RE KRZYSZTOF MARSZALEK

HCB 10950/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY NO. 10950 OF 2009

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HCB 10951/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY NO. 10951 OF 2009

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D E C I S I O N

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Introduction

1. There are two identical applications before the Court.  One is taken out by Mr Krzysztof Marszalek, a bankrupt in HCB 10950 of 2009 (“Mr Marszalek”). The other is taken out by Mr Yu Shun Leung Grady, a bankrupt in HCB 10951 of 2009 (“Mr Yu”) (collectively “the Bankrupts”).

2. In these two applications, Mr Marszalek and Mr Yu seek for the same reliefs namely that:

(a)  Pursuant to section 156 of the Companies Ordinance, Cap 32, they be granted leave to act as director of a company known as Buy Together (Hong Kong) Limited (“Buy Together”);

(b)  Alternatively and pursuant to section 33 of the Bankruptcy Ordinance, Cap 6 (“the Ordinance”), the bankruptcy order made against them be annulled on the ground that the provable debts and expenses of their respective bankruptcy have all been secured for; and

(c)  Pursuant to section 114 of the Ordinance, the prescribed fees due and payable to the Official Receiver and Trustee be remitted absolutely or on such sums/terms as the Court may think fit.

3. These two applications are listed to be heard together because they involved common issues of facts and law.

4. On 6 January 2012, and by consent of the parties, Au J ordered that the application for leave to act as director of Buy Together be stayed pending the determination of the annulment application.  This is a sensible course taken by the parties because if the court is to allow the annulment, the application for leave to act as a director would fall away and become superfluous.

5. Before the hearing of the applications scheduled on 14 March 2012, the petitioning creditor namely Standard Chartered Bank (Hong Kong) Limited (“the Petitioning Creditor”) and the Official Receiver have indicated that they would not oppose to the annulment application by the Bankrupts save that the Petitioning Creditor insisted that statutory interest be paid on the bankruptcy debts of Mr Marszalek and Mr Yu.  The Petitioning Creditor also seeks for costs against the Bankrupts on an indemnity basis.

6. However, at the hearing on 14 March 2012, the Petitioning Creditor changed its stance in respect of the claim for statutory interest.  Mr Wong, Counsel for the Petitioning Creditor, informed the court that the Petitioning Creditor would abandon the claim for statutory interest, but would seek for costs against the Bankrupts namely costs incurred in pursuing the claim for statutory interest and also costs of these applications.

7. The sudden change of instance by the Petitioning Creditor was attributed to the fact that at the hearing, Mr Beresford, Counsel for the Bankrupts, has confirmed that a Mr Wong Kam Wing (“Mr Wong Kam Wing”), the third party who has provided funds to pay all the bankruptcy debts of Mr Marszalek and Mr Yu (“the Third Party Fund”) is not prepared to pay any statutory interest on the bankruptcy debts. Upon such confirmation, the Petitioning Creditor decided to abandon such claim.

8. On this issue of statutory interest, the Official Receiver has indicated in her Supplemental Report dated 29 February 2012 that she is not going to insist on payment of statutory interest.  The Official Receiver is of the opinion that the Bankrupts’ assets are insufficient to pay all liabilities, costs, fees and expenses of these bankruptcy proceedings.

9. In respect of the application for remission of fees, the Official Receiver is of view that she is entitled to charge the fees and expenses as prescribed by the Bankruptcy (Fees and Percentages) Order, Cap 6C.  The Official Receiver contended that she has no statutory power to waive or compromise such fees.  Nevertheless and at the hearing, the Official Receiver confirmed that she would take a neutral stance on the matter and would leave the matter to be decided by the Court.

10. The Petitioning Creditor expressed no views on the application for remission of fees.

11. In view of the above, the issues that remain to be determined by the Court would be as follows: -

(a)  whether the Petitioning Creditor is entitled to claim for costs incurred in pursuing its claim for statutory interest against the Bankrupts, and if so, whether such costs should be paid on an indemnity basis; and

(b)  whether the Court should exercise its discretion to allow a remission of the fees payable to the Official Receiver and Trustee.

Background

12. Mr Marszalek and Mr Yu were directors of their former company Starline International Group Limited (“Starline”).  In August 2008, 2 separate bankruptcy petitions were presented by the Petitioning Creditor against Mr Marszalek under HCB 10950/2009 and Mr Yu under HCB 10951/2009.  The petitions were presented on the ground that they had defaulted on their personal guarantee (“Guarantee”) given in favour of the Petitioning Creditor in respect of the debts owed by Starline.

13. On 14 October 2009, bankruptcy orders were made against Mr Marszalek and Mr Yu and the Official Receiver was appointed as trustee of their respective bankruptcy.

14. According to the Official Receiver, 4 proofs of debt were received in respect of the bankruptcy estate of Mr Marszalek.  They comprised a joint debt owed to the Petitioning Creditor by Mr Marszalek and Mr Yu in the sum of HK$18,200,145.03 and 3 individual debts in the total sum of HK$203,890.79.  For the estate of Mr Yu, 3 proofs of debt were received.  These included the said joint debt owed to the Petitioning Creditor and 2 individual debts in the total sum of HK$83,141.

15. Mr Wong Kam Wing, the provider of the Third Party Fund, is the uncle of Mr Yu.  He had also provided financial assistance to the Bankrupts to set up the business of Buy Together.  Currently, Mr Marszalek is the Chief Executive Officer of Buy Together and Mr Yu is the Senior Vice President.

16. Buy Together was incorporated on 31 March 2010 as a private company under the Companies Ordinance.  It carries on the business of designing and operating a website known as “BeeCrazy.com”.  The website serves as a channel for Buy Together to sell to its members discount coupons, services and products offered by third party retailers.  The website also serves as an advertising platform for retailers for which an advertising fee is charged.

17. The nominal capital of Buy Together is HK$1,500,000 divided into shares of HK$1.00 each.  Its entired issued share capital in the sum of HK$10,000 is held in the name of Middle Kingdom Capital Group (“Middle Kingdom”) which is a company registered in Cayman Islands.  The only issued shares of Middle Kingdom (ie 50,000 shares) are in turn held by another company on trust for a Mr Maciej Jerzy PAS (“Mr PAS”).

18. On 3 December 2009, Mr PAS declared that he was holding 25,000 shares of Middle Kingdom on behalf of Mr Marszalek and the remaining 25,000 shares on behalf of Mr Yu.  Therefore, and in effect, Mr Marszalek and Mr Yu are the beneficial owner of the shares of Buy Together.

19. On 5 August 2011, and pursuant to section 43A of the Ordinance, the Official Receiver gave notice to the Bankrupts that their beneficial interests in 50,000 shares in Middle Kingdom were vested in the Official Receiver as after-acquired property and formed part of their bankruptcy estates.

20. According to the First Affirmation of Mr Marszalek dated 11 November 2011 (the contents of which are adopted by Mr Yu in his Affirmation of the same date), the shares in Buy Together have no intrinsic value as it is still operating at a loss with net liabilities of HK$2,716,858.94 as at 31 August 2011.  However and despite that, a number of prospective investors have shown interest to make an outright acquisition of Buy Together.

21. One of the prospective purchasers (to which I shall refer to as “the Investor Company”) has offered to acquire Buy Together by payment of cash and by assignment of the shares in the Investor Company to the Bankrupts.  Under the terms of the proposed acquisition, Mr Marszalek and Mr Yu are required to continue to work for Buy Together for 36 months.  The Investor Company further requires Mr Marszalek and Mr Yu to restore their status as a “non-bankrupt” before it would proceed with the acquisition.  It is for this reason that Mr Marszalek and Mr Yu have applied to the court for an annulment order. According to the Bankrupts, they are not allowed to sell the shares of the Investor Company assigned to them as the Investor Company intends to apply for an initial public offering after the acquisition.

22. In order to assist Mr Marszalek and Mr Yu to restore their status as a “non-bankrupt”. Mr Wong Kam Wong agreed to provide sufficient funds for Mr Marszalek and Mr Yu to settle all the bankruptcy debts including all the fees and expenses of the Official Receiver.  At first, an Escrow Agreement was signed by Mr Wong Kam Wing underwhich Mr Wong Kam Wing agreed to deposit a sum of HK$22,173,207.19 with an Escrow Agent for payment of the bankruptcy debts and related expenses. But the Escrow Agreement was subsequently cancelled.  In place of that, Mr Wong Kam Wing executed a letter of consent and authorisation (“the Letter of Consent”) in favour of the Official Receiver as Trustee for the estate of the Bankrupts.

23. Pursuant to the terms of the Letter of Consent, Mr Wong Kam Wing paid to the Official Receiver a sum of HK$22,173,207.19 (ie the Third Party Fund) for the purpose of securing the payment of the provable debts of the Bankrupts and the related fees, costs and expenses of the bankruptcy proceedings.  According to the investigation of the Official Receiver, the Third Party Fund and the realized assets of the Bankrupts should be sufficient to secure all known provable debts of the Bankrupts as well as all estimated fees, costs and expenses of the Official Receiver.

COSTS INCURRED FOR PURSUING THE STATUTORY INTEREST CLAIM

24. Mr Wong, Counsel for the Petitioning Creditor, submitted that the Petitioning Creditor should be entitled to claim for costs incurred in pursuing such claim.  He argued that if not for the confirmation by Counsel for the Bankrupts at the hearing that Mr Wong Kam Wing is not going to pay any statutory interest, it is entirely reasonable for the Petitioning Creditor to pursue the claim for statutory interest.  According to the solicitors for the Petitioning Creditor, the total amount of statutory interest that the Petitioning Creditor would be entitled on the bankruptcy debts of Mr Marszalek and Mr Yu amounts to over HK$3.5 million (see the calculation by solicitors for the Petitioning Creditor as per their letter dated 21 February 2012 at page 72, Tab B of the Bundle).

25. In my view, in order to determine whether the Petitioning Creditor is entitled to costs incurred for pursuing the claim of statutory interest, the court has to examine whether it is reasonable, in the particular circumstances of this case, for the Petitioning Creditor to pursue such a claim.

26. On the claim for statutory interest, Mr Wong relied on section 38(9) of the Ordinance which states that: -

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

27. Mr Wong argued that on the evidence of the present case, there is a surplus after the payment of the provable debts and related fees and expenses. As such, statutory interest is payable.  The arguments of Mr Wong may be summarized as follows:

(a)  Firstly, he stated that on the evidence before the court, the Third Party Fund and the realized assets of the Bankrupts are sufficient to discharge all the provable debts and related fee and expenses.  He referred the court to para.14 of the First Report of the Official Receiver dated 29 December 2011, which states that after the settlement of all provable debts and estimated fees, costs and expenses of the bankruptcy proceedings, there would be a surplus of about HK$620,672.07.

(b)  Secondly, Mr Wong submitted that even on the own Affirmation evidence of Mr Marszalek and Mr Yu, they have admitted that there would be a surplus available after the acquisition of Buy Together by the Investor Company.  According to paragraph 25 of the First Affirmation of Mr Marszalek dated 11 November 2011, he stated that the value of the total consideration offered to be paid by the Investor Company would be sufficient to pay all the debts owed by the Bankrupts to the Creditors.  It is also likely that there would be a surplus from the net proceeds which would benefit both Mr Marszalek & Mr Yu.

(c)  Thirdly and more importantly, Mr Wong pointed out that when Mr Wong Kam Wing deposited the Third Party Fund with the Official Receiver, he had made provision for payment of statutory interest as per the “breakdown” attached to the Letter of Consent.  According to the “breakdown”, a sum of HK$3,444,186.37 has been designated for payment of statutory interest for the period from 14 October 2009 (ie the date that the Bankrupt Oder was made) up to 11 February 2012, the assumed date of payment.  Mr Wong submitted that all along statutory interest was meant to be paid by Mr Wong Kam Wing from the Third Party Fund and that an exact amount in the sum of HK$3,444,186.37 has been reserved for such payment.  It must therefore be reasonable for the Petitioning Creditor to pursue such a claim.

28. On this claim for statutory interest, Mr Wong also relied on the case of Wilcock V Duckworth [2005] BPIR 682, and argued that statutory interest should be paid because the Third Party Fund is likely to be linked to the sale of the Bankrupts’ beneficial interest in Buy Together.  He submitted that such Third Party Fund should not be used as a vehicle to deny the Petitioning Creditor’s claim for statutory interest.  He referred the Court to the judgment of Deputy Registrar Schaffers.  At page 685 of the judgment, it states: -

“ [8] This question [of whether statutory interest should be paid] only arises when third party funds are being made available. I fully agree with Register Derrett [in Harper v Buchler (NO.2) [2005] BPIR577] that one must take into account that where they are introduced, thus saving Department of Trade fees, their payment should not be used as a vehicle to deny creditors the interest which they would otherwise seek to claim. It should be made clear that the Bankruptcy Court will normally require statutory interest to be paid by a debtor where he or she seeks an annulment in circumstances where there are sufficient assets in the bankruptcy estate to pay all liabilities, costs, fees and expenses. Third party funds may avoid the payment of DTI fees but that should not in principle, deprive creditors of interest on their claims.

[9] It should also be made clear that any third party funds to be proffered are not to be linked to assets in the estate. The applicant must show in his evidence before the court that the third party is neither whether directly, or indirectly taking a charge over the ‘bankruptcy assets’ (for example, by re-mortgaging his property) nor securing an interest in any of the assets in any way. If that cannot be demonstrated to the satisfaction of the court, the onus being on the debtor, then any concession the court may consider as to statutory interest will normally be withdrawn.” (words in square brackets added).

29. Mr Wong submitted that originally the Third Party Fund is provided by Mr Wong Kam Wing pursuant to a “bridging arrangement”.  Under the arrangement, Mr Wong Kam Wing agreed, as per the Escrow Agreement signed between Mr Wong Kam Wing and the Bankrupts, to deposit a sum of HK$22,173,207.19 with an Escrow Agent to discharge the bankruptcy debts and related fees and expenses.  In the Escrow Agreement, Mr Wong Kam Wing is described as the “Intended Lender” and the Bankrupts as the “Intended Borrowers”.

30. Mr Wong stated that this “bridging arrangement” is by no means an outright payment by Mr Wong Kam Wing as the payment of the Third Party Fund is clearly intended to be by way of a loan from Mr Wong Kam Wing as the Lender and the Bankrupts as the Borrowers.  However, and for reasons unknown to the Petitioning Creditor, Mr Wong Kam Wing cancelled the Escrow Agreement. Instead, he paid the Third Praty Fund directly to the Official Receiver.  He also agreed with the Official Receiver that he would have no claim or recourse against the Bankrupts in respect of the money deposited by him for payment of debts on behalf of the Bankrupts.

31. Mr Wong submitted that the Bankrupts have not given any explanation to account for such a stark change on the part of Mr Wong Kam Wing and that this has a cast a doubt on the source of the Third Party Fund.  It is also likely that the Third Party Fund is linked to the assets of the Bankrupts.

32. Mr Wong pointed out that this direct payment of over HK$22 million to the Official Receiver and without recourse against the Bankrupts is inconsistent with the arrangement under the Escrow Agreement.  According to the Escrow Agreement, the Third Party Fund is intended to be a loan to the Bankrupts.  Mr Wong submitted that this direct payment without recourse would also unhook the link between the Third Party Fund and the beneficial interest of the Bankrupts in Buy Together.  He stated that the Petitioning Creditor is entitled not to accept such a change of stance by Mr Wong Kam Wing at face value but to request the court to determine the issue of statutory interest.  He argued that it is highly unlikely that Mr Wong Kam Wing would pay over HK$22 million for no consideration at all when he originally intended to be repaid under the Escrow Agreement.  It is also highly unlikely that Mr Wong Kam Wing would agree that the Bankrupts could freely sell the business of Buy Together and reap at least over HK$22 million for their own benefit and with no further liabilities to Mr Wong Kam Wing.  Mr Wong submitted that as per the Wilcock v Dockworth case, the burden is on the Bankrupts to prove that the Third Party Fund is not linked directly or indirectly to the estate assets.  But so far, no evidence or information regarding the underlying sale of the business of Buy Together to the Investor Company has been made available nor is there any explanation advanced to account for the change of stance on the part of Mr Wong Kam Wing.  Mr Wong submitted that the Third Party Fund could have originated from the Investor Company.

33. Mr Wong also disagreed with the valuation report prepared by Norton Appraisals (“Norton Appraisals”) for the Bankrupts.  Norton Appraisals estimated that the market value of Buy Together as at 31 October 2011 was HK$13,500,000. He submitted that the valuation report is adduced simply for the purpose of showing that the Bankrupts’ asset in Buy Together is insufficient to pay the bankruptcy debts and related expenses, and therefore no statutory interest is payable.  He stated that the valuation by Norton Appraisals is in contradiction to the Affirmation evidence of the Bankrupts who had previously stated that the value of the total consideration offered by the Investor Company would be sufficient to cover all the debts owed by them and is likely to generate a surplus.  Mr Wong submitted that in view of the valuation, the Bankrupts’ estate may be better off if the Official Receiver is to hold on to the shares in Buy Together and then sell it to the highest bidder.

34. For the above reasons, Mr Wong submitted that it is reasonable for the Petitioning Creditor to pursue the claim for statutory interest not only because statutory interest has been provided for and included in the Third Party Fund, but also there is a surplus in the Bankrupts’ assets and that it is likely that the Third Party Fund is linked to the Bankrupts’ assets.

35. Mr Beresford disagreed with the submissions of Mr Wong above.  He maintained that on the evidence, the assets of the Bankrupts are insufficient to pay all liabilities, costs, fees and expenses of the bankruptcy proceedings.  He stated that since there is no surplus from the bankrupts’ assets, there is no jurisdiction to order statutory interest as under section 71 of the Ordinance, statutory interest only accrues out of any surplus. Section 71(2) of the Ordinance states: -

“Any surplus remaining after 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; and interest on preferential debts ranks equally with interest on debts other than preferential debts.”

36. Mr Beresford submitted that it is wrong for the Petitioning Creditor to justify the claim for statutory interest on the Bankrupts’ own evidence that there would be a surplus after the sale of Buy Together (i.e. at paragraph 25 of the Affirmation of Mr Marszalek dated 11 November 2011).  Mr Beresford submitted that the Petitioning Creditor’s argument completely ignored the bankrupts’ evidence that the full value of the shares in Buy Together would only be realizable on an initial public offering which was uncertain and in the future.  He referred the court to paragraph 35 of the Affirmation of Mr Marszalek which states: -

“35. The existing prospective purchaser has (subject to contract) indicated terms upon which it may be willing to purchase the business, including the payment of consideration consisting of two elements, cash and shares in the prospective purchaser. As presently proposed, the cash element by itself is insufficient to pay all my and Grady’s debts and expenses in full but if the current value of the prospective purchaser’s shares is taken into account, the total would be sufficient as well as providing a surplus for Grady and me. However, only part of the shares in the prospective purchaser are proposed to be assigned to us on completion and the balance will be kept as security for our obligation to continue working for the Company for 36 months as stated above. Moreover, the value of the prospective purchaser’s shares is speculative at present, as it depends upon the success of a proposed initial public offering.”

37. Mr Beresford submitted that there is no dispute that the debtors desired to use the proceeds of sale to settle the debts and there is no dispute that the proceeds are hoped to generate a surplus over all in the long term, but that is based upon a speculative future valuation of the share and depended upon the success of an initial public offering all of which is greatly uncertain.  He stated that the valuation evidence that the shares of Buy Together only worth HK$13.5 million further confirmed that the assets of the Bankrupts are insufficient to discharge the bankruptcy debts and expenses.  It is simply a mistaken assumption on the part of the Petitioning Creditor that a surplus is available.

38. Mr Beresford also disagreed with the submissions by Mr Wong in relation to the valuation of the shares of Buy Together.  He contended that apart from the submissions by Mr Wong from the Bar table, the valuation by Norton Appraisals has not been challenged.  He pointed out that no evidence nor valuation report has been adduced by the Petitioning Creditor to rebut the valuation by Norton Appraisals.  But more importantly, the valuation was accepted by the Official Receiver.  It is based on such valuation that the Official Receiver decided not to insist on payment of statutory interest as she is of the view that the assets of the Bankrupts are insufficient to pay the bankruptcy debts and related fees and expenses.

39. Mr. Beresford submitted that in the two cases relied on by Mr Wong namely Wilcock v Duckworth and Harper v Buchler (No 2) [2005] BPIR 577, they are quite different from the present case.  In both of those cases, the assets of the bankrupt were sufficient to discharge all of the debts and liabilities and that the third party was being used as a device to avoid the payment of statutory interest.  But in the present case, there is clearly insufficient funds to pay the bankruptcy debts without the input of the third party and there is no surplus from which statutory interest should be ordered.

40. Mr Beresford further contended that Third Party Fund is not linked to the assets of the Bankrupts.  It is simply a case where Mr Wong Kam Wing, as the uncle of Mr Yu, would like to assist Mr Marszalek and Mr Yu to get out of their Bankruptcy.  There is no basis upon which the Petitioning Creditor could have properly inferred that the source of the Third Party Fund is in doubt. For these reasons, Mr Beresford argued that it is not reasonable for the Petitioning Creditor to pursue the claim statutory interest and to seek for costs.  He stated that this is just an “opportunistic attempt” on the part of the Petitioning Creditor to obtain further statutory interest out of the third-party funder.  He contended that the Bankrupts should be entitled to costs against the Petitioning Creditor because of the stance it has taken on the claim for statutory interest.  Alternatively, there should be no order as to costs.

41. I have considered the submissions by Counsel, I agree with Mr Beresford that there is no evidence to support the contentions of Mr Wong that the Bankrupts’ assets are sufficient to discharge the bankruptcy debts and expenses and that there would be s surplus to pay statutory interest under section 71(2) of the Ordinance.  As pointed out by Mr Beresford and on the evidence, the full value of the shares in Buy Together is uncertain and in a way speculative as it depends on the success of a proposed initial public offering by the Investor Company.  This is further reiterated in the 2^nd Affirmation of Mr Marszalek dated 14 February 2012.  At paragraph 6, he explained that: -

“…… after completion of the sale and purchase, we will effectively become one of the shareholders/investors of the Investor Company. The transfer of such shares in the Investor will be subject to a restrictive covenant. In general, we will not be able to sell any of the shares in the Investors until after a successful listing. We can therefore only hope that the stock market will continue to treasure this kind of business and that the plan and strategy of the Investor Company will work to perfection. The Investor may fail to acquire enough businesses in order to ‘package’ itself into an attractive vehicle for listing. Also, the market for this kind of business may get saturated with competitors before the Investor successfully gets its listing. The shares of the Investor may not be attractive. It may be possible for the Investor to fail to get listed at all. In such circumstances, we will end up holding shares in a private company in the United States which has no assets of any real value.”

42. In my view, no evidence has been adduced by the Petitioning Creditor to challenge the evidence of the Bankrupts in respect of the value of the shares of Buy Together.  The same applies to the valuation by Norton Appraisals.  No evidence has been submitted to rebut the valuation.  On the contrary, the Official Receiver accepted the valuation report and agreed that the Bankrupts’ assets are insufficient to discharge all the bankruptcy debts and related fees and expenses.  As such, I see no substance in the contentions of Mr Wong that the Bankrupts’ assets are sufficient to discharge all provable debts and related expenses with a surplus to pay statutory interest.

43. In respect of the source of the Third Party Fund and whether it is linked to the assets of the Bankrupts, I tend to agree with the submissions of Mr Wong that an explanation is needed from Mr Wong Kam Wing or the Bankrupts to explain why Mr Wong Kam Wing had agreed to cancel the Escrow Agreement and to pay the Third Party Fund to the Official Receiver without recourse against the Bankrupts.  Without the explanation, one may be suspicious as to why Mr Wong Kam Wing would agree to provide over HK$22 million for no consideration at all and without recourse against the Bankrupts whilst initially he intended the Third Party Fund to be a loan to the Bankrupts.  In my view and in the absence of any explanation, it would not be unreasonable for the court to infer that the Third Party Fund may be linked to the Bankrupts’ assets.  It is to be borne in mind also that the amount of money involved is quite substantial and the burden is on the Bankrupts to prove otherwise (see Wilcock v Duckworth above).

44. Further, I also agree with the submissions of Mr Wong that all along Mr Wong Kam Wing had agreed to pay statutory interest.  In the first place, he had included the payment of statutory interest in the Third Party Fund that he had paid to the Official Receiver.  At the hearing, reference has also been made to the 2^nd Affirmation of Mr Marszalek dated 12 February 2012 where Mr Marszalek stated at paragraph 5(2) of his Affirmation that Mr Wong Kam Wing is not prepared to pay any statutory interest.  Paragraph 5(2) states: -

“I was advised by Mr Wong (ie Mr Wong Kam Wing) that he also believes that no statutory interest shall be payable and as such this sum shall be refunded to him. If however this Honourable Court considers it fit to order statutory interest, he is not prepared to make any further contribution.” (words in bracket added)

45. However, as submitted by Mr Wong, if the said paragraph 5(2) is properly read, it means that Mr Wong Kam Wing is prepared to pay statutory interest if the court considers that it should be paid.  But he is not prepared to make further contribution if the statutory interest ordered to be paid by the court is more than the sum he has already provided.  I agree with such reading of the said paragraph 5(2).  Nevertheless and as pointed out by Mr Wong, it was only at the hearing that Mr Wong Kam Wing confirmed through Mr Beresford that he is not going to pay any statutory interest.

46. In view of the above, I agree that there are reasonable grounds for the Petitioning Creditor to pursue the claim for statutory interest.  But having said that, I do not think that the Petitioning Creditor should be entitled to costs incurred for pursuing such a claim.  I take the view that since the Petitioning Creditor has made a commercial decision to abandon the claim and decided not to pursue it further for fear that Mr Wong Kam Wing might withdraw the Third Party Fund, the Petitioning Creditor should not be entitled to costs.  It is trite law that if a party chooses to abandon or discontinue a claim, he should be liable to pay costs to the other party and not the other way round, i.e. for the other party to pay costs to the party who has abandoned the claim.  However, having considered that there are some merits in the claim for statutory interest by the Petitioning Creditor, I think that the appropriate costs order to be made is that there should be no order as to costs as between the Petitioning Creditor and the Bankrupts in respect of the claim for statutory interest.

47. Further, in fairness to the Petitioning Creditor, I think the Petitioning Creditor should be entitled to costs of the annulment applications taken out by the Bankrupts.  I would also allow costs for a brief attendance of a solicitor at the hearing on 14 March 2012 as it is not unusual for solicitor acting for a petitioner to attend court to answer questions raised by the court in relation to the annulment application.  But the time spent on arguing whether it is reasonable to pursue statutory interest would be disallowed. Without disrespect to Mr Wong, I would not allow attendance of counsel for the hearing as it is within the competency of a solicitor to deal with the application on the basis that there is no argument on statutory interest.

Should costs be paid on indemnity basis

48. Mr Wong submitted that his client should be entitled to costs on indemnity basis.  He relied on the contractual provision in the Guarantee signed by the Bankrupts in favour of the Petitioning Creditor.

49. Clause 1(c) of the Guarantee states: -

“(c) to pay all costs and expenses which are of reasonable amount and were reasonably incurred (whether directly and indirectly) by the Bank in connection with the recovery or attempted recovery by the Bank of moneys due to the Bank under this Guarantee (including without limitation legal costs on an indemnity basis).

50. He further relied on the case of Bank of China (Hong Kong) Ltd v Twin Profit Ltd & Ors CACV 94/2010, unreported and the English Court of Appeal case Gomba Holdings (UK) Ltd v Minories Finance Ltd [1993] Ch 171.  At paragraph 7 of the decision of Yuen JA in Bank of China (Hong Kong) Ltd v Twin Profit Ltd & Ors (Stone J. dissenting), she states: -

“Where parties have entered into a commercial transaction on a certain basis, the court should be slow to disturb the parties’ agreement, unless the circumstances are such as to cause the court in the exercise of its discretion to intervene. For instance, the court may well consider intervention in the situation referred to in Gomba where the mortgagor is required to pay charges of an unreasonable amount or charges unreasonably incurred ……”

51. Mr Beresford disagreed that costs should be paid on an indemnity basis. He argued that costs is always at the unfettered discretion of the court. Though the court would normally follow the contractual basis, it is not obliged to do so if there are reasons to hold otherwise.

52. The main argument of Mr Beresford is that the present application does not relate to the recovery or attempted recovery by the Petitioning Creditor of moneys due under the Guarantee.  This is because the Petitioning Creditor is trying to get money that would be due if it were due at all under section 71 of the Ordinance.  He stated that all moneys due under the Guarantee stopped at the commencement of the bankruptcy.

53. Mr Wong argued otherwise.  He submitted that if the court grants the annulment order, the bankruptcy order would be treated as if it had never been made and the loan under the Guarantee would have run its normal course of life with interest and the Bankrupt would be liable to pay for them.

54. With respect, I do not agree with Mr Wong.  I am of the view that the costs incurred by the Petitioning Creditor, including costs for pursuing statutory interest, are costs incurred in relation to and arising out of the application for an annulment order by the Bankrupts.  They are not costs incurred in connection with the recovery or attempted recovery by the Petitioning Creditor for moneys due under the Guarantee.  It is true that if the court grants the annulment order (on the basis that all the provable debts have been secured or paid), the Petitioning Creditor would have recovered all the moneys due under the Guarantee, but this is the consequences of the application for an annulment order instituted and made by the Bankrupts and not the Petitioning Creditor.  Further, it should be noted that the moneys due under the Guarantee is to be repaid by a third party Mr Wong Kam Wing not Mr Marszalek and Mr Yu under the Guarantee. The repayment is to be made upon the annulment of the bankruptcy order and pursuant to section 33 of the Ordinance.  Again, this is not under the Guarantee.  As such, I do not think that the Petitioning Creditor can rely on the contractual provision under the Guarantee and seek for costs on an indemnity basis.  I order that the Petitioning Creditor should be entitled to costs on party and party basis only.

Remission of fees

55. This application for remission of fees is made pursuant to section 114(2) of the Ordinance which provides that: -

“The court may remit the payment of any particular fee or fees due from any bankrupt, or any part thereof, either absolutely or on such terms as it may think fit.”

56. According to the Official Receiver, the estimated chargeable fees calculated by reference to Table A and Table B of the Bankruptcy (Fees and Percentages) Order, Cap 6C amounts to HK$3,175,454.66 in respect of the bankruptcy of Mr Marszalek (i.e. HCB 10950/2009).  For the bankruptcy estate of Mr Yu (i.e. HCB 10951/2009), the chargeable fees is HK$18,673.35.  However, the actual time costs incurred by the Official Receiver (including the estimated time costs to be incurred) in respect of both bankruptcy estates amounts to about HK$260,000 only.

57. Mr Beresford submitted that this is a prima facie case for remission because there is a hugh discrepancy between the chargeable scale fees and the actual time costs incurred by the Official Receiver.  He stated that the scale fees are wholly disproportionate to the work done.  If the scale fees are to be allowed, there would be an element of payment for work which had not been done.  He relied on the Court of Appeal case in Re Suen Kin Ning [2011] 1 HKLRD 982 where Le Pichon JA stated at paragraph 28 that:-

“…… it is only reasonable to infer that the Legislature intended the scale fees to reflect and be commensurate with the responsibility that goes with being the trustee in bankruptcy.”

58. She continued to state at paragraph 30 that: -

“…… it is the court’s function to ensure that the present legislation does not result in a wholly inequitable imposition of a financial burden where it is not justified or justifiable.”

59. Mr Beresford further referred the court to paragraph 26 of the judgment of Le Pichon JA where she stated that when the court has to exercise its discretion to remit the fees in the context of an annulment, the court should seek to restore the status quo ante and should give effect to section 33(4) of the Ordinance to the extent possible.  Paragraph 26 reads: -

“26. …… It (i.e. the court) was accorded a wide discretion by s.114(2) to remit ‘any particular fee or fees … either absolutely or on such terms as it may think fit.’ As earlier noted, when the discretion has to be exercised in the context of an annulment, the provisions of s.33(4) are relevant and cannot be ignored. In ordinary parlance, an annulment can only mean that the matter or event annulled must be regarded as having had no legal existence. In other words, what one should seek to do is to restore the status quo ante. In my view, s.33(4) should be given effect to the extent possible without compromising what should fairly and properly be allowed by way of fees having regard to all the circumstances.” (words in bracket added).

60. Section 33(4) of the Ordinance referred to in paragraph 26 of the judgment of Le Pichon JA states that: -

“(4) Where the court annuls a bankruptcy order under this section or section 20I, any sale or other disposition of property, payment made or other thing duly done by or under the authority of the Official Receiver, a nominee or a trustee or by the court is valid, but if any of the bankrupt’s estate is then vested in such a trustee, it shall vest in such person as the court may appoint or, in default of any such appointment, revert to the bankruptcy on such terms (if any) as the court may direct, and the court may include in its order such supplemental provisions as may be authorized by the rules.”

61. Mr Beresford submitted that rationale of the Suen Kin Ning case is that when the court is dealing with an application for remission, the object of the court is to restore the bankrupt to the status quo ante.  As such, he submitted that there is no reason, on the decision of Le Pichon JA, to impose a hefty statutory scale fees on the Bankrupts in respect of the Official Receiver’s duties under the Ordinance.  He further submitted that there is no equitable basis upon which to charge unreasonable fees just because they are being borne by a third party.

62. At the hearing, the Official Receiver confirmed that she would maintain a neutral stance in the matter.  However, Ms Lam, solicitors for the Official Receiver and Trustee, reiterated that the Official Receiver has no statutory power to waive or compromise the fees.  In this respect, I echo the comments of Le Pichon JA in Suen Kin Ning that this is and remains to be “unsatisfactory” (see paragraph 25 thereof).

63. Ms Lam submitted that the court shall have regard to all the circumstances of the case before exercising its discretion to remit the fees.  She stated that the discretion should not be easily exercised by the court simply because the amount of the chargeable scale fees exceed the amount that the Official Receiver would have charged on a time costs basis.

64. Ms Lam pointed out that the facts in Suen Kin Ning case are quite different from the present case.  She submitted that because of the distinguishable features between these two cases, the chargeable scale fees imposed by the Official Receiver in the present case does not result in a wholly inequitable imposition of a financial burden where it is not justified or justifiable.  She stated that unlike Suen Kin Ning case, the present case does not cry out for the exercise of the court’s discretion to order a remission of fees.

65. Ms Lam submitted that the facts in Suen Kin Ning case are unusual and with unique features of its own.  They are very different from the facts of the Bankrupts’ case in the following ways: -

(a)  In Suen Kin Ning case, the annulment application is based on the ground that the bankruptcy order ought not to have been made because the petitioner has failed to disclose that he was a fully secured creditor (i.e. under section 33(1)(a) of the Ordinance).  Also, Mr Suen was solvent.  In the Bankrupts’ case, the ground of annulment is based on section 33(1)(b) of the Ordinance, that is the provable debts of the Bankrupts have all been secured or paid.  And in the present case, both Mr Marszalek and Mr Yu are insolvent;

(b)  The Suen Kin Ning case is a short-lived bankruptcy in that Mr Suen applied for an annulment and for remission of fees within 2 months after he first became aware of the bankruptcy proceedings.  It is not a typical bankruptcy case.  For the case of the Bankrupts, it is the usual run-of-mill case.  It lasted for nearly 2½ years during which the Official Receiver has undertaken various duties and functions as are required under the Ordinance; and

(c)  In Suen Kin Ning case, all the assets of Mr Suen had been reverted to him as per section 33(4) of the Ordinance.  But in the case of the Bankrupts, no assets would be reverted to them save the unrealized shares in Buy Together.

66. I accept that there are distinguishable features in the Suen Kin Ning case and the present case.  But in my view, whether the court should exercise its discretion to remit the fees does not depend on whether the facts of a particular case have the same or similar facts as those in the Suen Kin Ning case.  Rather, the court should consider the principles as set out in Suen Kin Ning case; that is the court should have regard to all the circumstances of the case; in particularly the court should ensure that the scale fees should reflect and be commensurate with the responsibility that goes with being the trustee in bankruptcy.  The court should also ensure that the scale fees imposed would not result in a wholly inequitable imposition of a financial burden where it is not justified or justifiable.  The approach to be adopted by the court is to restore the bankrupt to the status quo ante.

67. As for the present case is concerned, I accept that for the past 2½ years, the Official Receiver as trustee for the bankruptcy estate of Mr Marszalek and Mr Yu, has undertaken various duties in administrating their bankruptcy estates.  These include, inter alia, preserving and realizing the assets of the Bankrupts; investigating the beneficial interest of the Bankrupts in Buy Together and administering the Bankrupts’ financial affairs.  The actual time costs incurred by the Official Receiver including the estimated time costs to be incurred amounts to about HK$260,000.  However, I fail to see any justifiable ground for the Official Receiver to charge a scale fee of over HK$3 million nor has the Official Receiver advanced any reasonable ground to justify the same.  On this issue, I agree with Mr Beresford that if the chargeable scale fees are not remitted, the Official Receiver would be remunerated for work which had not been done.  This is unreasonable having considered the hugh discrepancy between the chargeable scale fees and the actual and estimated time costs of the Official Receiver.  In my view, the chargeable scale fees in the sum of over HK$3 million do not reflect nor commensurate with the responsibilities and duties undertaken or to be undertaken by the Official Receiver as trustee for the bankruptcy estates of Mr Marszalek and Mr Yu.  In the circumstances, I will order a remittance of the fees of the Bankruptcy save that the Official Receiver is entitled to charge for the actual time costs incurred in the administration of the bankruptcy estates of the Bankrupts and the time costs to be incurred in finalizing the bankruptcy estates upon the making of the annulment order.

Order

68. On the basis that the annulment applications are not opposed by the Official Receiver and the Petitioning Creditor, I make the following orders: -

(a)  the Bankruptcy order made against Mr Marszalek and Mr Yu be annulled;

(b)  the Petition presented against them be dismissed;

(c)  the advertisement and gazette of the annulment order be dispensed with;

(d)  the Bankrupts do pay the costs of the application to the Official Receiver and the Petitioning Creditor on a party and party basis and to be assessed on a summary basis;

(e)  there be no order as to costs as between the Bankrupts and the Petitioning Creditor in relation to the claim for statutory interests;

(f)  the scale fees of the Official Receiver in the total sum of HK$3,194,128.01 (i.e. $3,175,454.66 + $18,673.35) be remitted save that the Official Receiver shall be entitled to charge the actual time costs incurred and the time costs to be incurred in the administration of the two bankruptcy estates.  This would include dividend distribution and release of trusteeship.

69. The parties shall obtain a 30-minute hearing before the court for the summary assessment of the costs awarded.  The Official Receiver and the Petitioning Creditor do not less than 14 days before the assessment hearing lodge with the court and serve on the Bankrupts a statement of their costs. The Bankrupts do within 7 days thereafter lodge with the court and serve on the other parties their brief grounds of objection.