RE NANIK DAYARAM

HCB 7651/2011

[2018] HKCFI 2497

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 7651 OF 2011

_________________________

_________________________

___________________

D E C I S I O N

___________________

THE APPLICATION AND BACKGROUND

1.  This is an application (by summons dated 17 May 2017) for suspension of automatic discharge from bankruptcy for a period up to 4 years by the Joint and Several Trustees in bankruptcy (“Trustees”) of Nanik Dayaram (“Dayaram”), pursuant to section 30A of the Bankruptcy Ordinance, Cap 6 (“the Ordinance”).

2.  Dayaram was adjudged bankrupt on 13 June 2013 as a result of a petition dated 7 December 2011 presented by a creditor, namely the Hongkong and Shanghai Banking Corporation Limited (“HSBC”). But for this application and the interim suspension orders, Dayaram would have been discharged from bankruptcy on 13 June 2017. Mr Osman Mohammed Arab and Mr Wong Kwok Keung of RSM Nelson Wheeler Corporate Advisory Limited were appointed the Trustees on 23 July 2013by a resolution passed at the first meeting of creditors.

3.  Dayaram submitted his Statement of Affairs to the Official Receiver’s Office on 15 July 2013 and his Preliminary Examination of Bankrupt to the Trustees on 8 November 2013. He said that he did not own any stocks, shares, bonds, unit trust and other financial securities in his Preliminary Examination of Bankrupt. He, however, disclosed the following assets in his Statement of Affairs:-

(a) HK$71,907.72 (cash in banks);

(b) Investment in stocks and shares in Days International Limited (incorporated in Hong Kong) (in compulsory liquidation) (“Days International HK”); and

(c) Membership of Hilltop Country Club.

4.  Following the appointment of the Trustees, they started the usual investigation and raised many round of enquiries with Dayaram by sending him written requests for information and documents.

5.  As at the date of the present application (17 May 2017), according to the Trustees, the total value of the proofs of debt submitted were over HK$ 221 million and USD$ 39 million.

6.  On 11 August 2015, Dayaram was convicted by a jury of nine counts of conspiracy to defraud and sentenced to 10 years’ imprisonment, which consisted of making and submitting false invoices and false bills of lading to banks, including HSBC, in order to obtain loans which have remained overdue and outstanding: HKSAR v. Nanik Dayaram HCCC 2/2014 (unreported) 11 August 2015.

7.  Because of the criminal trial, Dayaram had been remanded in custody on 6 August 2015. Although he was later granted bail pending appeal against conviction and sentence on 24 August 2016, he returned to prison on 19 January 2017 to serve the remainder of his sentence.

8.  The Trustees make the present application to object the automatic discharge and they rely on the following 2 grounds as provided for in sections 30A(4)(c) and 30A(4)(d) of the Ordinance respectively, that:-

(a) Dayaram has failed to co-operate in the administration of his estate; and

(b) the conduct of Dayaram in respect of the period before and after the commencement of the bankruptcy has been unsatisfactory.

LEGAL PRINCIPLES

9.  Parties are represented by counsel at the hearing and they do not have great dispute as to the legal principles applicable in the present case. I therefore take the liberty to repeat some of their submissions below for reference.

10.  The applicable legal principles for suspension of time to discharge from bankruptcy under section 30A(3) of the Ordinance are helpfully summarised in following authorities.

11.  In Re Hui Hing Kwok [1999] 3 HKC 683, Le Pichon J (as she then was), having considered the purpose of sections 30A(1) and 30A(2) of the Ordinance as set out in the Law Reform Commission’s Report on Bankruptcy that led to their enactment, observed that:-

“Rehabilitation in the sense of enabling the bankrupt to resume a normal life in society is a key, if not the key, consideration. It should only be delayed by a bankrupt’s own failings.”

12.  In Re Lee Raymond Cho Min & Re Lee Priscilla Hwang CACV 112 & 113 of 2014 (unreported) 30 July 2014, Yuen JA held that:-

“It is well-established that an application for suspension of discharge from bankruptcy should be considered in two stages:

(1) the court should first determine whether one or more of the grounds mentioned in s.30A(4) has been established; and if established,

(2) the court would then move on to consider whether or not, in the exercise of its discretion, a suspension of discharge should be ordered,

- having regard to all the circumstances of the case, including the nature of the acts complained of and the post-bankruptcy order conduct of the bankrupt, and

- bearing in mind the two main objectives of this part of the [the Ordinance]:

(a) the rehabilitation of the bankrupt by allowing him to resume a normal commercial life, as well as

(b) the public interest in ensuring that the return of the bankrupt to the commercial world would not carry with it an unacceptable risk to persons who may be engaged in commercial relations with him, and in preserving commercial morality.”

13.  I am also told that it is useful to look at Yuen JA’s comments in Re Leung Yat Tung (the Bankrupt) (No 2) [2007] 4 HKC 192 in relation to the failure in co-operation ground that:-

“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 according to the strict letter of the questions. 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.”;

14.  Mr McLeish, counsel for Dayaram, specifically drew my attention to the reasons given by Yuen JA in Re Lee Raymond Cho Min & Re Lee Priscilla Hwang (supra), in relation to bankrupt’s unsatisfactory conduct, that:-

“7. …… It is now clear that suspension may be ordered only if the pre-bankruptcy order conduct was grave but it need not be “exceptionally grave”: Tang Kai Mo v Fred Lee [2009] 1 HKLRD 87 , paras. 30-32.”

“8. As to what is meant by “unsatisfactory” pre-bankruptcy conduct, it was held in Lau Chi Kam [Fred Lee v Lau Chi Kam [2008] 3 HKLRD 627 ] (para 10) that the test for determining whether pre-bankruptcy order conduct was unsatisfactory was whether society would be prepared to condone such conduct without any expression of disapproval. ……”

15.  Mr McLeish also submitted that for appropriate period of suspension of time to discharge from bankruptcy, Yuen JA held in Re Leung Yat Tung (supra) when overturning an order for suspension of the maximum period of four years:-

“In my view, that maximum period should be reserved for the most egregious cases. Whilst the bankrupt was not cooperative in substance, he at least remained in communication with the OR …”

16.  He also relied on a passage from Totterdell v Nelson (1990) 97 ALR 341 (cited by Le Pichon J (as she then was) in Re Li Tat Kong [2000] 3 HKC 360), in which Burchett J observed that:-

“There may be cases where it would be unfair to a bankrupt to delay his discharge by reason of an incomplete investigation, lethargically pursued, to the torpor of which he has not contributed.”

DISCUSSION

17.  Mr Lok, counsel for the Trustees, in support of the application, asked me to look at 4 particular incidents, namely:-

(a) Non-disclosure of claim against Days International HK;

(b) Non-disclosure of shareholding in Days Impex Limited (incorporated in Liberia) (“Days Impex Liberia”) and Days Impex Limited (incorporated in Hong Kong) (“Days Impex HK”) (both in compulsory liquidation); and

(c) Dissipation of shareholdings in some related companies to associated parties; and

(d) Dissipation of contributions from Mandatory Provident Fund (“MPF”) Scheme.

Non-disclosure of Claim against Days International HK

18.  First of all, the Trustees relied on the non-disclosure of the Dayaram’s claim against Days International HK, a company incorporated in Hong Kong which is currently in liquidation under HCCW 299 of 2011. Mr Lok submitted that Dayaram only mentioned about the claim on 27 December 2013 when prompted by the Trustees on 23 December 2013 and the claim was not stated in the Statement of Affairs filed by Dayaram dated 15 July 2013. The claim was in the sum of HK$4,744,239.20 and was not disclosed prior to this request. Mr Lok submitted that Dayaram has remained largely unhelpful in relation to the Trustee’s investigation. The paucity of information provided is unacceptable and this is particularly so given that Dayaram was a director and shareholder of Days International HK.

19.  Dayaram explained that provisional liquidators were appointed for Days International HK by the court on 14 September 2011. The provisional liquidators seized all company assets and documents. He said that he was excluded from the company’s premises save that he was permitted to collect personal items and effects. Furthermore, at the creditors’ meeting held on 18 January 2012, Dayaram’s claim of HK$4,744,239.20 was reduced to HK$1 for voting purposes.

20.  Dayaram further explained that the reason he did not initially inform the Trustees of this claim was because the claim had already been rejected and he did not consider that there was any realistic prospect of recovery in any event.

21.  Mr McLeish argued that there might be some substance to the Trustee’s allegation if there was any basis for suggesting that Dayaram could possibly have believed that the claim could result in a payment to him given what had occurred. But he submitted that there was none. Dayaram was misguided in initially omitting to mention the claim, but realistically he had nothing to gain from this so as to permit bad faith to be imputed to him. In his submissions, Dayaram’s omission did not cause prejudice to the Trustees’ administration.

it is not sufficient for a bankrupt to take a purely passive role. In discharge of his duty, Dayaram needed to take all reasonable steps to enable the Trustees to obtain all relevant information and understand his affairs promptly, but obviously he was in breach of this positive duty. It is not a matter for Dayaram to decide what should be investigated by the Trustees. I also notice that Dayaram was the director and shareholder of a number of companies.  He is a sophisticated businessman with ample experience in the commercial world and therefore he knows far better than anyone else the importance of the disclosure at an early stage. All in all, I agree with the Trustees that this amounts to failure to co-operate in administration of the estate.

Non-disclosure of shareholding in Days Impex Liberia and Days Impex HK

23.  Now, I turn to another incident relied on by the Trustees, namely the non-disclosure of shareholding in Days Impex Liberia who, in turn, was the controlling shareholder of Days Impex HK.

24.  Dayaram explained that he ceased to be the sole shareholder of Days Impex Liberia, and hence ceased to have any interest in Days Impex HK several months before the bankruptcy order. He said that “the ownership of Liberian companies is by way of bearer shares” and explained how he somehow came to lose his shareholding because of debts owed to a “friend” (who lent him US$250,000) as a result of “high stakes baccarat” in Las Vegas in Christmas 2010. As a result, he later “ceased to own any shares in Days Impex Liberia several months before [he] was declared bankrupt”, namely “about the end of 2012”.

25.  Mr McLeish submitted that as at the time Dayaram completed the Statement of Affairs, Mr Dayaram had no shareholding in Days Impex Liberia or interest in Days Impex HK. Accordingly, there was no omission as alleged by the Trustees and the complaint of failure to co-operate under this heading is not made out.

26.  I agree that the mere failure to mention the shareholding in Days Impex Liberia in the Statement of Affairs is not sufficient to establish that Dayaram was in breach of the duty to co-operate as I accept that at the material time he was no longer the shareholder. But the Trustees’ complaint went far deeper than that. There is no dispute that, even up to the present moment, Dayaram refused to provide any information on this “friend” who was the lender and later kept the “bearer shares” of Days Impex Liberia. Dayaram said in his affirmation dated 21 July 2017 that “I am unable to disclose the identity of the person to whom I gave the shares as this would cause considerable difficulties with his family”. Furthermore, there is also no record whatsoever, contemporaneous or otherwise, to support any of his bare allegations in the entire incident. Furthermore, Dayaram actually had been a director of Days Impex Liberia for the period 5 years preceding the bankruptcy petition until 1 June 2013 but no document has ever been provided to prove the resignation.

27.  I agree with Mr Lok’s submissions that although the Trustees have not had a lot of evidence to say that there must be some questionable or highly problematic transactions yet, in my view, Dayaram had a positive duty to provide the information and evidence for investigation.  The major problem is that he refused to provide the assistance that the Trustees was entitled to have.

28.  Furthermore, because there was no mention whatsoever by Dayaram of the shareholdings of Days Impex Liberia and Days Impex HK at all until the present application, the Trustees were unable to carry out their investigation. The information requested was definitely useful to the Trustees. It would be quite wrong to say now that there might not be much use to look at the shareholdings of Days Impex Liberia and Days Impex HK as they could be worthless. If bankrupts generally were allowed to delay, or even to refuse, to provide useful information like this, administration of estate of bankrupts would become an almost impossible mission. I find that this deliberate act of withholding useful information is a very serious breach of a bankrupt’s duty of co-operation in the administration of his estate.

Dissipation of Shareholdings in the Related Companies to Associated Parties

29.  I am told that the Trustees were concerned as to the circumstances in which Dayaram transferred his shares in 3 different Hong Kong companies, namely Days Cyberport Limited (“Days Cyberport”), Malkita Limited and Days Travel Service Limited (“Days Travel Service”) (collectively the “Related Companies”) shortly after the filing of the bankruptcy petition on 7 December 2011.

30.  According to the Trustees, Dayaram executed a number of share transfers of his shares in the Related Companies on 21 February 2012, as a result of which each of the transferees became the sole member of the Related Companies. The transferee of the shares in Days Travel Service and Malkita Limited was Dayaram’s wife, Sheila Dayaram, who further transferred the shares in November 2012 to their son, Mahesh Dayaram. The transferee of the share in Days Cyberport was Days International Limited, a company incorporated in British Virgin Islands (“BVI”), of which Dayaram was a director (and was once a shareholder until 2005 or 2006). Dayaram explained to the Trustees on 11 September 2013 that he was, in fact, holding shares on trust for the respective transferees of the Related Companies but was unable, upon repeated requests, to produce any relevant information so as to substantiate the explanation being advanced until almost 2 years later.

31.  Dayaram explained that in fact, he informed the Trustees about these transfers in his first response to their questions following their appointment in his letter to the Trustees dated 11 September 2013. He said that he was holding the shares on trust for the transferees who had requested him to transfer the shares to them. I am told that there was no consideration for these transfers. He also said that he sent copies of the relevant declarations of trust and transfer requests to the Trustees by post almost 2 years later on 5 August 2015. However, the Trustees, in reply, said that “they have not received copies of the Declarations of Trust and Transfer Request as alleged.”

32.  Besides giving the explanation above, Dayaram further said that, at the time of the transfers, the companies were all dormant and none of them had any assets. It was therefore submitted on his behalf that even if Dayaram had had any beneficial interest in the shares concerned, the transfer would be of nominal value and therefore would not constitute any unsatisfactory conduct.

33.  First of all, even accepting the fact that the relevant declarations of trust and transfer requests were sent by Dayaram to the Trustees by post on 5 August 2015, I agree with the Trustees that it is highly suspicious to take almost 2 years to come up with these documents.  I do not accept his explanation for the delay.

34.  Secondly, Dayaram never took the effort to ensure the Trustees received the documents. They were only recently disclosed in the present application. In my view, this alone amount to failure to co-operate in administration. And I also agree with the Trustees that “Had the Bankrupt provided the said documents also by e-mail (as per one of his usual modes of communication with the Trustees) the Bankrupt would have at least be able to provide electronic record of the same”. There is absolutely no evidence whatsoever to support that he “sent copies of these documents to the Trustees by post on 5 August 2015, with a covering letter”.  It is not in dispute that the duty is on the bankrupt to make full and frank disclosure and to proffer all pertinent information. Obviously, Dayaram, as a bankrupt, has failed to do so.

35.  Thirdly, the complaint against Dayaram was indeed about the suspicious transfer of the shares to some associated parties, namely his wife, his son and a company incorporated in BVI with Dayaram as a director. According to him, although he was no longer the shareholder of this BVI company at the time of transfer, he never explained who then became the shareholder or who was the beneficial owner of this company since 2005 or 2006 and the reasons behind all these changes of shareholdings. Although it might be argued that if the value of transfer was nominal, it might not constitute an unsatisfactory conduct, this is definitely not an answer to his conduct in failing on his part to co-operate in providing essential information to the Trustees for investigation.

Dissipation of Contributions from MPF Scheme

36.  The Trustees also submitted that Dayaram failed to provide any satisfactory explanation for the spending of HK$1,320,478.04 maintained at HSBC Life (International) Limited (“HSBC Life”) on or about 25 March 2013, namely after his bankruptcy petition was filed and around 2 months prior to his Bankruptcy Order was made.

37.  Dayaram admitted that he had withdrawn his entire MPF contributions in March and April 2013. In the letter dated 27 September 2013, the Trustees requested for transfer of the money to the estate as the MPF contributions vested in the Trustees. Initially, on 12 October 2013, in response to the Trustees’ request, he explained that the funds withdrawn “was already spent before the end of May, 2013.  There is no money remaining in my possession to refund to you”. More than 8 months later, on 30 June 2014, Dayaram purported to explain that the funds had been exhausted as a result of “donations in the dropboxes of Temples”, “cash handouts to poor people living in Government Housing Estates with particular emphasis on elderly and handicapped” and “food handouts to homeless living under flyovers with cash handouts as well”.  As a result, he “fully exhausted HK$1.08 million in the 9 weeks of charity”. There is no information whatsoever other than his bare assertions and there is no way to confirm the truth of the matter.

38.  My special attention was drawn to the initial answer given by Dayaram that the purpose of spending the contribution was not provided. Later, Dayaram decided to explain and said that he spent the MPF contributions on charity. He then gave a detailed account on how he made the donations to different parties. As a result, he “fully exhausted HK$1.08 million in the 9 weeks of charity” “plus travelling expenses of approximately 30K” and “there are no receipts for donations”.

39.  Mr McLeish submitted that given the charitable character of the dissipation of the MPF contributions, the test for determining whether pre-bankruptcy conduct was unsatisfactory is clearly not met. He argued that society would be prepared to condone such conduct without any expression of disapproval.

40.  With the greatest respect, I do not agree. It is wholly unacceptable and irresponsible for a businessman who donated his assets for charity when he knew too well that he was insolvent. After the bankruptcy petition was filed and served, Dayaram must have been aware of the huge liability he had to meet. I am sure that any responsible businessman would not have spent funds like that in a manner similar to what Dayaram had done. In my view, no one would be prepared to condone Dayaram’s conduct without any expression of disapproval. Applying the test in Re Lee Raymond Cho Min & Re Lee Priscilla Hwang (supra), this is no doubt an unsatisfactory conduct and I therefore find that the pre-bankruptcy conduct of Dayaram has been unsatisfactory. In addition, I also find that the initial answer given by Dayaram is an obvious failure in co-operation.

Sections 30A(4)(c) and 30A(4)(d) of the Ordinance

41.  All in all, I agree with Mr Lok that Dayaram’s conduct has been unsatisfactory and he has clearly failed to co-operate with the Trustees.  It appears to me that none of the conduct was relating to poor judgment or misfortune. The 2 grounds as provided for in sections 30A(4)(c) and 30A(4)(d) of the Ordinance respectively have been established.

The Exercise of Discretion

42.  In exercise of my discretion, I bear in mind the 2 main objectives for the Ordinance set out in Re Lee Raymond Cho Min & Re Lee Priscilla Hwang (supra) for suspension of automatic discharge from bankruptcy. Again, I do not intend to repeat the facts as they are usefully summarised in the counsel’s submissions. I shall just give my reasons and decision on this matter.

43.  First of all, I was invited to take into account the way that Dayaram arranged his affairs prior to his bankruptcy, which had a direct bearing on the way that his bankruptcy could be administered. For instance, Dayaram would acquire properties, in his own name, and then arrange for another corporate entity to take up the actual purchase. Complicated corporate structures were created for carrying on business or for holding investment including stock and shares or real property for Dayaram and his family. In my view, this made the work of the Trustees particularly difficult, unless Dayaram was upmost co-operative but unfortunately he was not.

44.  Secondly, I agree with the submissions of the Trustees that there are strong indications to suggest that the arrangements of Dayaram’s affairs, including the imposition of complicated trust arrangements and corporate structures, could have effectively concealed his relationship with a group of companies (holding a number of properties in Hong Kong) which on the face of it belonging to his family. I agree that Dayaram has clearly failed from being full and frank in his disclosure. For this, the Trustees will have to continue with the investigation because the administration has not been completed. In my view, the attitude adopted by Dayaram is far from satisfactory and co-operative. Trustees would need more time to investigate to complete a meaningful administration.

45.  Thirdly, I also take into account the serious commercial fraud that Dayaram was involved.

46.  Fourthly, it is quite apparent that Dayaram largely chose to be passive and reactive.  He adopted the “catch me if you can” approach and only provided information when he was caught and cornered by the Trustees.  And very often, he was unable to provide documentary evidence to support his explanation.

47.  Fifthly, I agree with Mr Lok that there was no undue delay in administration on the part of the Trustees.

48.  However, when exercise my discretion, I do notice one thing which is in favour of Dayaram. I agree with Mr McLeish that, so far, the results and the evidence coming out from the investigation of the 4 incidents, relied upon by the Trustees for making this application, did not seem to show Dayaram did actually conceal any assets, although his unco-operative attitude gave a very strong impression that he did. I also agree that the maximum period should be reserved for the most egregious cases and I am afraid that this is, although a very serious one, not one of the most egregious. I therefore do not intend to impose the maximum period of suspension of 4 years.

49.  Given all the circumstances of the present case, I order that the relevant period shall cease to run for a period of 3 years.

50.  I was specifically asked to reserve the decision on costs and so I order.

DISPOSITION

51.  I will make the following orders:-

(a) The discharge of the bankruptcy under section 30A of the Bankruptcy Ordinance (Cap. 6) shall cease to run for a period of 3 years from 12 June 2017; and

(b) Costs be reserved.

52.  Finally, I thank both counsel for their very helpful assistance.