XCHRX CHOY BING WING v. OFFICIAL RECEIVER

HCB 242/1992

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDING NO. 242 OF 1992

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D E C I S I O N

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1. This is an application by Mr Choy Bing Wing ("Choy") a creditor of Ng Yat Chi ("Ng"), who was adjudicated bankrupt in 1992 but who has since been discharged from bankruptcy. The present application before me is made under section 84 of the Bankruptcy Ordinance which provides as follows:-

"84. Control of court over trustee

(1) The court shall take cognizance of the conduct of trustees, who shall act in a fiduciary capacity and deal with property under their control honestly, in good faith, with proper skill and competence and in a reasonable manner, and in the event of any trustee not faithfully performing his duties and duly observing all the requirements imposed on him by Ordinance, rules or otherwise with respect to the performance of his duties, or in the event of any complaint being made to the court by any creditor, the Official Receiver, the bankrupt or any other person in regard thereto by notice duly served on the trustee at least 8 clear days before the date of hearing, the court shall inquire into the matter and take such action thereon as may be deemed expedient.

(1A) Without limiting the generality of the duties imposed on a trustee by subsection (1), in realizing the assets of a bankrupt's estate it shall be the duty of a trustee to take all reasonable care to realize the best price reasonably obtainable in the circumstances.

(2) The court may either of its own motion or on the application of the Official Receiver at any time require any trustee to answer any inquiry made by it or him in relation to any bankruptcy in which the trustee is engaged and may examine on oath the trustee or any other person concerning the bankruptcy.

(3) The court may also direct an investigation to be made of the books and vouchers of the trustee.

(4) Where on an application under this section the court is satisfied -

(a) that the trustee has misapplied or retained, or become accountable for, any money or other property comprised in the bankrupt's estate; or

(b) that a bankrupt's estate has suffered any loss in consequence of any misfeasance or breach of fiduciary or other duty by a trustee in the carrying out of his functions,

the court may order the trustee, for the benefit of the estate, to repay, restore or account for money or other property (together with interest at such rate as the court thinks just) or, as the case may require, to pay such sum by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just, and liability under this section is without prejudice to any liability arising apart from this section."

2. The trustee in bankruptcy here is the Official Receiver. Mr Choy's application is for an order that the Official Receiver do disclose to the Applicant and the Court all relevant documents connected to the sale of a company called Alljean Investment Ltd before and after the sale and that an inquiry be made by this Court of the conduct of the Official Receiver over the said transaction after disclosure of the relevant documents as sought.

3. At the hearing of the application, Mr Choy formulated the documents that he was seeking from the Official Receiver in the following terms:-

"All documents exchanged between the Official Receiver of the one part, and of the other part the Sin Hua Bank, its agents, valuers, potential buyers and enquirers, concerning the purchase of Alljean's shares, from 1992 to date."

Background

4. Before I consider the application, it is necessary to first set out the background facts as I understand them as the matter has a long and complicated history.

Luk Yu Building

5. In July 1990, a building in Central now known as the Luk Yu Building was owned by a company called Max Share in which Mr Ng had 49% of the shares. The tenant of part of the Luk Yu Building was the Luk Yu Tea House.

6. Max Share wanted to sell the property. Mr Ng and the Tea House were interested in acquiring the building. For these purposes, a company called Wealth Burden Ltd was formed, with each party holding half of its shares.

Alljean

7. Mr Ng's half of the shares in Wealth Burden were held by a company in the name of Alljean. Mr Ng was the beneficial owner of all the shares in Alljean, although the shares were registered in the names of his nominees.

8. So it was that in September 1990, Alljean acquired 50% of the shares of Wealth Burden, and Wealth Burden bought the Luk Yu Building at a price of $73 million (it would appear that a mortgage had been obtained from a bank for the purchase of the property).

9. It is apparently the case that it is not disputed by the parties to the present application that for the purpose of Alljean's contribution to the purchase, loans were made to Alljean by Mr Ng or by companies controlled by him. The Official Receiver's position is that the loans made by or on behalf of Mr Ng to Alljean amounted to $10.5 million. That appears to be now disputed by Alljean which, as would appear later, has fallen into other hands.

Indebtedness to bank

10. In 1991, if not before that, Mr Ng was indebted to the Sin Hua Bank ("the Bank"). He was liable on personal loans made to him and also as guarantor of debts incurred by companies controlled by him.

11. As security for these liabilities to the Bank, Mr Ng through his nominees, the registered shareholders of Alljean, charged all the shares in Alljean to the Bank on 13 March 1991. (I have not been shown copies of the document evidencing the establishment of this security, but it appears to be accepted by all parties to the present application).

12. At the same time, Alljean itself charged its shares in Wealth Burden in favour of the Bank by deed, and it also gave a debenture in favour of the Bank of all its assets and undertakings to secure Mr Ng's debts both personally and incurred by his companies. (Again, I have not seen a copy of these documents but I have seen a reference to them in a letter from the Official Receiver to Simmons and Simmons in July 1993.)

13. So the effect was that Mr Ng was liable to repay the Bank, and Alljean was also liable to repay the same debt to the Bank as a "guarantor". The question in the present application centres upon who eventually repaid that loan:- whether Alljean or Mr Ng.

Transfer of shares in Alljean

14. At the time the shares in Alljean were charged in 1991, transfer forms were provided to the Bank to enable the Bank to transfer the shares in Alljean into the names of its nominees.

15. In April 1992, the shares in Alljean were transferred into the names of the Bank's nominees.

Mr Ng's bankruptcy

16. In August 1992, Mr Ng was adjudicated bankrupt. The Official Receiver was made the trustee in bankruptcy. Mr Choy was a member of the Committee of Inspection from June 1993 until he was removed in December 1993 pursuant to an application to the Court made by the Official Receiver.

17. By 31 December 1994, the indebtedness of Mr Ng and his companies to the bank was $33.11 million. One of the assets of his estate was his beneficial interest in the shares of Alljean, which shares had of course been charged to the Bank.

Sale of Alljean shares

18. In August 1995 the Bank invited a public tender for the purchase of the shares in Alljean. This invitation to tender was known to Mr Choy and indeed he has said that he tried to interest his friends who were developers to acquire those shares. However, his friends were not interested in tendering because of the existence of an exceptional item in Alljean's accounts, being a provision for doubtful debts of $33 million "made in respect of an irrecoverable amount due from a third party [i.e. Mr Ng] which was secured by the company's assets [namely the shares in Wealth Burden]."

19. In his submission to me in reply to that of Mr Kwok, Mr Choy complained about the Official Receiver permitting that provision to appear in Alljean's financial statements. It has not been explained to me by Mr Choy why he considered that the Official Receiver had any control over the contents of Alljean's financial statements, when the directors of Alljean had been appointed by the Bank's nominees and not by the Official Receiver.

20. On 25 October 1995, the public tender closed. The highest tender was made by a company called Lintax. The sale and purchase agreement entered into between the Bank through its nominees, the registered shareholders of Alljean, and Lintax were for the sale of Alljean's shares free from encumbrance.

21. The consideration for the purchase of the shares in Alljean was $35.5 million only, not $70 million or $100 million reported in the press according to Mr Choy.

22. At one stage it appeared to me that Mr Choy was alleging that the consideration was $35.5 million plus a separate amount of $33 million paid to the Bank. However Mr Choy has accepted that according to the sale and purchase agreement (a copy of which he has obtained since January 2001 if not before) the entire consideration paid was $35.5 million. I have not been given a copy of this sale and purchase agreement but Mr Choy accepts that (1) the entire consideration stated was $35.5 million and (2) the shares in Alljean were to be sold free from encumbrances.

23. Since the shares of Alljean were to be sold free from encumbrances, and since the Alljean shares had been charged by Mr Ng through his nominees to secure repayment of his liabilities to the Bank, and since Mr Ng's liabilities to the Bank were about $33.11 million, the Bank had to be repaid that amount first to release that charge. So it was that according to the accounts provided by the Bank's solicitors to the Official Receiver, of the $35.5 million paid by Lintax for the Alljean shares, there was only a surplus of $489,000 odd for payment to the estate of the Bankrupt, after repayment of the Bank to release the charge and payment of the expenses of sale of the Alljean shares. This was reported to the creditors by the Official Receiver in January 1996.

24. I note at this juncture that the return of a surplus of only $489,000 odd from the Bank to the estate of Mr Ng could only mean that the shares in Alljean had been sold after deducting from the proceeds of the sale the amount due from Mr Ng to the Bank. In other words, the debt of $33 million had been repaid by Mr Ng, and not by any other person or company.

Mr Choy's complaint of misfeasance

25. Mr Choy was unhappy with the small amount of the surplus. He has made various allegations against certain members of the Official Receiver's office based on his estimate of a much higher value of Luk Yu Building in 1995, but no evidence has been placed before me on this application to substantiate any of the allegations of collusion.

26. Mr Choy's present application arises from a position taken by Alljean. Since the end of 1995, Alljean has been controlled by Lintax. In 1996 the Official Receiver, as the trustee in bankruptcy of Mr Ng, started an action against Alljean for repayment of the $10.5 million lent by Mr Ng to Alljean as referred to above. This has been resisted by Alljean, which has alleged that when Lintax acquired Alljean, it was not aware that Alljean was still under this liability to Mr Ng's estate. Alljean has also made various contentions of unjust enrichment against the estate of Mr Ng and of subrogation, and of subordination of rights. I should not comment on the merits or otherwise of these contentions as Alljean is not a party to the present application, and the action between the Official Receiver and Alljean under the 1996 Action has yet to be determined.

Unfiled affirmation of Mr Ling

27. Mr Choy's present allegation of misfeasance against the Official Receiver stems from an unfiled affirmation of Mr Ling Chi Kin made on behalf of Alljean. In an affirmation dated 14 October 2000 which was apparently shown to the Master but which has never been filed, Mr Ling has alleged that it was Alljean which had repaid the debt for and on behalf of Mr Ng, so that Mr Ng's estate has become liable to repay Alljean $33.11 million, a sum which would extinguish the amount claimed by the Official Receiver against Alljean.

28. The audited accounts of Alljean for the year ended 31 December 1995 show, under Current Liabilities, the following items -

(1) Under accounts payable for the year ended 31 December 1994, there was an amount of $33.11 million. That presumably refers to Alljean's undertaking of liability to repay Mr Ng's debts under the documents executed by Alljean in 1991.

For the year ended 31 December 1995, that amount had been reduced to nil. Again, that can be understood because the Bank had been repaid by 31 December 1995.

(2) There is another item for the year ended 31 December 1995 in the sum of $33.8 million referred to as "amount due to shareholders", in other words amount due to Lintax. This seems to suggest that Lintax had lent $33.8 million to Alljean. The financial statements do not show what that loan was for. In the light of Mr Ling's affirmation which alleged that Alljean had repaid the debt for and on behalf of Mr Ng, Mr Choy suggests that that $33.8 million must have been lent by Lintax to Alljean, for Alljean (not Mr Ng) to repay the Bank.

29. If it was Alljean that had repaid the debt, then clearly the Bank should not have deducted another sum of $33 million from the proceeds of sale before paying the surplus to Mr Ng's estate, and the Official Receiver would of course have to pursue the balance from the Bank. Any refusal or neglect to do so may be so serious as to constitute misfeasance.

Filed affirmation of Ling

30. However it is far from clear to me at this stage that that was indeed the case. The allegation that Alljean repaid the debt for Mr Ng is missing from Mr Ling's later affirmation which was filed in January 2001. (I would note that there was also an allegation that Alljean had itself paid for its own shares in the unfiled affirmation, that has since also been omitted).

31. There is no evidence e.g. in the way of cheques, or bank statements, or vouchers, or journal entries, to the effect that the debt to the bank of $33.11 million was repaid by Alljean in its capacity as guarantor, so to speak, of Mr Ng's debts to the Bank.

32. There is one sentence in para. 20 of Mr Ling's affirmation that says that "in effect" Alljean had settled the indebtedness owed by Mr Ng's group of companies, but there is, as I have said, no evidence that any such amount has been paid by Alljean to the Bank, as opposed to that by reason of the sale of the Alljean shares to Lintax, the debt has been extinguished.

33. I have noted that Alljean has not filed any proof of debt against Mr Ng's estate. If in fact Alljean as guarantor had repaid the debt to the Bank, thereby releasing Mr Ng from his liability to the Bank, one would expect Alljean to have lodged a proof of debt.

Conclusion

34. Therefore, before there is cogent evidence that a sum of $33.8 million was lent by Lintax to Alljean which was used by Alljean to settle Mr Ng's debt to the Bank (a matter that awaits the determination by the Court in HCA 9515/96), there is nothing that points to any misfeasance of the Official Receiver in accepting payment of only $489,000 odd from the Bank. In Re Gault; Gault v. Law [1981] 57 FLR 165, the Federal Court of Australia discussed the principles to be applied in an application for an enquiry into the conduct of a trustee under the Bankruptcy Act of 1966. It was held by the Federal Court that a court is not obliged to order an enquiry unless it is satisfied that sufficient grounds in support of an application to hold an enquiry have been made out. In considering whether to order an enquiry, the court may take into account (a) whether substantial allegations are made of misconduct in the administration of the trustee, (b) that the applicant has other remedies which are open to him to pursue, and (c) the extent of any delay and the effect of any such delay upon any enquiries.

35. In the present case, as I have indicated above, the evidence before me at this stage does not persuade me that there is sufficient substance in the allegations of misconduct on the part of the Official Receiver. Accordingly, I would dismiss the Notice of Motion. I will make an order nisi that the costs follow the event, i.e. that the Applicant bear the costs of the Official Receiver.