Alan Chung Wah Tang and Another v. Lee Siu Fung, Siegfried and Others

HCB 345/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 345 OF 2001

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RE: LEE SIU FING, SIEGFRIED

(A DISCHARGED BANKRUPT)

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Before: Hon G Lam J in Chambers

Date of Hearing: 7 July 2017

Date of Judgment: 21 September 2017

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J U D G M E N T

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Background

1.The trustees in bankruptcy seek an order for the private examination of the younger brother and the son of the (discharged) bankrupt, respectively the 2^nd and 3^rd respondents to the summons.  Where convenient, I shall refer to them simply as the “Brother” and the “Son”.  An order for examination was made as against the 1^st respondent to the summons, ie the bankrupt, on 28 September 2016, for reasons handed down on 12 October 2016, to which I shall refer below (“2016 Reasons”). I adopt the abbreviations used in those reasons.

2.The background to the matter was set out in §§2–13 and 36 of the 2016 Reasons, which, for ease of reference, I reproduce as follows:

“2. The 1^st respondent was the founder, Chairman, CEO and the largest single shareholder of Siu Fung Ceramics Holdings Limited (“SFCH”), a company whose shares were listed in Hong Kong in the 1990s.  I shall refer to SFCH and its subsidiaries and associated companies together as “the Group”.  The 2^nd respondent is the younger brother and the 3^rd respondent is the son of the 1^st respondent.

3. Petitions to wind up SFCH and several other companies in the Group were presented by HSBC in March 1999.  On 9 May 2000, winding up orders were made.  Claims of creditors admitted for the Group total approximately HK$8,436 million.  To date no dividend has been paid to the creditors of SFCH.  Aggregate dividends paid to the creditors of some of the companies in the Group are less than 1% of their admitted claims.

4. On 18 January 2001, a bankruptcy petition was presented by HSBC against the 1^st respondent for a debt of HK$322 million based on a guarantee.  He was adjudged bankrupt on 8 May 2001.  Proofs of debt filed in the bankruptcy to date (pending adjudication) amount to some HK$458 million.

5. Soon after the adjudication the 1^st respondent submitted a statement of affairs stating assets of HK$265 only.  Between 2001 and 2004 he submitted 3 annual statements reporting zero income and zero expenditure. Nothing has been contributed by the 1^st respondent to the bankruptcy estate.  Not a single cent of dividend has been paid to the creditors.  The 1^st respondent had stayed mostly in the Mainland in the years immediately following the adjudication of bankruptcy.

6. In 2004, the Insider Dealing Tribunal, chaired by Lugar‑Mawson J, found that the 1^st respondent had used the securities accounts of 3 persons to sell 16.94 million shares in SFCH in June 1996 and also counselled or procured his wife to sell 80 million shares in SFCH in July 1996 when he had price‑sensitive information adverse to the Group, thereby avoiding losses of HK$69.87 million.  The proceeds of sale were deposited by his wife into his bank account.  The Tribunal imposed an order for disqualification of the 1^st respondent from management of any company for the maximum period of 5 years (from 25 October 2004), ordered him to pay HK$69.87 million being the amount of loss avoided, HK$139.74 million in penalty, and HK$9.19 million in costs.  In making these orders, the Tribunal stated:

“In this regard, we are aware that Siegfried Lee is now bankrupt in Hong Kong. He has not responded to the publication of the first part of this report. He is believed to reside in Beijing, but neither the Tribunal nor the SFC knows his present address. There are however reasons to believe that Siegfried Lee is not totally without assets. In Chapter 11, at page 146, we referred to Daniel Chan admitting squirreling away $25 million offshore for Siegfried Lee’s benefit. We propose to proceed on the basis that Siegfried Lee remains a wealthy man and that eventually his assets will be tracked down. To do otherwise would be to reward mendacity.

…

Siegfried Lee has made no representations to us in mitigation of penalty. We can find none. He was motivated by greed throughout all his dealings. He displayed a cavalier attitude towards his duties as the chairman of a listed company. He was prepared to use his family members, as well as his subordinates and their family members, to execute his dishonest schemes. There is evidence that he has feathered a nest offshore to avoid his creditors in Hong Kong and he has expressed no remorse for his wrongdoing.” (emphasis added)

7. An order for payment was also made against Daniel Chan, an employee of SFCH whom the Tribunal found to be the “trusted lieutenant” of the 1^st respondent. When Daniel Chan failed to pay, an order was made for his oral examination as a judgment debtor. The explanation he gave there was accepted by the Master in a subsequent (unsuccessful) application by the Government as judgment creditor for an order of imprisonment under Order 49B rule 1B (unreported, HCMP 2851/2004, 23 October 2006), at §39:

“I accept the explanation of [Daniel Chan] that he was instructed by Lee Siu Fung to transfer the money of HK$25 million through his own HKBC account to the Singapore BNP account on the same day when he received cheques from Lee Siu Fung.  The Singapore account did not belong to him and … apparently belonged to Lee Siu Fung.  After the money was transferred to such account, [Daniel Chan] did not know what had happened to the money.”

8. Shortly before the expiry of 4 years from the adjudication of bankruptcy, on 5 May 2005, the trustees made an application, first, under s 30A(10) of the Ordinance, for a declaration that time had not run during the period in which the 1^st respondent was absent from Hong Kong (the trustees alleging that the 1^st respondent had gone to Beijing the day after he was adjudged bankrupt), and secondly, to object to automatic discharge on various grounds under s 30A(3) & (4) such as the 1^st respondent’s alleged failure to cooperate with the trustees.  In the light of the Court of Final Appeal’s decision in Re Chan Wing Hing (2006) 9 HKCFAR 545 (handed down on 20 July 2006) which declared s 30A(10)(b)(i) unconstitutional, the first part of the trustees’ application was withdrawn with leave in August 2006. 

9. The trustees, however, failed to proceed with the second part of their application.  On 2 February 2008, the 1^st respondent, represented by the solicitors’ firm of Messrs Anthony Siu & Co, took out an application to strike out the trustees’ summons of 5 May 2005.  In the end, on 27 August 2008, Barma J (as he then was) struck out the trustees’ summons on the ground that it was an abuse of process for the trustees to have taken out the application (and thereby obtained an interim suspension of discharge) and failed to proceed with it.  The 1^st respondent was as a consequence regarded as having been discharged from bankruptcy in May 2005. It should be noted that Barma J did not deal with the merits of the trustees’ objection based on s 30A(3) & (4).  In fact, the 1^st respondent had not yet by then filed evidence to respond to the allegations made against him because it had been agreed that the point on s 30A(10) would be dealt with first.  Barma J took into account that an objection to automatic discharge should be made at a reasonably early stage and proceeded with expeditiously since delay would mean the bankrupt may be unfairly denied his discharge until some time after he should have obtained it.  An interim order should not be left in place for longer than necessary to enable the objection to automatic discharge to be determined.  The learned judge also noted that in this case while the maximum postponement of automatic discharge was for 4 years, by the time an application could be heard after the filing of evidence relating to the grounds in s 30A(3) & (4), there would have had been a de facto suspension of discharge for over 3.5 years.

10. As I shall explain further below, the 1^st respondent’s discharge from bankruptcy did not in law end his duties to assist the trustees in their functions which continue notwithstanding the discharge.  On 6 January 2012, the trustees wrote to the 1^st respondent’s then solicitors, Messrs Anthony Siu & Co, asking the 1^st respondent to attend on the trustees to answer various questions and provide information as set out in a letter issued by the trustees to the 1^st respondent on 1 February 2005 (attaching previous letters) which had not been answered by him.  On 10 and 23 February 2012, the trustees wrote to the same solicitors asking the 1^st respondent to attend on the trustees to provide information.  The 1^st respondent refused to do so.

11. On 28 August 2012, the trustees wrote to Anthony Siu & Co again, pointing out that despite previous letters (including earlier letters of 4 October 2005, 12 January 2006 and 3 March 2008) to the 1^st respondent, no information had been received from the 1^st respondent, and asking the solicitors to remind the 1^st respondent of his legal obligations and statutory duties.  On 3 October 2012, the solicitors replied that their client, the 1^st respondent, was “not obliged to entertain” the trustees’ requests because they had not provided particulars or documentary evidence to support their allegations.

12. From December 2015 onwards, the trustees have sent written questionnaires to the 1^st respondent and various persons connected with him including the 2^nd and 3^rd respondents seeking answers and explanation.  …

13. There is evidence that, after the trustees took these steps, on 8 April 2016, the 1^st respondent and another man attended the trustees’ offices in Causeway Bay without prior notice.  He complained that the trustees had disturbed him and his family members, and threatened that he could send 6 men to the trustees’ offices every day for a month.  The trustees’ solicitors’ letter of the same date recording the incident was sent to the 1^st respondent by post and by hand …  A further solicitors’ letter dated 14 April 2016 was sent by post and by hand to the 1^st respondent …, complaining about the incident and also reminding him to respond to the questionnaire.  The 1strespondent did not respond.

…

36. Apart from certain Hong Kong bank accounts the trustees have found the 1^st respondent to have held, which had not been reported by him, the trustees suspect that not only had the 1^st respondent concealed or not disclosed his assets held in nominee accounts or through offshore companies, but he had since around 1996 taken steps to put his assets beyond the reach of creditors.  The evidence was that in 1996 the Group experienced financial difficulties.  As found by the Insider Dealing Tribunal, the 1^st respondent, with private information, caused shares in SFCH to be sold before the share price dropped.  An overall loss of HK$252 million was announced by the Group on 27 September 1996.  Cash flow problems were announced in November 1996.  Restructuring attempts began in 1997 for the Group but were unsuccessful.  Meanwhile the evidence shows certain dispositions of assets which have aroused the trustees’ suspicion.  In the 7^th affirmation of Alan Tang the trustees have identified five specific areas and one general area that they particularly wish to probe into.”

3.The 6 areas of inquiry mentioned in the last sentence in the quotation above are: (1) the bankrupt’s 75% holding in SFPH; (2) the interest in BSW; (3) nominee accounts; (4) unreported patents; (5) undisclosed cash receipts for disposals of joint venture interests; and (6) undisclosed assets generally.  As against the Brother, the trustees seek an order to have him examined primarily in relation to categories (1), (2), (4) and (5); and as against the Son, categories (2), (4) and (5).  For their part, the Brother and the Son contend that no examination should take place at all.

4.To supplement the background, I should mention that Mr Alan Tang and Mrs Alison Wong were appointed as trustees of the estate of the bankrupt in September 2002.  Mrs Wong had resigned and was replaced by Ms Hou Chung Man with effect from 9 April 2015.  Mr Tang was also one of the joint liquidators of several companies in the Group but resigned as such in November 2001 when he left KPMG.  He was re‑appointed a liquidator of the Group companies in 2016.

5.The trustees have stated that, up to the time of the present summons, the bankrupt had not released a single sheet of paper concerning his assets or affairs to the trustees and that, especially after the adverse findings made by the Insider Dealing Tribunal in 2004, the bankrupt had ignored all requests of the trustees.  The bankruptcy proceedings started with no available books and records, and no assets and realisations.

6.The trustees first wrote to the Brother in October 2002 seeking information about the transfer of 800,000 shares in SFPH (see §11 below).  In correspondence between November and December 2002, the Brother’s solicitors refused to provide any information to the trustees. In December 2005, the trustees wrote again to the Brother seeking information about the 800,000 shares in SFPH as well as (among other matters) the acquisition of interest in BSW.  The Brother failed to respond. In January and May 2013, the trustees wrote to the Brother again asking for information concerning the acquisition of interest in BSW.  The request was refused by the Brother.  The trustees had also written to the Brother and the Son since December 2015 requesting written answers to a questionnaire and the production of documents.  No substantive answer or document whatsoever was provided by them before the present summons was issued.

7.For his part, following the order for his private examination, the bankrupt had filed an affirmation on 1 February 2017 stating he had nothing to produce.  His oral examination was scheduled to take place before a Master of the High Court in early July 2017.

Legal principles on s 29

8.S 29 of the Bankruptcy Ordinance (Cap 6), so far as relevant to the summons, provides as follows:

“(1) The court may, on the application of the Official Receiver or trustee, at any time after a bankruptcy order has been made against a bankrupt summon before it the bankrupt or his spouse, or any person known or suspected to have in his possession any of the estate or effects belonging to the bankrupt or supposed to be indebted to the bankrupt, or any person whom the court may deem capable of giving information respecting the bankrupt, his dealings or property, and the court may require any such person to produce any documents in his custody or power relating to the bankrupt, his dealings or property.

(1A) The court may require a person referred to in subsection (1), other than the bankrupt, to submit an affidavit to the court containing an account of his dealings with the bankrupt or to produce any documents in his possession or under his control relating to the bankrupt or the bankrupt’s dealings, affairs or property.

……

(3) The court may, by itself or by a commissioner appointed for the purpose, examine on oath, either by word of mouth or by written interrogatories, any person so brought before it concerning the bankrupt, his dealings or property and any other matter the court considers relevant.”

9.The principles governing the exercise of power under s 29 are not in dispute.  I have endeavoured to set out the more relevant points in §§29–35 of the 2016 Reasons and shall not repeat them here.  The three principal considerations as formulated in Hau Po Man Stanley (in bankruptcy) v Joint and Several Trustees [2008] 1 HKC 256 (CA) at §21 are:

“(a) the applicant must satisfy the court the essential condition that the provision of information or documents is reasonably required for him to carry out his functions;

(b) the applicant must also establish a prima facie case that the respondent is able to provide such information or documents;

(c) if the above criteria are met, the court must carefully strike a balance between the applicant’s reasonable requirements and the need to avoid making an order which is wholly unreasonable, unnecessary or oppressive to the person concerned.  The burden is on the applicant to satisfy the court, after balancing all the relevant factors, there is a proper case for such an order to be made.”

For the purposes of presentation I shall deal with the first two requirements in the course of discussing the evidence on the four relevant areas of investigation below, and deal with the third stage — the balancing exercise — towards the end.

10.The attack mounted by the Brother and the Son on the trustees’ application has been centred round these three requirements in principle.  There has been no argument on the precise ambit of the investigation or on the specific individual questions.  In any event the court cannot be expected in an application such as this to “indulge in fine judgments as to the precise width of the order which should be made”: Joint and Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766, at §30(7).  It is also to be noted that an order for examination does not give carte blanche to the questions which may be asked of the witness at the examination; the examination takes place before a judge or a master who has the power, and indeed the duty, to prevent vexatious or oppressive questions: see Re Castle New Homes [1979] 1 WLR 1075, 1092; Re Hugh J Roberts Pty Ltd [1970] 2 NSWR 582, 585.  By the same token, the order for examination that I make herein is not intended to be and does not represent a wholesale endorsement of the questions set out in the questionnaires annexed to the summons.

The relevant areas of investigation

Area (1) — The bankrupt’s 75% shareholding in SFPH

11.Siu Fung Pharmaceutical Holdings Limited (“SFPH”) was a private company through which the bankrupt had carried on pharmaceutical business since about 1994.  In 1996, he held 75% (2.4 million shares) in SFPH and the Brother held the other 25% (800,000 shares).  In May 1997, SFPH allotted 3.2 million shares at par value ($1 per share) to a company (Lee’s Machinery Ltd) held by the bankrupt’s two sisters (“Sisters”), with the result that the bankrupt’s holding was diluted to 37.5% (these 3.2 million shares were in April 2000 transferred to a BVI company, Huby Technology Ltd, of which the Sisters were directors).  In December 1997 or January 1998, a month after HSBC made a demand to the bankrupt for HK$177.6 million based on his guarantee, the bankrupt transferred 800,000 shares out of his 2.4 million shares to the Brother, apparently for a total sum of HK$1.  In March 1998, the bankrupt transferred his remaining 1.6 million shares to a company (Triumph Leader Ltd) held by his then wife, Ms Dusanee, again apparently for a total sum of HK$1 (these 1.6 million shares were transferred in July 2000 to a BVI company, Dynamic Achieve Investments Ltd, of which the Sisters were directors).  Also in March 1998, the Brother transferred the 1.6 million SFPH shares then in his name to High Knowledge Investments Ltd, a company held by his wife, apparently for a consideration of HK$1.

12.As a result of some further share transfers and another allotment, by the end of 2001, the entire issued share capital of SFPH (by then re‑named Lee’s Pharmaceutical (HK) Ltd) became 18.4 million shares, which were held as follows:

(1) 15.2 million shares (82.61%) were held by Huby Technology Ltd (a company held by the Sisters);

(2) 0.8 million shares (4.35%) were held by Dynamic Achieve Investments Ltd (also a company held by the Sisters);

(3) 1.6 million shares (8.7%) were by High Knowledge Investments Ltd (a company held by the Brother’s wife); and

(4) 0.8 million shares (4.35%) were held by Techfarm Investment Ltd.

13.In February 2002, these four companies entered into a share exchange for shares in Lee’s Pharmaceutical Holdings Ltd (“LPHL”) (1 SFPH share for 10 LPHL shares), so that SFPH became a wholly‑owned subsidiary of LPHL (via an intermediate holding company, Lee’s Pharmaceutical Int’l Ltd (“LPIL”)) and the four companies became shareholders of LPHL.  In July 2002, LPHL’s shares were listed on the GEM Board of the Stock Exchange of Hong Kong; the listing was transferred to the Main Board in 2010. 

14.In short, on the face of this series of transactions, after the Group began to face financial difficulties, a pharmaceutical business which was held as to 75% by the bankrupt as at 1996 became the business of a listed company in which the bankrupt had ostensibly no interest, and all that the bankrupt had apparently obtained in return was HK$2.

15.The trustees consider that they require further information to investigate this matter; some of the questions for the Brother on this matter are set out in the questionnaire at Section C of Schedule 2 to the summons.  The trustees have raised questions such as why 3.2 million shares were allotted to Lee’s Machinery Ltd in May 1997, why the allotment was made at par, why 800,000 shares were transferred by the bankrupt to the Brother for just HK$1, how the consideration was determined, why 1.6 million shares were transferred by the Brother to High Knowledge Investments Ltd (a company held by his wife) in March 1998 for only HK$1, who set up High Knowledge Investments Ltd, and so on.

16.After the summons was issued, the Brother filed two affirmations, which (though made in opposition to the application) actually provided some information relating to the transactions.  It is said that SFPH was first incorporated in 1993 for the bankrupt, one SY Lee and the Brother to tap into the pharmaceutical industry.  SFPH was substituted as the foreign partner (with a 70% interest) in a joint venture (called Zhaoke) with a Mainland PRC entity, and in recognition of the Brother’s efforts in developing the joint venture, shares in SFPH were allotted to him in the first place in 1994.  The trustees consider that this explanation sits at odds with the return of allotment signed by Daniel Chan, the bankrupt’s “trusted lieutenant”, which stated that the allotment was for cash.  Mr Bernard Man SC, who appeared on behalf of the Brother and the Son, submitted there was no suggestion that even in 1994 the Brother had an intention to defraud creditors.  But this area has to be looked at as a whole, instead of in a minute piecemeal manner.

17.As to the allotment of 3.2 million shares in May 1997, the Brother said that SFPH was in dire need of funding at the time, especially given the obligations under the joint venture agreement and outstanding financial commitments of US$1.4 million.  The trustees have queried whether the subscription monies of US$1.4 million were still outstanding in 1997 and have pointed to circumstances which tend to suggest that the monies should have been paid up before the substitution of SFPH as the joint venture partner (in place of SFCH).  In this connection, the trustees also wish to see the capital verification reports and approval of the Mainland authorities for the substitution.  Allotting 3.2 million shares for HK$1 each would in any event not be sufficient to fund a capital commitment of US$1.4 million.  To be fair, however, it seems to me that the 1997 accounts of SFPH (Note 3) would suggest that about HK$5 million of the capital contribution was only paid during 1997.

18.The Brother also exhibited SFPH’s balance sheet for 1998 (signed off in October 2000) showing accumulated losses of approximately HK$2 million and HK$1.5 million for 1998 and 1997 respectively.  He said that since the Group was also experiencing serious cash flow problems, the Sisters agreed to inject HK$3.2 million from their trading company, Lee’s Machinery Ltd.  The balance sheet showed net assets of HK$4.4 million and HK$4.9 million as at the end of 1998 and 1997 respectively.  Significantly, the accounts appear to show SFPH’s 70% interest in the Zhaoke joint venture at cost, rather than any “market value”.  The trustees have identified in the listing prospectus of LPHL various awards and accreditations obtained by the joint venture between 1995 and 1997, which demonstrated promise for a pharmaceutical company despite losses in the initial years.  The same prospectus stated that the business activities of the LPHL group were primarily carried out through the Zhaoke joint venture, which implied that the business of the joint venture was deemed by the Stock Exchange to be sufficient to support the listing of LPHL.

19.As for the transfer of 800,000 shares by the bankrupt to the Brother for HK$1 in December 1997, the Brother produced a schedule saying that it recorded repayments to HSBC made by Lee’s Machinery Ltd on behalf of SFPH, and that the Sisters continued to invest in SFPH at his request.  He said that the 800,000 shares were “allotted” to him at the direction of the Sisters in consideration of their repayment to HSBC and their further investments.  It seems to me this explanation itself raises more questions than it answers.  Were the shares really “allotted”?  There are contrary indications that the 800,000 shares were not new shares allotted by SFPH, but existing shares transferred from the bankrupt.  It may be said that an allotment of shares in return for investments in and payments on behalf of SFPH would be logical but, prima facie, a transfer by the bankrupt of his own shares would not, for why, of all shareholders, should only the bankrupt give up his shares for HK$1 in return for assistance given to SFPH? Also, the Brother’s 2^nd affirmation (§16.1) suggested that SFPH was part of the “Siu Fung Group” between July 1998 and August 1999. Given the then shareholders of SFPH were Lee’s Machinery Ltd, Triumph Leader Ltd and High Knowledge Ltd, it is not clear why SFPH was part of the Group. However, as will be seen from the section below on the balancing exercise, I consider that the examination should not extend to this transfer.

20.The Brother said that the transfer of 1.6 million shares by himself to High Knowledge Investments Ltd in March 1998 was an arrangement between him and his wife and their own private affairs.  The trustees contend that it would be relevant for them to know, both as a matter of the law of equity generally and for the purpose of s 51A(2) of the Bankruptcy Ordinance, whether High Knowledge Investments Ltd was a bona fide purchaser for value, if there was a potential claim to follow those shares arising from the relevant transactions.  Again, however, as a matter of balancing I shall explain later, this transfer should in my view be excluded from the scope of the examination.

21.As for the transfer of another 1.6 million SFPH shares in March 1998, by the bankrupt to Triumph Leader Ltd, a company held by his then wife, Ms Dusanee, Mr Man submitted there was no basis to think the Brother can answer anything.  But in his affirmation, the Brother said that to the best of his knowledge and belief, it was in return for Ms Dusanee’s payment of two tranches of HK$51,785,240 each to the bankrupt in July 1996 — being the proceeds of sale of the insider dealing in the sale of 80 million shares in SFCH.  Although this transfer did not directly involve the Brother, he has spoken of his knowledge of the circumstances.  The basis and source of information for his statement is however unclear, and the trustees justifiably require further information.  It is unknown why the share transfer was only made almost two years after the payments.  Furthermore, the consideration would suggest that the SFPH shares were highly valuable (HK$64.73 per share).  There is also doubt whether the 80 million shares in SFCH in fact belonged to the bankrupt’s wife or the bankrupt.

22.On behalf of the Brother, Mr Man submitted that the trustees have wrongly assumed that SFPH had always been a highly profitable company and that in fact the contrary was true.  He also submitted that the allotment of 3.2 million shares was in return for capital contribution of HK$3.2 million and entirely unassailable.  He argued that the 3.2 million shares were subsequently transferred to LPIL, and that the trustees have not shown that LPIL was not a bona fide purchaser for value without notice.  With respect, it is not for the court on the present application to make any finding or come to any concluded view on these matters one way or the other.  The issue is whether the trustees should be enabled to probe, and in the light of the Brother’s affirmations, to probe further, into the circumstances of these transactions through private examination.  There may or may not be a case, even prima facie case, for impugning or re‑opening any transaction, but it is not necessary to establish a prima facie claim in order to justify an order for examination.  As Bokhary and Chan PJJ reminded us in their joint judgment in Kong Wah at §2, it is as important to liquidators to know “what blind alleys they had best avoid so as not to throw good money after bad” as it is for them to find out “what promising paths they can pursue”. 

23.Moreover, it should be noted that the duty of trustees in bankruptcy, and the purpose of a s 29 examination, is not confined to recovery of assets.  There is a strong public interest in ensuring that trustees are enabled to obtain relevant information to understand the bankrupt’s affairs and to report relevant misconduct to the authorities.

24.It is convenient at this point to deal with a contention raised by the Brother and the Son.  They have relied on the fact that Mr Tang, one of the trustees, has (together with Mrs Wong, formerly the other trustee) been found in civil contempt of court in failing to comply with an order for the production of documents in a different set of proceedings.  The circumstances of that finding are set out in the first instance decision of To J in Ip Pui Lam Arthur and Ip Pui Sum (Joint and Several Trustees in Bankruptcy) v Alan Chung Wah Tang and Alison Wong Lee Fung Ying (unrep, HCMP 450/2016, 18 October 2016) and the Court of Appeal’s decision on appeal (unrep, CACV 214/2016, 16 February 2017) which I need not repeat.  While To J found Mr Tang to have been in contempt for failing to disclose four categories of documents, the Court of Appeal set aside the order with respect to three categories, upholding the finding of contempt in relation to the remaining category. Cheung JA criticised Mr Tang (and Mrs Wong) for choosing not to inspect the voluminous documents held by their previous firm, Grant Thornton (with whose majority partners they were in a long‑standing dispute), with a view to producing the required documents (because of their view, stubbornly held, regarding the expenses for the inspection).  The court said they “demonstrated a determined and obstinate refusal to comply” with the order in question. However, the custodial sentence was quashed as being unjustified by the finding of contempt that survived.

25.There are several points to note in this connection.  First, there are two trustees in bankruptcy, Mr Tang and Ms Hou, making the present application.  Ms Hou was appointed more than a year before the present summons was issued.  She is not said to have had anything to do with the acts which were held to constitute contempt.  There is nothing in the evidence put before me to suggest that Ms Hou, in making this application, did not exercise independent judgment or was oblivious to her duty to do so.  As a co‑applicant, plainly she has taken the view that the information and documents sought are reasonably required for the carrying out of her functions.  There is no reason why the court should not place weight on her views.

26.Secondly, the contempt did not arise out of any act in the course of this bankruptcy.  Mr Man submitted that as a result of the finding of contempt, Mr Tang’s “judgment, as to what is right and proper in contentious litigation, is called in question”.  Taking this at its highest, it goes to the weight to be placed on Mr Tang’s views on the need for the information and documents.

27.Thirdly, although the court tends to place weight on the views of the office‑holder as to what is reasonably required for him to carry out his functions (see Kong Wah at §31), it does not mean that the court cannot or does not also approach the matter objectively.  It would be to trivialise the courts’ function in this type of applications to suppose that they could only deal with the first requirement on the basis of the say‑so of the office‑holder.  In the present case, I have carefully examined the evidence and come to the conclusions set out herein.

28.Further, relying on the finding of contempt against Mr Tang, the bankrupt, the Brother and the Son have applied to remove Mr Tang (as well as Ms Hou) as trustees.  Mr Man submitted that I should reserve judgment in the present matter until after the removal application has been heard, because, inter alia, if that application succeeds, new trustees would be appointed, and they might take a different view on the question of private examination.  This seems to me in substance a repetition of the Brother’s and the Son’s earlier application, which I have already refused, to fix the removal application, out of sequence, to be heard before the present summons.  There was no appeal from that direction.  In any event, I do not consider it appropriate deliberately to defer determining this summons, issued in July 2016, on a speculative basis.

29.On the second requirement of the 3‑pronged test, it was contended on behalf of the Brother and the Son that given the lapse of time, it is “doubtful” they would be in a position to provide any meaningful information and documents.  It seems to me that, far from showing he had no information to give, the Brother’s 2^nd affirmation shows that he was a person capable of giving relevant information.

30.To be fair, neither the Brother nor the Son actually went so far as to say that they had no information whatever to supply.  Even if there is such an assertion, as stated by Ng J in Re Nanik Dayaram (unrep, HCB 7651/2011, 6 November 2015) at §§31–32, the court is not bound to accept at its face value a respondent’s statement that he has no recollection or, by analogy, no information to give.  The court has to assess the weight to be given to such a statement against all the background facts and the manner in which the statement is made.  For the reasons herein, I am of the view that the Brother should prima facie have relevant information in relation to SFPH.

31.There has plainly been a long lapse of time since the transactions, but it should be noted that, as stated in the prospectus for the listing of LPHL published in 2002 (pp 35–36 & 42), it was recognised at a very early stage that various claims could be considered by the liquidators of SFCH and the trustees of the bankrupt, particularly arising from the transfers of SFPH shares to the Brother and to Triumph Leader Ltd.  In the light of that, it could be expected that the family had been well advised to retain relevant documents.  Further, the Brother had, since the issue of the summons, produced certain documents including the Zhaoke joint venture agreements and the schedule said to be a record of the repayments made by Lee’s Machinery Ltd on behalf of SFPH to HSBC.  The Brother said despite enquiries, he had only managed to retrieve from the auditors the accounts of SFPH (renamed Lee’s Pharmaceutical (HK) Ltd) for the year 1999, but as the trustees pointed out, that was not surprising because he had only asked the firm that acted as auditors only for the year 1999.

Area (2) — Interest in BSW

32.BSW (ie Siu Fung Ceramics (Beijing) Sanitary Ware Co Ltd) is a Mainland joint‑venture company.  It was one of the largest joint ventures within the Group in the 1990s, and has since 1993 owned a factory on a piece of land with an area of 150,000 m² in Beijing.  As at 1995, SFCH held a 36% interest in BSW; Kingbridge Investment Ltd (“KBI”) held 20%; Hillmond International Holdings Ltd (“Hillmond”) held 22%; and a Mainland entity (Beijing Glass No 2 Factory) held another 22%. 

33.In July 2001, KBI acquired the 36% shareholding in BSW from the liquidators of SFCH for HK$17 million, while Asset Reward, a wholly‑owned subsidiary of Lion Legend[1], which in turn was owned by Capital Ocean (as to 68%) and by World Cheer[2] (as to 32%), acquired a 70% stake in Beijing DBS Co Ltd (“Dubois Beijing”) — another equity joint venture.

34.There was also apparently a transfer of KBI to Lion Legend.  The resultant holding structure set out in the diagram in the public announcement was that World Cheer and Capital Ocean respectively held 32% and 68% of Lion Legend, which held 100% of KBI, which in turn held 56% of BSW.  The bankrupt has stated that the interest in BSW was sold to the Brother.  But the trustees now suspect that the bankrupt was not only behind the acquisition of the 36% interest, but also continued to hold and control the other stakes held by KBI and Hillmond in BSW.  The matters leading to the suspicion include the following:

(1) The bankrupt had continuously been a director (from 1998) and the Managing Director and Legal Person’s Representative (from 2000) of BSW to date.  The respondents argued that the public announcement stated that the bankrupt would be appointed by Lion Legend as a consultant, but I agree with the trustees that being the legal person’s representative of BSW (as the bankrupt has been since 2000) may suggest a closer connection.  It will be recalled that the bankrupt had in his annual statements consistently reported zero income (see §5 of the 2016 Reasons). The Brother, as Chairman of BSW, should be able to assist the trustees on this matter.

(2) Other directors of BSW included the Son, appointed in 2005 (who has been replaced by Yang Lei, the bankrupt’s present wife, since 2010) and Wong Ying, apparently a shareholder of World Cheer and believed to be a former employee of the Group.

(3) As papers filed with Beijing authorities in 2004 show, the bankrupt was also stated to be the representative of KBI.

(4) The total consideration, in the sum of HK$19 million, was paid by cashier’s order as to HK$7.5 million, by a cheque of Wong Ying as to HK$3 million, and by cheques of a BVI company called Goldsmith International Ltd as to HK$8.5 million.  According to the information referred to in the following sub‑paragraph, Goldsmith International Ltd was wholly owned by the Son, a high school student in 2001.

(5) In May 2012, an announcement was made by China Eco‑Farming Ltd, a company listed on the GEM Board, that it had agreed to acquire from Lion Legend a 10% interest in KBI which held a 67.11% interest in BSW.  According to that announcement, major shareholders of Lion Legend included Goldsmith International Ltd, Capital Ocean and another company called Shine Eagle Holdings Ltd; all these three companies were said to be wholly owned by the Son, who was also their sole director.  The Son was also said to be the sole director of Lion Legend (though he appears to have been replaced in that position by the bankrupt’s wife in July 2015 — see §20 of the 2016 Reasons).

(6) In November 2014, Lion Legend was injected into a German‑domiciled company called ROY Ceramics SE (“ROY Ceramics”), with Lion Legend’s shareholders obtaining shares in ROY Ceramics instead.  ROY Ceramics became listed in Germany in 2015.  In the listing prospectus issued in March 2015, it was stated that back in March 2001, Lion Legend was indirectly wholly owned by the Son, through two companies namely, Capital Ocean and Siu Fung Concept Limited, both BVI companies.

(7) Following the listing of ROY Ceramics, the bankrupt became its CEO and Chairman and has remained such to date.

35.The trustees consider that they need further information to investigate this matter; some of the questions for the Brother and the Son on this matter are set out in Sections D‑E of Schedule 2 and Sections C‑D of Schedule 3 to the summons.  The trustees have raised questions, inter alia, regarding the ownership of Capital Ocean, Goldsmith International Ltd, KBI, Hillmond, Lion Legend, and Siu Fung Concept Ltd (BVI).

36.The respondents placed great store on the fact that Mr Tang was a joint liquidator of SFCH at the time and responsible for handling the sale of the 36% interest in BSW on the vendor’s side.  It was argued that, therefore, Mr Tang had ample knowledge of the transaction and no need to extract any information from them.  In my view, this simply does not follow.  First, no trustees in bankruptcy had yet been appointed at the time in July 2001.  Secondly, the trustees are not now trying to impugn the sale and purchase transaction in the sense of undoing it.  They are trying to get behind the purchaser’s side to see who really acquired the beneficial ownership of the assets.  That was not something to which Mr Tang, as liquidator on the vendor’s side, would have necessarily been paying attention at the time. Thirdly, such due diligence as could have been conducted by the vendor on the purchaser at the time did not cover the ultimate source of funds for the purchase.

37.The Brother stated that it was KBI which acquired the 36% shareholding in BSW for HK$17 million, that KBI was a wholly‑owned subsidiary of World Cheer, that World Cheer was beneficially owned by Wong Ying, Yip Siu Yin and Fu De Liang (as to 40%, 35% and 25% respectively), and that these three individuals were independent persons not connected with him.  He did not, however, offer any comment on the trustees’ statement that Wong Ying was a mere employee of the Group.  (The trustees have also requested information from Wong Ying but she has failed to respond.)  Further, Yip Siu Yin’s solicitor initially told the trustees that Yip had no involvement whatsoever, direct or indirect, in all matters of World Cheer and BSW, and that her name had been “borrowed” by the bankrupt simply to fulfil certain formal requirements, such as the filing of annual returns, for World Cheer.  Neither the solicitor nor Yip had reverted to the trustees after being shown the public announcement which claimed that Yip was an independent person beneficially owning 35% of World Cheer.  In fact, the Chinese name of KBI appeared to be “兆峰創建（北京海外）有限公司”.  “兆峰” (Siu Fung) was both the name of the bankrupt and the Group.

38.The Brother emphasised that under the transaction, he only acquired 70% in Dubois Beijing via Capital Ocean. However, the public announcement also referred to the transfer of KBI by World Cheer to Lion Legend so that Capital Ocean would become the 68% of KBI which in turn would hold 56% of BSW, and stated that the Brother would be appointed the chairman of the acquired business.  The Brother has not explained how or why that should happen, if World Cheer was owned by Wong, Yip and Fu.  Moreover, in an affirmation in 2005, the bankrupt stated that “BSW was sold to my brother Dr Benjamin Li”.

39.The Brother has stated that in 2008, at the suggestion of the Sisters, he transferred Capital Ocean to the Son.  The trustees wish to know the detailed circumstances under which Capital Ocean was transferred to the Son in 2008, when the Son had probably just completed his tertiary education.  The trustees also wish to ask the Brother about his role and the Son’s role in BSW, if any, over the years.

40.I consider that the trustees have shown a reasonable requirement for further information.  They have sought it elsewhere, but as the trustees have explained, the bankrupt has refused to provide any information concerning BSW and his own arrangements with BSW.

41.The trustees have also written to ROY Ceramics, its directors and sponsors for the listing, to request clarification and information but have received no assistance.  A Hong Kong firm of solicitors have replied on ROY Ceramics’ behalf stating (erroneously) that the trustees’ powers have ceased.  No response has been received after this was rebutted.

42.The Brother apparently became owner, through Capital Ocean, of a substantial interest in BSW, which he later allegedly gifted to the Son, with the bankrupt apparently running BSW all the while.  The trustees have some basis to suspect that funding for the initial acquisition in 2001 came from parties closely related to the bankrupt.  Given their central involvement in the transactions involved in this area, I consider it likely that the Brother and the Son would have relevant information to provide.  I am not persuaded that because of the lapse of time no information will be available.  In fact, it can be seen that some information was disclosed for the purposes of the ROY Ceramics listing in 2015.  The Son should have been, on the face of the available information, heavily involved in the listing of ROY Ceramics.  Furthermore, not every relevant transaction in this area took place as early as in 2001.  The gift of Capital Ocean from the Brother to the Son, for example, is said to have taken place in 2008.  The transaction involving Eco‑farming took place in 2012 and the listing of ROY Ceramics only in 2015.

Area (4) — Unreported patents

43.The trustees’ investigations have revealed that, of the sanitary ware products traded by BSW, patents for the design of 46 types of sanitary ware were registered in the name of the bankrupt with the State Intellectual Property Office of Mainland PRC and valid for a period of 10 years from 2003.  While these patents have now expired, there is reason to suspect that they had generated substantial income and benefits that should form part of the bankruptcy estate.  There was a further US patent registered on 26 May 2005.  None of these intellectual property rights had been declared by the bankrupt to the trustees.

44.The trustees consider they require further information and have raised further questions for the Brother and the Son on this matter, as set out in Section F of Schedule 2 and Section E of Schedule 3 to the summons, such as disclosure of all royalties, other payments or benefits in kind given to the bankrupt for use by BSW of the 46 patents registered in the Mainland and the patent registered in the US.

45.The Brother and the Son were directors of BSW at the relevant time.  It is reasonable to suppose that as such they would have knowledge and information relevant to this matter.  They have in their opposing affirmations omitted this matter as one of the areas of investigation on which the trustees seek information from them.  They have not said they had no information to provide.  I am also satisfied that the trustees have shown a reasonable requirement for the information sought in this regard.

Area (5) — Undisclosed receipts

46.The trustees’ investigations have revealed that shortly prior to or after the liquidation of the companies in the Group, many of the Group’s joint ventures in the Mainland were disposed of and that the consideration was in many cases, wholly or in part, paid in cash to the bankrupt.  At least 18 written acknowledgments, signed by the bankrupt, of receipt of cash of approximately RMB54 million between May 1998 and February 1999 have been found.  The bankrupt had refused to account to the liquidators of the Group, suggesting that these receipts related to his personal affairs.  But he has also failed to account for them to the trustees.

47.Mr Man argued that there is no basis to ask the Brother and the Son questions about what happened to the purchase monies received.  The gravamen of the trustees’ concern, however, on the present application, is that some of the counter-parties to these disposals (ie the purchasers), for example, Shine Eagle Holdings Ltd, are now apparently wholly owned by the Son (another one, Hi Scene Industrial Ltd, seems to be owned by Yang Lei, the bankrupt’s wife, though the Son was its sole director) and were heavily involved in the transactions noted in the China‑Eco announcement in May 2012 and in the listing of ROY Ceramics.  It is clearly suspicious that the joint venture interests in the Mainland relating to the Group were allegedly disposed of to purchasers who are now controlled by the Son, allegedly for cash paid to the bankrupt which he has refused to account for.  The Son had not explained how it is that these companies would have been involved in apparently purchasing the joint venture interests of the Group.  I consider that the trustees have shown that they reasonably require further information from the Son.  I accept that there is no sufficient basis to examine the Brother about this matter.

Balancing exercise

48.It was submitted on behalf of the two respondents that they are strangers to the bankruptcy and as such the case for examination of them is comparatively weaker.  I accept that the case for examination of the bankrupt is usually stronger than that against third parties.  But one must also have regard to the roles of the third parties as evidenced by available information.  The respondents here are the brother and the son of the bankrupt.  They were closely involved in the relevant areas as discussed above and appear to be two of the most crucial sources of information apart from the bankrupt himself.

49.Mr Man has relied heavily on the time elapsed since the bankruptcy.  Apart from its significance to each of the 3 factors set out above, it was submitted that there was such delay as to be sufficient on its own to render the application an abuse of process.  I reject this submission essentially on the basis of §§64–67 of the 2016 Reasons.  In addition, the trustees have explained their attempts to seek information from the bankrupt since 2002 in Tang’s 7^th affirmation §§79–87 and the threats and intimidations made by the bankrupt to the trustees in §§88–91. The trustees have also sought information from the Brother since 2002, but their requests have been ignored or refused.  There is little merit for the Brother to complain that the trustees only took out a summons in 2016 to compel him to provide information.

50.Reliance has continued to be placed by the respondents on Barma J’s decision in 2008 (referred to in §9 of the 2016 Reasons).  As explained before, the context of that decision is, in my view, wholly different from the present application and it provides no assistance to the Brother and the Son.

51.Separately, the delay was also relied upon in the submission that private examination would be oppressive.  I accept that in general, the time elapsed since the matters in question is relevant to the degree of oppressiveness to the proposed examinees.  But I also take into account that the trustees had raised questions a long time ago, which the Brother and others had refused to answer, and that the family had anticipated legal challenges raised by trustees or liquidators in relation to certain relevant transactions; see eg §31 above.

52.I have of course also taken into account that the Brother and the Son may be potential targets of claims that may be instituted by the trustees.  The whole tenor of their affirmations so far and the submissions made on their behalf, however, is that they have perfect answers to any inquiry and that any substantive claim to be made by the trustees would be wholly misconceived.  No claim has yet been served on them but even if there were an ongoing action against them, it would not constitute an automatic absolute bar to private examination, though it would be a significant factor to take into consideration in the balancing exercise.  The court has to consider the extent to which the trustees require the information and the degree of oppression to the person sought to be examined. 

53.Such considerations have led me to conclude that the Brother should not be examined in relation to the transfer by the bankrupt of the 800,000 SFPH shares to him in December 1997 or his subsequent transfer of 1.6 million SFPH shares to his wife in March 1998, as stated in §§19-20 above.  I consider that in relation to these transfers, having regard to the information the trustees already have, the trustees’ need for further information and the potential oppression to the Brother, the private examination should not extend to these transfers.

54.Overall, at the end of the day, one must not lose sight of the fact that this is a massive bankruptcy with a very large deficiency of assets.  The bankrupt, hitherto the chairman of a listed group, had effectively produced no asset or income for the estate at all while continuing to run a business.  The Insider Dealing Tribunal, after a lengthy inquiry, considered that the bankrupt remained a wealthy man who had feathered a nest offshore to avoid his creditors and whose assets remained to be tracked down, and that he was a man who was prepared to use his family members and others to execute his dishonest schemes.  The administration of the bankruptcy started with no books and records.  The Brother and the Son have featured prominently in the relevant transactions mentioned above.  The trustees have, in my view, identified suspicious circumstances and the need for further investigation, with which the Brother and the Son have steadfastly refused to assist voluntarily.  Within each sphere of investigation there may be certain matters on which the trustees already have some information and it may be said that in relation to such matters, private examination is not absolutely indispensable.  But the jurisdiction is engaged once the trustees show a reasonable requirement; they do not have to establish an absolute need.  In any event, considerable areas remain in which the trustees have no or little information and it does not appear, nor is it suggested by the respondents, that the information may be obtained elsewhere.

55.In all the circumstances, I consider that the balance comes down in favour of making an order for examination.

Disposition

56.For these reasons there will be an order for the private examination of the Brother and the Son, subject to the qualifications mentioned in §§10, 19, 20 and 47 above.  The examination is to take place before a master of the High Court.

57.On a provisionalbasis, I order that the costs of and relating to the trustees’ summons be paid forthwith by the Brother and the Son to the trustees, to be taxed if not agreed.

Mr Patrick Siu, instructed by ONC Lawyers, for the Applicant (Joint and Several Trustees in Bankruptcy of the property of the Bankrupt)

Mr Bernard Man SC and Mr Justin Ho, instructed by Anthony Siu & Co, for the 2^nd and 3^rd Respondents