Re GABRIEL RICARDO DIAS-AZEDO

HCB 2212/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 2212 OF 2010

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J U D G M E N T

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Introduction

1.  Mr Gabriel Ricardo Dias-Azedo (“the Bankrupt”) is a former partner of Grant Thornton (“GTHK”), a firm of accountants and the Hong Kong member firm of Grant Thornton International Limited (“GTI”), a company incorporated in the United Kingdom. In late September 2009, the Bankrupt suddenly disappeared from Hong Kong. His disappearance was widely reported in the media at the time.

2.  Ms Angela Rita Gardner (“the Petitioner”) is a distant cousin of the Bankrupt. Mr and Mrs Arthur Antonio Da Silva (“the Funding Creditors”) have been long-time friends of the Bankrupt.  Both were innocent victims of the Bankrupt’s dishonest conduct prior to his disappearance.

3.  The principal matter before this Court was the Funding Creditors’ application for an order that the Joint and Several Trustees of the property of the Bankrupt (“the Trustees”) be permitted to pay them, from the Bankrupt’s estate and in the same priority as the costs of the Petition, their legal costs incurred in Hong Kong and the United Kingdom in preserving the Bankrupt’s property for the benefit of all creditors pursuant to sections 37(2) and 97 of the Bankruptcy Ordinance, Cap. 6 (“the Ordinance”). The amounts claimed were respectively HK$684,020.19 (“the Hong Kong Costs”) billed by Messrs Haldanes and HK$3,559,800.08 (“the UK Costs”) billed by Messrs Herbert Smith.

4.  In response to inquiry from this court, Ms Leung, for the Funding Creditors, indicated that these were not costs taxed on a party and party basis, as prescribed by section 37(2) of the Ordinance. Instead, the UK Costs represented the full amount billed by Messrs Herbert Smith whereas the Hong Kong Costs represented a portion of the total costs of over HK$1.9 million billed by Messrs Haldanes. What happened was that Messrs Haldanes had engaged a law costs draftsman to prepare a schedule giving an estimate of HK$815,541.00 as the sum which, in his view, would be allowable on taxation. Messrs Haldanes then further cut it down to HK$684,020.19, the sum claimed in the present application.

5.  According to a table of breakdown of legal costs supplied by Ms Leung at the hearing, Messrs Herbert Smith’s bills covered all work done from 26 October 2009, when they began taking instructions and preparing for the freezing order and disclosure order against the Bankrupt and his wife (“the Wife”), to 23 March 2010. The reason why the cut‑off date was set at 23 March 2010 was because the Funding Creditors were notified of the Petition on 24 March 2010, and section 37(2) of the Ordinance only encompassed costs of legal proceedings brought without notice of the petition. Messrs Haldanes’ bills covered work done in Hong Kong from 19 October 2009 onwards for the preparation and issue of proceedings in HCA2158 and so on. The last bill however covered work done from 1 March to 24 May 2010, without a cut-off point as at 23 March 2010. To the credit of Messrs Haldanes and the Funding Creditors, this last bill was in the sum of almost HK$650,000.00 but only HK$52,461.00 was included in the present application.

6.  There was also before this court a summons by the Petitioner for leave to intervene in the Funding Creditors’ application, with a view to opposing it. Given the Petitioner’s interest in the Bankrupt’s estate, the Funding Creditors had, quite properly, raised no objection to the proposed intervention and Ms Lam, for the Petitioner, duly made submissions to oppose the Funding Creditors’ application.

7.  The Trustees were represented at the hearing and maintained a neutral stance. Their role was limited to setting out the relevant background facts within their knowledge with a view to assisting this court.

Background

The Petitioner’s action

8.  On 12 October 2009, the Petitioner issued a writ under HCA 2082/2009 (“HCA2082”) against the Bankrupt and Senning International Limited, a BVI trust vehicle incorporated by the Bankrupt and GTHK. It was the Petitioner’s case that she had entrusted the Bankrupt to invest for her and, between 1999 and 2009, she had transferred over US$9 million to him or his designate for such purposes.  The Bankrupt had failed to account for or return any of her investments. On the same day, the Petitioner obtained a mareva injunction against the Bankrupt. Among the assets specifically identified in the injunction order were the HSBC account and the HK Property referred to in paragraphs 14 and 17 below.

9.  On 14 January 2010, the Petitioner entered a default judgment against the Bankrupt in the sum of US$9,756,879.63 with interest and costs.

10.  The Petitioner then presented a petition dated 23 March 2010 (“Petition”) for the bankruptcy of the Bankrupt on the ground that the latter had failed to comply with a statutory demand based on the default judgment. The Funding Creditors were notified of the Petition the next day. Despite the Funding Creditors’ opposition, Au J granted the bankruptcy order sought on 27 October 2010: Re Gabriel Ricardo Dias-Azedo [2010] 5 HKLRD 474.

11.  On 16 November 2010, the Trustees were duly appointed at the first meeting of the Bankrupt’s creditors.

The Funding Creditors’ action

12.  On 22 October 2009, the Funding Creditors issued a writ under HCA2158/2009 (“HCA2158”) against the Bankrupt and GTHK. It was their case that in 1995, the Bankrupt persuaded them to part with over US$2.3 million in order to set up an offshore trust fund for their estate planning.  Likewise, the Bankrupt had failed to account for or return their investments. On 23 October 2009, the Funding Creditors obtained a mareva injunction against the Bankrupt. The assets then known to the Funding Creditors and specifically identified in the injunction order included the HK Property referred to in paragraph 17 below.

13.  The Funding Creditors then took steps to pursue the Bankrupt and the Wife in the UK (“Funding Creditors’ UK Proceedings”). On  4  November 2009, they obtained a disclosure order against them (“disclosure order”) and a freezing order against their assets (“freezing order”). Among the assets specifically identified in the freezing order was No.6 Onslow Mews East, London registered in the Wife’s name.

14.  On 12 November 2009, pursuant to the disclosure order, the Wife disclosed a handwritten note by the Bankrupt which set out a list of his assets, some of which were previously unknown to the Funding Creditors. These included inter alia three insurance policies with Transamerica Life Insurance Limited (“Transamerica”), a MPF account with Manulife Provident Funds Trust Company Limited (“Manulife”), a  BVI company called Longear International Limited (“Longear”), in which the Bankrupt and the Wife were 50/50 registered shareholders, which had an investment portfolio managed by RBS Coutts Bank in Hong Kong, as well as an HSBC account in Hong Kong no. 600-397954-001 (“HSBC account”).

15.  The Funding Creditors’ solicitors then followed up on such information and gave notice of the Hong Kong mareva injunction to inter alia Transamerica and Manulife. They also amended the Hong Kong mareva injunction to include Longear.

16.  On 27 November 2009, the Funding Creditors obtained a default judgment against the Bankrupt. The regularity of this default judgment was questioned by the Petitioner at the hearing before this court and, prior to the funding agreement referred to in paragraph 20 below, by the Trustees.

17.  On the back of the default judgment, the Funding Creditors took various enforcement proceedings in Hong Kong and UK and obtained:

(a) on 10 February 2010, a charging order absolute over the property of the Bankrupt located at Flat B, 16^th Floor and 2 car parking spaces at Excelsior Court, 83 Robinson Road, Hong Kong (“the HK Property”);

(b) on 23 February 2010, a garnishee order absolute over the HSBC account;

(c) on 3 March 2010, interim charging orders over two properties in London, one registered in the name of the Bankrupt viz Suite 25, No.25 Onslow Gardens, London and the other in the name of the Wife in which the Bankrupt was said to retain an interest viz No.6 Onslow Mews East, London (collectively “the London Properties”).

18.  These steps were all taken prior to 24 March 2010 when the Funding Creditors were notified of the Petition.

Bankrupt’s assets and liabilities

19.  As at May 2011, the Trustees only managed to recover approximately HK$1.35 million of the Bankrupt’s assets, of which slightly over HK$1 million came from refund of the Bankrupt’s voluntary contribution to his MPF account with Manulife. By contrast, the Trustees had received proofs of debts in excess of US$11.2 million and HK$23.6 million respectively, excluding the duplicated proofs and the one filed by GTHK.

20.  On 16 May 2011, the Trustees and the Funding Creditors entered into a funding agreement (“Funding Agreement”). The Funding Agreement set out the terms on which the Funding Creditors were prepared to fund the Trustees in their intended recovery action in UK (“Trustees’ UK Proceedings”) the principal targets of which were No.6 Onslow Mews East (Suite 25, No.25 Onslow Gardens having been sold in July 2010 by Coutts Bank UK, the chargee of the London Properties) and the entire, rather than just 50%, interest in Longear. The Trustees anticipated the proceedings would be resisted by the Wife, hence their request for funding. Neither the Petitioner nor any other creditors were willing to provide the necessary funding to the Trustees. The Funding Agreement was put to vote at a meeting of creditors on 6 May 2011 where an overwhelming majority of the attending creditors voted in favour of it. It was subsequently approved by the Bankruptcy court on 7 June 2011.

21.  Four aspects of the Funding Agreement were pertinent to the present application:

(a) The Funding Creditors were to receive 40% of the amount realisable from No.6 Onslow Mews East and from Longear, after deducting the Trustees’ fees and any adverse costs order made against the Funding Creditors or the Trustees in the UK proceedings (“Final Amount”).

(b) The remaining 60% of the Final Amount would be retained by the Trustees pursuant to section 67(1) of the Ordinance “for the expenses of the bankruptcy including payment of the fees of the Official Receiver… any preferential claims by the Inland Revenue Department [of the HKSAR] and thereafter distributed to the [creditors of the Bankrupt] pari passu in accordance with the adjudication of their proofs of debts by the Trustees in accordance with the Bankruptcy Ordinance (Cap.6)”.

(c) The Trustees and the Funding Creditors would share equally the balance of sale proceeds of the HK Property, approximately HK$3.3 million, while the Trustees would keep the HK$200,000 or so remained in the HSBC account.

(d) The Trustees agreed not to raise any objection to the default judgment obtained and the proof of debt filed by the Funding Creditors.

22.  As at 24 October 2012, the total amount of proofs of debts received by the Trustees (excluding those rejected and/or duplicated) were in excess of US$11.2 million and HK$91 million respectively. The amounts recovered by the Trustees and payment from the Bankrupt’s assets were as follows:

The Applicable principles

23.  Under the Ordinance, the trustees in bankruptcy must distribute the available assets of the bankrupt in accordance with a prescribed order of priority as follows:

(a) the expenses of the bankruptcy;

(b) debts of preferential creditors (including interest on the debts prior to the commencement of the bankruptcy);

(c) debts of ordinary creditors (including interest on the debts prior to the commencement of the bankruptcy);

(d) interest arising on the debts of both preferential and ordinary creditors since the commencement of the bankruptcy;

(e) claims by the bankrupt’s spouse.

see sections 37, 38, 39, 41, 71 of the Ordinance.

24.  Priority of the expenses of the bankruptcy is governed by section 37(1) of the Ordinance. For the present purpose, suffice it to say that the taxed costs of the petition enjoy a high priority and come just after the fees, charges and percentages prescribed in the Bankruptcy (Fees and Percentages) Order, Cap 6C, and payable to the Official Receiver, as well as the costs, charges and expenses incurred or authorized by the Official Receiver.

25.  Section 37(2) of the Ordinance confers on the court a discretion to give the costs of legal proceedings by a creditor against the bankrupt or any part of them (taxed as between party and party) the same priority as the taxed costs of the petitioner in certain circumstances. The section provides as follows:

“Whenever the court is satisfied that property of a bankrupt … has been preserved for the benefit of the creditors by means of legal proceedings brought by a creditor against the bankrupt without notice of presentation of the petition, the court may in its discretion order the payment of the costs of such legal proceedings or any part of them (taxed as between party and party) out of the estate, with the same priority as to payment as is herein provided in respect of the taxed costs of the petitioner.” (emphasis added)

26.  Section 97 of the Ordinance further provides the court with full power to decide all questions of priorities which may arise in any case of bankruptcy coming within the cognisance of the court or which the court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property in any such case.

27.  Direct authorities on section 37(2) are scarce. Only two were cited by the Funding Creditors.

28.  In Re The Nam Tai Lung Firm, Ex parte The Tak Shun Bank (1936) 28 HKLR 35, the applicant was a judgment creditor who had obtained garnishee orders nisi against the book debtors of the bankrupt firm calling upon them to show cause why they should not pay to him, ie the judgment creditor, the amount which each of them owed to the bankrupt firm. The garnishee orders nisi had all been served before an interim receiving order was made against the bankrupt firm. The applicant then applied under section 37(2) of the Bankruptcy Ordinance 1931, the predecessor of section 37(2) of the Ordinance, for an order that he was entitled to the payment of his costs of the legal proceedings on the basis that property of the bankrupt “had been preserved for the benefit of the creditors.”

29.  Sir Atholl MacGregor C.J. refused the application. He held that “in order to get the benefit of [section 37(2)] a plaintiff creditor must show that but for his diligence assets would have been dissipated or removed from the jurisdiction”. 

30.  In that case, there was no evidence that any of the garnishees had been asked to make repayment of their debts directly to the bankrupt, in fraud of the creditors, or that by the applicant’s diligence any property was made available in the bankruptcy which would not equally have been collected by the Official Receiver. For these reasons, the application failed.

31.  By contrast, in Re The Asiatic Knitting Co Ex parte The Shiu Yuen Cotton Yarn Co Ltd. (1932-33) 26 HKLR 29, there was probable cause to believe that a debtor was about to dispose of or remove his property with intent to obstruct and delay the execution of any judgment against him, and a creditor had obtained a warrant of interim attachment which prevented disposal or removal of the debtor’s goods. In these circumstances, Wood Acting CJ held that the effect of the warrant of interim attachment was to preserve the debtor’s property for the benefit of his creditors, within the meaning of section 37(2).

32.  In Re Wu Kit Ping [1993] 2 HKC 614, the court had the opportunity of considering whether assets of the bankrupt in that case could be said to have been “protected or preserved” within the meaning of section 38(5B) of the Ordinance.

33.  Section 38(5B) provides as follows:

“Where any assets have been recovered under an indemnity for costs of litigation given by certain creditors, or have been protected or preserved by the payment of moneys or the giving of indemnity by creditors, or where expenses in relation to which a creditor has indemnified a trustee have been recovered, the court may, on the application of the Official Receiver or the trustee or any such creditor, make such order as it deems just with respect to the distribution of those assets and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk run by them in so doing.”(emphasis added)

34.  In that case, a judgment creditor of the bankrupt obtained a charging order absolute against the latter’s property. The petitioner, also a creditor of the bankrupt, applied to set it aside on the ground that the judgment creditor had notice of the bankrupt’s insolvency prior to the making of the charging order. The charging order was subsequently discharged by consent. The petitioner then sought payment out of the balance of the sale proceeds of the bankrupt’s property on the ground that it was entitled to priority under section 38(5B), failing which section 97, of the Ordinance because it was instrumental to the recovery of the balance of the sale proceeds by running the risk of applying to set aside the charging order.

35.  Patrick Chan J (as he then was) held that the petitioner was instrumental to or largely responsible for the success in getting back the balance of the sale proceeds - it was only fair that the petitioner be given priority over the other creditors provided that it fell within the terms of section 38(5B) or section 97 of the Ordinance. More importantly, his Lordship, at 621 B-C, ruled that “the application to set aside the charging order was clearly an action to get rid of the charge on the money and was, in every sense of the word, protecting or preserving the assets” of the bankrupt within the meaning of section 38(5B).[1]

36.  With regard to section 97 of the Ordinance, Patrick Chan J (as he then was) held that the section, although wide in its terms, only empowered the court to determine the priorities of the parties’ entitlement in accordance with the Ordinance and law – it did not confer on a party any advantage or priority where such an advantage or priority did not otherwise exist. In other words, section 97 does not disturb the normal rules of priority in a bankruptcy, in the way that section 37(2) or section 38(5B) does.

Discussion

37.  It was not, and could not be, disputed that the Funding Creditors had incurred substantial legal costs in tracking down and pursuing the Bankrupt’s assets before they had notice of the bankruptcy petition, and, of course, long before the Trustees were appointed.

38.  The submissions on behalf of the Funding Creditors were straightforward: as a result of their prompt action, shortly after the Bankrupt’s disappearance, in obtaining the injunction and freezing order in Hong Kong and UK, the disclosure order against the Wife, Messrs Haldanes’ follow-up action in giving notice of the mareva injunction to various third parties who were thought to be holding the Bankrupt’s assets, and the various enforcement proceedings referred to in paragraph 17 above, the following properties of the Bankrupt had been preserved, their value subsequently realised by the Trustees and the pool of assets available for distribution to the creditors enlarged:

(1) One of the London Properties ie No.6 Onslow Mews East, after a settlement with the Wife in October 2011, accounting for HK$11,393,803.35.

(2) 100% of Longear whose investment portfolio was worth around US$450,000.

(3) Refund of the Bankrupt’s voluntary MPF contribution from Manulife amounting to HK$1,027,461.87.

(4) Refund of insurance policies premium from Transamerica amounting to HK$243,643.60.

39.  As noted before, these assets were not specifically identified in the Petitioner’s mareva injunction and there was no evidence that the Petitioner had taken any further steps to track down or take enforcement proceedings against these assets after obtaining a default judgment against the Bankrupt. Equally, these assets, save for the London properties, were initially unknown to the Funding Creditors and were not specifically identified in the mareva injunction they obtained in Hong Kong or the freezing injunction in UK – they were only revealed by the Wife after the Funding Creditors had obtained a disclosure order against her.

40.  This court would begin by construing section 37(2).

41.  The word “preserve” has no single recognised legal meaning which fits all situations: cf Re Passmore, ex p Official Receiver in Bankruptcy (1984) 56 ALR 181 at 185 5-10.

42.  In this regard, this court does not find it helpful to dwell on the authorities cited by Ms Lam e.g. Re Passmore, ex p Official Receiver in Bankruptcy supra and Re Kiu May Construction Co. Ltd. [1986] HKLR 165, in which the courts endeavoured to find some difference in meaning between the words “recover” and “protect or preserve” in section 38(5B) of the Ordinance, its equivalent in insolvency ie section 265(5B) of the Companies Ordinance, Cap. 32 or their near equivalent in the Australian statutes. The reason is that the word “recover” is not present in section 37(2). Whatever the word “recover” might mean when it appears in juxtaposition with the words “protect or preserve” in the context of section 38(5B) of the Ordinance or section 265(5B) of the Companies Ordinance, there is no justification to allow the word “recover” to dictate or constrain the meaning of the word “preserve” when construing section 37(2).  In so far as Ms Lam suggested in her submissions that this should be the proper approach in construing section 37(2), this court was not minded to adopt it.

43.  For these reasons, this court would approach the section by considering the natural and ordinary meaning of the word “preserve” which is to keep safe from harm, injury, damage or loss. In the present context and in line with the words of Sir Atholl MacGregor C.J. in Re The Nam Tai Lung Firm, Ex parte The Tak Shun Bank quoted in paragraph 29 above, the word “preserve” is apt also to mean keeping safe from unlawful dissipation or removal from the jurisdiction. It appears to this court that the spirit of the section is to reward a pro-active creditor for his endeavours in maintaining a bankrupt’s property and hence the pool of funds available for eventually distribution to all his creditors in accordance with the Ordinance. But for section 37(2), the pro-active creditor’s expenditure in taking legal proceedings against a bankrupt will only rank as ordinary unsecured debt and in most cases of bankruptcy he will only recoup a small percentage of it by way of pari passu distribution. If so, the other passive creditors will in effect be getting a free ride of the pro-active creditor’s efforts and legal expenditure and thereby an unfair advantage over the latter.

44.  So construed and applying this construction to the available evidence, this court was of the view that the Funding Creditors’ legal actions in Hong Kong and UK did have the effect of preserving the Bankrupt’s properties to the benefit of all the creditors within the meaning of section 37(2). On balance of probabilities, this court was satisfied that but for the Funding Creditors’ diligence in obtaining the injunctions in Hong Kong and London and the disclosure order against the Wife, the interim charging orders against the London Properties, as well as giving notice of the injunction to Transamerica and Manulife, the Bankrupt’s assets previously unknown to his creditors, or some of them, would not have been tracked down, or tracked down so promptly, and those known assets would be at risk of being dissipated: Re The Nam Tai Lung Firm, Ex parte The Tak Shun Bank supra; The Asiatic Knitting Co Ex parte The Shiu Yuen Cotton Yarn Co Ltd. Supra. In coming to this view, this court had taken into account the following circumstances.

45.  First, the fact that No.6 Onslow Mews East and 50% of the shareholding of Longear were registered in the Wife’s name albeit the Bankrupt’s retention of a beneficial interest in them was an indication, and this court would take it no higher than that, the Bankrupt had long intended to hide his assets behind the cloak of legal ownership in the Wife, and keep them out of reach of his creditors.

46.  Second, the scale of the debts the Bankrupt left behind and his sudden disappearance in September 2009 meant that he had no intention to repay his debts at all.  Whatever assets the Bankrupt might still have in September 2009, it was unlikely that he would voluntarily hand them over to the Trustees for distribution to his creditors. 

47.  Third, in granting the mareva injunctions and freezing order in October and November 2009, the courts in Hong Kong and UK must have been satisfied on the evidence before them that there was a real risk of dissipation of the Bankrupt’s assets by the Bankrupt himself and a real risk of dissipation of the Wife’s assets in which the Bankrupt retained an interest by the Wife herself.

48.  Fourth, the Trustees were only appointed in November 2010, more than a year after the Bankrupt’s disappearance. There was thus ample time for the Bankrupt either directly or with the assistance of the Wife to dissipate the assets in his name and/or hide his interest in those in the Wife’s name. In all probability, well before the Trustees were in a position to take steps to prevent the dissipation from happening, at least some of the Bankrupt’s assets would have long gone.

49.  This court of course recognised that not all the Bankrupt’s assets were at the same level of risk of dissipation. The Bankrupt’s voluntary MPF contribution held by Manulife or the insurance premium paid to Transamerica, for instance, would in all probabilities be at a low risk. Given that the Bankrupt’s disappearance was widely reported in the media at the time, and given the relatively small amount of money involved, it was rather unlikely that the Bankrupt would come back to Hong Kong to demand their refund or would take the risk of giving away his whereabouts by demanding their refund from an unknown foreign country. The point, in relation to these assets, was that but for the Funding Creditors’ efforts, the existence of these assets might not have been found out at all and if they had not been found out, they would not have been put back into the pool for distribution in the bankruptcy.

50.  Fifth, the Wife’s initial position in the Funding Creditors’ UK Proceedings and the Trustees’ UK Proceedings was that she insisted she owned 50% of Longear and No.6 Onslow Mews East beneficially. Hence, the Trustees’ anticipation that she would likely resist the Trustees’ UK Proceedings. It stood to reason that but for the prompt intervention of the Funding Creditors, the Wife could and, in all likelihood, would take steps to ensure that the 50% shareholding of Longear and No.6 Onslow Mews East would continue to be kept out of reach of the Bankrupt’s creditors.

51.  Before coming to a final conclusion, this court would first consider the objections raised by the Petitioner.

52.  Ms Lam, for the Petitioner, raised five grounds of opposition in her submissions as follows: 

(1) Section 37(2) of the Ordinance should be construed strictly, and so construed, the Funding Creditors did not fall within its ambit. Section 97 of the Ordinance did not take the matter any further as it only conferred general powers on the court to determine all questions of priority, but did not empower a court to create a separate priority in favour of a creditor.

(2) In particular, the Funding Creditors’ legal proceedings were not proceedings which had preserved the Bankrupt’s assets for the benefit of the creditors. Rather, the Funding Creditors were motivated by purely selfish desires in taking the steps they took in respect of the Bankrupt’s assets.

(3) The default judgment obtained by the Funding Creditors was irregular – it would be inappropriate to exercise the court’s discretion to reward such irregular action.

(4) By reason of the Funding Agreement, the Funding Creditors had already obtained priority over a large proportion of the recovery thus far. It was implicit in the terms of the Funding Agreement that this should more than compensate the Funding Creditors for any detriment which they might have suffered.

(5) There were only limited funds in the Bankrupt’s estate. Considering the matter in the round, the Funding Creditors had already received a lion’s share of the recovery. Allowing the present application would be an unfair and undue disturbance of the general principle of pari passu distribution.

53.  The first two grounds could be considered together.

54.  First, it is true that section 97 of the Ordinance does not empower the court to confer on a creditor any priority where it does not otherwise exist: Re Wu Kit Ping supra. It is also true that provisions in the Ordinance which disturb the principle of pari passu distribution within the same category of debts should be approached with caution and construed strictly: Re Wu Kit Ping supra. But, however strictly one construes section 37(2), some meaning must be given to the words “preserving the bankrupt’s property”. This court had already explained its view on the proper construction of section 37(2) and would not repeat it here.

55.  Second, there is no requirement under section 37(2) that an applicant must have a benevolent or altruistic intent or motive – indeed, there is no requirement concerning his subjective intention or motive at all. This construction is consistent with both Re The Nam Tai Lung Firm, Ex parte The Tak Shun Bank supra and The Asiatic Knitting Co Ex parte The Shiu Yuen Cotton Yarn Co Ltd. supra which focused on the effect of the legal proceedings taken by the applicant, not his subjective intention or motive.

56.  The intention or motive of the Funding Creditors was thus irrelevant to the present action. In coming to this view, this court had also taken into account one of the requirements under section 37(2) was that the applicant must not have notice of the presentation of the petition. If an applicant did not have notice of the presentation of the petition, it was wholly unrealistic to expect him to bring the legal proceedings in question with a view to benefiting anyone other than himself. In other words, if it were a requirement of section 37(2) that an applicant must have an intent to benefit all the debtor’s creditors in the event of his bankruptcy at an uncertain point of time in the future, the purpose of section 37(2) would be largely defeated.

57.  Next, the alleged irregularity of the default judgment obtained by the Funding Creditors. The objections taken by the Petitioner were that service of the writ in HCA2158 was bad and there was material non‑disclosure when the Funding Creditors applied for default judgment.

58.  Quite apart from insisting on the regularity of the default judgment, the Funding Creditors’ answer was this. The Trustees never applied to set aside the default judgment. On the contrary, pursuant to the Funding Agreement, the Trustees had agreed not to raise any objection to the default judgment or the proof of debt filed by the Funding Creditors. The Petitioner herself was aware of this – she had received a copy of the first draft of the Funding Agreement where it was clearly stated that in consideration of the funding, the Trustees would not raise any objection to the default judgment obtained by the Funding Creditors. Nevertheless, the Petitioner, as a major creditor, voted in favour of the Funding Agreement.

59.  This court should add that the Petitioner had never sought to intervene in HCA2158 in order to challenge the regularity of the default judgment. This court should also add that, in February 2010 when the Funding Creditors, on the back of the default judgment, applied to make the garnishee order against the HSBC account absolute, the Petitioner had indicated through her solicitors that she had no objection to the application.

60.  In the view of this court, it was unnecessary to adjudicate upon the regularity or otherwise of the default judgment for the purpose of the present application.

61.  First, whether or not the default judgment was regular, it would not have affected, one way or another, the Funding Creditors’ efforts to obtain the mareva injunction, freezing order or disclosure order. This is because that a claimant can legitimately apply for a mareva injunction etc on the basis of a claim rather than a judgment, provided that other criteria are met. In other words, whether or not the Funding Creditors had a valid default judgment was irrelevant to the question whether the Funding Creditors’ legal action had the effect of preserving the Bankrupt’s assets within section 37(2).

62.  Second, if the Petitioner took the view that the default judgment was irregular and liable to be set aside, she should have pressed the Trustees to do so, failing which she should have applied to intervene in HCA2158 and set it aside herself. On the evidence, she did neither. It lied ill in her mouth to challenge the default judgment now that the Funding Creditors’ effort had enlarged the pool of the Bankrupt’s assets, to the benefit of all creditors including the Petitioner.

63.  Third, even if the default judgment was irregular, in allowing the Funding Creditors’ application, this court would not be rewarding them for obtaining an irregular default judgment as such. Instead, the court would be rewarding the Funding Creditors for their efforts and the risk they took in incurring the legal expenses in question which had a beneficial effect on all creditors of the Bankrupt. That was in accordance with the letter and the spirit of section 37(2).

64.  Finally, the last two grounds could also be considered together.

65.  The Petitioner’s complaint was essentially this.

66.  By reason of the Funding Agreement, the Funding Creditors were already entitled to 40% of the Final Amount and had received over HK$4.2 million as interim payment. In addition, they were entitled to a half share of the net proceeds of sale of the HK Property in excess of HK$1.6 million and were guaranteed that their proof of debt as amended would be admitted in full. As such, it would be inequitable to award a further priority to the Funding Creditors when they had already gained a substantial advantage over the other creditors.

67.  Further, this court was urged to take the overall picture into account:

(a) The recoveries to date were merely HK$14,796,713.

(b) The proofs of debts received by the Trustees totalled US$11,222,877.26 and HK$91,083,356.29.

(c) The Funding Creditors had already received over HK$4.2 million out of the UK recovery to date, and approximately HK$1.6 million from the sale of the HK Property. Their total receipt was thus in excess of HK$5.8 million.

(d) The Applicants would further be entitled to share pari passu in 60% of the Final Amount.

(e) Presently, there were only HK$8,341,836 in the pool of assets available for distribution. If the application succeeded in full, the Funding Creditors would obtain another HK$4.2 million leaving behind slightly over HK$4 million for sharing by all creditors. This amount was liable to be further reduced after deducting the fees of the Trustees.

68.  Overall, the Petitioner submitted that it would be manifestly unfair to the other creditors if the Funding Creditors were to succeed in the present application.

69.  This court had considerable sympathy to the Petitioner who as stated at the beginning of this Judgment was an innocent victim of the Bankrupt’s dishonest conduct. But so were the Funding Creditors and possibly most if not all the other creditors. The difference between them was that the Funding Creditors were prepared to take on the risk of incurring substantial legal costs in pursuing the Bankrupt’s assets as well as the risk of funding the Trustees in their recovery action. These legal costs and funding might or might not be recoverable in full or at all.

70.  The Funding Creditors’ recovery thus far, and their so‑called lion’s share of the recovery, was a result of entering into the Funding Agreement and providing funding to the Trustees. This was an endeavour and risk taken on by the Funding Creditors separate and independent from that of pursuing the Bankrupt’s assets in their own right. On the evidence, the Funding Creditors had spent over HK$2.3 million under the Funding Agreement which sum was not covered by the present application. The Petitioner, or any other creditors for that matter, did not challenge the Funding Agreement now or at the time it was entered into. Rather, the overwhelming majority of the creditors, including the Petitioner, voted in favour of it before the agreement was submitted to the Bankruptcy court for approval.  It should be noted that the Funding Agreement did not preclude the Funding Creditors from making a section 37(2) application for priority to be given to their legal costs incurred without notice of the bankruptcy petition. It also did not preclude the Funding Creditors from participating in the remaining 60% of the Final Amount – rather, the Funding Agreement expressly included the Funding Creditors when it came to participation in the remaining 60%.

71.  In these circumstances, it would be wrong in principle for this court, in the exercise of its discretion, to reject the present application merely because the Funding Creditors had obtained an advantage and priority over the other creditors on a separate account ie by virtue of the Funding Agreement.

72.  In the view of this court, if a creditor comes within the ambit of section 37(2) of the Ordinance, then normally it would be fair for the court to exercise its discretion in making an order in his favour with regard to his legal costs. There may be scope for according priority to only part of his legal costs. If, for instance, the creditor’s efforts only make a minimal contribution to preserving the bankrupt’s property. Alternatively, the amount of legal costs incurred, even after party and party taxation, may be wholly disproportionate to the amount of recovery. In these cases, it could be unfair to the other creditors if the applicant’s taxed costs are given priority in full, in which case the court can and should exercise its discretion in allowing only a percentage of the taxed costs.

73.  Be that as it may, the stance taken by the Petitioner in the present case was that the Funding Creditors’ application should be dismissed. No attempt was made by the Petitioner to put forward an alternative case that only a percentage of the Funding Creditors’ costs should be awarded priority. Nor was there material put before this court that the Funding Creditors’ contribution to the preservation of the Bankrupt’s property could be assessed in terms of a percentage of the recovery. In these circumstances, subject to party and party taxation, this court was not minded to arbitrarily disallow priority for a part of the Funding Creditors’ legal costs. 

74.  At the end of the day, the pool of assets now available to all creditors was over HK$8 million. This pool would be further enlarged when the Trustees eventually realised the investment portfolio of Longear and other assets of the Bankrupt disclosed by the Wife e.g. a painting by Sir Sidney Nolan. This compared favourably to the meagre sum of HK$1.35 million as at May 2011. Even for this sum of HK$1.35 million, over HK$1 million came from a refund of the Bankrupt’s voluntary contribution to his MPF account with Manulife, which was first disclosed by the Wife pursuant to the disclosure order obtained by the Funding Creditors – shortly afterwards, solicitors for the Funding Creditors gave notice of the mareva injunction to Manulife and secured the money. The Petitioner, as well as the Bankrupt’s other creditors, stood to benefit from this enlargement of the pool without undertaking any financial risk. The overall fairness of the case actually compelled this court to grant, rather than dismiss, the present application.

Conclusion

75.  For the above reasons, this court did not accept the objections raised by the Petitioner and maintained the view that the property of the Bankrupt had been preserved for the benefit of his creditors by means of legal proceedings brought by the Funding Creditors. In the exercise of its discretion, this court would make an order under section 37(2) of the Ordinance in favour of the Funding Creditors.

76.  However, as the amounts claimed by the Funding Creditors in the summons were not taxed costs on a party and party basis as prescribed by section 37(2), this court was not minded to allow them in full now or conduct a mini-taxation of those costs. As accepted by Ms Leung at the hearing, those costs would have to be scrutinised by the Trustees and if necessary subject to a proper taxation process.

Disposition and costs order nisi

77.  On the Funding Creditors’ application, this court would grant the following orders:

(a) The Trustees be permitted to pay the Funding Creditors from the Bankrupt’s estate, in the same priority as the taxed costs of the Petition, their legal costs incurred in Hong Kong and the United Kingdom in preserving the property of the Bankrupt up to 23 March 2010, such costs to be referred to a taxing master for taxation on a party and party basis unless the same be agreed between the Funding Creditors and the Trustees.

(b) Liberty to apply.

78.  On the Petitioner’s application, this court would formally make an order in terms of her summons dated 12 October 2012.

79.  On the question of costs, this court would make a costs order nisi that the Petitioner do pay the Funding Creditors’ costs of and occasioned by their application, to be taxed if not agreed on a party and party basis, with certificate for 1 counsel.

80.  As for the Trustees’ costs, this court would also make a costs order nisi that the Trustees’ costs be paid out of the Bankrupt’s estate, save for the costs of their application for this hearing to be closed to the public. The application was dismissed after hearing submissions from the Trustees’ legal representative. While both the Petitioner and the Funding Creditors expressed no objection to the Trustees’ application, this court was not satisfied that a hearing open to the public “would prejudice the interests of justice” within the meaning of Article 10 of the Hong Kong Bill of Rights. In the view of this court, the Trustees had not even begun to make out a case why this hearing should be heard in camera. In these circumstances, it would not be appropriate for the Trustees’ costs of the failed application to be paid out of the Bankrupt’s estate. For the record, the first 45 minutes of the hearing before this court was consumed by the Trustee’s application.

(Peter Ng) Judge of the Court of First Instance High Court