; and no explanation as to why he was willing to work for nothing. The Bankrupt’s version is a typical bare assertion without substance. I found that the Applicant has proved this complaint.

4^th and 5^th Complaint

16.  These complaints came from the auditor’s report of the Xian Hotel for the financial year ending December 2005. It was stated in the report that the hotel “代老板付通惠公司借款利息29萬元, 代老板付康達律師事務所款12萬元”. Mr. Liu submitted that since the Bankrupt is the legal representative of the hotel, “老板” must mean the Bankrupt.

17.  The Bankrupt did not deal with this allegation at all. The Bankrupt  did  not   tell  the  Court  in  a  positive manner  that  he is  not the “老板”. It is not difficult at all for he to explain if he is not. He can always ask the hotel to clarify for him. Yet, there is nothing to rebut the Applicant’s submission.

18.  Without any plausible explanation from the Bankrupt, it is my ruling that the Applicant has also proved the 4^th and 5^th complaints.  

The 6^th Complaint

19.  This matter has a long history. The Bankrupt holds 97% of the shareholding of one Chaoming Limited (“Chaoming”) which in turn owns 30% of the Beijing City Hotel. The other 70% is owned by Beijing Foreign Enterprises Services Group Company Limited (“FESCO”).  In other words, the Bankrupt indirectly owns around 30% of the Beijing City Hotel. Chaoming is in liquidation. As a creditor of Chaoming and the Bankrupt, the Applicant claimed to have a charge over the interest of Chaoming in the Beijing City Hotel. Such interest was valued at around RMB 200 millions in 2007.

20.  Over the years, the Applicant was eager to realize the 30% interest. Nevertheless, it is submitted that it is difficult to do so without the co-operation of the Bankrupt. First, the disposal must comply with the Chinese law as the hotel is in the Mainland. Second, notwithstanding the liquidation of  Chaoming, the Bankrupt remains as the legal representative of Chaoming. Third, there are certain disputes between the lessor of the land on which the hotel is situated and FESCO. It is submitted that as the Bankrupt had his connections in the Mainland and had relationships with the lessor, the Military Police, the Bankrupt should assist in settling the disputes so that the 30% interest can be disposed of.    

21.  Mr. Liu submitted that the Bankrupt has failed to use his best endeavour to procure a settlement of the dispute and thus the Court should suspend the running of the relevant period. I do not accept his submission. While a bankrupt has a positive duty to co-operate with the trustees to administer his estate, I do not think that the bankrupt has any duty to assist the trustees to realize any asset of his estate or to do anything to enhance their values.  So far a bankrupt has done all he has to do in handing over his assets or making his assets available to the trustees for administration or disposal, he has fulfilled his duty in this regard. Just take an example. If the asset in question is a watch and it has broken down; and if it so happens that the bankrupt knows how to repair the watch, does it mean that he has the duty to repair the watch so that it can be sold at a higher price? The answer must be no.  It will be a different story if the bankrupt hands over his watch to the trustees in a locked box without also handing over the key. In such situation, the bankrupt effectively has failed to hand over the watch.   

22.  In our present case, even accepting the submission of the Applicant in full, the Bankrupt may only be able to settle the disputes and there is no evidence that he is a must to resolve the disputes. Further, the Applicant is in fact asking the Bankrupt to do something to make the asset, i.e. the 30% interest, more valuable. For these reasons, I do not accept that there is any substance under this head of the complaint.

23.  This is however not the end of the Applicant’s complaint here.  It is the Applicant’s case that on 4^th April 2007, the Guangzhou Railway Transport Intermediate Court (“the Intermediate Court”) granted a Civil Adjudication Decision freezing the interest of Chaoming in the Beijing City Hotel. With the said freezing order, the Applicant is able to sell the interest by auction provided that certain legal formalities are complied with including the service of certain legal documents upon the Bankrupt.  The Applicant now complains that the Bankrupt did refuse to accept service of the legal documents and makes reference to an incident on 23^rd October 2008. On that occasion, the Applicant managed to invite the Bankrupt and a Ms. So (representatives of the Trustees) to attend a meeting with the representatives of the Applicant. During that meeting, two judges of the Intermediate Court attended the office of the Applicant to mediate the matter. There was then a private talk between the Bankrupt, Ms. So and the said judges. After that, the judges revealed that the Bankrupt refused to sign any court documents.

24.  For this issue, the Bankrupt said that all over the years, the representatives of the Applicant, who knew the contact phone number and address of the Bankrupt, had been in contact with him. The Bankrupt accepted that the said judges did talk to him and he refused to sign some documents as he believed that he did not have the capacity of so doing.

25.   The Bankrupt however did not explain clearly why he held such belief that he was not in the position to accept service of the court documents. Should the Bankrupt be co-operative in this aspect, there should be no difficulty on the part of the Bankrupt to put in evidence to refute the allegations put forward by the Applicant. There is also nothing from the Bankrupt whatsoever suggesting that he was and still is willing to accept service of the documents. There is also no suggestion or proposal as to how the documents can be serviced upon him.

26.   For these reasons, it is my ruling that the Applicant has also proved the 6^th complaint as the Bankrupt failed to accept service of the court documents and thus the Applicant is not in the position to dispose of the interest in the Beijing City Hotel by auction.

Exercise of Discretion

27.  In Fred Lee v Tong Yuk Kin (HCB 22870/2002, 20^th June 2007), Deputy Judge To stated that “the question of whether the conduct is unsatisfactory is whether the conduct is one which the society is prepared to condone without expressing disapproval. This question is to be answered by the reasonable man’s test”. The Bankrupt lied to the Trustees about the disposal of his interest in the Xian Hotel which worth millions of RMB; concealed the transaction in 2005; failed to disclose the remunerations and benefits he obtained from the Xian Hotel; and refused to accept service of  court documents are clearly unsatisfactory conduct. These also demonstrated that the Bankrupt failed to co-operate in the administration of the estate. As the Applicant has proved the grounds of objection, I have to consider whether I should exercise my discretion to suspend the running of the relevant period.

28.   The exercise of the discretion was described in this manner by Smithers J of the Federal Court of Australia, General Division Bankruptcy District of the State of Victoria in Re Zion; Ex parte: The bankrupt, unreported, 26 September 1986, at para. 6:

“In my view it is the policy of the law that bankruptcy should in most cases come to an end at three years and when there is an objection at the end of five years from the decree for sequestration of the estate, but that in a case where public interest so requires the discharge may be delayed or made conditional according to the requirements of the public interest in the circumstances of the case.  Public interest will require that a discharge be delayed or made conditional if the conduct revealed or the character of the bankrupt indicates that the return of the bankrupt to the commercial world in full freedom might involve unacceptable risk to persons likely to be engaged in commercial relations with him in the future.  In other words, it is for the applicant to show that balancing the policy of the law in favour of the return to commercial life of a bankrupt against the dangers that might accrue to the public from full commercial capacity of the applicant, it is appropriate that the discharge be granted.”

29.   This was adopted   in Hong Kong by Kwan J. in Fred Lee v  Leung Chin Yeung [2007] 1 HKC 164.

30.   In Tong Yuk Kin, Deputy Judge To at paragraph 21 of his judgment stated that:

“[I]n the exercise of its discretion under section 30A(3), the court should take a balanced view.  It should balance the interest of the bankrupt, the interest of his creditors, the public interest in the bankrupt’s rehabilitation and the demands of commercial morality underpinning the bankruptcy laws. It should take into consideration all the circumstances leading to the bankruptcy and not just the conduct complained of.  It should consider the seriousness of the conduct, the bankrupt’s conduct after the commencement of bankruptcy, the degree of co-operation he has shown with the trustee during the relevant period and the effort he has contributed to repaying his debt.  In an appropriate case, the court should consider the risk to the commercial community should the bankrupt be allowed to resume full commercial activity.  The discretion to suspend the running of the relevant period should not be lightly exercised.  But in its balancing exercise, the court should not allow the bankruptcy regime to be abused.”

31.  The Bankrupt engaged in a series of misconducts. The present case is one which calls for a suspension.

32.  I have taken into account what the Court of Appeal said in   Re Leung Yat Tung (No. 2) [2007] 4 HKC 192.  I noted that the Bankrupt did promise and in fact had signed something to show his willingness to co-operate with the Trustees. I also noted that the Bankrupt did co-operate with the Trustees in other aspects. I have considered all the circumstances of this case and come to the view that a further suspension of 18 months is appropriate.

33.   The Bankrupt has to personally pay costs of this application including all costs reserved to the Applicant and the Trustees to be assessed by summary assessment under O62 r 9A(1)(a) if not agreed. Certificate to Counsel. The costs is payable after the Bankrupt is discharged from bankruptcy. The parties have to make an appointment for summary assessment of costs within 14 days (from 7 May 2009) should they fail to agree on the quantum.