HARBOUR FRONT LTD v. THE OFFICIAL RECEIVER AND TRUSTEE OF THE PROPERTY OF LEUNG YAT TUNG

HCMP 400/2022

[2024] HKCFI 1203

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLEANOUS PROCEEDINGS NO 400 OF 2022

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J U D G M E N T

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A.  INTRODUCTION

1.  Upon a creditor’s petition, Leung Yat Tung (“Bankrupt”) was adjudged bankrupt in 2001. The Official Receiver was appointed Official Receiver and Trustee (“ORT”) of the Bankrupt’s estate. In 2007, ORT commenced proceedings (“Avoidance Proceedings”) to set aside the Bankrupt’s transfer of his shares in 2 companies to Harbour Front Ltd (“HF”). The Avoidance Proceedings were stayed by the Court in 2015 upon a settlement reached between ORT and HF.

2.  This is the substantive hearing of the Originating Summons dated 14 April 2022 (“OS”) taken out by HF against the ORT. By the time of this hearing, HF only seeks the following reliefs and orders:

(1)  The Court’s determination on the question of whether HF is obliged to pay to ORT pursuant to the Settlement Agreement dated 12 February 2015 (“Settlement Agreement”) various items demanded by ORT and, if so, how much;

(2)  An order that the share charges granted by HF over its shareholding in the 2 companies in favour of ORT under the Settlement Agreement (“Share Charges”) be released or discharged forthwith;

(3)  An order that ORT do return to HF forthwith the signed and executed instruments of transfer previously delivered by HF to ORT in respect of the Share Charges;

(4)  Damages for breach of the Settlement Agreement.

3.  Since the taking out of the OS, the parties have reached substantial agreement as set out in the Updated Appendix 1 to counsel’s submissions. The remaining disputes are under reliefs (1) and (4) that concern HF’s obligation to pay interest on the proved debts under Clause 1 of the Settlement Agreement and whether ORT has breached that Settlement Agreement so as to be liable to HF for damages.

4.  By consent, the parties agreed that upon HF’s payment into court of HK$16,920,000, HF be discharged from an obligation to provide a bank guarantee and ORT be restrained from taking steps to enforce the Share Charges until the determination of the OS or further order of the Court.

B.  BACKGROUND

5.  On 1 March 2001, on the petition of Healthy Wharf Limited (“Healthy Wharf”), the Bankrupt was adjudged bankrupt in HCB2019/2000. Healthy Wharf was and is under the control of Leung Yuet Keung, brother of the Bankrupt.

6.  On 14 June 2001, ORT was appointed and has administered the Bankrupt’s estate since then.

7.  On 22 February 2007, ORT commenced the Avoidance Proceedings to set aside the Bankrupt’s transfer of his shares in Fonfair Company Limited and Money Facts Limited to HF (“Transactions”) pursuant to s.49 of the Bankruptcy Ordinance (Cap 6) (“BO”). The underlying asset of the Transactions was a piece of land in Yau Tong.

8.  On 13 January 2015, the Avoidance Proceedings were stayed by way of an ex parte order made by this Court. A Tomlin order was made to sanction the Settlement Agreement.

9.  On 12 February 2015, the parties formally entered into the Settlement Agreement. As of that date, the Bankrupt’s estate (not including the subject shares in the Transactions) had negligible assets realised for around HK$200,000. The “balance” of the Bankrupt’s estate, after deducting the costs for conducting the public examination and settlement of other expenses in the Bankruptcy Proceedings, was less than HK$15,000. The value of the Bankrupt’s estate fell short of the total amount of the proofs of debt as of October 2014 (i.e. more than HK$358 million) and also of the admitted proved debts (i.e. HK$149,184,477.45). As admitted by HF, there was no surplus remaining after settlement of the proved debts.

10.  The Settlement Agreement contains, amongst others, the following terms:

(1)  Clause 1:

“Harbour Front agrees to make full payment to the Trustee for the satisfaction of all proved debts of creditors and interest pursuant to sections 38(9) and 71 of the Bankruptcy Ordinance in respect of the bankruptcy of [the Bankrupt] within the period specified in paragraph 2 below together with all costs (including all costs of and occasioned by the adjudication of any and all proofs of debt and legal proceedings arising therefrom, as well as all costs which the Trustee may be liable for), fees, expenses and disbursements (including legal expenses) that the Trustee is entitled to receive under the provisions of the Bankruptcy Ordinance.” (italics added)

(2)  Clause 2:

“Subject to any reasonable extension to be agreed between the parties, failing which, further directions from the Court upon application by either party, the Trustee shall complete the adjudication of the proofs of debt (which have not been withdrawn) on or before 8 July 2015. Thereafter, Harbour Front shall pay to the Trustee the full amount payable on the proved debts and interest pursuant to sections 38(9) and 71 of the Bankruptcy Ordinance within 28 days from the date of the Trustee’s written demand to do so.”(italics added)

(3)  Clause 4: HF agrees to provide a charge over the Fonfair Shares and Money Fact Shares in favour of ORT as security for HF’s obligations under Clause 1.

(4)  Clause 5: HF agrees to provide a bank guarantee in the sum of HK$15 million to ORT as security for HF’s obligations under Clause 1.

(5)  Clause 6: If HF defaults in honouring any of its payment obligations set out in Clause 1, despite a 14-day written notice from ORT, ORT shall be entitled to realise the value of the Shares for payment of the proved debts, expenses and interests arising out of the bankruptcy.

(6)  Under Clause 7.1, HF is to pay costs of the Avoidance Proceedings to be taxed if not agreed.

All references to “Clause” below shall be to one in the Settlement Agreement.

11.  It is common ground that the Written Demand to be issued under Clause 2 applies only to proved debts but not costs or interests.

12.  It is also common ground that the Settlement Agreement contains a Written Demand Implied Term but with a slight difference between the parties. HF's version is that upon completion of “the adjudication of the proofs of debt” by ORT, ORT shall issue the Written Demand to HF within a reasonable time. ORT’s version is upon completion of “the adjudication of all proofs of debt”.

13.  HF also asserts another implied term - that ORT shall provide HF with sufficient particulars and supporting documentation with respect to any sums claimed under the Settlement Agreement to enable HF to verify that such sums were due and payable to ORT (“Supporting Documents Implied Term”). This is disputed by ORT.

14.  ORT did not complete the adjudication of the proofs of debt by 8 July 2015 (“Deadline”). One day later, ORT indicated her decision to instruct private insolvency practitioners to assist in the adjudication. On 22 July 2015, HF proposed RSM Nelson Wheeler (“RSM”) as a candidate in response to ORT’s indication. RSM was appointed by the Court on 17 September 2015.

15.  It was in early May 2016 that ORT finally completed the adjudication of the proofs of debt, with the last batch of the notices of adjudication issued to the creditors on 23 June 2016. ORT did not issue any Written Demand for any of the adjudicated proofs of debt (“Proved Debts”) at the time.

16.  The parties exchanged further correspondence and proposals in relation to the Proved Debts. On 17 July 2018, HF proposed to settle 4 out of the 9 Proved Debts directly with one group of creditors[1] (“Related Creditors”) and presented a cheque of HK$4,829,486.38 (“2018 Cheque”) to ORT to settle the remaining 5 creditors[2] (“Remaining Creditors”).

17.  On 23 August 2018, ORT issued a letter to HF, demanding HF to pay the amount of all 9 Proved Debts (totalling HK$149,184,477.45) ORT stated that once the amount is settled in full, ORT shall be in a position to work out the exact amount of the interests payable on the Proved Debts and shall make a written demand to HF for payment. ORT claims that this was the Written Demand under Clause 2. HF does not agree.

18.  On 27 August 2018, HF provided evidence that it had directly settled the Proved Debts of the Related Creditors and reiterated its proposal for ORT to apply the 2018 Cheque to settle the Proved Debts of the Remaining Creditors, and to provide a fresh bank guarantee to substitute the share charges.

19.  On 2 November 2018, HF issued another letter, putting on record that ORT failed to complete the adjudication of proved debts before 8 July 2015 and issue a Written Demand thereafter. Harbour Front pointed out it was still not being provided with the total amount for its settlement and that the Settlement Agreement remained outstanding as a result of ORT’s default in performance. HF asked ORT to inform it of the final amount to pay with particulars, no later than 14 November 2018.

20.  In her reply letter dated 13 November 2018, ORT reiterated its request for HF to settle the sum of HK$149,184,477.45 for the Proved Debts. ORT asked for further information in relation to Orix’s assignment of its debt to HF.

21.  By a further letter dated 5 December 2018, HF reiterated its request for ORT to provide the final amount payable with particulars, and provided details as to the assignment of Orix’s claim to HF.

22.  What then followed was complete silence on ORT’s part for 2½ years until her letters dated 18 June and 23 July 2021. Those letters did not address HF’s proposals, but requested HF to provide a new guarantee.

23.  On 19 January 2022, ORT sent a letter to HF (“19 January 2022 Letter”), expressly pursuant to Clause 1, around 6.5 years after the Deadline. HF claims this was the only Written Demand. ORT does not agree.

24.  On 16 February 2022, HF expressed its disagreement with some of the items in the 19 January 2022 Letter, but nevertheless issued 2 cheques in favour of ORT (“2022 Cheques”) respectively of HK$4,829,486.38 for the Proved Debts of the Remaining Creditors and HK$711,755.41 for the additional amount payable to Healthy Wharf which ORT informed HF for the first time in that Letter. HF proposed to put up a sum of HK$16,920,000 as security pending final resolution of all outstanding issues (“the 2022 Proposal”).

25.  By a letter dated 9 March 2022, ORT supplied further particulars and supporting documents at HF’s request.

26.  By a letter on 10 March 2022, ORT rejected the 2022 Proposal and gave notice of her intention to enforce the security.

27.  On 14 April 2022, ORT finally applied the 2022 Cheques to settle the Proved Debts (HK$5,541,241.79) of the Remaining Creditors.

28.  The most recent development was that on 20 February 2024. HF and the Related Creditors attempted to “resurrect” the 4 admitted but withdrawn Proved Debts for the purpose of claiming interest. HF and ORT are, however, agreed that this is not the proper forum and the issue should be left to another application.

29.  On 14 April 2022, HF took out the OS and the Payment-in Summons, seeking the Court’s permission for it to pay in HK$16,920,000 in return for the immediate release of the Share Charges and the Bank Guarantee (collectively “Securities”).

30.  By consent in respect of the Payment-in Summons, Ng J ordered on 18 October 2023 that upon HF making payment of HK$16,920,000 into Court as security for its obligation under Clause 1, HF shall be discharged from any obligation to provide the Bank Guarantee, and ORT shall refrain from enforcing the Share Charges. HF duly made the payment-in on 16 November 2023.

C.  ISSUES

31.  The first issue is the Liability to Pay Interest Issue (Item 7 of Updated Appendix 1). HF disputes both liability and quantum to pay interests on the Proved Debts. Its primary position is that its obligation to pay interest is not triggered under Clause 1 as there is no “surplus remaining” after the payment of the Proved Debts under Sections 38(9) and 71 of BO. Alternatively, HF contends that any obligation to pay interest should be limited to a shorter period up to the time when ORT should have issued the Written Demand by reason of Clauses 1 and 2 and the Written Demand Implied Term.

32.  ORT’s position is that “surplus” is not the expressed intention of the parties under Clauses 1 and 2. Sections 38(9) and 71 of BO only govern the rate of interest on the Proved Debts and when they start to accrue.

33.  The second issue is the Period of Interest Issue.

34.  The third issue is the OR’s Breach Issue. HF asserts that ORT breached Clause 2 and the 2 Implied Terms.

35.  ORT denies the breaches and asserts that HF has failed to prove that the Written Demand was not issued within reasonable time. ORT disputes the existence of the Supporting Documents Implied Term.

36.  The fourth issue is the Damages Issue. HF claims to have suffered loss as a result of ORT’s breaches. ORT denies and asserts that causation is not established.

37.  The fifth issue is the Item 5 Issue, in relation to HF’s liability for interest on the Petitioner’s costs.

38.  The sixth issue is the Item 8.5 Issue, being taxing fees for forensic accountant.

39.  There is dispute over the quantum in Items 8.7 and 11, but it is arithmetic in nature and consequential on the Court’s determination of the first issue.

40.  HF requests for the release from the Share Charges upon its payment of the sum ordered by the Court. This is consequential and ORT does not dispute it.

D.  LEGAL PRINCIPLES ON CONSTRUCTION OF CONTRACT

41.  The legal principles on contractual construction are not in dispute. The task is to ascertain the common intention of the parties by construing the agreement: Foskett on Compromise (9^th ed.), §5-02 to 5-09.

42.  The propositions of particular relevance when considering a compromise have usually been the following as set out in Foskett, §§5-18:

(1)  words are to be given their natural and ordinary meaning unless the result is absurd or the agreement is inconsistent within itself;

(2)  words are to be interpreted in such a way as to effectuate the agreement rather than to invalidate it;

(3)  the agreement should be considered as a whole, the meaning of words to be taken from their context with a view, if possible, to giving effect to the whole of it.

43.  In construing a contract all parts of it must be given effect where possible, and no part of it should be treated as inoperative or surplus. The presumption against surplusage is a relevant consideration in a bespoke contract drafted by the parties to meet the exigencies of a particular and significant commercial arrangement: Achieve Goal Holdings v Zhong Xin Ore Material Holdings [2020] HKCA 51, §16(6).

44.  The Court should have regard to the implications of each competing construction, at least by way of cross check. Business common sense should be engaged in the interactive process: New Castle Investments Ltd v WFC Holding Ltd [2020] HKCA 755, §§38-39, Lam VP (as he then was).

E.  LIABILITY TO PAY INTEREST ISSUE

45.  Under Clause 1, HF’s obligation is limited to paying interest “pursuant to Sections 38(9) and 71 of the Bankruptcy Ordinance”.

46.  Sub-sections 38(1) – (8) of BO set out the order of payment of different types of debts.

47.  Section 38(9) provides that,

“If there is any surplus after payment of the foregoing debts, it shall be applied in payment of interest from the date of the bankruptcy order at the rate specified in section 71(3) on all debts proved in the bankruptcy.” (underline added)

48.  Section 71 provides that,

“(1) Where a bankruptcy debt bears interest, that interest is provable as part of the debt except in so far as it is payable in respect of any period after the commencement of the bankruptcy.

(2) Any surplus remaining after the payment of debts that are proved in bankruptcy shall, before being applied for any other purpose, be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the commencement of the bankruptcy. …

(3) The rate of interest payable under subsection (2) in respect of any debt is whichever is the greater of the following –

(a) The rate specified under section 49 of the High Court Ordinance (Cap. 4) at the commencement of the bankruptcy; and

(b) The rate applicable to that debt apart from the bankruptcy.”

49.  HF submits that it is only liable to pay interest when there is surplus after payment of the Proved Debts (“Surplus Point”). I disagree.

50.  First, although the Settlement Agreement arose in a bankruptcy, the Court should not elide bankruptcy provisions with contract terms. HF’s obligation to pay interest is derived from contract and not statute.

51.  Second, as is common ground between the parties, when the Settlement Agreement was entered into, the Bankruptcy’s estate had negligible assets. Against the background of the Avoidance Proceedings, the clear intention of the parties must have been that, in ORT’s words, HF should “underwrite” all the proved debts, associated interests and costs in full settlement of the Avoidance Proceedings. It was not expected that ORT would be put in any real sense of “surplus”, quite apart from the fact that HF’s payments were not in themselves assets of the Bankrupt’s estate.

52.  Third, HF accepts that Clause 1 cannot be rendered otiose as a matter of construction, but argues that surplus may arise when HF defaults in paying the proved debts and ORT enforces the Securities pursuant to Clause 6. If the enforcement results in a surplus, HF will have to pay interest.

53.  Again, I do not agree. There is nothing in the wording of Clause 1 that suggests the payment of interest should arise in such a limited circumstance, subsequent to and contingent on the exercise of rights under Clause 6.

54.  Moreover, the “surplus” in Clause 1 must mean surplus belonging to the Bankrupt’s estate: Re GW Electronics Ltd [2020] HKCFI 2936 §§22-27, per Linda Chan J, construing a similar provision in Section 264A(2) of the Companies (Winding-up) and Miscellaneous Ordinance (Cap 32) (“Cap 32”). The Securities do not belong to the estate and neither would the surplus on enforcement. They belong to HF, the provider of those Securities. Even HF accepts this: §42 of Ms Janice Ho’s submission.

55.  HF queries why, if ORT’s stance is correct, the parties did not draft Clauses 1 and 2 in another way. However, this kind of question is of limited assistance: Lewison on the Interpretation of Contracts (8^th ed) at §2.113. The question is not whether the contract could have been better, differently or more elegantly expressed, but simply what it meant.

56.  HF further submits, if statutory interest is always payable under Clause 1 without any limit and regardless of whether there is any surplus in the Bankrupt’s estate, it will lead to absurd results of allowing the creditors to recover more than they would have been entitled to:

(1)  Even on ORT’s case, if the Avoidance Proceedings were determined in favour of ORT and therefore the Shares ought to have formed part of the Bankrupt’s estate, the maximum value of the Bankrupt’s estate would only have been the value of the Shares, i.e. about HK$240 million in early 2015 when the Settlement Agreement was entered into.

(2)  The total value of the 9 Proved Debts is around HK$149 million.

(3)  As a result, even without taking into account ORT’s fees and expenses, the maximum amount of “surplus” available for payment of statutory interest which the creditors would have been entitled to would not exceed HK$91 million (“Maximum Statutory Interest”).

(4)  Nevertheless, adopting ORT’s interpretation, the total amount of interest payable for the 9 Proved Debts between the commencement of the bankruptcy (1 March 2001) and the entry of the Settlement Agreement (12 February 2015) would have been around HK$262 million[3], which would already have far exceeded the Maximum Statutory Interest which the creditors would have been entitled to under Sections 38(9) and 71 BO.

(5)  It could not have been the parties’ intention, at the time when the Settlement Agreement was entered into in 2015, that the creditors would be entitled to recover more than what they were entitled to under sections 38(9) and 71 BO.

57.  With respect, such hypothetical analyses of HF’s exposure to interest payment assuming the Avoidance Proceedings had proceeded is speculative and unwarranted. It is against established principles of contractual interpretation on an objective basis. Even if a contractual arrangement, interpreted according to its natural language, has worked out badly or even disastrously for one of the parties, it is not a reason for departing from the natural language. The Court will not assist an unwise party or penalise an astute party by rewriting the contract: see e.g. Achieve Goal v Zhong Xin, §16(3).

58.  In any case, the Deadline and one or more of the Implied Terms would operate to control HF’s exposure to interests (discussed in the next issue below).

59.  For the reasons, given in this Section, I hold that HF's liability to pay interests to ORT does not depend on there being a surplus after payment of the Proved Debts. I agree with ORT that the parties’ reference to sections 38(9) and 71 of the BO was to govern the interest rates on the Proved Debts and when they start to accrue. HF is liable to pay interest in the present case.

F.  PERIOD OF INTEREST ISSUE

F1.  Legal principles

60.  It is common ground that ORT has to issue the Written Demand within reasonable time, and the period of interest is limited by Clause 2.

61.  What constitutes “reasonable time” is highly fact-sensitive, and is a question of mixed fact and law. Whether reasonable time has been exceeded is not limited to what the parties contemplated or ought to have foreseen at the time of the contract. See Urban 1 (Blonk Street) Ltd v Ayres [2014] 1 WLR 756 at §§46 and 49 (CA), citing from previous authorities:

“[It is] a broad consideration, with the benefit of hindsight, and viewed from the time at which one party contends that a reasonable time for performance has been exceeded, of what would, in all the circumstances which are by then known to have happened, have been a reasonable time for performance. That broad consideration is likely to include taking into account any estimate given by the performing party of how long it would take him to perform; whether that estimate has been exceeded and, if so, in what circumstances; whether the party for whose benefit the relevant obligation was to be performed needed to participate in the performance, actively, in the sense of collaborating in what was needed to be done, or passively, in the sense of being in a position to receive performance, or not at all; whether it was necessary for third parties to collaborate with the performing party in order to enable it to perform; and what exactly was the cause, or were the causes of the delay to performance. The list is not intended to be exhaustive.”

62.  The Court of Final Appeal has once observed that reasonable time for compliance is to some degree impressionistic. No one could be confident to draw such a fine line to separate what would, from what would not, constitute a “reasonable time”: Kensland Realty Ltd v Tai Tang & Chong (2008) 11 HKCFAR 237, at §137.

63.  Statutory interest under Section 71 BO will not be reduced simply on the basis that the trustee in bankruptcy unduly delayed in realising the bankrupt’s property and paying off the creditors: Re Yick Kin Chung, HCB 1187/2004, 1 December 2014, §§34-35, Mimmie Chan J.

64.  However, this authority is not applicable since the present case is not concerned with statutory interest, but the contractual liability of HF (a third party who is not the Bankrupt) on the proper interpretation of the Settlement Agreement. To deprive ORT of interest, there must be a proper basis. The Court or HF has no discretion.

65.  A person is not permitted to take advantage of his own wrong. In a contractual context, there are 2 limitations to this principle. (1) Relevant breach, ie it is necessary to show that the relevant party’s “wrong” involves his breach of the contract in respect of an obligation owed to the innocent party. (2) Causation, ie that the rights or benefits which the party claims under the contract arise as a direct consequence of his prior breach. Either as a matter of construction or a substantive rule of law, the claimant may be prevented from claiming such benefits arising in consequence of his own breach. See Kensland Realty, §§91, 94 – 98, Ribeiro PJ. This is referred to as the “prevention principle”.

F2.  Parties’ positions on the period of interests

66.  It is common ground that the need to issue a Written Demand within reasonable time applies to Proved Debts but not bankruptcy costs.

67.  HF submits that there are 3 possible time periods to which interests should apply, all from commencement of the bankruptcy:

(1)  Up to 5 August 2015, being 28 days after 8 July 2015, ie the Deadline by which ORT should have completed its adjudication of the Proved Debts pursuant to Clause 2 (“Period 1”);

(2)  Up to 21 July 2016, being 28 days after 23 June 2016, ie the actual date of the adjudication of the Proved Debts by ORT (“Period 2”); or

(3)  Up to 17 July 2018, when HF informed ORT that it would settle the Proved Debts of the Related Creditors and provided the 2018 Cheque to ORT to settle the Proved Debts of the Remaining Creditors (“Period 3”).

68.  ORT submits that she is entitled to interests from commencement of the bankruptcy up to 14 April 2022 (date of payment to the creditors) or 16 February 2022 (date of the 2022 Cheques). She accepts that if she has breached the Written Demand Implied Term, she may be precluded from claiming interests if the prevention principle is satisfied. However, even if the Supporting Documents Implied Term exists, there is no complaint about such breach in relation to the Proved Debts. Insofar as bankruptcy costs are concerned, ORT is not obliged to issue a Written Demand but HF is under a continuing duty to provide for them as they arise from time to time until the end of the bankruptcy administration.

F3.  Period 1

69.  HF submits that Period 1 should apply because 8 July 2015 was the agreed Deadline, which had never been extended. ORT should have issued the Written Demand on the same day, in which case HF would have to pay the proved debts within 28 days, ie by 5 August 2015.

70.  On the other hand, ORT submits that there had been extension of time by conduct because RSM had been appointed by HF to assist ORT in the adjudication.

71.  As a matter of law, waiver or promise that HF would not enforce the strict time limit must be clear and unequivocal: Chitty on Contracts (35^th ed), Vol 1, at §§7-040 to 7-041.

72.  ORT’s submission is refuted by various letters of HF:

(1)  HF had made clear that the move to propose the appointment of RSM was “to approach the matter practically” to achieve its “primary objective” to have timely adjudication of the proof of debts. See the letter dated 22 July 2015. The appointment of RSM (at the cost of HF) was the result of the delay by ORT in completing adjudication in the first place, and HF’s attempt to reduce the prejudice caused as a result.

(2)  In various letters between 9 July and 6 August 2015, HF made clear that it had all along requested for timely adjudication of the proof of debts, that ORT failed to identify any difficulties or delays it had encountered since January 2015 in completing the adjudication. Even on 21 November 2017 or 2 November 2018, HF was still complaining that the adjudication process had taken far longer than anticipated and that ORT was in delay.

73.  In my view, the Deadline was imposed by contract. Recital (10) to the Settlement Agreement expressly spelt out that the parties have agreed to voluntarily enter into this Settlement Agreement and to strictly perform the provisions therein. It is not open to ORT to renege on it or claim that the adjudication was so complicated as not being able to meet the Deadline.

74.  However, the Deadline was not equivalent to the reasonable date for issuing the Written Demand. There is no suggestion that what ORT did before and after the Deadline was otiose. The discussion under Period 2 below illustrates that ORT could not have issued a Written Demand without clearing objections to her adjudication. There is no suggestion that the alleged difficulty which prompted ORT to appoint RSM was false. With full knowledge that ORT had failed to finalize the adjudication by the Deadline, HF had pushed ORT to continue with the adjudication exercise. The Settlement Agreement had continued. HF may have a claim in damages against ORT but the adjudication must go on until final conclusion. This is in line with the general duties of trustees to complete the administration of the assets with proper skill and competence in a reasonable manner, including the duty to act within a reasonable time without needlessly protracting the bankruptcy: Section 84 (1) BO.

75.  However, applying the prevention principle, breach of contract is established as ORT failed to adhere to the Deadline. Causation is established because ORT’s delay caused HF to have to bear about an additional year’s interest. Accordingly, though interest would not stop running after Period 1, ORT is precluded from claiming interest for the period between 9 July 2015 and 23 June 2016 (both dates inclusive).

F4.  Period 2

76.  After ORT completed the adjudication on 23 June 2016, Healthy Wharf promptly appealed against the adjudication of its Proved Debts, by a summons dated 13 July 2016. That summons was only dismissed on 29 August 2017, save as to a further sum by consent. Healthy Wharf’s further application to vary the costs order nisi was only dismissed on 15 November 2017. ORT had then to take into account the possibility of a further appeal. There is no complaint about the need for ORT to give time to creditors to consider the results of adjudication and the way she handled Healthy Wharf’s summons. Hence, the Proved Debts could not be finalized until the end of 2017, earliest.

77.  Here, the parties’ different propositions for the Written Demand Implied Term become relevant.

(1)  HF’s proposition is that ORT could have issued multiple Written Demands for unchallenged proofs because HF had to underwrite all Proved Debts anyway. ORT did not have to wait for the parties’ dispute on costs and interests to be dealt with. HF has raised the issue of interest (effectively the Surplus Point) and had provided counsel’s advice for ORT’s consideration as early as 2017. HF's concern was to implement the settlement so as to have the Shares released.

(2)  ORT’s proposition is that the Written Demand should be issued only upon completion of her adjudication of all Proved Debts.

78.  I accept ORT’s proposition. The Settlement Agreement was made against the backdrop of a Tomlin Order that stayed all further proceedings on the terms of the Settlement Agreement. Under the Settlement Agreement, there was no question of distribution of money received from HF to the creditors on a pro rata basis. If any creditor was not paid in full, ORT would be duty-bound to continue her investigation and seek to restore the Avoidance Proceedings. That may well have repercussions on eventual distribution to creditors and costs and defeats the settlement. ORT’s proposition has the contrary effect of giving business efficacy to the Settlement Agreement.

79.  For the aforesaid reasons, I reject Period 2, subject to denial of the one year’s interest stated in paragraph 75 above.

F5.  Period 3

80.  Mr Maurellet SC and Mr Fan (counsel for ORT) point out that Period 3 was not mentioned in HF’s affirmations and ORT did not have to the opportunity to respond by evidence. Be that as it may, I deal with it for the sake of completeness. Afterall, in the proper administration of the bankruptcy, though ORT is not aimed at profit-making, HF should not be made to pay more than is necessary.

81.  HF’s stance is premised on its letter dated 17 July 2018 whilst ORT’s is premised on her letter dated 23 August 2018.

82.  By the 17 July 2018 letter, HF had proposed settling the Proved Debts of the Related Creditors directly and had given the 2018 Cheque to ORT to pay the Remaining Creditors. ORT had not presented the 2018 Cheque for payment, but HF submits that it would not change the position that HF had discharged its obligation. The very delay in paying out the Proved Debts was also the subject of complaint by Healthy Wharf as early as 2 March 2017.

83.  I am satisfied that HF had always been ready, willing and able to perform its obligations to pay the Proved Debts, as evidenced by its keenness in pushing ORT to a final adjudication, making direct payment to the Related Creditors and delivery of the 2018 Cheque. However, 17 July 2018 could not have caused interest to cease running for the following reasons.

84.  Firstly, since 30 August 2017, HF has disputed its obligation to pay interest, relying on the Surplus Point. HF’s stance was not accepted by ORT, which I find to be a bona fide dispute and justified for the reasons given under the Liability to Pay Interest Issue.

85.  Secondly, HF merely made proposals in the 17 July 2018 letter and did not unconditionally tender payment. HF stated that, “By presenting the [2018] Cheque, in respect of the principal adjudicated for [the Remaining Creditors] and our separate agreement with [the Related Creditors], we have duly discharged our obligation under the Settlement Agreement to settle other than the disputed interest liability for [the Remaining Creditors]”. (italics supplied)

86.  ORT submits that under Clause 1, HF was to pay ORT and the Clauses had to be strictly performed. HF’s procurement of the 4 Related Creditors to withdraw their Proved Debts and direct payment to them without ORT’s consent was against the letter and spirit of Clause 1.

87.  Even if I can accept that there should not be form over substance, HF had only agreed to pay the Related Creditors. I am of the view that ORT was entitled to seek proof of payment before agreeing to the proposal.

88.  Thirdly, HF’s proposals on how to deal with the disputed interests and costs would have the effect of altering the Securities. ORT was not obliged to accept that.

89.  Fourthly, by the 23 August 2018 letter, ORT had expressly rejected HF’s proposals. Although ORT indicated in the same letter that it would return the 2018 Cheque, she eventually did not. The 2018 Cheque was never cashed and its validity would have expired by 6 months.

90.  For these reasons, HF could not have harboured any hope that interest would cease running from 17 August 2018.

91.  On the other hand, I find that it was plain from its contents that the 23 August 2018 letter was a Written Demand from ORT for payment of a specified sum for all the Proved Debts and the 28 days for payment in Clause 2 was expressly referred to.

92.  In fact, HF itself acknowledged the 23 August 2018 Letter to be the Written Demand. On 27 August 2018, after producing proof of withdrawal of the Proved Debts of the Related Creditors, HF requested ORT to issue a “revised written demand”.

93.  Given the final adjudication on 23 June 2016, my finding in paragraph 76 above that the earliest date that ORT could have finalized the Proved Debts was the end of 2017, and the fact that a bona fide dispute over interests had arisen since 30 August 2017 which remains unresolved, it could not be said that the Written Demand dated 23 August 2018 was not issued within reasonable time.

94.  There was no “revised written demand” as such but ORT issued the 19 January 2022 Letter. There was no explanation as to why it had taken about 3 ½ years for ORT to issue it. The quantum of total Proved Debts had not changed since 2018 but this letter claimed HK$5,571,241.79 only, having taken into account withdrawal of the Proved Debts of Related Creditors.

95.  Meanwhile, HF had not tendered unconditional payment for the Proved Debts between 23 August 2018 and 19 January 2022. Despite its own indications of bringing the matter to the Court on 30 August and 21 November 2017, HF delayed for over 4 years before taking out the OS.

96.  There was an additional amount of HK$711,755.41, which HF promptly paid by one of the 2022 Cheques whilst raising a query. This amount was crystallized in 2017 but HF was only first informed by the 19 January 2022 Letter. ORT explained this amount by reference to notices of adjudication and a court order dated 29 August 2017. These were for costs (instead of Proved Debts), for which ORT was not obliged to issue a Written Demand.

97.  For the reasons given, I reject Period 3.

F6.  Findings on period of interest

98.  I reject Periods 1-3. I find that the Written Demand was first issued on 23 August 2018. As HF had not paid the Proved Debts until 2022, interests had not ceased to run in the interim. The Proved Debts ceased to be “outstanding” upon ORT’s receipt of payment from HF on 16 February 2022. In accordance with Clause 2, I hold that interest has ceased to run from this date instead of the date ORT paid the creditors. Interest for the period from 9 July 2015 to 23 June 2016 should be denied.

G.  ORT’s BREACH ISSUE

99.  ORT was allegedly in breach of the Settlement Agreement in 2 respects.

(1)  Breach of Clause 2 and the Written Demand Implied Term in: (a) failing to complete the adjudication by the Deadline, and (b) failing to issue the Written Demand to HF within a reasonable time thereafter;

(2)  Breach of the Supporting Documents Implied Term.

100.  With regard to the first breach, for the reasons given in Section F above, ORT was in breach as regards (a) but not (b).

101.  With regard to the second breach, HF alleges that, in the 19 January 2022 Letter, there was a complete lack of particulars as to the computation of the amounts claimed. It was not until 9 March 2022 when ORT provided further particulars and supporting documents for some items HF showed that ORT was in error which led ORT to withdraw some items only belatedly in June 2023. The failure to provide accurate and sufficient particulars in justifying ORT’s claim prolonged the time for HF to verify the amount demanded and to make payment accordingly.

102.  With respect, I fail to see how it can be said that it was necessary to have the Supporting Documents Implied Term. In any case, it is far too vague. Given the volume of papers that ORT may need to go through in the administration of the bankruptcy, how does one define what are “sufficient particulars and supporting documents” that ORT should supply to HF to give business efficacy to the Settlement Agreement?

103.  In any case, even without this Implied Term, documents were promptly provided by ORT in less than 2 months on HF’s request.

104.  Even if the Supporting Documents Implied Term existed, any breach was not in respect of ORT’s claim for the Proved Debts but bankruptcy costs. ORT was not obliged to issue a Written Demand for bankruptcy costs but HF was under a continuing duty to provide for them as they arise from time to time and until the end of the administration. Adjudication of Proved Debts and claims for costs involve lots of mathematics. ORT could not be said to be in breach simply because of calculation errors.

105.  I am not satisfied that the 2^nd breach was established.

H.  DAMAGES ISSUE

106.  HF alleges that as a result of the OR’s delay in finalizing the adjudication and issuing the Written Demand with proper particulars, HF was required to maintain the Guarantee for an extended period of time long beyond the Deadline. The Guarantee was only discharged pursuant to the order of Ng J on 18 October 2023 (i.e. more than 8 years after the Deadline). The losses of HF are in:

(1)  Costs of maintaining the Guarantee; disregarding HF’s expenses in maintaining the Guarantee which were time-barred, the full particulars of HF’s losses are HK$337,500:

Date	HK$
Loss before Written Demand was issued
2016.07.18	18,750
2017.09.18	112,500
Loss after Written Demand was issued
2022.02.04	37,500
2022.03.23	18,750
2022.04.06- 2023.10.09	356,250
Total	337,500

(2)  Loss of use of HK$15 million cash deposit to secure the Guarantee between 2015 to 2023; HF accepts that it has to satisfy the test of remoteness; and

(3)  Costs of HK$480,000 for engaging RSM to assist ORT in completing the adjudication, to mitigate ORT’s delay.

107.  For breaching the Deadline only, I have already deprived ORT of contractual interest.

108.  Even if the rest of the breaches are established, the claim for damages can be dealt with shortly.

109.  The first 2 losses in relation to the Guarantee are claimed on the assumption that the Guarantee could have been discharged earlier but for ORT’s delay in adjudication and resolution of the issue on interest. That assumption, without disrespect, is erroneous because for as long as HF needs to pay ORT, and that includes costs and interests which still have not been paid in full till now, HF has to maintain the Guarantee.

110.  Further, when Ng J discharged the Guarantee, that was on condition that HF had to pay in HK$16.92 million to cover all contingent payments including costs, even more than the value of the Guarantee (HK$15 million). Accordingly, causation for loss is not established.

111.  With regard to the 3^rd loss, ORT’s suggestion of appointing a private insolvency practitioner to adjudicate on the debts expressly referred to HF’s obligation under the Settlement Agreement to make full payment to ORT for all costs of and occasioned by the adjudication of any and all proof of debt and legal proceedings arising therefrom. See ORT’s letter dated 9 July 2015.

112.  In all the correspondence about this appointment, there was no agreement between the parties that ORT should bear such costs. In Ng J’s order dated 17 September 2015 appointing RSM, it was stated that the relevant funding was to be provided by HF pursuant to the terms of the Settlement Agreement, without any reservation of HF’s right to claim against ORT.

113.  I find that there is no legal or contractual basis to require ORT to bear the 3^rd item of loss.

114.  In summary, apart from the one year interest that I have denied ORT, the claim for damages is dismissed.

I.  ITEM 5 ISSUE (INTEREST ON PETITIONER’S COSTS)

115.  Every judgment debt carried simple interest from the date of the costs order until satisfaction and this includes an order for taxed costs: Hotung v Ho Yuen Ki (No.3) [2009] 2 HKC 378, §§6-7, Master De Souza.

116.  However, there is no basis to impose liability on HF for these reasons.

117.  Firstly, Section 37(1)(b) of BO provides for the priority of the taxed costs of the petition but specifically excludes interest on such costs.

118.  Secondly, the Petitioner’s costs are not part of the Proved Debts and thus do not fall within the precincts of Clauses 1 and 2.

119.  Thirdly, rule 179(1) of Cap. 32H was similar to section 37(1)(b) of BO. However, section 264A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“Cap. 32”) and rule 179 of Cap. 32H were amended in 2000 to provide that any surplus remaining after the payment of debts proved in a winding up shall, before being applied for any other purpose, be applied in paying interest on the taxed costs of the petition and the proved debts since the winding-up order. While section 37(1) of BO was introduced in 2003 to follow rule 179 of Cap.32H regarding the order of priority of costs of bankruptcy, amendments in the same terms as section 264A of Cap. 32 were omitted from the BO. Without a statutory or contractual basis, it is not open to the Court to impose liability for interest on taxed costs by analogy with Cap 32 provisions.

120.  For the reasons given, I hold that HF is not liable for Item 5.

J.  ITEM 8.5 ISSUE (TAXING FEES FOR FORENSIC ACCOUNTANT)

121.  HF’s position is that Item 8.5 was for costs incurred by ORT in the Avoidance Proceedings and ought to be recovered pursuant to Clause 7.1 of the Settlement Agreement with a right to taxation if the parties cannot agree on quantum.

122.  ORT points out that HF did not dispute liability to pay but quibbled with the lack of documentary proof: Gillian 1^st §61(b).

123.  It is common ground that the costs of the forensic accountant incurred in the Avoidance Proceedings have been paid by ORT out of the estate. Those costs have been taxed between ORT and the estate.

124.  The taxing fees were actually fees incurred for that taxation, as confirmed by the Court’s letter dated 30 July 2018.

125.  I accept ORT’s explanation and find that Item 8.5 was not really litigation costs as between HF and ORT provided for under Clause 7.1, but bankruptcy costs which are payable by HF under Clause 1.

K.  FINDINGS AND CONCLUSIONS

126.  I hold that having a “surplus” in the estate is not a pre-condition and HF is obliged to pay ORT interest under Clause 1 for the Proved Debts (excluding Proved Debts of the Related Creditors which had been withdrawn). ORT is required to issue a Written Demand under Clause 2 for Proved Debts but not for bankruptcy costs. ORT was in breach of the Settlement Agreement in failing to adhere to the Deadline but not in breach of the Written Demand Implied Term when she issued the Written Demand on 23 August 2018. Due to the prevention principle, ORT should not be entitled to interests for the period between 9 July 2015 and 23 June 2016. Save for this period, HF is obliged to pay ORT interests from the date of bankruptcy (1 March 2001) to 16 February 2022. The Supporting Documents Implied Term was not necessary for the business efficacy of the Settlement Agreement. Even if that Implied Term existed, the complaint is in relation to bankruptcy costs and not Proved Debts. ORT was not in breach as a Written Demand for bankruptcy costs was not required. ORT is not liable to HF in damages for lack of causation or legal or contractual basis. HF is not liable to pay Item 5 as a matter of law. However, HF is liable to pay Item 8.5, which were bankruptcy costs payable under Clause 1.

127.  I therefore order as follows:

(1)  HF is obliged to pay to ORT all items as set out in the Updated Appendix 1 handed up at the hearing and initialled by me, save that (a) under Item 7, ORT should be deprived of interest for the period from 9 July 2015 (day after the Deadline) to 23 June 2016 (day of final adjudication) (both dates inclusive); (b) HF is not liable for Item 5; (c) Items 8.7 and 11 shall be calculated in accordance with my ruling on Item 7;

(2)  That the Share Charges be released or discharged upon HF’s payment of the sums ordered by the Court in sub-paragraph (1) above;

(3)  That ORT do return to HF the signed and executed instruments of transfer previously delivered by HF to ORT in respect of the Share Charges forthwith upon HF’s payment of the sum ordered by the Court in sub-paragraph (1) above; and

(4)  The claim for damages to be paid by ORT to HF for breach of the Settlement Agreement be dismissed.

(5)  There be liberty to apply.

128.  On a nisi basis and pursuant to Clause 1, I order HF to bear the costs of ORT with certificates for 2 counsel, summarily assessed at HK$800,000.

129.  I thank counsel for their able assistance, their focussed approach and efforts in narrowing down the issues.