Alan Chung Wah Tang and Another v. Lee Siu Fong and Another

CACV 236 /2017

[2020] HKCA 482

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 236 OF 2017

(ON APPEAL FROM HCB NO 345 OF 2001)

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BETWEEN

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.There are before us an appeal and an application of the appellants for stay of execution of the orders being the subject of the appeal pending appeal. As things turn out, the stay application has become pointless. We will deal with the stay application first.

The application for stay pending appeal

2.The orders that are the subject of the appeal are for the private examination and production of documents of the elder sisters (“the Sisters”) of a discharged bankrupt, Lee Siu Fung Siegfried (“the Bankrupt”), made by G Lam J on 21 September 2017, at the same time when he made similar orders against the younger brother (“the Brother”) and the son (“the Son”) of the Bankrupt.  The Sisters served a notice of appeal on 19 October 2017.

3.Nearly two years later, on 15 October 2019, the Sisters filed an application to fix a date for the hearing of their appeal.  On 21 October 2019, a joint checklist of the Sisters and the trustees in bankruptcy (the respondents in the appeal; “the Trustees”) was filed.  In answer to the question “Have all necessary interlocutory applications been taken out?”, it was written “No interlocutory applications have been taken out”.  This is lacking in candour, as only two days later the Sisters issued a summons to stay the orders for private examination pending appeal.  They filed a notice of setting down the appeal on 25 October.  There was clearly inordinate delay in prosecuting the appeal and in issuing the application for stay pending appeal.

4.The notice of hearing of this appeal was issued on 6 November 2019, with a hearing date of 1 April 2020.  Hearing dates were fixed for the private examination of the Sisters before a master on two dates.  The first was to take place on 24 March 2020, the latter on 23 April.

5.The stay application was dealt with on paper by the judge, who handed down his decision on 13 January 2020 (“the Stay Decision”). The judge went through each of the grounds of appeal in seven pages of the notice of appeal.  He came to the view that there are simply no sufficient prospects of success in the appeal to warrant a stay of execution and dismissed the application for this reason alone.  He noted that the examination of one of the Sisters was scheduled to take place more than three weeks after the appeal and remarked that it is not apparent her appeal in relation to the oral examination would be rendered nugatory without a stay.  As for the orders for production of documents and the making of an affirmation[1] that are also the subject of the appeal, the Sisters have just not complied with those orders, and it has not been established why the appeal against such orders would be rendered nugatory without a stay[2].

6.The Sisters renewed their application for stay pending appeal by issuing a summons in this appeal on 24 January 2020.  On the same day, the Registrar of Civil Appeals gave directions for the filing of evidence and lodging of submissions, taking the view as the tight time frame was “self-created”, it would be unfair to abridge the time for the Trustees to comply with the usual directions in Practice Direction 4.1 §36.  The submission of the Sisters was served on 10 March and by the time the Trustees lodged their submission in answer on 24 March, that was just eight days before the scheduled hearing date of the appeal.

7.On 24 March 2020, this court gave directions to deal with the stay application on paper and requested the parties to respond by 27 March whether they would consent to the disposal of the appeal on paper.  By then, the private examination of one of the Sisters on 24 March and the appeal had been adjourned due to the general adjournment of court proceedings (“GAP”) for public health reasons.

8.All parties consented to the disposal of the appeal on paper.  On 27 March, we directed a paper disposal of the appeal and gave directions for the Sisters to lodge reply submissions in the stay application and in the appeal.

9.On 8 April, it was announced by the judiciary that GAP will continue from 14 April to 3 May 2020.  The private examination of both Sisters have been adjourned due to GAP and the hearing dates would be re-fixed in due course.  As the appeal is to be disposed of on paper ahead of the private examination, it cannot be argued that the appeal will be rendered nugatory if there is no stay of execution and the application for stay of execution pending appeal has become meaningless.  As for the appeal regarding the production of documents and the making of an affirmation, notwithstanding the Stay Decision, no evidence has been adduced by the Sisters in their renewed application that without a stay such an appeal would be rendered nugatory.

10.For the above reasons, the application for stay pending appeal must be dismissed.

Background

11.Before turning to the appeal, we will mention the relevant background matters. 

12.The judge’s judgment on 21 September 2017 relating to the Sisters (“the Sisters Judgment”) must be read with his reasons for decision on 12 October 2016 ordering the private examination of the Bankrupt ([2017] 1 HKLRD 1155; “the Bankrupt Decision”) and his judgment on 21 September 2017 ordering the private examination of the Brother and the Son (“the Brother and Son Judgment”).  There is no appeal from the Bankrupt Decision and the Brother and Son Judgment.

13.The background matters were set out in the Bankrupt Decision at §§2 to 6 and are as follows:

“2. The [Bankrupt] 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”. …

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 [Bankrupt] 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 [Bankrupt] 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 [Bankrupt] to the bankruptcy estate. Not a single cent of dividend has been paid to the creditors. The [Bankrupt] 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 [Bankrupt] 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 [Bankrupt] 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^[3] 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)”

The Sisters Judgment

14.The judge granted the orders sought by the Trustees under section 29 of the Bankruptcy Ordinance, Cap 6 in respect of four areas of inquiry: (1) the Bankrupt’s nominee accounts (only as against one of the Sisters, Lee Siu Fong); (2) the Bankrupt’s 75% holding in Siu Fung Pharmaceutical Holdings Ltd (“SFPH”); (3) the interest in Siu Fung Ceramics (Beijing) Sanitary Ware Co Ltd (“BSW”); and (4) the Bankrupt’s living expenses. The evidence and findings in respect of those areas of inquiry may be summarised as follows.

(1) The Bankrupt’s nominee accounts

15.The relevant evidence was set out in the Bankrupt Decision at §§45 to 49 and §9 of the Sisters Judgment:

“45. As referred to above, Daniel Chan had revealed that at least HK$25 million belonging to the [Bankrupt] paid to him and his mother had been squirreled away in 1996 to a nominee account held with BNP Singapore (account no JN 519). The [Trustees’] investigations have revealed that that account was held by BNP Jersey. Daniel Chan was authorised by the [Bankrupt] under a power of attorney to give instructions to BNP Jersey in relation to Account JN 519. The HK$25 million was then used to purchase shares in SFCH. In August 1996, 7.5 million SFCH shares (worth about HK$9 million) were transferred from Account JN 519 to another nominee account no JN 302 at BNP. On 6 September 1996, following a sale of 10.6 million SFCH shares in Account JN 519, a sum of HK$11 million out of the proceeds of sale was transferred from Account JN 519 to a Hong Kong bank account of Lee Siu Fong, one of the [Bankrupt’s] sisters.

46. Documents obtained by the [Trustees] under a Jersey court order in 2010 have further revealed that Account JN 302 was opened under the name of one Brian Law, an investment director of HSBC Private Equity Management Ltd at the time. A Mr David Wong was one of the authorised signatories for that account. David Wong was the person at CEF Brokerage responsible for operating the securities trading account of the [Bankrupt’s] wife, found to have been used for insider dealing in 1996 … . Further trading of SFCH shares was conducted after 7.5 million shares were deposited into this account in August 1996.

47. The evidence shows that on about 22 August 1997, a sum of US$2.5 million was transferred from Account JN 302 to a Swiss account with the Union Bank of Switzerland, Zurich, no CQUE775.069.

48. When asked in 2012 for an explanation of the nominee accounts, the [Bankrupt] (through his solicitors Messrs Anthony Siu & Co) asked the [Trustees] to provide documentary evidence of any nominee accounts. To help refresh his memory, the [Trustees] provided him with a copy of an undated letter to BNP Jersey requesting nominee facilities signed by the [Bankrupt] and countersigned by BNP Jersey. Despite this, the [Bankrupt] has failed and refused to provide any information.

49. As for the HK$11 million paid from Account JN 519 to Lee Siu Fong’s bank account, an action has been brought by the [Trustees] (HCA 779/2013).  By way of defence, she has since said that the money was in turn transferred by her to NHD Systems (Asia) Ltd, a company over which the [Bankrupt] had interest and control prior to its winding up.”

“9. As stated above, Lee Siu Fong ignored the request for information relating to the HK$11 million transfer referred to in §49 of the 2016 Reasons.  It was only after the [Trustees] commenced HCA 779/2013 in an attempt to recover that sum from her, that Lee Siu Fong admitted the sum of HK$11 million was paid from Account JN 519 to a bank account in her name with Nanyang Commercial Bank on 6 September 1996, but she stated that on the very next day, 7 September 1996, she drew a cheque for the same amount which was paid to NHD Systems (Asia) Ltd (“NHDA”), a company within the Group at the time, which held a 70% interest in Dubois Beijing[4].  She also produced a copy of both sides of the cheque in that action.  As a result, the trustees had to withdraw that action and pay costs.”

16.In light of the above evidence, the Trustees found that the Bankrupt had maintained offshore nominee accounts and they consider it “quite possible” there were other fund transfers involving Lee Siu Fong and it is therefore necessary to obtain information from her.  She had given no explanation why the $11 million was transferred in 1996 in such a “tortuous” manner.  There is no suggestion from her that was a one-off incident.  The Trustees wish to ask her why $11 million was transferred from Account JN 519 to her account and then immediately from her account to NHDA, and whether there were other sums of money or property she received from the Bankrupt.

17.The judge considered that there is basis for suspicion that the Bankrupt had used Lee Siu Fong in connection with his offshore money and that the Trustees have demonstrated a reasonable requirement to inquire into whether Lee Siu Fong had been involved in other fund transfers[5]. He noted that in 2013, she managed to produce documents and details relating to the transfer and payment in 1996, and considered that the Trustees have shown, prima facie, that she will be able to provide the information sought[6].

18.The judge took into account the complaint that an investigation unlimited in time or amount would be oppressive.  He ordered that the inquiry be directed at sums equal to or over $100,000 (or its equivalent in other currencies) and to payments or transfers from 1996 onwards[7].

(2) The Bankrupt’s 75% holding in SFPH

19.The evidence and findings were set out in the Brother and Son Judgment at §§11 to 31 and the Sisters Judgment at §14 and the relevant parts read as follows:

“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, [the Bankrupt] 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.”

“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. …

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. …”

“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, … in his affirmation, the Brother said that to the best of his knowledge and belief, it was in return for MsDusanee’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. … 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].”

“14. … Clearly, many of the transactions relating to SFPH directly concerned the Sisters, including (i) the allotment of 3.2 million SFPH shares in May 1997 to Lee’s Machinery Ltd (which was apparently owned by the Sisters) which were transferred later in April 2000 to Huby Technology Ltd, and (ii) the 1.6 million shares which the [Bankrupt] transferred to his then wife’s company (Triumph Leader Ltd) apparently for HK$1 and which Triumph Leader Ltd later transferred to Dynamic Achieve Investments Ltd. Further, as regards the transfer of 800,000 shares by the [Bankrupt] to the Brother for HK$1 in December 1997, the Brother said it was done at the Sisters’ direction — a statement the Sisters have since adopted. As regards the other transactions, the Sisters have not stated they have no knowledge; instead, they have expressly adopted the Brother’s evidence. Clearly, many questions remain: for example, while the Brother has said that the 1.6 million shares which the [Bankrupt] transferred to his then wife’s company, Triumph Leader Ltd, were transferred in return for two sums of HK$51,785,240 each, the Sisters have not explained why Triumph Leader Ltd, 2 years later, transferred those 1.6 million shares to Dynamic Achieve Investments Ltd (apparently their company) for apparently only HK$313,525.”

20.The judge is satisfied that the Trustees have shown a reasonable requirement for information from the Sisters in this area and that prima facie they have information to provide[8].  But he did not allow the examination to extend to the origin of the general funding of Lee’s Machinery Ltd or its general operation, as that would be going too far.  Although that company got involved in a number of transactions concerning SFPH, it was set up well before the Group faced acute financial difficulties[9].

21.The judge made another qualification in respect of the transfer of 1.6 million shares by Triumph Leader Ltd to Dynamic Achieve Investments Ltd in July 2000.  He considers that the Trustees already have a fair amount of information here and that the potential oppression in this regard outweighs the Trustees’ requirement for further information and the examination should not cover this transaction. But this consideration does not apply to the allotment of 3.2 million shares to Lee’s Machinery Ltd, of which relatively little is known[10].

(3) The interest in BSW

22.The evidence was set out in the Brother and Son Judgment at §§32 to 42 and the Sisters Judgment at §18. The relevant parts read as follows:

“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”)[11] 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[12], which in turn was owned by Capital Ocean[13] (as to 68%) and by World Cheer[14] (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. …

(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.”

“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. …

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. …

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]. …”

“18. … The Sisters were not, on the face of the transactions, directly involved in this area. However, the Brother has said that part of the consideration paid (HK$2 million) to acquire Dubois Beijing was contributed by the Sisters (a statement the Sisters have adopted). Mr Cheung[15] said part of the HK$1.36 million said to be paid by the Brother came from the Sisters. Also, the Brother said that he transferred Capital Ocean to the Son in 2008 at the suggestion of the Sisters who have always doted on the Son.”

23.The judge is satisfied that within the apparently limited involvement of the Sisters in this area, the Trustees have shown they reasonably require information from the Sisters for the purpose of their further functions.  He also considers that prima facie the Sisters are in possession of the information sought[16].

(4) The Bankrupt’s living expenses

24.The relevant evidence was set out at §20 of the Sisters Judgment:

“The [Bankrupt] filed a statement of affairs reporting only HK$265 in assets and 3 annual statements each reporting he had no income whatsoever. There is suspicion that he remained a wealthy man with assets at his disposal, as the Insider Dealing Tribunal found. To explain how he continued to make a living, the [Bankrupt] said the Sisters had provided for his daily living. When asked for information in this respect in 2002, the Sisters gave no reply. …”

25.The judge took the view it is relevant for the Trustees’ investigation to see whether the Bankrupt in fact had his own assets at his disposal.  He found that a reasonable requirement is shown for the Trustees to inquire, and that prima facie the Sisters should be able to assist[17].

26.In the balancing exercise, the judge remarked that the Sisters are not entirely independent, commercial third parties vis-à-vis the Bankrupt.  They were closely involved in the transactions involving SFPH from which questions arise which the Trustees have shown a need to pursue. In relation to at least the $11 million transferred from Account JN 519, Lee Siu Fong was prepared to be used by the Bankrupt as a conduit. The Sisters’ role in relation to the interest in BSW appears limited but nonetheless they were involved in the way they accept.  And they are said to have been the source of the Bankrupt’s financial support as regards how he made a living[18].

27.The judge further had this to say:

“The purpose of s 29 is of course not to give the trustees an unfair advantage in litigation. Considerations of public policy, however, underlie statutory provisions such as s 29 which enable trustees in bankruptcy and company liquidators to obtain information through private examination, a route that is not available to an ordinary litigant. Ultimately whether private examination becomes unfair or oppressive because of potential or existing proceedings against the examinee is a question of degree that depends on the circumstances of each case. Here, in relation to the interest in BSW, the nominee accounts and the resources to support the bankrupt’s living, there is as yet no concrete reason to think that there is any potential claim against the Sisters. Even in relation to SFPH, it seems to me the present case is not one where the trustees are ‘seeking merely to dot the i’s and cross the t’s of a fairly clear claim’ (Cloverbay Ltd v Bank of Credit and Commerce International SA [1991] Ch 90, 102C). There are numerous transactions involved in connection with SFPH and the information is not evenly spread.”[19]

The principles on appeal

28.The judge has correctly stated the relevant principles how this appeal should be approached in §5 of the Stay Decision:

“The decision being appealed was an exercise of the discretionary power of the court under s 29 of the Bankruptcy Ordinance (Cap 6) to order private examination for the purpose of enquiring into a bankrupt’s conduct, dealings and property: see, by analogy, The Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766, at §§4, 18, 28, 29, 31, 45. In relation to the equivalent statutory power in company liquidation, it has been said that the court has a ‘general’ or ‘unfettered’ discretion, although well-established principles have been laid down in the cases over the years to guide the exercise of that power: Cloverbay Ltd (Joint Administrators) v Bank of Credit and Commerce International SA [1991] Ch 90, 99B, 105B-D, 106E. On this basis it seems to me that the Court of Appeal will not lightly intervene on appeal except where this court has proceeded on wrong principles or the exercise of discretion has been plainly wrong.”

29.As stated by Rogers VP in The Joint and Several Liquidators of B+B Construction Co Ltd (In Liquidation) v Ulrich Weinmann & Ors, CACV 196/2004, 25 May 2005, at §20, in the context of an appeal against an order for examination under section 221 of the old Companies Ordinance, Cap 32:

“It must be borne in mind that when considering the exercise of discretion by a judge, this court must look to see whether grounds for reviewing the exercise of the discretion exist. If they do not, this court should not exercise any discretion itself or otherwise usurp the function of the judge.”

30.As regards the assessment of the evidence of various areas of inquiry being challenged in this appeal, we think it is pertinent to bear in mind these words of the judge in the Brother and Son Judgment:

“22. …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.”

31.As mentioned, the grounds of appeal covered seven pages in the notice of appeal. Instead of dealing with the grounds one by one in an orderly manner, as was the judge’s approach in the Stay Decision, Mr Cheung chose to set out his arguments under various topics where some of the grounds of appeal discussed under one topic would resurface under one or more of the subsequent topics.  This is an unsatisfactory way to marshal his arguments, as there is little hint in his submission whether each of the grounds of appeal specified under one topic has been dealt with, not to mention it makes for burdensome reading.  Another unsatisfactory feature is that Mr Cheung only stated in his reply submission those grounds of appeal he would abandon[20]. This should have been stated at the outset, as it is clear from the Stay Decision those grounds are untenable.

32.We will deal with this appeal under the various topics mentioned in Mr Cheung’s submission.

The Bankrupt’s nominee accounts

33.Mr Cheung’s arguments may be summarised as follows:

(1)  It is unjustified to elevate suspicion to an inference that the Bankrupt had used Lee Siu Fong as a conduit in connection with his offshore money as this is akin to witch hunt or fishing expedition without any evidential basis.  There is no evidence Lee Siu Fong was implicated in the other transfers of the Bankrupt apart from the $11 million.  There was merely suspicion and surmise.  There is no evidence that other fund or property transfers were related to the Bankrupt’s dealing and property, so the court has no power to allow the Trustees to inquire into any transfer of money, property or benefits in kind between the Bankrupt and Lee Siu Fong.

(2)  For some of the questions posed by the Trustees, Lee Siu Fong has already tendered her explanation in the defence of HCA 779/2013. The other questions (such as why NHDA needed the $11 million, how did it spend the money) should be addressed to the Bankrupt instead.

(3)  The Trustees have sufficient materials to ground an action against the Bankrupt to recover the $11 million and they have already found the Bankrupt had maintained nominee offshore bank accounts to conceal his assets.  The examination of Lee Siu Fong on this area is an attempt merely to dot the i’s and cross the t’s of a fairly clear claim.

(4)  The Trustees’ withdrawal of HCA 779/2013 is an admission that the relentless pursuit of the questioning pertaining to the transfer of $11 million would not lead to recovery against Lee Siu Fong.  There is little or nothing that could be achieved by the inquiry on this topic.

(5)  The discovery ordered is far too wide and overly burdensome in that the fund transfers are not confined to the Bankrupt’s offshore nominee accounts and Lee Siu Fong is expected to go through the records since 1996.

(6)  The judge erred in “over tilting” the scale in not finding that the oppressiveness does outweigh the Trustees’ need to inquire under the circumstances.

(7)  The judge did not give reason why a curtailed examination (limited to sums equal or above $100,000 and to payments or transfers from 1996) would be less oppressive than what was sought by the Trustees.  Nor did he deal with a number of arguments raised by the Sisters (repeated by Mr Cheung on appeal) in his judgment.

34.It would appear from point (7) above that the arguments advanced on appeal under this topic are largely a repetition of those raised before the judge.  There is nothing in Mr Cheung’s contention that the judge had failed to give reasons or sufficient reasons.  There is no duty on a judge in his reasoned judgment to deal with every argument presented by counsel.  Nor is he required to identify and explain every factor which weighed with him in his appraisal of the evidence.  It is sufficient if what he says shows the basis on which he acted and how he resolved the issues that were vital to his conclusion (Tsit Wing (Hong Kong) Co Ltd v TWG Tea Co Pte Ltd [2013] 2 HKLRD 505 at §§26 to 28 and the cases there cited).

35.We would reject the contention in (7) without hesitation. There is nothing in the contention there is no difference in terms of oppressiveness between the curtailed examination and what was sought by the Trustees.  As the judge has emphasised, ultimately whether private examination becomes unfair or oppressive because of potential or existing proceedings against the examinee is a question of degree depending on the circumstances of the case. For this reason, we reject also the contentions in (5) and (6).  As the judge had noted in the Stay Decision at §6, Lee Siu Fong’s affirmation merely said they would be in a greatly difficult position in retrieving documents and that memories faded.  It has not been shown there is any error in principle or that the judge was plainly wrong to warrant interference with his exercise of discretion.

36.We agree with the judge there is basis for the Trustees’ suspicions that the Bankrupt had used Lee Siu Fong as a conduit in connection with his offshore money[21]. The submission that there was suspicion but no evidential basis in respect of certain matters is misconceived.  As the judge had mentioned[22], in an application of this nature, it is not for the court to come to any finding or concluded view on the matters canvassed.  The issue is whether the Trustees should be enabled to probe or probe further in all the circumstances, and it is not necessary to establish a prima facie case to justify an order for examination. The contention in (1) is without merit.

37.As for HCA 779/2013, this was a simple action against Lee Siu Fong for the recovery of the known sum of $11 million.  The explanation she gave in her defence regarding that transfer is limited. Further, there is no suggestion that the transfer of $11 million was a one-off incident.  The judge took the view that the Trustees have demonstrated a reasonable requirement to inquire into whether Lee Siu Fong had been involved in other fund transfers.  We agree also with the judge’s assessment that in relation to the nominee accounts, there is as yet no concrete reason to think that there is any potential claim against Lee Siu Fong.  We are unable to see any error of principle, nor can it be said that the judge was plainly wrong.  We do not think there is any substance in the contentions in (2) and (3).

38.The contention in (4) is a bad point.  The duty of trustees in bankruptcy, and the purpose of a private examination, is not confined to the recovery of assets.  The judge has already mentioned 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[23].

The Bankrupt’s 75% holding in SFPH

39.Mr Cheung’s arguments are along these lines:

(1)  Regarding the allotment of 3.2 million shares in SFPH in May 1997 to Lee’s Machinery Ltd, there was evidence that $3.2 million was injected into SFPH to meet the financial commitments of the joint venture Zhaoke. In the 1997 audited account of SFPH, it would appear that about $5 million of the capital contribution for the subsidiary company was only paid during 1997.  In the prospectus of LPHL, it was stated that US$1.4 million in respect of Zhaoke was paid by 2 September 1997.

(2)  The judge did not allow examination to extend to the origin of the general funding of Lee’s Machinery Ltd or its general operation.  He must have implicitly ruled there was no ground for the Trustees to harbour suspicion that the source of funding from that company had originated from the Bankrupt.  There is therefore no sound basis to allow the Trustees to probe into the allotment of 3.2 million shares in SFPH to Lee’s Machinery Ltd, when there is “not a scintilla” to suggest it was not a genuine commercial transaction.

(3)  Any action to recover the 75% shareholding in SFPH would be time-barred.  The Sisters should not be treated in law as trustees holding trust property belonging to the Bankrupt under section 20(1)(b) of the Limitation Ordinance, Cap 347.

40.There is no merit in any of the above contentions.

41.The arguments have all been considered by the judge and we agree with him.  The judge has gone into the allotment of the 3.2 million shares in SFPH in some detail.  He noted in particular that the allotment was at par, and that the Sisters thereby acquired 50% of SFPH, the business of which subsequently became the business of the listed vehicle, LPHL[24]. That the examination ordered did not extend to the source of funding from Lee’s Machinery Ltd or its general operation is immaterial.  The Trustees’ concern was that on the face of the 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 he had ostensibly no interest, and all that he had apparently obtained in return was $2[25]. It cannot be disputed that the Sisters were closely involved in the Bankrupt’s disposal of his 75% interest in SFPH.  There is no basis to interfere with the judge’s exercise of discretion in ordering an examination against the Sisters, as prima facie they have relevant information to provide.

42.As for the time bar argument, in an application for private examination the trustees need not formulate a cause of action and it would be premature to speculate at this stage what causes of action the Trustees may have against which persons[26]. Besides, the examination is sought not only for the purposes of claims against the Sisters but also for the purposes of the bankruptcy generally including investigating potential claims against other parties.  It is quite unnecessary to deal with Mr Cheung’s convoluted arguments here, not to mention they beg the question if property was received in good faith, for value and without notice prior to the commencement of bankruptcy.  In any event, we agree with the judge that where a bankrupt has, prior to bankruptcy, placed assets in others’ hands as nominees, an action by the trustee-in-bankruptcy, who steps into the shoes of the bankrupt, to recover such assets would be an action by a beneficiary to recover trust property from his trustee and such action is not subject to any statutory period of limitation by virtue of section 20(1)(b) of the Limitation Ordinance[27].

The interest in BSW

43.Mr Cheung ran these arguments:

(1)  The Sisters’ involvement in this area was limited to part of the consideration paid by the Brother ($1.36 million) to acquire Dubois Beijing in 2001 and suggesting to the Brother to transfer Capital Ocean to the Son in 2008.  Regarding the acquisition of Dubois Beijing in 2001, the Trustees only have evidence that the Sisters provided financial assistance to the Brother and no evidence that the Sisters were directly connected with this transaction.  The judge did not give sufficient weight to the limited involvement of the Sisters in this area, which “pales into insignificance”, nor did he explain why the limited involvement of the Sisters should warrant investigation by the Trustees.

(2)  There is no basis to suggest that the Sisters are in a position to provide information of any sort regarding the transaction in 2001.

(3)  The Brother had made clear that at the time of acquisition of BSW, KBI was owned by World Cheer, which was an independent entity not related to him.  The Trustees were unable to prove that the Sisters had any connection with the acquisition of the 36% shareholding in BSW by KBI in July 2001.

44.We find nothing of substance in any of the above arguments. The judge was clearly aware that the Sisters’ involvement was limited and considers that prima facie the Sisters are in possession of the information sought.  It is immaterial that the Trustees do not have evidence showing any direct involvement of the Sisters in the acquisition of the 36% shareholding in BSW by KBI or the acquisition of Dubois Beijing by the Brother.  The Trustees’ concern was that the Brother apparently became owner, through Capital Ocean, of a substantial interest in BSW, which he allegedly gifted to the Son some years later, with the Bankrupt apparently running BSW all the while.  They also have some basis to suspect that funding for the initial acquisition in 2001 came from parties closely related to the Bankrupt. There is nothing to warrant interference with the judge’s exercise of discretion.

The Bankrupt’s living expenses

45.The complaint is that the decision is “overly arduous and harsh”, and is based on “suspicious findings” of the Insider Dealing Tribunal, with no evidence that the financial assistance provided by the Sisters to the Bankrupt came from the funds of the Bankrupt and was surmise at most.  The Trustees fail to “pinpoint” any suspicious transaction in this regard. 

46.We reject the above contentions.  The inquiry was directed to address the Trustees’ suspicion, based on the conclusion of the Insider Dealing Tribunal, that the Bankrupt remained in control of substantial assets on which he relied for his living, contrary to his allegation that the Sisters paid for his living expenses.  The Sisters were closely involved in some of the Bankrupt’s financial affairs, being the offshore nominee accounts, the SFPH shareholding, and the interest in BSW.  They were said by the Bankrupt to be the source of his financial support.  Prima facie they should be able to assist with the Trustees’ inquiry in this area.  We disagree with Mr Cheung that the decision of the judge was plainly wrong.  There is nothing to suggest that the judge had failed to conduct a proper balancing exercise.

Unfair advantage given to the Trustees

47.We have dealt with the argument that the Trustees already have sufficient materials to commence action against Lee Siu Fong for knowingly assisting the Bankrupt to siphon off his assets in the nominee offshore bank accounts.  A similar complaint was made in relation to the SFPH shareholding.  It was alleged that the Trustees have already identified all the transactions for the SFPH shares and they have issued protective writs in this respect.  The judge did not deal with this in the judgment.

48.The judge had considered the submissions in this respect regarding the SFPH shareholding and had dealt with them[28].  That he did not mention the protective writs is neither here nor there.  He took the view that in relation to SFPH, it is not a situation where the Trustees are seeking merely to dot the i’s and cross the t’s of a fairly clear claim.  He had taken this into account in the balancing exercise.  There is no basis to interfere with his assessment or the exercise of his discretion.

Trustees’ inordinate delay

49.The complaint is that the Trustees have been waiting for the past 16 years and using lack of funding as an excuse.  The information relied on by them regarding the transfer of the SFPH shareholding has been revealed in the public domain (being the prospectus of LPHL) since 2002. The Trustees have identified the Sisters as the main targets of investigation in their report in August 2007.  It was only in December 2015 that they raised query with the Sisters regarding the transfer of the SFPH shareholding.  There was unexplained delay of eight years at least.  The judge did not mention whether this inordinate delay would constitute prejudice and oppression to the Sisters.  He had failed to factor in the Trustees’ delay in his balancing exercise.

50.Contrary to the above contentions, the judge had expressly considered the issue of the time elapsed in conducting the balancing exercise[29]. As rightly pointed out by the judge, the question of how much weight to give to this is not a ground of appeal against an exercise of discretion[30].

Trustees’ ulterior motives

51.The complaint is that the Trustees stand to benefit from remuneration of over $7 million by taking part in a series of litigation out of the costs that may be awarded by the court against the opposite parties.  It was contended that the Trustees are not entitled to receive remuneration in this manner, and that they have pursued the application for private examination with such ulterior motive, not for the benefit of creditors.

52.This was considered by the judge who did not think it necessary to deal with the argument whether a trustee’s own fees can be recovered as part of the costs of a contested application[31].  The judge characterised the arguments in the grounds of appeal as nothing more than a repetition of the allegation of ulterior motive without identifying any relevant error[32]. We agree with him.

Conclusion and costs

53.We dismiss the appeal as none of the arguments advanced are of any merit.

54.There is no reason why the costs of the application for stay pending appeal and the costs of the appeal should not follow the event.

55.The Trustees seek costs of the application and of the appeal against the Sisters on an indemnity basis as both matters are hopeless, to mark the disapproval of the court.

56.The renewed application for stay pending appeal should not have been brought.  Each of the grounds of appeal have been considered and rejected by the judge in the Stay Decision with detailed reasons.  The appeal against his exercise of discretion is quite hopeless.  We think the circumstances are exceptional to justify indemnity costs and we so order in respect of both matters before us.

Mr Patrick Siu, instructed by ONC Lawyers, for the Applicants (Respondents)

Mr Jeremy Cheung and Miss Karen Cheung, instructed by Liu, Chan & Lam, for the 1^st and 2^nd Respondents (Appellants)