RE LEUNG YAT TUNG

HCB 2019/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 2019 OF 2000

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D E C I S I O N
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Introduction

1. There are two applications by Healthy Wharf Limited (“Petitioning Creditor”) before this court.

2. First, by summons dated 21 April 2015 (“1^st summons”), the Petitioning Creditor seeks an order under section 38(5B) of the Bankruptcy Ordinance (“BO”) that: 

“The [Official Receiver] do pay the Petitioning Creditor from the Bankrupt’s estate forthwith their expenses incurred in the application to set aside the transfer of share, and in any event with priority over payment of the fees, charges and percentages described in the Bankruptcy (Fees and Percentages) Order (Cap 6 sub Leg C) and payable to the Official Receiver, and costs, charges and expenses incurred or authorized by, the Official Receiver, whether acting as trustee or otherwise, including the costs of any person properly employed by him.”

3. Second, by summons dated 8 June 2016 (“2^nd summons”), the Petitioning Creditor seeks the return of a HK$1.2m deposit it paid to the Official Receiver (“OR”) pursuant to a Funding Agreement between the two in September 2006.

Facts

4. The material facts are these.

5. In February 1998, the Bankrupt, Leung Yat Tung (“B”) transferred to Harbour Front Limited (“Harbour Front”) certain shares owned by him allegedly at a gross undervalue.  These shares consisted of:

(a) 50% of shareholding in Money Facts Limited (“Money Facts”);

(b) 32.96% of shareholding in Fonfair Company Limited (“Fonfair”).

6. Money Facts held 65.79% of Fonfair and Fonfair holds a valuable piece of land in Yau Tong, valued at around HK$464m to HK$500m in September 2015, according to a valuation report. On that basis, B’s direct and indirect shareholding of Fonfair would be worth around HK$300m. The figures are confirmed by the OR at the hearing to be more or less correct.

7. In March 2001, B was adjudicated bankrupt on the petition of the Petitioning Creditor for his failure to pay a judgment debt in the sum of HK$5,182,519.93.  The OR was appointed trustee of the bankruptcy estate. 

8. Thereafter, a total of 39 proofs of debt were received by the OR.  Most of them were received in 2001, 2002 and 2003; 9 were received between March 2010 and December 2014.

9. B denied he had any beneficial interest in the shares in question. The Petitioning Creditor said investigation was called for as to whether the transfer of the shares by B to Harbour Front fell foul of section 49 of the BO.  For reasons not entirely clear to this court, the OR did not see fit to bring proceedings to recover the shares from Harbour Front.

10. On 13 September 2005, the Petitioning Creditor applied to court to reverse the OR’s decision and for an order directing the OR to enter into a funding agreement with the Petitioning Creditor to enable the OR to proceed with the so-called “Avoidance Proceedings”. By Order dated 29 March 2006, the application was allowed by Recorder Edward Chan SC. Costs of the Petitioning Creditor (as well as the OR) were ordered to be borne out of the bankruptcy estate. The Petitioning Creditor’s costs were about HK$452,000. This sum forms part of the subject matter of the 1^st summons.

11. In September 2006, the Funding Agreement was formally executed by the Petitioning Creditor and the OR.

12. Under the Funding Agreement,

(1) At Clause 2, the Petitioning Creditor undertook and agreed with the OR that whatever the outcome of the Avoidance Proceedings, it shall indemnify the OR against all judgments and orders (including adverse costs orders) made against the OR as well as all costs, expenses and liabilities made against or incurred by the OR in the Avoidance Proceedings.

(2) At Clause 3, the Petitioning Creditor gave an indemnity to the OR if it shall be held personally liable for any costs or other form of liabilities arising out of or in connection with the Avoidance Proceedings.

(3) Under Clause 4, the Petitioning Creditor agreed to provide security for its obligations in the form of an irrevocable bank guarantee in favour of the OR in the sum of HK$1.2 million. Subsequently, in September 2011, the bank guarantee was replaced by a cashier order of HK$1.2m. This is the subject matter of the 2^nd summons.

13. In February 2007, the OR eventually lodged the Avoidance Proceedings to set aside the transfer of the shares and for an order that the shares be vested in the bankruptcy estate. A solicitors firm, Messrs Ho & Ip, were engaged by the OR to conduct the proceedings. Counsel and experts have also been engaged.

14. In the course of the Avoidance Proceedings, the Petitioning Creditor directly paid Messrs Ho & Ip’s bills of costs and disbursements incurred. The total amount so paid by the Petitioning Creditor comes to slightly over HK$3m. This sum also forms part of the subject matter of the 1^st summons. 

15. Trial of the Avoidance Proceedings was scheduled to commence before Madam Justice Au-Yeung on 7 January 2015. In December 2014, Harbour Front proposed to settle with the OR and sent it a cheque of around HK$5.18m. On 8 January 2015, a settlement was reached between Harbour Front and the OR.

16. On 13 January 2015, Au-Yeung J directed and authorized the OR to settle the Avoidance Proceedings.

17. On 12 February 2015, the OR and Harbour Front executed the Settlement Agreement. The terms were highly favorable to the bankruptcy estate.

(a) Under Clause 1, Harbour Front agreed to make full payment to the OR for the satisfaction of all proved debts and interest, together with all costs, fees, expenses and disbursements that the OR was entitled to receive under the provisions of the BO.

(b) Under Clause 3, Harbour Front’s previous payment of HK$5.18m to the OR should be treated as part payment under Clause 1 and the OR should be at liberty to use such funds for such purposes as it saw fit.

(c) Under Clause 4, Harbour Front agreed to charge the shares in favour of the OR as security of its payment obligations under Clause 1.

(d) Under Clause 5, as further security of its payment obligations, Harbour Front agreed to tender a cheque of HK$15m to the OR. The cheque was subsequently replaced by a bank guarantee of the same amount.

18. By an Order of this court in September 2015, RSM Nelson Wheeler Corporate Advisory Ltd was appointed to assist the OR in the adjudication of the proofs of debt submitted. The adjudication was completed in May 2016.  9 proofs of debt were admitted, including part of the Petitioning Creditor’s proof of debt to the extent of HK$4.26m. The total amount of proofs so admitted was in the region of HK$149 million.

19. Since the security provided by Harbour Front under the Settlement Agreement includes a bank guarantee of HK$15m and shares worth around HK$300m, couple with the cash payment of HK$5.18m, it is likely that the admitted proofs of debt (save for the interest element which has yet to be worked out by the OR) will be substantially if not completely repaid. On any view of the matter, this is a good result for the bankruptcy estate and the creditors.

1^st summons

20. I shall deal with the 1^st summons first. The sums of money that we are concerned with in this summons are:

(a) HK$452,000 odd, being legal costs incurred and paid by the Petitioning Creditor in its application to reverse the OR’s decision. As I mentioned earlier, the OR’s decision was reversed by Recorder Edward Chan SC and costs of Petitioning Creditor were ordered to be paid out of the bankruptcy estate.

(b) HK$3m odd, being legal costs incurred and paid by the Petitioning Creditor pursuant to the Funding Agreement in the Avoidance Proceedings. 

21. In a nutshell, the basis of the 1^st summons is that the 2 sums of money involved are out-of-pocket expenses actually paid by the Petitioning Creditor for the benefit of the bankruptcy estate and eventually resulted in huge benefit to the bankruptcy estate and hence the creditors as a whole. The Petitioning Creditor has run the risk of funding the proceedings and should be given an advantage.

22. There are two main issues pertaining to this application ie whether the court has jurisdiction under section 38(5B) BO to grant the order and if yes how the court should exercise its discretion.

Jurisdiction

23. On question of jurisdiction, the OR fairly concedes that the Court has jurisdiction to make an order in relation to the HK$3m odd legal costs incurred and paid by Petitioning Creditor in the Avoidance Proceedings.  This concession is well made.

24. Section 38(5B) BO provides:

“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 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)

25. The Court’s jurisdiction under section 38(5B) BO is engaged if one of these three limbs is satisfied:

(a) assets have been recovered under an indemnity for costs of litigation given by certain creditors; or

(b) assets have been protected or preserved by the payment of moneys or the giving of indemnity by creditors; or

(c) expenses in relation to which a creditor has indemnified a trustee have been recovered.

26. For the present purpose, only the first two limbs require consideration.

27. In the present case, there is no doubt that assets have been recovered in the Avoidance Proceedings ie the HK$5.18m cash and Harbour Front’s promise to pay secured the HK$15m bank guarantee and the shares in the two companies.  These assets have been recovered under an indemnity for costs of litigation provided by the Petitioning Creditor in the Funding Agreement.

28. Hence, in this court’s view, the 1^st limb of section 38(5B) BO is engaged and satisfied and the court does have jurisdiction to make the order sought by the Petitioning Creditor ie the payment of the HK$3m odd by the OR.

29. Concerning the sum of HK$452,000, the Petitioning Creditor’s submission is that the 2^nd limb of section 38(5B) BO is also engaged: assets have been “protected or preserved” by the payment of monies.  Its argument is that the Petitioning Creditor has incurred and paid legal costs in the reversal proceedings in which it was successful. But for the reversal proceedings, there would have been no Avoidance Proceedings. Without the Avoidance Proceedings, there would not have been the substantial recovery by the OR under the Settlement Agreement for the benefit of the bankruptcy estate and hence the creditors.

30. The OR takes a neutral stance on the court’s jurisdiction to order the payment of this sum to the Petitioning Creditor.

31. On the face of it, the Petitioning Creditor’s argument is straightforward. However, a problem is said to arise from the construction of the words “payment of monies” in re Wu Kit Ping [1993] 2 HKC 614 which Ms Lok has very properly drawn to this court’s attention.  What happened in that case was this.

32. A company by the name Kin Ming and Radio and Electric Co was granted a charging order nisi and later order absolute against Miss Wu’s property (subsequently made bankrupt) in December 1992. In January 1993, the Applicant filed a bankruptcy petition against Miss Wu. In May 1993, Miss Wu was adjudicated bankrupt. In June 1993, the Applicant issued a summons seeking to set aside the charging order.  In August 1993, a consent order was made discharging the charging order. The Applicant then sought priority payment out of half of the sale proceeds from Miss Wu’s property.  It argued that it was entitled to priority under inter alia section 38(5B) BO.  It submitted that it was instrumental in the recovery of the sale proceeds and had run the risk of applying to have the charging order set aside. It should, therefore, be rewarded with some priority. The OR opposed the application. The application was dismissed.

33. At p 621 C-H, the learned Judge said this:

“However, in order to fall within s 38(5B), it must be shown that the assets had been protected or preserved by the payment of monies (or the giving of indemnity by creditors). All the applicant had done in this case was to take proceedings to set aside the Charging Order. It is true that legal costs had been incurred in doing so. Can this be regarded as ‘payment of monies’? I do not think so. Firstly, s 38(5B) allows the court to give an advantage or priority to one creditor over the others as a ‘reward’ for the risk he has run in recovering, protecting or preserving the assets of the bankrupt for the benefit of all creditors generally. Any advantage or priority to be given to one creditor will certainly have the effect of depriving the other creditors of an equal or appropriate distribution. The court should therefore exercise great caution and not give an advantage or priority so readily to any particular creditor unless the conditions set out in the section are satisfied and it is fair and just to do so. In view of this, I think that the section must be ‘construed strictly and its terms must not be unduly extended’ to avoid opening a floodgate (see p207, Williams and Hunter on Bankruptcy 19th Ed). Secondly, the term ‘payment of monies’ can be contrasted with the term ‘cost of litigation’ in the earlier part of the section (the first limb). While ‘payment of monies’ can have a wide meaning, I doubt if it is intended to include the payment of the costs of litigation in the context of this provision. What is contemplated by the payment of monies in the protection or preservation of assets are, in my view, payments such as payment to defray Crown Rent, rates or other expenses or payment incurred for the purpose of improving the property or payment to prevent the property from being forfeited or falling into dilapidation. I do not think therefore that the applicant falls within s 38(5B).” (emphasis added)

34. At first sight, it might appear that the learned Judge had held that payment of “costs of litigation”, whatever the nature of the litigation and whatever the nature of the assets involved, does not fall within the term “payment of monies” in the 2^nd limb of the section. Upon a closer look, that is not what the learned Judge had decided.

35. In this court’s view, the learned Judge’s decision should be read in light of the factual context in that case. As remarked by jurists of the highest authority from time to time, in law, context is everything.

36. The asset in question, in the context of that case, was physical asset, specifically real property in Shatin[1]. In relation to such property, this court has no doubt that the learned Judge’s decision that costs incurred in removing a charging order against the property did not come within the 2^nd limb of section 38(5B) BO is right.

37. The nature of payment of monies so to “protect and preserve” real property can vary. This is clear from the examples given by the learned Judge ie crown rent, rates, expenses incurred for the purpose of improving the property, or payments to prevent the property from being forfeited or falling into dilapidation.

38. In common parlance, “removing a charging order” against real property can hardly be regarded as “protecting”, “preserving”, or “improving” the real property. Nor can it be said to be “preventing” the real property from being forfeited or falling into dilapidation. Given it is accepted that section 38(5B) BO should be construed strictly, an applicant should not be given an “advantage” under that section unless he clearly comes within one or the other of the three limbs in the section.

39. The present case is different. The asset involved is not real property or any physical asset at all. It is a potential claim by the OR (stepping into the shoes of B) to recover shares in 2 companies which had been transferred to Harbour Front prior to his bankruptcy. In other words, the asset in this case is a chose in action. Under section 58 BO, on the making of a bankruptcy order, the property (as defined in section 2 which includes inter alia things in action) of the bankrupt shall vest in the OR.

40. With regard to choses in action, one cannot really speak in terms of “improving” the chose in action or “preventing” it from being forfeited or falling into dilapidation. But a chose in action can certainly be “preserved”. Since B’s assets including his choses in action are vested in the OR, if the OR did not institute the Avoidance Proceedings[2], no one else could. In other words, the claim to recover the shares would likely be lost. By the reversal proceedings, the claim (or the chose in action) had been “preserved”.

41. In these circumstances, it would not at all be stretching the ordinary meaning of the 2^nd limb in section 38(5B) BO to say that the legal costs incurred and paid by the Petitioning Creditor in the reversal proceedings were monies paid in the “preservation” of B’s asset. If authority is required tin support of this view, the same can be found in the decision of the Supreme Court of Western Australia in Re Kyra Nominees Pty Ltd (in liq) 11 ACLR 767 at 772.

42. That is enough to dispose of whatever doubt there may be as to the court’s jurisdiction to order payment by the OR of the HK$452,000 to the Petitioning Creditor.

Discretion

43. The exercise of discretion is fairly straightforward.

44. The Petitioning Creditor assumed considerable risk under the Funding Agreement.  There was apparently no monetary limit to the indemnity given to the OR.

45. The Avoidance Proceedings were said to be complicated and, prima facie, this appears to be right. Judging from the bill of costs in the Avoidance Proceedings, Senior and junior counsel, as well as experts were engaged. The proceedings were commenced in 2007 and were only settled in 2015.  The Petitioning Creditor’s potential liability for costs was substantial.  Given the huge amount at stake, one would not expect Harbour Front to be a “rollover”, so to speak.

46. The total proofs of debt submitted to the OR was over HK$379m. The Petitioning Creditor’s debt was merely HK$5.18m, constituting about 1.36% of the total proofs of debt submitted.

47. The benefits reaped by the bankruptcy estate from the Avoidance Proceedings turn out to be substantial – Harbour Front is to discharge all the adjudicated debts and interest under the terms of the Settlement Agreement. According to the OR, the amount of the admitted proofs of debt is around HK$149m. The legal costs of around HK$452,000 and HK$3m claimed by the Petitioning Creditor are relatively small in comparison. No point was taken by the OR regarding the quantum of the costs.

48. The primary objective behind the section[3] is to encourage those who are willing to assist trustees/liquidators in recovery of assets. Very often, owing to lack of funding, trustees/liquidators might be unable to take action to recover assets and as a consequence, unmeritorious persons would be tempted to hold back on delivery of assets which they should otherwise make: per Rogers J (as he then was) in re Intertrans Far East Ltd [1994] 2 HKC 704, 706 E-G.

49. On the exercise of discretion, the only point taken by the OR is in relation to the timing of the payment out to the Petitioning Creditor. According to Ms Lee, although the adjudication of the proofs of debt was completed in May this year, the calculation of post-bankruptcy interest due to the 9 creditors has yet to be finalized. Hence, it would be premature to order the payment of the two sums claimed by Petitioning Creditor now.

50. The answer to that point is simple. The OR is only concerned with the calculation of interest due to 9 creditors. The rate of interest is either contractual rate or judgment interest: section 71(3) BO. Even though judgment rate does change from time to time, it cannot possibly be a huge task to do the calculation. Having discussed the matter with Ms Lee, she agreed that 7 days should be enough for her colleagues to complete the calculation of interest. This court is prepared to give them 14 days and this will be reflected in the Order to be made.

51. In these circumstances, and taking into account the objective behind section 38(5B) BO, with a view to giving the Petitioning Creditor an advantage over other creditors in consideration of the risk run by it, this court should exercise its discretion in granting the application.

2^nd Summons

52. The 2^nd summons can be dealt with briefly.

53. The HK$1.2m deposit was paid by the Petitioning Creditor to the OR pursuant to the Funding Agreement as revised in September 2011.

54. The Avoidance Proceedings were concluded in a favourable settlement for the OR in 2015 - all proceedings were stayed by a “Tomlin Order” made by Au-Yeung J on 13 January 2015. No further legal costs need to be incurred by the OR in the Avoidance Proceedings and there would not be any future adverse costs order against it. In short, there is simply no reason for the OR to hang on to the HK$1.2m deposit, which, after all, has been provided by the Petitioning Creditor to the OR interest free since 2011.

55. Ms Lee submits the deposit cannot be returned to the Petitioning Creditor just yet. The reason given is that there is still an outstanding issue between the OR and Harbour Front regarding interpretation of a clause in the Settlement Agreement ie how costs previously reserved in the Avoidance Proceedings should be dealt with. Such costs have not been specifically dealt with under clause 7.1 of the Settlement Agreement and the OR seemed to take the view that such costs should also be borne by Harbour Front. Unsurprisingly, Harbour Front took a different view and stated in correspondence that there should be no re-opening of the proceedings or re-visiting the terms of the Tomlin Order. The OR appears to be considering going to court to clarify the issue and looks to the Petitioning Creditor to indemnify its costs of doing so under the Funding Agreement.

56. This court does not understand the logic of the OR’s stance and no reasons or justifications have been provided by Ms Lee at the hearing.

57. The Avoidance Proceedings have been stayed by a Tomlin order with costs payable by Harbour Front to the OR. There were no adverse costs orders against the OR as such. Costs reserved are costs reserved - they are not adverse costs orders. Harbour Front is content to leave things as they are and is unlikely to take the initiative to go back to court for clarification. The OR has not paid a cent for the legal costs incurred in the proceedings - they have all been paid by the Petitioning Creditor. It seems to this court totally pointless for the OR to seek clarification on a matter which has no financial or practical significance to the OR (and none has been suggested by Ms Lee) just because the OR disagreed with Harbour Front on the interpretation of clause 7.1. 

58. In these circumstances, this court agrees with the Petitioning Creditor that there is no justification for the OR to hold on to the HK$1.2m deposit. It should be returned to the Petitioning Creditor.

Disposition

59. For the above reasons, this court allows both applications by the Petitioning Creditor.

60. This court will hear the parties on the exact terms of the Order to be made and on costs.