Re Luu, Hung Viet Derrick

HCB 4776/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 4776 OF 2011

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D E C I S I O N

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Application

1.This is an application for suspension of automatic discharge of bankruptcy.

Background

2.Mr. Zhang Liyuan 〔張禮元〕filed the petition herein on 1 August 2011 praying for a bankruptcy order against Mr. Luu, Hung Viet Derrick 〔劉志雄〕. It was said that Mr. Luu owed him a total sums of over $ 62 million.  Mr. Luu opposed the petition.

3.On 8 February 2012, the Hon. Barma J. (as he then was) refused to accept the arguments raised by counsel acting for Mr. Luu, including that there was prospect of establishing a bona fide dispute to part of the claim and the Court should exercise discretion to postpone the matter to afford Mr. Luu a further opportunity to try and pay the debt. Usual bankruptcy order with costs was then made against Mr. Luu (hereinafter called as “the Bankrupt”). 

4.The Bankrupt then filed his appeal in CACV 41/2012, but he took no further step to prosecute it.

5.Later, Mr. Stephen Wong and Mr. Osman M. Arab, both of RSM Corporate Advisory (Hong Kong) Limited were appointed trustees in bankruptcy (“the Trustees”) for the Bankrupt.  

6.The Trustees started administration of the estate of the Bankrupt.

7.By a Statement of Affairs (“SOA”) affirmed by the Bankrupt on 17 April 2012, he deposed, inter alia, that:

(a) His address was “House 18, 8 Severn Road, Hong Kong (the “Peak Property”).

(b) His net assets (or surplus) were in the sum of about $427 million.

(c) The amount of his assets was $607 million, comprising of:  

(i) Innovative Generation Holdings Ltd. (“Innovative”), and

(ii) 3/F, C, Hooley Mansion, No.21-23 Wong Nai Chung Road (“Hooley Mansion”).

(d) The amount of his liabilities was about $179 million,    comprising of : 

(i) 3 secured creditors for about $118 million, and

(ii) 5 unsecured creditors for about $61 million.

8.In the next few years, it followed by a series of communications arguments and litigations among the Trustees, the Bankrupt and some other parties. In June 2013, the Bankrupt applied, inter alia, to remove the Trustees. The Hon. G Lam J. rejected all the alleged misconducts on the part of the Trustees by the Bankrupt, including that funding arrangements were generally confidential in nature and there was no reason that the Trustees should disclose them to the Bankrupt. The application was dismissed on 26 September 2013.

9.On the other hand, the Trustees filed the present summons on 13 November 2015 to object the automatic discharge of the Bankrupt. They relied on 3 grounds.

(a) The automatic discharge would prejudice the administration of the Bankrupt’s estate.

(b) The Bankrupt failed to co-operate in the administration of his estate.

(c) The conduct of the Bankrupt, before or after his bankruptcy,  was unsatisfactory.

10.By consent of both parties, on 15 January 2016, usual directions for affidavit evidence were ordered, including that the discharge of the Bankrupt be suspended pending final disposal of the Trustee’s summons.

11.On 8 July 2016, I heard the substantive argument. Ms. Rachel Lam of Counsel acted for the Trustees and the Bankrupt was represented by Mr. Jonathan Chang of Counsel. Upon hearing from them, I reserved my decision to be handed down. Here it is.

Discussions

12.The Trustees made seven (7) complaints against the Bankrupt. He denied all of them. He further said that there was delay of the Trustees which caused the administration of the estate to be incomplete. I will see and decide if the Trustees could make out the complaints and then, consider if there was any delay on them.

(1)  Hooley Mansion

13.The Trustees said that Hooley Mansion was owned by the Bankrupt.  He should have surrendered vacant possession of it to them. However, he did not do so. Notwithstanding the commencement of the HCMP 1844/2012 and the subsequent possession order made therein on 26 September 2012, the Bankrupt handed the keys to one of the mortgagees who subsequently sold the same. The Trustees were considering taking further steps to recover sale proceeds.

14.The Bankrupt disagreed and said, inter alia, that Hooley Mansion was occupied by his mother-in-law. Facing the claim of the mortgagees, he had no choice but to hand over the keys. Although the Bankrupt admitted that he only informed the Trustees the delivery of possession 8 days late, the latter sat on the case for 43 months without taking any step for the intended recovery of the sale proceeds.

15.In my view, the conduct of the Bankrupt regarding Hooley Mansion is not satisfactory, albeit not as serious as those complained by the Trustees. One of course cannot dispute that the Bankrupt did disclose the existence of the 2 mortgagees in the Statement of Affairs. However, but for the lack of information (including the discussion and agreed arrangement between the Bankrupt and the mortgagee(s)) and communications, the Trustees would not have unnecessarily spent time and costs in the MP proceedings which achieves nothing useful for the administration of the estate.

(2)  Innovative

16.The shareholdings in Innovative are the major assets of the Bankrupt as disclosed by him in the SOA. The Trustees complained that the Bankrupt only disclosed very limited information regarding it.  Despite requests and demands, the Bankrupt has not been co-operative. Hence, the Trustees need to conduct further investigations.

17.The Bankrupt replied that he had provided all assistance he could have done, including documentation available in his hands. He also pointed to the Trustees other possible sources of information. It was the Trustees who failed to take effort or sufficient effort to follow up the matter. The Bankrupt should not be blamed. 

18.I am unable to accept the answers of the Bankrupt. With the evidence before me, on balance, I find that the Bankrupt has not disclosed all information with him on Innovative.

(a) It is the major asset owned by him, valued at $600 million.

(b) He is the sole shareholder and director of the Innovative.

(c) He is an experienced businessman.

(d)Even if most of the documents was no longer in the possession of the Bankrupt after the closing down of his business office, he could and should have provided with the Trustees more information, but not only 2 names, one individual and one company, who owe no duty to assist the Trustees at all. 

(3)  Peak Property

19.The Trustees said that the Bankrupt did not disclose in the SOA his shareholdings in a BVI company (called “Alphred”) which was the sole shareholder of another company named “Fortune King”. It held the Peak Property. After his bankruptcy, without consent from the Official Receiver or the Trustees, the Bankrupt (and his wife transferred) their shareholdings in Alphred to another company “Satisfactory Kingdom”. It thereafter sold the Peak Property. The net proceeds of the sale amounted to about $13.4 million.

20.Although the Trustees were able to secure the proceeds with an injunction in HCA 1055/2012, the matter was complicated by a suspected judgment entered against Fortune King by one Construction Limited. The subsequent winding up of Fortune King even made the job of the Trustees more difficult. Parties were fighting for the proceeds and the Trustees have further work to carry out which is not expected to be concluded anytime soon.

21.In this regard, the Bankrupt explained in his affirmation in opposition that:

“…a Ms. M. L. Leung saw me on 17 April 2012 and assisted me in filling the Statements of Affairs. When I asked her whether I should fill in my BVA company, she advised me just to fill in the form briefly and to give supplemental information later because the creditors’ meeting would be held on 18 April 2012. I believed her and followed her advice…”

22.He further said that the proceeds were with the Court and it was up to the Trustees to see fit how to do. Nonetheless, it would be an abuse of process to extend the bankruptcy against him in the circumstances.

23.I have no hesitation to refuse the explanation given by the Bankrupt. With his level of education and experience in business, one cannot easily accept the excuse of omitting such important information in the SOA. In any event, he is the one who affirmed the document and is to be held liable for the material omission.  

24.This Court is not in a position to resolve the ownership of the proceeds. Nonetheless, I cannot agree more that, given the convoluted shareholdings and their transfer as well as the suspected transactions, time should be provided further to the Trustees to investigate and recover assets which might be belonging to the estate to be distributed to the creditors.    

(4)  Celestial Heights

25.The Trustees discovered that, on 29 June 2009, the Bankrupt transferred his shareholdings in a company called “Champ Will” at $1 to his wife. Champ Will held a property at Celestial Heights. The Trustees commenced HCA 1808/2012 against all parties.

26.Due to funding issue, such action had been stalled but the Trustees asked for more time to deal with it.

27.The Bankrupt objected to it. He said that he merely held the shares on trust for his wife and as such, there was nothing wrong for him to transfer them back to her. The Trustees could not sit on the matter without prosecuting it.

28.The issue as to whether the de facto ownership of the Champ Will (and hence the Celestial Heights) is to be resolved within HCA 1808/2012. As far as the present application is concerned, the funding issue (without more details) appears to be a matter between/among the Trustees and others, and the Bankrupt has no role to play. 

(5)  Dealings in Canada

29.The Trustees complained said that the Bankrupt had failed to disclose any of his assets or dealings in Canada. From their own investigations, they discovered that the Bankrupt was plaintiffs in 2 Canadian proceedings. Judgment was granted in his favour and payments were made to him.

30.The Trustees sought discovery of details of them in the Canadian Court. They won but the Bankrupt appealed. Although the Bankrupt lost all his appeals, he had not been cooperative with the Trustees. The Bankrupt even refused to disclose how he was able to fund the litigation costs in Canada, except one brief answer that his sister was helping him.

31.The Trustees expected that further in-depth investigations were needed to discover and realize the assets of the Bankrupt in Canada.

32.The Bankrupt argued that the proceedings and judgment were obtained before the bankruptcy. He was opposing the application of the Trustees because he had a legal right to do so in the Canadian Court. It should not be treated as an instance of “not co-operating” with the Trustees. 

33.After the final ruling by the Canadian Court, he did provide the Trustees with the documents, with irrelevant parts being redacted. He also saw nothing wrong in his sister helping him in funding the litigation there.

34.I agree with the Bankrupt to the extent that he should not be blamed in any respect of his exercise of his legal right after his bankruptcy. However, one has to bear in mind the followings in the present case.  

(a) The Bankrupt did not mention in the SOA any of his dealings in Canada.

(b) Upon being discovered by the Trustees, the Bankrupt did not co-operate with the Trustees.

(c) With the benefit of the various judgments from the Canadian Court, one can tell that the so-called exercise of legal right by the Trustees has been totally rejected.  

(d)Hence, the Bankrupt not only did not assist the Trustees by providing necessary information but also took each and every step to try avoiding them from finding the truth.

(6)  Dealings in USA

35.The Trustees also, from their own investigations, discovered that the Bankrupt had been involved in proceedings in USA. He further, without consent from the Trustees, took steps therein.

36.Despite opposition by the Bankrupt, the Trustees managed to grant recognition on 9 April 2014 by the US court. It was further noted that, on 26 September 2014, the Trustees was granted a further order to realize the assets of the Bankrupt in US. They therefore asked for more time.

37.On the other hand, the Bankrupt maintained that he was free to defend the proceedings there. He was doing nothing more than protecting the estate.

38.The argument of the Bankrupt is misconceived. Immediately after his bankruptcy, his estate went into the hands of the Trustees. He simply did not have any locus to take further step in those proceedings.

39.The Trustees further informed that the US Court had granted a further order allowing, inter alia, realization of the assets of the Bankrupt in US. More time should be allowed to the Trustees for investigation and administration.

(7)  Dealings in China

40.Once again, from the investigations of the Trustees, the Bankrupt was found to be the legal representative, majority shareholder and supervisor of various entities in China. The Trustees said that the Bankrupt continued to conduct business in there but he disclosed none.

41.The Bankrupt replied that the so-called disclosure by the Trustees was neither here nor there. They did not mean that it was a business in which he had a “disclosable” interest.

42.In my view, the attitude adopted by the Bankrupt is dissatisfactory and non-cooperative. No doubt, the Trustees would need more time to investigate to complete a meaningful administration.

Delay on the Trustees?

43.Regarding the argument by the Bankrupt that the Trustees had delays in the administration. I do think it holds any water at all. Ms. Lam provided a complete answer to it.

“55. As to a constant theme of the Bankrupt’s evidence that it was the delay of the Trustees which caused the administration of his estate to be incomplete…, the Trustees’ primary submission is that there is a substantial amount of evidence… showing that the Trustees have been carrying out the administration of his estate with diligence.

56. Further of alternatively, even if the court considers that there may have been an occasion delay in the Trustees’ administration of the Bankrupt’s estate, the Trustees submits that it was due to the deliberate concealment and lack of cooperation on the part of the Bankrupt.

57. In Re Leung Yat Tung (No.2)… Yuen JA stated that:

… However I do not think it would be right to treat that as an overriding factor. The court should not look at the time taken by the OR in isolation, oblivious to the facts of the particular case. Where the bankrupt has only disclosed information in dribs and drabs, it lies ill in his mouth to complain of delay on the part of the OR who, with limited financial and staff resources, has had to try grapple with this complex case.

As was held in Re Zeenek Weiss, ex p Official Trustee in Bankruptcy (No W 293 of 1978, unreported) (para 7):

‘There may be cases where it would be unfair to a bankrupt to delay his discharge by reason of an incomplete investigation, lethargically pursued, to the torpor of which he has not contributed. But no such unfairness may appear where there has been concealment or lack of cooperation on his own part’. (Emphasis added).”

The Findings

44.To conclude, on balance, the Trustees have satisfied this Court six (6) out of their seven (7) complaints.  I further agree that all the 3 grounds relied upon by the Trustees have been established.

Suspension of the Discharge? If so, for how long?

45.I now move to consider whether this Court should in the circumstances of the case exercise his discretion to suspend the automatic discharge, and if so, for how long.  In this respect, both counsel referred me to a number of different authorities. I see no conflicts among them. For the present purpose, I set out the followings.

46.As a starting point, I ask myself to bear in mind paragraphs 17.16 and 17.24 of the Law Reform Commission’s Report on Bankruptcy (1995)

“17.16 The introduction of automatic discharge should, with the objection system, have two-folded effect. Firstly, bankrupts should have a greater incentive than at present to co-operate with the trustee, as failure to co-operate could result in the trustee objecting to a bankrupt’s discharge. Secondly, the rehabilitation of a bankrupt from bankruptcy would be assured, subject to rehabilitation being delayed as a consequence of a bankrupt’s own failings.”

“17.24 The introduction of automatic discharge would shift the emphasis from discharge being a privilege to its being a right. This right, however, must be set alongside a bankrupt’s duty to co-operate with the trustee in the administration of the estate. If he fails to co-operate with the trustee after bankruptcy, or if a bankrupt’s conduct before bankruptcy was unsatisfactory, he should not be automatically discharged.”

47.Useful guidance can be located in comments of Mrs. Justice Le Pichon (as she then was) in two authorities, viz: Re Hui Hing Kwok [1999] 3 HKC 683 and Re Li Tak Kong [2000] 3 HKC 360

“Rehabilitation is the sense of enabling the bankrupt to resume a normal life in society is a key, if not the key consideration. It should only be delayed by bankrupt’s own failings ……”

“In exercising its discretion, the court would have regard to the scope and purposes of the statutory provisions conferring the discretion, the interests of commercial morality and the public interest. Before a discharge was granted or permitted to occur, there should be an adequate investigation of a bankrupt’s conduct and affairs, and such investigation should generally be concluded. It was incumbent on the bankrupt to make a full and frank disclosure and to proffer all pertinent information regarding his assets and financial dealings to the Official Receiver. In seeking a discharge, the bankrupt had to show that he had taken all reasonable steps to ensure that his estate was available for distribution among his creditors and that the trustee was appraised of all relevant information; it was not good enough for him to adopt a purely passive or reactive role. Where there had been concealment or lack of co-operation on the part of the bankrupt, it would not be unfair to delay his discharge.”

48.Further, Yuen JA said in Re Leung Yat Tung (No.2) [2007] 4 HKC 192 the followings.

“As the courts have said, a bankrupt is not permitted to adopt a “catch me if you can” approach. He cannot wait and see if the trustee in bankruptcy manages to piece together the jigsaw of his financial affairs, and then when he is required to answer the trustee’s questions, try to get away with revealing as little as he can according to the strict letter of the questions. Instead he should pro-actively reveal the complete picture of his financial affairs to the trustee, and where pieces do not appear to fit, in that his conduct or transactions appear to be inconsistent, it is for him to explain the inconsistencies and convince the trustee of the true state of affairs. The more complex the bankrupt’s transactions, the more difficult the task of the trustee in bankruptcy, and so the more comprehensive the bankrupt’s disclosure should be.”

49.Last but not least, in Re Liu Man Hoo [2007] 5 HKC 346, Lam J (as he then was) agreed that:

“(2) The discretion should be exercised in line with the underlying spirit of bankruptcy law, that of the rehabilitation of the bankrupt to normal life upon expiry of the relevant period, subject to the public interest that a discharge be delayed if the conduct of the bankrupt indicated that the return of the bankrupt to the commercial world in full freedom might involve an unacceptable risk to persons likely to be engaged in commercial relations with him in the future.”

50.Ms. Lam asked the period of suspension be extended for the statutory maximum of 4 years. Mr. Chang said that the application should be dismissed, and in any event, the suspension should not be more than 1 year.

51.With the above principles and findings, I have no hesitation that the automatic discharge should be suspended and a period of 4 years is well-justified in the circumstances.

(a) The SOA does not reflect the true position of the Bankrupt. There is a lot of concealment. He was far from full and frank disclosure.

(b) In the administration of the estate, the Bankrupt did not co-operate with the Trustees. He was passive and reactive.

(c) He not only adopted the “catch me if you can” approach, but also went further to obstruct positively the Trustees from their investigation and recovery of assets, even upon being “caught”.

(d) Investigation and administration are on-going and have not been completed. The Bankrupt has been hiding his assets from disclosure and collection by the Trustees for distribution among the creditors.

(e) With the said conduct of the Bankrupt, his rehabilitation should be delayed because of his own failings. It should also be delayed in the eyes of public interest. He is a sophisticated business man at international level. His return to the commercial world with full freedom might expose the persons likely to be engaged in commercial relations with him in future an unacceptable risk.  

Costs

52.Costs usually follows event. There is no reason to depart from the general principle in the present case. I am also indebted to the assistance by both learned counsel.

Summary

53.To sum up, I will make the following orders.

(a) The discharge of the Bankrupt under section 30A of the Bankruptcy Ordinance (Cap. 6) shall cease to run for a period of 4 years.

(b) There is an order nisi that the Bankrupt do pay the Trustees costs of the application, including certificate for counsel for hearing on 8 July 2016 and costs reserved, to be taxed if not agreed.

Mr. Rachel Lam, instructed by Messrs. Tanner De Witt, solicitors for the Trustees.

Mr. Jonathan Chang, instructed by Messrs. Simon Li & Co, solicitors for the Bankrupt.