CHEN YUNG NGAI KENNETH AND ANOTHER v. ALAN CHUNG WAH TANG AND ANOTHER

CACV 83/2020

[2022] HKCA 110

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 83 OF 2020

(ON APPEAL FROM HCB NO 3819 OF 2011)

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J U D G M E N T

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Hon Cheung JA:

1.  I agree with the Judgment of Yuen JA.

Hon Yuen JA:

2.  This is an appeal from the Decision of Au-Yeung J (“the judge”) given on 8 April 2020 (“the Decision”) dismissing a summons filed by the Trustees in bankruptcy of David Ho Yuk Wah (“the Bankrupt”) under s.29 Bankruptcy Ordinance (“BO”) for an order requiring Alan Tang Chung Wah (“Tang”) and Hou Chung Man (“Hou”) who are the liquidators (“the Liquidators”) of Asia-Pac Infrastructure Development Ltd (“the Company” or “APIDL”) to produce information and documents relating to litigation funding, in which the Trustees suspect the Bankrupt is involved and which may result in funds available for the Bankrupt’s estate if the litigation is successful.

The Bankrupt and the Company

3.1.  The Bankrupt was formerly a partner in a large law firm.  He was also a businessman involved in substantial projects on the mainland.  He founded the Company (a member of the Asia-Pac group of companies) in 1996. 

3.2.  In 2004, the Bankrupt purportedly sold the Company to two companies including King Ocean Development Inc (“King Ocean”), a BVI company purportedly owned by Yu Yang, whose sister was at one stage married to him.

3.3.  In August 2011, the Bankrupt was made bankrupt on his own petition.

3.4.  In April 2013, the Company was put in creditors voluntary winding-up.  Tang and Hou were appointed liquidators.   

4.1.  At the s.29 application, the Trustees asserted that, as evidenced by the Bankrupt’s continued involvement with the Company long after its purported sale, it was a sham and he has in fact retained beneficial ownership of the Company.

4.2.  For their part, the Liquidators disputed the above assertion, describing as “imperative” the defence¹ of the purported new shareholders of the Company who had denied the sale was a sham². 

The 971 Action

5.1.  The issue of the Bankrupt’s beneficial ownership of the Company was one of the subject matters of HCA971/2012 (“the 971 Action”), in which the Trustees were plaintiffs, and the Bankrupt and the Company were defendants. Other defendants included King Ocean and Sparkle Lanes Ltd, a BVI company owned by the Company (“Sparkle Lanes”).

5.2.  In the 971 Action, the Liquidators had filed a defence for the Company which “consists largely of denials and non-admissions” and at trial, they took a “neutral stance”³.

5.3.  At the date of the hearing of the s.29 application, the 971 Action had not yet been tried.  In the Decision, the judge held that “for present purposes, the 971 Action provides sufficient basis for the Trustees to think that the Bankrupt was related to APIDL”⁴ (emphasis added).  However, she considered that “nothing turns on the merits of the 971 Action here”⁵.  I will discuss this view later in this Judgment⁶.

5.4.  After the Decision in the s.29 application, judgment was given in the 971 Action by Ng J⁷, in which he found:

- the Bankrupt’s purported sale of the Company in 2004 was indeed a sham and that the Bankrupt has continued to beneficially own it⁸; and

- King Ocean was not a genuine investor⁹ and that it acted in accordance with the Bankrupt’s instructions and as his nominee¹⁰. 

There is no appeal from Ng J’s Judgment. 

6.  In other words,

- the Bankrupt has all along beneficially owned the Company, as asserted by the Trustees and denied by the Liquidators, and

- consequently, his estate is entitled to any surplus funds of the Company¹¹.

The Trustees’ s.29 application

7.  Section 29 of the BO provides (where material):

“(1) The court, may, on the application of the ... trustee, at any time after a bankruptcy order has been made against a bankrupt summon before it ... any person whom the court may deem capable of giving information respecting the bankrupt, his dealings or property, and the court may require any such person to produce any document in his custody or power relating to the bankrupt, his dealings or property”.

The Trustees’ case        

8.1.  The Trustees suspect that the Bankrupt was involved in:

- funding arrangements for HCA806/2006, a current action in which the Company is claiming compensation in excess of US$400 million¹² from its former legal advisers (“the 806 Action”);

- funding arrangements in other proceedings in which the Company was a party. 

8.2.  The grounds for the Trustees’ suspicions were as follows.

(1) The Bankrupt has continued to own the Company, contrary to his allegation that he had sold it in 2004 (a matter since confirmed by Ng J’s judgment in the 971 Action).  

(2) The Bankrupt has a record of funding litigation in the following 4 proceedings, having provided funds for 2 actions in which the Company was a party, as well as 2 other proceedings:

(a) HCA16778/1999¹³, a claim by the Company for compensation against Alexander Ing, a former officer of the Company (“the 16778 Action”);

(b) the 806 Action;

(c) HCA4188/2002 (“the CWT case”), in which CWT Textile Supplies Co Ltd (“CWT”) claimed compensation from its former auditors; and

(d) HCB345/2001, in which the trustees in bankruptcy of Lee Siu Fung Siegfried have been tracing assets which they suspect Lee has concealed (“the LSF Case”).

In relation to the above 4 proceedings, the evidence relating to litigation funding are as follows.

(a) In relation to the 16778 Action, even after the Bankrupt had purportedly sold the Company in 2004, the solicitors acting for the Company in that case sent him their bills as late as 2009 - 2010¹⁴.

(b) In relation to the 806 Action, again even after the Bankrupt had purportedly sold the Company in 2004, funds in support of its litigation were provided by King Ocean and Sparkle Lanes, the Bankrupt’s corporate vehicles¹⁵ (his connection with these companies was confirmed in Ng J’s judgment in the 971 Action¹⁶).

(c) In relation to the CWT Case,

(i) this company went into creditors voluntary winding-up in 2003.  It then entered into a funding agreement with Sun Ascent International Ltd (“Sun Ascent”) and a consultancy agreement with Topmark Asia Ltd (“Topmark”) for HCA4188/2002.  These two companies were BVI vehicles through which the Bankrupt conducted his business and paid for personal and family expenses¹⁷.

(ii) - According to Jeff Li Chak Fu (the Company’s accountant between 1998 and 2005), the Bankrupt told him he had a friend who was a partner at Grant Thornton¹⁸, who had some distressed asset projects under litigation and asked the Bankrupt to invest in them¹⁹.  

- According to Peter Lo Hung Hing (the senior accounting manager/financial controller of the Asia-Pac group of companies), Sun Ascent, Topmark²⁰ and the Company had channeled funds from the Asia-Pac group to Grant Thornton for the liquidators of CWT²¹, and the Bankrupt was in charge²².

- According to Brian Chan (a solicitor who used to be the Bankrupt’s assistant), he had transferred funds from an account he held for the Bankrupt to Grant Thornton at the Bankrupt’s request²³.

(iii) The CWT case was settled in March 2009.  Out of $45 million recovered, more than $20 million was paid to Topmark, $5.6 million to Sun Ascent, and $7.75 million to the liquidators on approval from Sun Ascent²⁴.

(d) In relation to the LSF Case,

(i) more than $1.5 million from the CWT Case settlement was transferred directly to fund the LSF Case²⁵; 

(ii) Hou agreed that there were common litigation funders for the CWT Case and the LSF Case²⁶.  

(3) Apart from litigation funders associated with the Bankrupt (King Ocean, Sparkle Lanes, Sun Ascent and Topmark), the 806 Action, the CWT Case and the LSF Case also had another common feature in that Tang is a liquidator of the Company in the current 806 Action, he was a liquidator of CWT, and he was a trustee in bankruptcy in the LSF Case²⁷. So, not only does the Bankrupt have a record of funding litigation, he has a record of funding litigation in which Tang was involved as liquidator or trustee in bankruptcy.  The Trustees suspected that, consistently with the above “close working relationship between the Bankrupt and Tang”²⁸ and in view of the Bankrupt’s ownership of the Company, he (the Bankrupt) is involved in the funding.   

The Liquidators’ case

9.1.  The Liquidators opposed the application.  Their case was that the Trustees was acting in a “large-scale conspiracy” with (among others) the other parties in the LSF Case and the defendants in the 806 Action²⁹.  The judge did not make such a finding and there is no cross-appeal. 

9.2.  The Liquidators also opposed the s.29 application on the following bases. 

- The Trustees had failed to establish a relationship between the Bankrupt and the Company³⁰.

- As for the 806 Action, the Trustees had not provided documentary evidence to show the relationship between the Bankrupt and the Company’s current funders³¹, viz. two BVI companies True Treasure Enterprises Ltd (“True Treasure”) and China New Investments Ltd (“CNIL”), and a Hong Kong company Fidelity Insurance Co Ltd (“FICL”) which is a co-partner of CNIL.  True Treasure had been a creditor of the Company, and CNIL is a BVI company which Tang “introduced through his primary school mate Tony Cheung”³².  From the certificate of incumbency and register of members of True Treasure and the certificate of incumbency and a letter from the administrator of CNIL, the Liquidators say they had no basis to believe or suspect that these companies were owned or controlled by the Bankrupt³³.

- As for the other actions, the 16778 Action was settled, and the funding of the CWT Case and the LSF Case occurred in 2009, before the Bankrupt’s bankruptcy in 2011³⁴ and before they were appointed the Company’s Liquidators in 2013.

- As for what Jeff Li said³⁵, the Liquidators doubted its reliability due to lapse of time³⁶.

In fact, CNIL has not only been funding the 806 Action, it is also funding the LSF Case: see para. 44 of the Decision of Recorder Eugene Fung SC in Re Ho Yuk Wah David³⁷.

The judge’s Decision

10.  For reasons set out in the Decision, the judge held that:

- she was not satisfied that the Trustees have shown that the funders were/are related to the Bankrupt;

- if she were wrong on the above,

- the information and documents sought by the Trustees were reasonably required for them to properly discharge their duties³⁸; and

- the Liquidators would be able to produce such information and documents³⁹.

Appeal

11.1.  The Trustees appealed.  In brief, they submitted that the judge had adopted the wrong legal threshold and had not applied the proper standard in her assessment that the Trustees had not discharged their burden of showing reasonable grounds of suspicion that the Bankrupt was connected to the funders. 

11.2.  At the hearing of the appeal on 21 December 2021, Mr Man SC leading counsel for the Trustees⁴⁰, also sought leave to further amend the Notice of Appeal by adding a further ground, viz that the judge failed to take into account the possibility, which became an eventuality (Ng J’s Judgment in the 971 Action) that the Bankrupt was or would be the beneficial shareholder of the Company.  This court gave leave for the re-amendment.  Written submissions on this new ground were subsequently provided by the parties and were considered by this court.

Discussion

12.  In the Decision, the judge set out the principles governing an application under s.29 BO in detail at paras. 22, 31 and 47.  The judge was thus aware that the legal threshold was only one of reasonable suspicion.  The issue on appeal is whether it was adopted or applied to the evidence.

13.1.  At para.26 of the Decision, the judge stated that “there is no dispute that the Bankrupt has been in the business of litigation funding, including in the CWT case and the LSF case”⁴¹. The Bankrupt’s connection to Tang was also acknowledged as the judge accepted that “it was he [the Bankrupt] who introduced Topmark and Sun Ascent to the CWT Liquidators [Tang and Wong] in around 2003 ...”⁴².  After listing in para. 27 the Trustees’ evidence in support of the belief that the Bankrupt has retained a beneficial interest in the Company and through the funders, may receive proceeds from the 806 Action if the Company succeeds in those proceedings, she held at para. 28:

“It could be seen from the Trustees’ evidence that the Bankrupt could be related to funders even though his name did not appear on formal legal documents as a shareholder, director or funder”⁴³. (Emphasis added).

13.2.  Having said that however, the judge discussed the Trustees’ evidence listed in para. 27 in the following way:

“51. With regard to paragraph 27(1)⁴⁴, for present purposes, the 971 Action provides sufficient basis for the Trustees to think that the Bankrupt was related to [the Company].

52. With regard to paragraph 27(2)(a), it does not follow from the fact that the Liquidators have previously used funders introduced to them by the Bankrupt for other liquidations or bankruptcies that the current Funders must be related to the Bankrupt.

53. With regard to paragraph 27(2)(b) to (d), it should be borne in mind that litigation funding is a business. The pleaded damages in the 806 Action were in the region of US$322,000,000 plus HK$62,000,000. It is not inherently improbable for unrelated litigation funders to be interested” (Emphasis added).

14.  With respect to the judge, the passages in paras. 52 and 53 emphasised above demonstrate that a higher threshold was adopted or applied than that of reasonable suspicion.  The Trustees were not obliged to show that the current funders “must” be related to the Bankrupt.  A reasonable suspicion would suffice.  Nor did the Trustees have to show any “inherent improbability” that unrelated funders would not be interested.

15.  As for the injunction dated 1 June 2012 referred to in para. 27(2)(c), it would not be cause for concern after its variation, referred to by the judge in para. 54 of the Decision.  But if there was any concern about the injunction, then one would have thought that unrelated funders, in contradistinction to the Bankrupt, would not have wished to risk their money in funding this litigation.

16.  In light of the passages in paras. 52-53 above vitiating the judge’s exercise of discretion, it therefore fell to this court to exercise the discretion in deciding whether to grant the s.29 application in light of circumstances now known.   

17.1.  In this connection, it is important to note that the Trustees were not simply asserting that the Bankrupt was only “related” to the Company; their case was that the Bankrupt actually continued to own the Company, as asserted in the 971 Action.  However, at para. 16, the judge remarked “nothing turns on the merits of the 971 Action here”.  Putting it that way, the judge was indicating that the 971 Action was irrelevant, not that it was of more or less weight.   

17.2.  With respect, the question whether the Bankrupt continued to own the Company was an important factor which the judge should have taken into account.  First, unlike unrelated funders, he would have an intimate knowledge of the affairs of the Company, and consequently the merits of the litigation.  More importantly, the claim of the Company in the 806 Action was for a substantial amount: US$322,000,000 plus HK$62,000,000.  The Liquidators did not adduce any evidence before this court of the total amount of creditors’ claims against the Company.  If the Company succeeded in the litigation, any surplus funds would go to the shareholder.  As the Bankrupt has retained the ownership of the shares in the Company, he has even more incentive to fund this litigation so as to benefit from any surplus funds (which, until the finding of the sham sale in the Judgment in the 971 Action, would not have fallen into his estate in bankruptcy).  This should be considered in conjunction with his record of litigation funding especially in co-operation with Tang. 

18.  Whilst Hou has gone on affirmation to say that to the best of the Liquidators’ knowledge, information and belief, they have no information which may suggest that the Bankrupt has a financial interest in the litigation funding⁴⁵, as the judge noted in para. 40, that statement must be assessed against the background facts.  At that time, the Liquidators’ position was that the Bankrupt had sold his shares in the Company in 2004.  As confirmed by Ng J’s Judgment in the 971 Action, that was a sham sale.

19.  For the above reasons, I would make the following order:

(1) the appeal be allowed;

(2) the order of the judge made on 8 April 2020 be set aside;

(3) the respondents do produce information and documents set out in paras. 1, 4-6 (except class 5.2) of the schedule to the applicants’ Summons filed on 6 October 2017 (as amended);

(4) there be an order nisi that the costs of the appeal and the said Summons be to the applicants, save that the appellants’ costs of the appeal shall be reduced by 10% to reflect additional work having to be done by the respondents as a result of the late introduction of the new ground of appeal.

Hon Chow JA:

20.  I agree with the judgment of Yuen JA.