Fred Lee and Chow Wai Lan, Christine, Trustee of the Property of Chu Yung, A Bankrupt v. Chu Yung

HCB 2027/2018

[2022] HKCFI 2487

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 2027 OF 2018

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RE: CHU YUNG, a bankrupt

BETWEEN

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D E C I S I O N

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Application

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

Background

2.On 13 April 2018, Mr Chu Yung (朱勇), applied to this Court for his own bankruptcy. He deposed, inter alia, that he was a restaurant captain earning about $13,000 per month. He owed debts to 4 banks/finance companies in the total sums of about $1.6 million. He was unable to pay them and prayed for an order of bankruptcy for himself.

3.The Official Receiver (“OR”) investigated into the matter and found that Mr Chu had not disclosed a sale of land property^[1] by him on 16 January 2018, within 3 months before the filing of his petition, at $4.68 million. The court also raised requisitions on the disposal of the sale proceeds.

4.As a result, Mr Chu amended his Statement of Affairs to include an additional “income” of sale proceeds for $4,256,098.04 ($468,000 + $3,788,098.04) and prepared 2 affirmations to explain the position.

5.By the Supplemental Affirmation^[2], he explained that:

(a) most of the deposit of $468,000 was withdrawn for settlement of the debt repayments to various unsecured creditors, leaving a balance of $95.55^[3] as at 15 January 2018, and

(b) most of the balance of purchase price of $3,788,098.04 was also withdrawn for debt repayments to the said 4 banks/finance companies and other creditors (to whom he had fully repaid all debts). Some repayment receipts had been lost and some were kept by him. He produced copy receipts showing payment for 13 creditors of about $2.2 million^[4], leaving a balance of $245.44^[5].

6.By the 2^nd Supplemental Affirmation^[6], Mr Chu changed his case so that, from the said deposit of $468,000, a total sum of $51,000 had been spent on payment of rental deposit and rent when the balance was for settlement of debts to unsecured creditors. Again, some repayment receipts had been lost and some were kept by him. He produced copy receipts showing payment for 13 creditors of about $108,000.

7.On 19 June 2018, Master M Wong made Mr Chu (hereinafter called as the “Bankrupt”) a bankrupt.

8.On 20 May 2022, the Trustee filed the present application and complained that the Bankrupt’s conduct was unsatisfactory and uncooperative. Particulars of the complaints can be found in the Affirmation of Fred Lee, including:

(a) On 3 October 2018, at the creditor’s meeting convened by OR, she noted that there was a “suspected unfair preference” given by the Bankrupt to one Mr C C Yip (“Yip”) for $2.1 million, 3 months before the filing of the petition for bankruptcy.

(b) The Trustee further observed that, even if one would accept the explanations in the 2 affirmations of the Bankrupt, he still failed to account for the whereabouts of about $1.9 million[7] which he only made general assertion that they were used to repay creditors but had lost the receipts.

(c) Despite investigation by the Trustee, including a letter of 18 September 2019, the Bankrupt did not provide or provide a satisfactory account and it prejudiced the administration of the estate of the Bankrupt.

9.On the same date, solicitors acting for the Bankrupt also wrote to the Trustees raising objections.

“1. The Bankrupt wrote to you on 30 Aug 2019 giving his explanation about Mr C C Ip, He also wrote a letter to the Official Receiver in reply to the Official Receiver’s letter dated 1 Aug 2018.

2. Your requisitions raised in your letter dated 18 Sept 2019 (such as Mr C C Ip and the difference of $1,568,404) were the pre-bankruptcy conducts of the Bankrupt.

3. We believe that the pre-bankruptcy conducts you raise were fully answered by the Supplemental Affirmation and 2nd Supplemental Affirmation of the Bankrupt filed to the Court. All these Affirmations were served on the Official Receiver. As a result, the Court satisfied his explanations and issued a Bankruptcy Order on 19 June 2018.

4. Since our letter dated 17 Nov 2019 to the Official Receiver (in reply to the Official Receiver’s letter of 12 Oct 2020), the Bankrupt and we have not received any complaint/letter from the Official Receiver or you.

5. Further, the Bankrupt was co-operative with the trustee in Bankrupt by contributing over a total sum of HK$50,000 for the past years.

6. We would like to draw your attention to paragraphs 12 and 13 of the Decision made by Master J Wong on 3 April 2007 under HCB 10035 of 2002, a copy of which is enclosed herewith for your easy reference.”

10.The Bankrupt, acting in person, further disputed the application and filed his affirmation in Chinese on 10 June 2022 to oppose the same. All in all, he had tried his best to assist Trustee, including that:

(a) He did answer the requisitions from OR and the Court.

(b) He also attended meetings with the Trustee and answered their questions. He however did not receive the letter of 18 September 2019 or any reminder.

(c) Yip was a loan shark. He did not tell his address to the Bankrupt who only knew Yip’s mobile phone number. To avoid the harassment by Yip to his father, family and company, the Bankrupt was only forced to repay him $2.1 million.

(d) He reiterated that most of the sale proceeds was used for repayment of debts.

11.Parties appeared before me 15 June 2022 for the call-over hearing of the application. Upon hearing from them, I granted further leave for the Bankrupt to file and serve a further affirmation in opposition. Of course, the Trustee will have a right to reply. The automatic stay of bankruptcy was withheld in the meantime pending determination of the application or further order of the Court.

12.The Bankrupt prepared his 2^nd affirmation in Chinese.

(a) He repeated his repayment record having been deposed in the said Supplemental Affirmation and 2^nd Supplemental Affirmation.

(b) His sister recently helped her to locate further receipts showing some repayment to other 22 creditors, amounting to $520,228.9.

(c) He also recently located an ex-colleague, Ms Tsang, who only knew that Yip was living in Tai Kok Tsui. She also lost contact with Yip and did not have his mobile phone number.

(d) He reiterated that he had not received the letter of 18 September 2019 or any reminder from the Trustee. Hence, he lost the “golden” opportunity for 3 years to try to find out the answers sought by the Trustee. It was unfair for him that the Trustee only took out the present application in 2022 so that he might be further subject to the restriction of being a bankrupt.

13.The Trustee replied by the 2^nd affirmation of Fred Lee.

(a) The latest attempt to produce documents was still unsatisfactory. Even if one accepted them in their entirety, there remained over 1.3 million[8] unaccounted for.

(b) The letter of 18 September 2019 was sent by ordinary post to the usual address of the Bankrupt. It was not returned through the dead letter service of the Post Office. The Bankrupt was always aware of the queries raised by the Trustee. However, the Bankrupt’s answers were always evasive or not credible.

(c) The loan by Yip to the Bankrupt was not credible and allegation of the Bankrupt, including harassment to his father, family and company, was not substantiated.

(d) The Trustee did not agree with the Bankrupt that he had been cooperative.

Ruling

14.Upon consideration of the evidence, authorities and submissions from the parties, I agree with Ms Chan, counsel for the Trustee that the Trustee has proved the complaints against the Bankrupt and the discharge of the Bankrupt should be extended for two years in the circumstances. My reasons appear in below.

Findings of facts

15.Has the Trustee established their complaints against the Bankrupt?

16.In my view, with the available evidence before this Court, on balance, I agree that the Trustee has satisfied their burden. The answer and explanation given by the Bankrupt are difficult, if not impossible, to be believed.

17.To start with, the Bankrupt was not honest from the very start when he applied for his own bankruptcy. He did not include his sale of subject property in his petition papers. He only revealed the same upon query and requisitions from the Court in 2018. The proceeds amounted to over $4.2 million. As compared with his debt of $1.6 million shown in the petition, it is hard to accept that he would have missed to include such information therein.

18.The subject property was purchased as a residence for the Bankrupt and his family. They resided there for about 20 years. It would be an important decision to sell it. The Bankrupt explained that he did so for the purpose of repayment to creditors. However, notwithstanding the substantial amount of sale proceeds having been realized, he still had to petition for a bankruptcy within a few months. The Bankrupt attempted to explain that he was forced to do so because two finance companies had commenced proceedings against him. However, when being further pressed as to whether he had planned to repay all his creditors with the decision to sell the property, he was then unable to offer any or any reasonable explanation.

19.There is no doubt that the Trustee took a practical step to press only for details of the repayment of $2.1 million to Yip. It is the biggest sum of repayment. Not even a single document has been produced by the Bankrupt apart from the pay-in slips. No particulars were produced to explain how they were incurred and paid.

20.Worse still, with the following development in the matter, I am afraid that the Bankrupt has only shown that he has failed to co-operate with the Trustee, his conduct is unsatisfactory and prejudicial to the administration of his estate. Either he did not help the Trustee to trace Yip or such person simply has never existed at all, and in the description of Ms Chan, a “phantom” only.

(a) By the Supplemental Affirmation filed on 7 June 2018 herein, the Bankrupt revealed for the first time the repayment of $2.1 million to Yip. He produced 2 copy pay-in slips.

(b) On 10 April 2019, at a meeting with the Trustee, the Bankrupt said that Yip was a friend to whom he had borrowed in the past 3 to 4 years. There was however no written agreement to show the loans. He could not provide further information on the borrowing and contact details of Yip.

(c) On 30 August 2019, the Bankrupt wrote to inform the Trustee that he had lost contact of Yip. The telephone number of Yip was no longer in use.

(d) The Bankrupt did not respond to the letter issued by the Trustee on 18 September 2019.

(e) By letter of his solicitors dated 20 May 2022, he repeated his earlier answers given to the Trustee.

(f) In his affirmation in opposition filed on 10 June 2022 herein, he said, inter alia, that Yip was a “loan shark” and he often came to the restaurant he worked in the past.

(g) In his 2^nd affirmation in opposition filed on 30 June 222 herein, he added that he had recently found an ex-colleague, Ms Tsang who also lost contact with Yip. She only knew that Yip resided in Tai Kok Tsui and did not have his mobile phone number.

21.With the above attitude adopted by the Bankrupt, it falls squarely in the comments made by Madam Justice Le Pichon (as she then was) in Re Li Tat Kong [2000] 3 HKC360 (CFI)[9] when she said that:

“… In my Judgment, it is incumbent on the bankrupt to make a full and frank disclosure and to proffer all pertinent information regarding his assets and financial dealings to the trustee [emphasis added]. As French J observed in Re Barrie Andrew Knight (WB 307 of 1998, 14 August 1991, unreported), a decision of the Federal Court of Australia:

…It is not sufficient, I think, for a bankrupt to say in relation to the deficiencies which the trustee complains are unexplained, that it is all there in the transcript of evidence and auditor’s report put before the District Court in the criminal proceedings. Nor is it sufficient to say that the trustee has not made inquiry of him. It is the bankrupt’s duty, if he seeks the indulgence of discharge where discharge would not otherwise be automatically available, to show that he has taken all reasonable steps to ensure that his estate is available for distribution among his creditors and that the trustee is appraised of all the relevant information [emphasis added].

Thus, it is not good enough for a bankrupt to adopt a purely passive or reactive role, responding when asked in the expectation that with any luck, pertinent matters might be overlooked [emphasis added].”

22.$2.1 million is a substantial sum of money. How did the Bankrupt come and accumulate to owe Yip such sum? The Bankrupt once explained that he repaid Yip because he had interfered his father, family and company. However, there has been no single shred of evidence on the same. What has the Bankrupt done to try to locate Yip? This court has no idea as to what steps, not to mention if the same are reasonable or not, the Bankrupt has taken at all.

23.The Trustee further said that they had sent letter to the Bankrupt on 18 September 2019. The Bankrupt denied having receipt of it. On balance, I accept that such letter was sent to the Bankrupt.

(a) At all material times, the Bankrupt has only one usual address. It is also the address whereby the Trustee sends and serves letters and papers upon the Bankrupt. If he could be served with all other papers, I see no reason why he would not have received such letter.

(b) The letter only reiterated the position of the Trustee on the sum of repayments to Yip and chased the Bankrupt for an account.

(c) In any event, with the present stance taken by the Bankrupt, he would have maintained his position that he could no longer provide any information of the loan, repayment or whereabouts of Yip to assist the Trustee.

(d) It is not argued or unarguable that the Trustee always target at such suspicious transaction with Yip. It therefore lies ill in the month of the Bankrupt that the Trustee had not pursued the matter after August 2019 and only commenced the present application in May 2022. Clearly, a purely passive or reactive role on the part of the Bankrupt is not acceptable.

24.I should also expressly reject a misconceived argument raised, namely, in issuing the bankruptcy order upon the Bankrupt, the court had satisfied his explanations offered in the Supplemental Affirmation and 2^nd Supplemental Affirmation. The reality is that: In making the bankruptcy order upon him, on face of all the evidence then available, the court was satisfied that the Bankrupt was unable to repay his debts. As to other matters, including whether the answers and explanations given by the Bankrupt to requisitions, they are subject to further investigation by the Official Receiver and/or the Trustee.

Exercise of discretion

25.Having satisfied that the complaints of the Trustee are established, I move to the exercise of the Court’s discretion to see if the discharge of bankruptcy against the Bankrupt should be suspended, and if so, for how long. In this respect, I ask myself to bear in mind the underlying principle of the current bankruptcy regime as per paragraphs 17.16 and 17.24 of the Law Reform Commission Report on Bankruptcy (1995):

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

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

26.Further, useful guidance can be located in comment of Madam Justice Le Pichon (as she then was) in two authorities, viz: Re Hui Hing Kwok [1999] 3 HKC 683 and Re Li Tak Kong [2000] 3 HKC 360 (CFI):

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

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

27.Applying the above principles to the present case, I have no doubt that the discharge of the Bankrupt should be suspended. While I agree that the Bankrupt have filed all statements of affairs and contributed a total sum of $43,900[10] throughout the years[11], the Bankrupt did fail to respond promptly and timeously to queries raised by the Trustee. The Bankrupt did not adopt a positive duty to cooperate with the Trustee in the administration of his estate. He has been adopting a “catch me if you can” approach. One certainly does not forget that he has “successfully” transferred his assets (at least, the sum of $2.1 million complained by the Trustee under the present application), the Bankrupt shall provide a full picture so that the Trustee would see if third party can be looked to for the benefit of the estate.

28.Although the conduct complained by the Trustee against the Bankrupt might be said to be “pre-bankruptcy” conduct, unlike the usual case of excessive credit or gambling, by adopting a hypothetical reasonable man test, the Bankrupt has failed to get the rehabilitation offered by our bankruptcy regime because of his own failings in the present instance.

29.The case relied by the Bankrupt, Re Chan Lai Sze, HCB 10035/2002, unreported Decision of mine dated 3 April 2007 does not assist him. As pointed out by Ms Chan, the authority could be distinguished because the underlying facts were different. In that case, the total sum complained is only about $370,000. It was spent by the bankrupt over a period of 7 months. Supporting documents and particulars of repayment were also provided and made available to the trustee. The court was satisfied that the administration had not been prejudiced by conduct of the bankrupt.

Suspension for how long?

30.The Bankrupt is 49 years old. He is single and living at a rented unit at Tseung Kwan O. He is still working as a restaurant captain earning about $13,000 per month.

31.Ms Chan also referred me to one of my earlier decision (HCB 1799/2005, Re Hon Hing On, dated 30 July 2009). In that case, the bankrupt was found having made unfair preferences[12] to family members before his petition for bankruptcy. However, he admitted his fault and supplied information for the trustee to follow up. In the end, the automatic discharge of his bankruptcy was ordered to be suspended for 8 months.

32.In the present case, the quantum involved is much larger, 6 times of the sum as compared to the case cited by Ms Chan. At all times, the Bankrupt insisted on his case which the Trustee did not accept. The administration of the estate has been prejudiced. Against it, the Bankrupt did contribute as requested by the Trustee throughout the relevant 4 years and there is no complaint of failure to provide statement of affairs. With all these, I agree with the suggestion from Ms Chan that a suspension of 2 years is appropriate in the circumstances.

Costs

33.I see no reason why costs should not follow the event. Ms Chan asked the matter to be summarily assessed and I also see no reason why further costs should be spent on formal taxation. The sums claimed under the costs statement, including the fee of Ms Chan ($5,000 for hearing on 15 June 2022 and $10,000 for hearing on 28 July 2022) are proper necessary and reasonable. I also have not heard any or any realistic objection from the Bankrupt save that he had no money to pay. Of course, it is not a valid or relevant consideration at all. Hence, the claim of $55,359 is allowed.

Conclusion

21.  To conclude, I order that the automatic discharge of the Bankrupt shall be suspended for 2 years from 18 June 2022. The Bankrupt shall pay the Trustee costs of the application including certificate for counsel for the 2 hearings on 15 June 2022 and 28 July 2022, summarily assessed at $55,359.

Interpretation

22.  To assist the Bankrupt to understand the Decision herein, this Court will arrange a translator for such purpose at the time of the handing down.

Ms Jacqueline K K Chan, instructed by Lee & Chow for the trustee of the property of Chu Yung, a bankrupt

Chu Yung, appearing in person