RE CHU CHI HO IAN (ALSO KNOWN AS CHU CHI HO)

HCB 4344/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 4344 OF 2012

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D E C I S I O N

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1.  This is the application of Sun Willie Financing Ltd (“Sun Willie”) and Dragonite Resources Ltd (“Dragonite”) (collectively “Applicants”) by an Amended Summons dated 23 July 2014 under sections 83, 84, 97 and 100F of the Bankruptcy Ordinance, Cap 6 (“Ordinance”) for an order that the trustees (“Trustees”) of the estate of Chu Chi Ho Ian (“Bankrupt”) disclose the particulars of a funding arrangement said to have been entered into by the Trustees.

2.  One of the creditors of the Bankrupt, Forefront Finance Co Ltd (“Forefront”), had appeared at the hearing of this application in support of it.

Background

3.  Forefront submitted a bankruptcy petition (“Petition”) on 5 July 2012 against the Bankrupt and a bankruptcy order was made on 5 September 2012.  On 14 December 2012 at the first general meeting of creditors convened by the creditors committee (“Committee”), comprising of Forefront, the Applicants and Melco Crown (Macau) Ltd (“Melco”), the Trustees were appointed as the joint and several trustees of the Bankrupt’s property.

4.  The present application cannot be considered in isolation.  For reasons which will become apparent, there is a good deal of controversies involving the Trustees on one hand and the Applicants and Forefront on the other.  In order to examine the present application in its proper context, one needs to go into some details in the background facts. 

5.  There are currently 4 applications made by the parties :

(a) An application by the Trustees pursuant to s 29 of the Ordinance to examine the Bankrupt (“Examination Application”);

(b) An application by the Applicants and Forefront seeking the removal of the Trustees (“Removal Application”);

(c) An application by the Trustees to seek the court’s sanction of a funding arrangement (“Sanction Application”); and

(d) This application (“Disclosure Application”).

6.  The current status of each application is as follows.

7.  The Examination Application was made by Summons dated 12 March 2014.  It was heard on 7 May 2014 before Ng J at the same time as the first hearing of the Removal Application.  It was agreed that pending determination of the Removal Application, the Examination Application should be adjourned.

8.  It is no secret, and the Applicants and Forefront are well aware, that the focus of the intended examination of the Bankrupt is what the Trustees believe to be suspicious transactions and relationship between the Bankrupt and, inter alios, Forefront and the Applicants.  It should also be said that the Trustees have fairly and openly informed the creditors, including the Applicants and Forefront, that one of the purposes of the funding in question is to conduct such examination and further investigation into those matters.

9.  The Removal Application was made by Summons dated 29 April 2014.  It is stated to be an application (a) to confirm the removal of the Trustees pursuant to resolutions said to have been passed by creditors; or (b) seeking an order removing the Trustees.

10.  At the hearing before Ng J on 7 May 2014, the Removal Application was adjourned for argument on the basis that the only issue was the removal of the Trustees for misconduct under s 96 of the Ordinance.  The issue whether the Trustees were removed at a creditors’ meeting on 9 October 2013 was abandoned.

11.  The Removal Application was heard on 28 August 2014 before Ng J.  On 7 October 2014, after receiving correspondence from the Trustees and the applicants Ng J directed, inter alia, that further affidavit evidence be filed by the parties and that the application be set down for a further hearing with 2 hours reserved.  The Removal Application is, therefore, part-heard.

12.  The Sanction Application was made ex parte on 9 June 2014.  Upon the Applicants making the Disclosure Application on 10 June 2014, the Trustees’ solicitors wrote to the court on 13 June 2014 proposing that the Disclosure Application be dealt with before consideration of the Sanction Application.  By a letter dated 2 July 2014, the court directed (a) that the Sanction Application be heard after the determination of the Disclosure Application; and (b) should the Applicants wish to be heard on the Sanction Application they should make an application to that effect after the determination of the Disclosure Application.

13.  A date has been fixed for the hearing of the Sanction Application, being 4 December 2014.

14.  The Disclosure Application was made by Summons dated 10 June 2014.  It asks for disclosure of the particulars of the funding agreement and for an order that the Sanction Application be heard inter partes.  At a hearing before this court on 24 June 2014, leave was granted to the Applicants to amend the Summons by deleting the second part of the application.  The question of appearance by the Applicants at the Sanction Application has subsequently been dealt with by the direction of the court dated 2 July 2014 (see para 12 above).

15.  There was also an order made at the hearing on 24 June 2014 that this application be heard before the Sanction Application.  The order was made at the request of the Applicants and with the Trustees’ agreement.

16.  Next, I need to go into a little detail so as to explain the background to the controversies.

17.  After their appointment, the Trustees carried out investigations in the Bankrupt’s affairs.  From such investigations it became apparent to the Trustees that there might be more to the relationship between the Bankrupt and the Applicants and Forefront than what appeared on the surface and a number of transactions involving these parties which the Trustees considered as suspicious had come to light.

18.  There is a succinct summary of the findings of the investigations contained in the 3^rd affirmation of Wong Kwok Keung (“Wong”), one of the Trustees, para 8 :

“(a) the loan agreement entered into on 27 July 2012 by the Bankrupt as borrower and Dragonite as lender for HK$10 million. This transaction was entered into 22 days after the presentation of the bankruptcy petition by Forefront on 5 July 2012. This was also 5 months after Forefront and Sun Willie commenced recovery actions against the Bankrupt;

(b) the Bankrupt in the period 18 July 2011 to 27 July 2012 borrowed, for reasons which remain unknown, over HK$42 million from Forefront, Sun Willie and Dragonite. These loans were made without security or any guarantees being given. The majority of the funds borrowed by the Bankrupt were paid by Forefront, Sun Willie and Dragonite directly to HEC Finance without ever being paid to the Bankrupt with the exception of HK$5.4 million paid by Sun Willie to the Bankrupt by cheque on 9 August 2011;

(c) the intermediate holding company of HEC Finance is HEC Capital Limited (“HEC Capital”) which is in turn the intermediate holding company of Seekers Financial Research Limited (“Seekers Financial”), a company of which the Bankrupt was a director and employee. Now shown to me and marked “WKK-6” is a copy of the Annual Return of Seekers Financial and the Bankrupt’s tax return for assessment of years 2011/2012 filed with the Inland Revenue Department;

(d) HEC Capital’s shareholders include Forefront Group Limited, a Hong Kong listed company (Stock Code 885) (“Forefront Group”) and Willie International Holdings Limited, Hong Kong listed company (Stock Code 273) (“Willie International”). Forefront Group is the sole shareholder of Forefront and Willie International is the sole shareholder of Sun Willie;

(e) Wellhand has alleged that the Bnakrupt sold to it 4 motor vehicles for a total sum of HK$5 million in or around October 2010. According to records obtained by the Trustees from the Transport Department, the Bankrupt was until 1 February 2012 the registered owner of 3 out of the 4 motor vehicles. Willie International is the holder of at least 50% of the shares in Wellhand;

(f) Forefront and Sun Willie issued Writs of Summons against the Bankrupt on 8 February 2012 and 29 February 2012.

(g) The sole proprietor of Ching & Solicitors, the solicitors acting on behalf of Forefront, Sun Willie and Dragonite, is Ching Yuen Man Angela (“Ms Ching”). Ms Ching was up to 2 May 2012 a director and the authorised representative of Dragonite. Ms Ching’s Notice of Resignation as a director of Dragonite was filed with the Companies Registry on 6 July 2012, the day after Ching & Solicitors presented the Bankruptcy Petition to this Honourable Court on behalf of Forefront.

(h) The Bankrupt since the bankruptcy order was made on 5 September 2012 has lived in a house at House No. 18, Lausanne Avenue, Valais No. 28 Kwu Tung Road, Sheung Shui, New Territories (“Bankrupt’s Residence”). The monthly rental for Bankrupt’s Residence is HK$50,000 per month. The Bankrupt has advised the Trustee’s that the Bankrupt’s Residence was provided to him by a friend with no rent payable. Investigations carried out by the Trustees indicate that a tenancy agreement for the Bankrupt’s Residence was entered into between Profit Face Limited (“Profit Face”) as landlord and Radford Development Limited (“Radford”), a company registered in the British Virgin Islands, as tenant at a rental of HK$50,000 per month. The directors of Radford are/were Chuang Yue Chien Eugene and his brother Cheng Yu Heng Henry, a former director of HEC Securities Limited and Willie International.

(i) Further investigations by the Trustees indicate that the Bankrupt continues to be employed by Seekers Financial.  Furthermore, the Bankrupt was still using his email address with Seekers Financial as his primary contact up until October 2013.”

19.  Further, the Trustees had found out from the Bankrupt’s bank account that he had deposit and withdrawal transactions which amounted to more than HK$188 million and HK$140 million respectively over a 5 year period prior to the presentation of the Petition.  During the same period of time, the Bankrupt had owned 18 vehicles. However, only HK$57,000 worth of the Bankrupt’s property has been recovered to date.

20.  There are 9 separate entities who have lodged Proofs of Debt with the Trustees (totalling over HK$58 million) as follows :

		HK$
1.	The Hong Kong and Shanghai Banking Corporation Ltd	816,668.80
2.	Melco	3,596,686.66
3.	Dragonite	10,132,268.06
4.	Forefront	21,134,794.62
5.	Sun Willie	11,035,220.06
6.	Enhanced Securities Ltd	765,977.75
7.	Commissioner of Inland Revenue	47,772.00
8.	American Express International Inc	2,333,437.14
9.	American Express International Inc	2,085,616.75
10.	Marina Bay Sands Pte Ltd	6,350,081.16
11.	Commissioner of Inland Revenue	6,740.00

21.  It should be noted that both Forefront and Sun Willie are judgment creditors.  It appears that the Proofs of Debt filed by them are based on the judgments.  Forefront’s judgment was obtained by reason of the failure of the Bankrupt to file his pleading, whereas Sun Willie’s judgment was obtained due to the absence of any notice of intention to defend.

22.  In respect of Dragonite’s claim, it has been said by Mr Bell SC, who appeared with Mr Kim for the Applicants, that it is well documented.  However, Wong had said in para 9 of his 3^rd affirmation :

“Based on the information received by them, the Trustees requested further information from HEC Finance, Forefront, Sun Willie and Dragonite with regard to their loan arrangements with the Bankrupt. However, only limited information has been received by the Trustees from these companies.”

23.  Given these circumstances, it is consistent with the Trustees’ duties to investigate further into these matters.

24.  On 3 September 2013, the Trustees wrote to each of the members of the Committee to inform them that due to the complexity and the involvement of legal matters in the bankruptcy proceedings they proposed to engage solicitors for assistance, and sough their sanction in that regard[1].

25.  On the next day, Ching & Solicitors, acting for Forefront wrote to the Trustees seeking an update on various aspects of the bankruptcy proceedings, including the fees incurred by the Trustees.

26.  A reply by the Trustees was given on 6 September 2013.  Amongst other information, 2 “major areas that will likely result in a recovery” were identified – (i) potential recovery of HK$30 million from HEC Finance 92 Ltd (“HEC”) and (ii) transfer of vehicles to Wellhand Ltd (“Wellhand”).

27.  The details provided for the HEC recovery should be quoted here :

“The investigations of the Trustees reveal that your clients Forefront Finance Company Limited and Dragonite Resources Limited issued cheques of HK$20,000,000 and HK$10,000,000 respectively to HEC on 22 September 2011 and 27 July 2012 pursuant to the loan agreements entered into between the Bankrupt and your clients separately.

Accordingly, the Trustees sent letters to HEC requesting them to explain the reason behind the nature of the payment and their dealings with the Bankrupt. The Trustees have yet to receive a substantial reply from HEC.

If HEC fail to provide any substantial reply or they respond stating that the HK$30,000,000 was in fact a loan from the Bankrupt, the Trustees will demand HEC for repayment and may take appropriate legal action.”

28.  On 18 September 2013, Forefront and the Applicants sought to convene a general meeting of the Committee in order to vote to remove the Trustees and have them replaced with the Official Receiver.  The reason given for the removal was the allegedly exorbitant fees (HK$744,689.81 from December 2013 to September 2014) incurred by the Trustees.

29.  A general meeting of the creditors was held on 9 October 2013 where Forefront and the Applicants were each served with a notice of rejection of proof for the purpose of voting at the meeting.

30.  Forefront and the Applicants took out the Removal Application on 29 April 2014 (see para 9 above).

31.  On 12 May 2014, the Trustees wrote to the creditors informing them that the Trustees had entered into a funding agreement (“Agreement”) with a funder and that the Trustees would like to hold a meeting of creditors to discuss the general terms of the funding arrangement.

32.  There is a complaint by the Applicants that the Trustees have been blowing hot and cold as to whether Agreement has been made or it is only a proposed arrangement.  As I understand from the evidence, it is a matter being ventilated in the Removal Application and in respect of which additional evidence has been filed pursuant to direction of Ng J (see para 11 above).  Moreover, I do not believe that the point is of any relevance in the present application.  Whether or not the Agreement has been made, it is undisputed that the sanction of the court is required before it can take effect.

33.  At the meeting of creditors held on 21 May 2014, the Trustees’ solicitors declined to disclose any details of the funding arrangement on the ground of confidentiality.  This has led to the present application.

The arguments

34.  On behalf of the Applicants, Mr Bell argues that this application should be granted for 4 reasons :

(a) Firstly, the common law rules making maintenance and champerty criminal offences, torts and a ground of public policy for invalidating tainted transactions : Unruh v Seeberger (2007) 10 HKCFAR 31, §78.  If the Trustees’ funding arrangement is with a third-party funder, it will fall foul of the common law.

(b) Secondly, whether the Trustees are entering into a funding arrangement with a third-party funder or another creditor, the Trustees are required to seek the sanction of the Court and this should be done inter partes with all the creditors of the Bankrupt : Re Cyberworks Audio Video Technology Ltd [2010] 2 HKLRD 1137 and Berman v SPF CDO I Ltd [2011] 2 HKLRD 815.

(c) Thirdly, even if the Trustees are entering into a funding arrangement with a creditor, the terms of the funding arrangement should be made available to the other creditors in order to determine whether the Trustees are acting impartially with regard the other creditors and not in favour of the funding creditor : Re Goodway Ltd, unrep, HCCW 162/1998, 11 January 1999.

(d) Fourthly, the Trustees have not acted impartially and have only selectively offered the funding arrangement and the court should order the disclosure of its contents.

35.  Mr Ko, who appeared for Forefront, has adopted the submissions of the Applicants and made 1 additional point, namely, that by reason of the potential advantage which a funding creditor may have in the eventual distribution of the Bankrupt’s assets (see s 38(5B) of the Ordinance) it is only fair for the terms of Agreement to be disclosed to the other creditors.

36.  Appearing for the Trustees, Mr Darton maintains that the disclosure of the Agreement is prohibited by a confidentiality clause (“Clause”) therein and that there is no unreasonableness on the part of the Trustees in abiding by the contractual obligation.  The terms of the Clause are as follows:

“The Trustee and the Funder shall keep the contents of this Agreement confidential save and except where disclosure is required by law or for obtaining approval from the Court or for obtaining legal advice or with the prior written consent of the other party to this Agreement.”

Analysis

37.  The relevant facts have been set out in some detail because not infrequently the merits of an application will become apparent once the factual picture is clear.

38.  Let may say at the outset that, on the material before this court, the suggestion of impropriety on the part of the Trustees is not made out.  In particular, I do not see any attempt on their part to hide the fact that the funding arrangement is not open to all creditors.  In their letter dated 12 May 2014 (see para 31 above), it was made clear that the Trustees had “… invited certain major creditors … to provide funding … to engage lawyers, to commence legal actions and to perform further investigations”.

39.  More importantly, this appears to be a matter in issue in the Removal Application and this court should avoid the prospects of making any inconsistent finding.  I shall return to the inconsistent finding point later.

40.  The picture which emerged from the facts is that, more likely than not, the Applicants and Forefront are unhappy about the discoveries made by the Trustees with their investigations.  I do not believe that the attempt to remove the Trustees is motivated solely, if at all, by the belief of excessive fees.  On the evidence, the Trustees’ remuneration is to be fixed by the Committee.  Hence, as Mr Darton has pointed out, if these parties take the view that the fees are excessive it is open for them not to pass the resolution to approve the same. These parties in fact constitute the majority of the Committee.

41.  It is reasonably clear from the evidence that the results of the Trustees’ investigations and their intention to pursue the matters further have triggered a concerted effort by the Applicants and Forefront to remove them and to resist their further actions.  This is borne out by the resistance to the funding arrangement.  On its face, the Applicants and Forefront stand to benefit from the arrangement without paying anything.  Why would they resist the arrangement?  Mr Bell has not been able to provide any answer in this regard.

42.  There is no merit in the suggestion that the Applicants or Forefront would like to participate in the funding arrangement.  It is quite clear that the intended course of action of the Trustees involves an examination of the propriety of the transactions in which they may be concerned.  Mr Ko argues, with Mr Bell’s support, that Forefront may like to participate in the funding arrangement for the recovery action against Wellhand (see para 26 above).  With respect, the suggestion cannot be taken seriously given the connection between Forefront and Wellhand : see paras 18(d) and (e) above.

43.  This brings me to the point which I find most troubling with this application.  It is quite clear that the issues in this application overlap substantially with those in the Sanction Application.  It is also clear that this application was made in aid of the Applicants’ intended opposition to the Sanction Application.  All 4 grounds advanced by the Mr Bell (see para 34 above) are relevant to the Sanction Application and no doubt will be ventilated in that application again (there is no suggestion by Mr Bell that the Applicants will abandon at the Sanction Application any of his 4 complaints).  To a lesser degree, the issues in this application also overlap with those in the Removal Application.  It is not right for the court to be put into a situation where inconsistent findings may be made: see the well-known dicta of Lord Devlin in Connelly v DPP [1964] AC 1254 at 1353.

44.  This concern has been put to Mr Bell and the only answer provided is that if the issues are relevant to more than 1 application then the court will have to deal with them in each application.  With respect, I do not agree in light of the present circumstances.  To begin with, this application should at least be heard together with the Sanction Application.  With the benefit of hindsight, this court should not have acceded to the parties’ application to have this application heard prior to the Sanction Application (see para 15 above).  Given its timing, it appears that the first direction of Ng J dated 2 July 2014 (see para 12 above) was made as a consequence of the direction of this court that this application be heard before the Sanction Application.

45.  Secondly, given the overlap of the issues, I do not see what real justification there is for pursuing this application.  Mr Darton has confirmed that the Agreement will be provided to the judge dealing with the Sanction Application for consideration. Such disclosure will be consistent with the Clause.  The Applicants[2] are free to apply to the court to be heard on the Sanction Application (see para 12 above) and complain that the non-disclosure of the Agreement is unfair to them.  The judge seized of the matter will then have to determine the validity of the complaint.  The Trustees will run the risk of not obtaining the sanction of the court without disclosure of the Agreement or its material terms.  Another way of looking at this application is that it is unnecessary.

46.  The above analysis applies equally to the ground advanced by Forefront.

47.  For these reasons alone, this application must be dismissed.

48.  It follows from the reasons stated above that this court should desist from adjudicating on the grounds advanced by Mr Bell and Mr Ko.

49.  Finally, I would like to say that although it is quite common for a funding agreement to contain a confidentiality clause (see Re Luu Hung Viet Derrick, unrep, HCB 4776/2011, 26 September 2013, §33), it is puzzling to me why, apart from the wish of the funder, it has to be kept confidential.  It is not difficult to see that the lack of transparency will generate controversy.  Obviously, the funder considers it worthwhile to invest in the further investigation or litigation by the trustees with a view to recovery of assets from which it will benefit.  If it is in the interest of the funder to pursue the matter, why should it shackle the trustees with a duty of confidentiality?  This is a matter which should be carefully considered by trustees before they enter into such an agreement. They have a duty to avoid satellite litigation.

Conclusions

50.  This application is dismissed and I make an order nisi that the costs of the Trustees be paid by the Applicants.

[1][1] Sanction was subsequently given by Chung J on 6 November 2013.

[2] I see no reason why Forefront cannot make a similar application if so desires.