RE LEUNG YAT TUNG

HCBI 1/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS

INTERIM ORDER APPLICATION NO.1 OF 2001

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BANKRUPTCY PROCEEDINGS NO.2019 OF 2000

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J U D G M E N T

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The applications

1. There are two applications before me. The first is a petition for bankruptcy by Healthy Wharf Ltd against Mr Leung Yat Tung ("the debtor"). The petition is based by the failure by the debtor to pay a debt of $3,566,479.37 and interest due to the petitioner under a judgment dated 5 May 2000. The other application is an application for an interim order by the debtor pursuant to sections 20 and 20A of the Bankruptcy Ordinance.

2. The parties agreed that the interim order application should be dealt with first and in the event that I should find against the debtor in his application, the bankruptcy petition would not be opposed.

History of the proceedings

3. I will give a brief outline of the history of the proceeding leading to the hearing on 20 February 2001. This history will become relevant in the light of events that had developed in this case. The petition was presented on 14 June 2000. On 21 August 2000, Le Pichon J (as she then was) first heard the bankruptcy petition. At that hearing, the debtor wished to pay the debt by instalments and the petitioner's solicitor already raised the requirement of disclosure by the debtor of his financial position. The debtor who was legally represented agreed to give full disclosure within 14 days. The matter was adjourned to enable the debtor to file affirmation. Three affirmations were filed by the debtor in the bankruptcy proceeding on 1 September 2000. On 7 September 2000, when the matter was heard again by Le Pichon J, the issue was again raised on the lack of full disclosure by the debtor. The petitioner rejected the offer of payment by instalments, the Judge then gave directions for the hearing of the bankruptcy petition. The petition was then fixed in September 2000 to be heard on 20 February 2001.

4. On 2 February 2001, the debtor filed the application for interim order which was to be heard by Yuen J on 15 February 2001. The application was, however, only served on the petitioner on 7 February 2001. This application was supported by the first affirmation of the debtor, the proposal for voluntary arrangement, the nominees' report and the Notice to intended nominees in which the intended nominees stated they agreed to act as nominees.

5. The petitioner then served one affirmation on 14 February 2001 exhibiting two documents. Mr Leong, SC, counsel for the petitioner, served his submission on the same date.

6. On 15 February 2001, when the matter came before Yuen J, the debtor asked for an adjournment to deal with the petitioner's material. Yuen J adjourned the matter to 20 February 2001. On 19 February 2001, the debtor served his second affirmation. On 20 February 2001, on the first day of the hearing, Ms Lau Wu Kwai King, Lauren ("Ms Lau"), a certified public accountant, who together with her partner, Mr Kennic Lai Hang Lui, are the intended nominees for the debtor, filed and served an affirmation.

Voluntary Arrangement

7. Section 20(1) of the Ordinance enables the court to make an interim order, the effect of which is that during the duration of the order, the bankruptcy petition cannot be issued or proceeded with and proceedings cannot be instituted or continued against the debtor. Section 20A allows the application to be made if the debtor intends to make a proposal for a voluntary arrangement. Section 20C(1) sets out the three conditions for making the application, namely the debtor intends to make a proposal; the debtor, at the time of the making of the application, was able to petition for his own bankruptcy and no previous application had been made in the past 12 months by the debtor. Section 20C(2) provides that that the court may make an order if it thinks that it would be appropriate to do so for the purpose of facilitating the consideration and implementation of the debtor's proposal.

The principles

8. The making of the interim order is one of discretion of the court. As shown in Cooper v. Fearnley (Re Debtor 103 of 1994) (21 October 1994, Lexis transcript), the test is that the proposal must be serious and viable. In Hook v. Jewson Ltd [1997] 1 BCLC 664, Scott VC adopted this test and further held that that it would not be right to allow application for interim orders to be used in order to postpone bankruptcy order. In Re a debtor (No.114010 of 1995) [1996] 2 BCLC 429, Lindsay J referred to the requirement of a full and frank disclosure by the debtor. As the voluntary arrangement requires a nominee to provide a report to the court stating in his opinion that a meeting of the debtor's creditors should be summoned to consider the debtor's proposal, Lindsay J further required the insolvency practitioner, acting as the nominee, must ensure that :

i) the debtor's true position as to assets and liabilities does not appear to him to be substantially different in material respects from that which is represented to the creditors;

ii) the debtor's proposal as put to the creditors' meeting has a real prospect of being implemented in the way it is to be represented; and

iii) the information he has provides a basis that there will be no unfairness in the functions he is going to discharge in terms of admitting or rejecting claims to vote and agreeing values for voting purposes.

9. The judge held that these duties arise where the fullness or candour of the debtor's information has properly called into question. The nominee should also not act as a "post-box".

The starting and fundamental point

10. The starting and fundamental point in an application of this nature must be that the debtor should make a full and frank disclosure of his finance. This, in my view, is of the utmost importance because unless this duty is discharged, the court is not in a position to say that the proposal is serious and viable and, hence, should exercise the discretion in making an interim order. In considering whether a full and frank disclosure had been made, the approach is not to use a fine comb to see whether there is some discrepancies or miscalculation of figures here and there, but rather one should consider the case as a whole and see whether there are in fact serious deficiencies in the disclosure by the debtor. In my view, there are indeed serious deficiencies in this case.

The proposal

11. Under the proposal, the debtor stated that his assets are worth $566,795 and his liabilities are $275,159,872. He stated that he is earning $6.25 million per annum by way of director's remuneration in the UDL group of companies and other companies. He will contribute $20 million to the voluntary arrangement at $4 million per annum for a period of five years. Under the voluntary arrangement, the creditors would receive 6.75 cents in a dollar as contrasts with 0.08 cents in a dollar in case of bankruptcy. The assets of the debtor consist of shares in four companies which have no reliable value, a loan to associates which the debtor did not know when would be repaid, $655 in savings accounts and $218,069 cash value of insurance policies.

12. The intended nominees reported that a creditors' meeting should be called. They stated that they had made no independent investigation or verification of the debtor's net worth and were unable to state whether reliance can be placed on the values attributed to the assets or the estimate of liabilities. Mr Bartlett, counsel for the intended nominees, explained in submission that by this statement the intended nominees meant that they had not verified with the third parties of the debtor's net worth but they had perused documents from the debtor on these matters.

The latest disclosure

13. Mr Leong attacked the proposal on, among other grounds, its lack of full and candid disclosure on the debtor's finance. After Mr Leong completed his submission, the case took an unusual turn when on the second day of the hearing, Mr Cheung, counsel for the debtor, applied to introduce a third affirmation from the debtor purportedly to answer the allegations of the petitioner. Mr Leong's submission was made after Mr Cheung and Mr Bartlett had made their main submission. The explanation given for this late affirmation was that the debtor was away from Hong Kong and only returned on 17 February 2001 and instructions were only given on 18 February 2001. It was said that the debtor could not second guess the case of the petitioner.

14. This is a lame excuse because the petitioner had made known its case on non-disclosure as early as August 2000. The debtor had every opportunity in answering the challenge. He had also chosen to respond to the specific criticisms on the proposal by his second affirmation of 19 February 2001 and Ms Lau's affirmation of 20 February 2001. Yet, he chose to keep other informations close to himself and only disclose them when it is clear that his situation has become desperate.

15. Mr Leong described the debtor as manipulative and keeps everyone dancing to his tone. In my view, the debtor shows a complete disdain of the court procedure and has abused it. This begins with the service of the application for interim order. No reason was given why the application was not served immediately after it was filed. Mr Cheung referred to rule 122E(4)(b) of the Bankruptcy Rules which states that that the applicant shall give at least three days' notice of the hearing to the petitioner. If this rule is relied upon, as the basis for the delay in serving the application, then the debtor is clearly using it to abuse the process, bearing in mind, the petition for bankruptcy was first heard as early as August 2000 and the nominees were instructed in November 2000. The material contained in the third affirmation are clearly available to him a long time again and could be disclosed much earlier if he had so inclined. In the end, Mr Leong, however, did not oppose to the introduction of this late affirmation.

Misrepresentation of the liability

16. What is more disturbing about this late disclosure is the disclosure at the same time of another document, not contained in the affirmation, that shows the debtor had completely misrepresented the extent of his liability.

17. The debtor said he has unsecured liability of $275,159,872. The bulk of this is the liabilities he has in respect of guarantees to banks and financial institutions amounting to $242,573,856. A dividend of 6.75 cents in a dollar is based on the supposed liability of $275,159,872. Clearly, in respect of the huge sums of money advanced, it is a matter of commercial reality that other than guarantees, securities must have been furnished in obtaining these advances. This being the case, the liability must be substantially reduced by the securities. There is a complete lack of information on which advances is secured. Not even an estimated present value of the securities is given.

18. The petitioner filed evidence which shows that the advances of $36,346,944 from GE Capital Hong Kong Limited, $14,858,652 from HSBC Capital (Asia) Pte. Limited and $77,464,658 from Overseas Chinese Banking Corporation are all secured with assets. The debtor disclosed in his second affirmation that in respect of $69,057,891 advanced by Orix Asia Ltd, there is a security of a property worth $43.2 million. Other than this, the debtor did not provide any information of the securities.

19. What is revealed in the latest disclosure, however, shows that everyone of the guarantee is in fact secured. The value of the securities are also given. After taking into account these securities, the debtor's total liability is $123,832,648, which is only about half of what is disclosed in the proposal. If this is not a misrepresentation of the most blatant kind, I do not know what it is.

The intended nominees' breach of duty

20. Mr Bartlett submitted that the intended nominees had deliberately chosen a minimum dividend in order not to give false hopes to the creditors. He stated that this is not an omission or error on the part of the nominees but based on their professional opinion. The intended nominees are assisted in this case by their assistant, Mr Richard Bradley who had professional experience in the United Kingdom and it is said that the practice there is also to adopt a minimal dividend approach without taking into account any securities.

21. In my view, the issue goes beyond merely on the range of dividends that may be available. The primary obligation is to present to the court with a complete picture of the debtor's worth. Even if a minimum dividend is to be proposed, it does not mean that important information, such as the presence of securities, should not be revealed.

22. It is said that the debtor's liability under the guarantees is that of a secondary liability, whereas the securities are furnished by the borrowers. The financial institutions may only pursue against the debtor and hence the securities should not be taken into account. I disagree with this reasoning. Is this really how commerce operate in Hong Kong? The matter only needs to be stated to show its absurdity. The intended nominees are experienced insolvency practitioners. They had disclosed in the proposal that the debtor is jointly and severally liable together with his wife and others on some of the guarantees. If they can disclose this information, then on what possible basis can they not state the existence of the securities? In respect of the so-called practice in the United Kingdom, no evidence has been given on its existence. If indeed such a practice exists, then it would mean that the true information on the debtor is deliberately not given and the court is not provided with the complete picture for it to exercise its discretion. I cannot even begin to imagine that this is how the bankruptcy courts in England operate.

23. The intended nominees maintained that they have discharged their duty. They said that they had seen the guarantees and other documents. The debtor had imposed a non-disclosure requirement on them. However, without providing the court with the basic information, how can the court be in a position to assess that the intended nominees' view is one which a reasonable nominee would have formed having properly instructed himself and having satisfied himself with the three basic requirements referred to by Lindsay J. The court is, clearly, not a rubber stamp to any opinion of the intended nominees. In this case, the issue here goes beyond the intended nominees' attention being drawn to the candour of the debtor. They must discharge a separate and independent obligation to ensure that all relevant informations are provided to the court. Afterall, they are the one who would recommend the meeting. In my view, the intended nominees have breached their duties in this case.

Amendment of proposal

24. Reference is made to statutory provisions such as section 20F of the Bankruptcy Ordinance, by which the proposal may be amended at a creditors' meeting, and section 22Q of the Bankruptcy Rules which enables the chairman of a creditors' meeting to assess the value of a debtor for the purpose of calculating voting rights and there is a provision for appeal against the chairman's decision. Likewise, rule 122R is also relied upon. None of these is relevant at this stage of the proceedings because the debtor has to satisfy the court first that the proposal is a serious and viable one before the question of meeting is to be considered.

Two-stage approach

25. It is submitted on behalf of the debtor that, although for the purpose of saving costs, the debtor has adopted the one stage or "concertina" procedure, the procedure actually consists of two separate applications, namely :

(1) the application for an interim order, which may be granted if the conditions in section 20C are satisfied; and

(2) the hearing to consider the nominees' report and to allow a creditors' meeting to be called to consider and vote upon the proposal.

26. It is submitted that even if there are further matters which remain outstanding, such as the need for further consideration of the nominees' report, an interim order may still be granted if it is clear that the debtor intended to make a serious proposal.

27. If this submission means that the debtor does not need to give a frank and full disclosure, then this submission must be wrong. As pointed out in Fletcher on the Law of Insolvency, 2nd Edn, page 44, in practice, even in the preliminary stage when the debtor intends to apply for an interim order, he will seek the advice of the intended nominee who will inevitably be required to be supplied with a full disclosure of the debtor's finance before signifying his consent to act in relation to the proposal and will moreover need to be in possession of the debtor's affairs when subsequently preparing the report which he will be required to submit to the court.

28. In this case, where both the proposal and nominees' report are before the court, all the more that frank disclosure should be made. Fletcher at page 46 states this :

"It is vitally important in keeping with the modern law's emphasis on the role of the licensed insolvency practitioner, that the nominee should exercise an independent and objective professional judgment in evaluating the debtor's proposal and in formulating his recommendations upon which the court, and subsequently the creditors, will necessarily rely in taking their respective decisions as to what course to pursue. The nominee must therefore guard against any tendency to suspend critical judgment in relation to the affairs and conduct of the debtor on whose behalf he has been retained to act, and be mindful of the wider responsibilities which he is required to discharge at this stage."

29. An interim order is a drastic order, it imposes a moratorium on all proceedings that may be brought or continued against the debtor. I am equally conscious of the effect on the debtor of a bankruptcy order, but where there is non-disclosure as serious as this one, the court should not simply make an interim order and defer the consideration of the nominees' report.

Debtor failed to provide full disclosure

30. The debtor himself cannot hide behind the intended nominees. Clearly, he must disclose the relevant information to the court. If he sees fit to disclose one of the securities, then why did he not disclose the rest but only did so in the course of the hearing? This is not simply a matter of allowing the debtor to amend the proposal in the light of this disclosure. Having regard to the approach taken by the debtor and the intended nominees, I have grave doubts on the candour of the debtor. I am not prepared to exercise the discretion in making an interim order so as to put forward a proposal to the creditors.

Income

31. This, however, is not the only instance on the lack of full and frank disclosure. The viability of the voluntary arrangement depends on the debtor receiving $6.75 million each year from his remuneration, $2.25 million of which would be for his own personal expenses and the remaining $4 million to be used for the voluntary arrangement. This earning is first disclosed in the present application on 2 February 2001. Earlier on 21 August 2000, the debtor's counsel informed the court that the debtor was earning $100,000 per month (or $1.2 million per annum) from his directorship with UDL Holdings Ltd. In his affirmation filed on 31 August 2000, the debtor stated that he earned $63,000 from UDL Holdings Ltd and another $27,000 from a contract with another company. The contract expired on 30 September 2000. The petitioner's affirmation filed on 6 September 2000 had already dealt with the discrepancies in the debtor's earning. Mr Leong had challenged this sudden increase in the debtor's earning since 14 February 2001. There was no response by the debtor to this until the third affirmation when he revealed that he had arranged for an increase of his salaries from the UDL group of companies. He exhibited five service agreements which he had entered from 1 January 2001.

32. This latest disclosure reveals one thing : the debtor exercises tremendous authority in the operation of his companies. He can arrange for his salaries to be increased from an alleged $100,000 per month to $6.25 million per annum over a period of less than four months. It raises a fundamental question as to the extent of the money under his disposal. In the light of the development of the case so far, the court is left in real doubt as to the debtor's actual disposable income. In my view, an overview must be taken in this case. The debtor is one claiming to earn $6.25 million per year. His personal expenses are $2.25 million. The debt due to the petitioner is $4 million. Less than two weeks before the resumed hearing of the bankruptcy petition, the debtor said he has a liability of over $275 million which is now substantially reduced by about half. While being presented with a bankruptcy petition may be an act of default on the part of the bankrupt under the guarantees, there is no evidence that despite the presentation of the petition in June 2000, the creditors had demanded the debtor for repayment, although the debtor attributed this to the good relationship he has with them. In my view, the contentions now raised by the debtor are artificial to the extreme.

The creditors

33. After the hearing on the second day, the case was adjourned in order for the debtor to obtain consent of the beneficiaries to disclose the Family Trust documents. Despite my ruling, the debtor filed yet another affirmation, his fourth one, one day before the resumed hearing. In it, he exhibited two letters from two of the creditors, namely, Bank of America and Overseas Chinese Bank Corporation, who said that they are interested in the proposal and would support the calling of a creditors' meeting "in the context of the proposed IVA". Yuen & Partners had also, one day before the resumed hearing, filed notices of intention to appear on behalf of three creditors of the debtor, namely, GE Capital Finance Ltd, Grand Media Limited and Ming Hing Waterworks Engineering Co. Ltd. GE Capital and Ming Hing stated that they wished to consider the debtor's proposal while Grand Media said that it is in principle agreeable to a suitable arrangement being made to maximize recovery of the debt owed by the debtor and, if possible, to avoid the debtor's bankruptcy. It wishes to have a meeting of creditors to consider the proposal These three creditors were represented by counsel on the resumed hearing..

34. In my view, these are manoeuvres by the debtor to apply pressure on the court to accede to his request. It should be noted that according to the documents belatedly disclosed, the debt of Bank of America is in fact fully secured. More importantly, the court is not assisted in any way by the views expressed by the creditors. They are not appraised of the non-disclosure by the debtor and the events that had taken place in this court. Ultimately, it is the court and not the creditors who should decide whether the proposal should go to the creditors or not.

The Family Trust

35. The next issue on the lack of full disclosure concerns that of a Family Trust which is excluded from the debtor's assets. The trustee of the Family Trust is Harbour Front Ltd. It owns 66% of a property in Yau Tong. According to the intended nominees' estimate, this property is worth $90 million. By the debtor's own admission, Harbour Front Ltd owes significant interest in UDL Holdings Ltd. The petitioner asserts that the debtor is hiding behind the Family Trust and he has unfettered control of this Family Trust and also in its assets, and that he had transferred his personal interest in the Yau Tong property to Harbour Front Ltd shortly before the restructuring of the UDL Group in February 1998. This assertion was made as early as 12 October 2000.

36. The response of the debtor is a curious one. Apart from stating that he is not a beneficiary to the Family Trust and apart from producing two identical affirmations from his wife and daughter who are beneficiaries to this Family Trust, the debtor had, until the conclusion of the second day of submission, steadfastly refused to produce the trust instruments. It is said by Mr Cheung that the document may be produced for my own perusal only. Clearly, it is not right that only the court can have sight of the documents and not that of the petitioner. It is said that counsel's opinion had been obtained stating that the Family Trust is a discretionary trust and the debtor has no interest in it. This opinion was not produced. The intended nominees said that they have seen the trust instrument and counsel's opinion, and confirm that the debtor has no interest in it.

Evidence of control of Family Trust

37. The assertion that the debtor has control of the Family Trust is not a fanciful one. Despite his claim that he is not a beneficiary, evidence shows that he was in a position to deal with the assets of the Trust. In September 1999, Standard Chartered Bank informed the debtor that it would lend $20 million on the security of the Yau Tong property. This arrangement was apparently initiated by the debtor. In November 1999, the debtor offered to sell to his brother, Leung Yuet Keung, who is a director of the petitioner, the whole or part of the interest of the property for $80 million or $50 million respectively.

38. On 25 May 2000, the debtor offered to repay the entire debt to the petitioner by 10 June 2000. Then, in September 2000, he proposed to pay the debt by instalments : $1 million initially and the rest by 12 instalments. While the source of fund for the first proposal is not revealed, the source of the funds for the payment by instalments came from the Family Trust.

39. It is now said that the Family Trust is not prepared to make a single full repayment, because in doing so, other creditors would likewise demand immediate full payment and might expect the Family Trust to bail the debtor out. I think the petitioner's criticism on the debtor's approach is a valid one : he would either assert that he is able to deal with the property under the Family Trust or distance himself from the Family Trust when the matter suits him. This is part of the rather contrived and artificial nature of the debtor's proposal.

Trust documents

40. The two trust deeds that were disclosed are in respect of "The 747 Trust" and "The Harbour Front Unit Trust". The parties had only briefly referred to these two documents. The trustees of Harbour Front Unit Trust is Harbour Front Ltd. The deed is dated 2 September 1991. The two "initial unit holders" are Guardian Trustee Ltd of British Virgin Island holding one unit and the debtor holding 100 units. The initial number of units is 101. The recital stated that the trustees have received the initial trust sum (described as US$101) from or for the benefit of the initial unit holders. Clause 2 stated that the trustees declare that they shall stand possessed of the corpus upon trust to invest or apply the same under the powers of the deed. Clause 16 provides that the unit holders shall have no interest in the assets of the trust but shall have the right to have the trust administered in accordance with the deed. As to the income arising from the trust, clause A1(1) of Schedule A provides that the trustee may pay to the unit holders or accumulate them.

41. As to The 747 Trust, the deed is also dated 2 September 1991. The settlor of the trust is the debtor. Clause 4 provides that the corpus and income of the trust shall be excluded from members of the "Excluded Class" of which the debtor is one. The beneficiaries in the trust are, among others, the spouse and issue of the debtor. Under clause R1 of Schedule R, the powers of the trustees "shall be exercisable at their absolute and uncontrolled discretion".

Discretionary Trust

42. The principle relating to discretionary trust is stated in Snell's Equity, 30th Ed., at para.7-70 as follows :

"A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. ..."

In relation to bankruptcy, Snell stated that :

"If there is a discretionary trust for the maintenance and benefit of a number of persons, and one of them is bankrupt or has alienated his interest under the trust, it is not clear whether the trustee in bankruptcy or the assignee is entitled to the whole of any sums in fact paid to the beneficiary, or only to the excess over the amount needed for his maintenance. ..."

On this point, the Australian case of Dwyer and Another v. Ross and Others (1992) 34 FCR 463 held that :

"However, where the interest in the trust is a mere discretionary interest, the right to be considered for the purposes of a distribution, it is difficult to see that the right to enforce the due administration of the trust can be property which passes to the trustee in bankruptcy. The interest in the trust would seem to be a personal right which remains with the bankrupt. Of course, if a distribution of money or property is made to the bankrupt during the period of the bankruptcy, the trustee will be entitled to it as after-acquired property. See ss 58(2) and 116(1)(a) of the Bankruptcy Act."

43. First of all, it has to be pointed out that there is a complete absence of evidence on how the two trusts relate to each other. All that one knows of these two trusts is a chart exhibited to Leung Yuet Keung's affirmation of 12 October 2000 showing "The 747 Trust" is placed in a position above the other trust. What is more important is that whatever may be said of the terms of the deeds, the trustee of the Harbour Front Unit Trust is Harbour Front Trust Ltd itself. It is a company wholly owned by the debtor. According to the beneficiaries, the debtor is the one who executes the decisions relating to the administration of the Family Trust. Lindsay J referred to the Cork Report on Insolvency Law and Practice 1981 and drew a distinction between insolvencies due primarily to incompetence and insolvency where for reasons of conduct, commercial morality or public concern, a full investigation is necessary. In my view, whether the debtor owns beneficiary interest in the Family Trust, is clearly one of the matters that need to be investigated in bankruptcy so that any hidden asset should be made available for distribution.

Transfer of assets

44. The intended nominees said that the transfer of the assets by the debtor was not made known to them by the debtor. They only knew of this when they received Mr Leong's submission on 15 February 2001. They said that they had asked the debtor for explanation and documentation, they are satisfied that the transfer was not a transfer at an undervalue.

45. The shares that were transferred to Harbour Front were that of Money Facts Ltd and Fonfair Co. Ltd. The debtor maintained that he always held these shares as trustee for the Family Trust. This is contradicted by the contemporary documents. According to the prospectus of UDL when it was first listed, the debtor was the beneficial owner of the shares in these two companies. According to UDL's Annual Reports 1996 and 1997, Fonfair is a company in which the debtor and Leung Yuet Keung have direct or indirect beneficial interests. According to a plan provided by the debtor to his brother, Harbour Front is a company wholly owned by the debtor. According to UDL's Annual Report 2000, Fonfair is a company in which the debtor has a beneficiary interest.

46. The debtor's allegation that his brother always knew that he, i.e. debtor, always held the shares in the two companies on trust when the brother signed the board resolution for the transfer was not borne out by this evidence.

47. It is said that the bought and sold notes for the transfer of shares in the two companies were stamped at a nominal value and not ad valorem. The intended nominees said that they had satisfied themselves that the transfer does not fall within the provisions of section 49 of the Bankruptcy Ordinance which enables the court to set aside a transaction entered by the debtor with any person at an undervalue. As Mr Leong submitted, the question of stamping is a red herring, afterall, the transfer of shares will only be stamped according to the stated consideration whether or not the transferor owns substantial assets or not. If based on the contemporary documents, it was the debtor who has a beneficiary interest in the shares of the two companies, then the transfer to Harbour Front for nominal value would, prima facie, mean that Harbour Front had provided no consideration for the transfer and the transaction is caught by section 49 because it occurred within five years prior to 14 June 2000, the date of the petition. Again, this is a matter that should be investigated.

Manner of accounting

48. The petitioner relied on two further matters which I will simply record without the need to make any determination as they are not decisive of the issues I am facing in this case.

49. Extracts from the Annual Report 2000 of UDL Holdings showed that it had made HK$604 million of profit before minority interests during the 16 month period, ending 31 July 2000. In the latest affirmation of the debtor, it is said that the UDL Holdings had only a turnover of $71 million and it could not make a profit of $604 million. The debtor said the profit is merely the result of the accounting treatment of the huge debts and liabilities which had been settled pursuant to the Scheme of Arrangement. It is said this Arrangement was done at the advice of overseas counsel, although the opinion that was disclosed did not mention this point.

The proposal

50. The petitioner further referred to the difficulties with the proposal itself. It provides for the payment of interim and final dividends. Interim dividend will be paid when the debtor's liabilities under the guarantees have crystallised. The proposal stated that no specific date can be given because it is not possible to determine "when or if those claims will crystalise". The petitioner's claim against the debtor is totally ignored as an event capable of triggering the payment of the interim dividends. If the guarantees never crystalise, the petitioner cannot expect any interim payment at all. As to the payment of final dividend, it is said to be payable under the termination of the voluntary arrangement. Termination is not defined. The duration of voluntary arrangement is not specified. Under clause 6.6 of the proposal upon the intended nominees issuing notice of full implementation of the voluntary arrangement, they should pay any unpaid dividends to the debtor who shall be liable to the creditors concerned for the unpaid dividend. The petitioner submitted that it will end up at the mercy of the debtor after a few years.

51. The debtor had responded that once the voluntary scheme is in place, then the liabilities of the creditors are crystalised, and it is unrealistic to say that the intended nominees will not distribute the dividends to the petitioner.

52. Again, I do not need to make a determination of this issue in the light of the conclusions I had reached.

Scheme of Arrangement

53. It is said that the court must sanction the proposal because the debtor is instrumental in putting forward the Scheme of Arrangement concerning the UDL group of companies. The Scheme has been sanctioned by the Court of Appeal. If the debtor is declared bankrupt, he cannot be the chairman and director and cannot ensure implementation of the Scheme.

54. The court does not sanction a proposal in the blind. The debtor must discharge his primary responsibility with a full and frank disclosure of his net worth. This, he had not done and he has to take the consequence of his own action.

Conclusion on the interim order application

55. For the reasons I have stated, I shall dismiss the debtor's application for interim order.

The bankruptcy petition

56. As there is no contest to the bankruptcy petition, I shall order a bankruptcy order being made against the debtor.