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HCBI 426/2024
[2025] HKCFI 1888
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
BANKRUPTCY PROCEEDINGS
INTERIM ORDER APPLICATION NO.426 OF 2024
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| Before: |
Master S P Yip in Court |
| Date of Hearing: |
11 February 2025 |
| Date of Decision: |
12 May 2025 |
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DECISION
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BACKGROUND
1.This is an adjourned hearing of the Debtor’s application for an Interim Order pursuant to ss.20 and 20A of the Bankruptcy Ordinance (Cap. 6) (“BO”) for his individual voluntary arrangement filed on 18 June 2024 (“IO Application”) together with the substantial hearing of the following 3 summonses filed by one of the creditors, 成都圆中侨信商贸有限公司 (“Creditor”), as follows:
(a) the summons filed on 25 September 2024 for leave to apply for specific discovery for discovering various documents referred by the Debtor in his exhibits and leave to administer interrogatories against the Debtor (“Discovery Summons”);
(b) the summons filed on 5 November 2024 for extending the time to file and serve an affirmation in reply to the 2nd Nominee’s Report (“EoT Summons”); and
(c) the summons filed on 28 January 2025 for the dismissal of the IO Application (“Dismissal Summons”) on the ground that the Debtor is in breach of the unless order made on 30 September 2024 (“Unless Order”) and restoring a hearing of the bankruptcy petition against the Debtor in HCB 2619/2024.
PROCEDURAL HISTORY
2.At the first hearing of the IO Application on 29 July 2024, Mr Leung, the Creditor’s counsel, cast doubt on whether the Debtor has discharged his duty of full and frank disclosure of his net worth and liabilities and whether the nominee has carried out independent investigation and verification of the Debtor’s statement of assets and liabilities as set out in the Debtor’s statement of affairs (“Statement”). In particular, paragraphs 15 and 16 of the Petitioning Creditor’s Skeleton Submissions dated 25 July 2024 (“C’s 1st Skeleton”) are recited as follows:
“15. Firstly, it is questionable whether the Debtor has given a full picture of his assets.
(1) As stated in the Proposal, the Debtor is the former chairman, executive director and chief executive officer of National Arts Group Holdings Limited (“National Arts”), a company that was formerly listed on the Hong Kong Stock Exchange[§1(2)]. He is currently employed by Keptain Family Office Limited as a Project Director with a monthly salary of around HK$130,000 [§1(4)].
(2) As such, it is doubtful whether the Debtor has been forthcoming when he asserted that he merely has around HK$105,215.03 in his only bank account (as disclosed in List A of the Statement) ‒ a sum that is even lower than his monthly salary at present.
(3) Equally doubtful is the Debtor’s “total” assets of merely HK$584,284.17 (including AIA insurance that worth HK$479,069.14) ‒ an amount that in no way commensurate with his previous senior positions in National Arts and his high-salaried employment at present.
(4) Notably, the conspicuous absence of any particulars with regard to the Debtor’s Manulife MPF account in the Statement is also telling as to the lack of candour on the part of the Debtor.
(5) As such, further investigation is plainly warranted to scrutinise the assets of the Debtor and, in particular, whether claim could arise in the event of the Debtor’s bankruptcy under sections 49 (transactions at an undervalue), 50 (unfair preferences) or 71A (extortionate credit transactions) of BO.
16. Secondly, the total indebtedness and authenticity of the alleged creditors and their claims as set out in the Statement are open to doubt.
(1) As stated in List B of the Statement, the total amount of the Debtor’s unsecured liabilities currently stands at HK$612,384,796.60.
(2) Whilst most of these debts, on the Debtor’s case, are debts borrowed personally by the Debtor to finance the operation of National Arts from various individuals, it is inherently improbable that debts being used to finance a listed company of such magnitude are all unsecured and borrowed personally by the Debtor ‒ who was not the shareholder of National Arts but merely a paid senior employee.
(3) Equally dubious is the authenticity of the alleged creditors, when creditors No. 5 to 12 (which accounts for nearly 1/3 of the alleged total indebtedness, i.e. HK$212,371,055) all share the same address of a random apartment in Shatin as stated in List C of the Statement, viz. Flat F, Floor 28, Block 3, Castello, Shatin (“Shatin Creditors”).
(4) The doubtful authenticity of the alleged creditors is made even more apparent when this is viewed against the purported support offered by 54% of the alleged creditors in respect of the Proposal ‒ when the Shatin Creditor have already accounted for nearly 30% of the Debtor’s alleged total indebtedness.
(5) Bearing in mind the alleged creditors would receive a mere return of 0.87% return at the end of the IVA, and viewed against the suspicious circumstances set out above, it is submitted that a cautious approach ought to be exercised by having the Nominee to investigate and verify the authenticity of the alleged debts before the Court is better placed to determine whether an interim order ought to be granted.
(6) This is particularly so when the Creditor would merely receive an astonishingly low return of HK$262,076.23 after five years out of its debt of RMB30,126,650.84 should the Proposal be approved.”
3.In light of the above criticism and the assurance given by the Debtor’s counsel that a further nominee’s report would satisfy the Creditor’s concern, the IO Application was adjourned to 30 September 2024 for a second call-over hearing and the Nominee was directed to carry out independent investigation and verification of the Debtor’s statement of assets and liabilities as set out in the Statement, including but not limited to matters raised in paragraphs 15(5) and 16(3) of C’s 1st Skeleton, and file and serve on the Petitioning Creditor a further nominee’s report as aforesaid on or before 16 September 2024.
4.During the adjournment, the Debtor took out a time summons on 16 September 2024 seeking a 28-day extension for filing and serving the further nominee’s report, whereas the Creditor took out the Discovery Summons on 25 September 2024.
5.Both summonses were returnable before me on 30 September 2024, the second call-over hearing of the IO Application. After protracted arguments on both summonses, the time for the Debtor to file and serve the further nominee’s report under paragraph 1 of the order of the first call-over hearing dated 29 July 2024 (“§1 of 29/7 Order”) was extended to 28 October 2024 on unless basis with the sanction of dismissal of the IO Application in the event of default. The call-over hearing of the IO Application and the Creditor’s Discovery Summons were adjourned to 8 November 2024.
6.Despite that a further nominee’s report was filed within time on 28 October 2024 (“2nd Nominee’s Report”), the Creditor submitted at the third call-over hearing of the IO Application on 8 November 2024 that the Debtor has breached the qualitative requirement of the Unless Order, which was denied by the Debtor. Parties did agree that the issue of any non-compliance of the Unless Order and the Creditor’s Discovery Summons were to adjourn for substantive argument which was then fixed for 11 February 2025. The Creditor subsequently took out the Dismissal Summons on 28 January 2025 for dismissing the IO Application for breach of the Unless Order.
LEGAL PRINCIPLES
7.Both parties refer me to the approach of construing an unless order and how to decide whether there is compliance summarized by DHCJ Yeung (as he then was) in Silver Universe Investments Ltd v China Times Securities Ltd [2019] HKCFI 834 at §§18 – 24 :
(a) The starting point is the natural and ordinary meaning of the words used in light of the syntax, context and background in which those words are used; (§18)
(b) What additional principles and factors come into play will depend on the nature of the writing to be interpreted and will be highly dependent on the facts of the specific case; (§18)
(c) To identify the default event, ie, whether it is the default in undertaking the step ordered by the court within the stipulated time or the qualitative adequacy of undertaking that step; (§§19 – 20)
(d) In most cases, and in particular in cases where an unless order is made to secure compliance of the Rules of the High Court, the default event is the failure to undertake that step rather than the qualitative adequacy of that step, unless it can be said that the compliance is not made in good faith or illusory; (§20)
(e) The general position is that an unless order should be construed as a time order, unless there is clear wording and the history of the proceedings point to a contrary interpretation. (§24)
CONSTRUCTION OF THE UNLESS ORDER
8.The issues in dispute of the Unless Order are about the construction of it as to:
(a) whether it is a time order only;
(b) whether the independence of the Nominee can be regarded as a “default event”; and
(c) whether the Debtor / Nominee has complied with the Unless Order.
9.The wording of the Unless Order is as follows:
“Unless the Debtor do file and serve a further nominee’s report under paragraph 1 of the Order dated 29 July 2024 by 4 pm on 28 October 2024, the IO Application of the Debtor be dismissed with costs to the Petitioning Creditor;”
10.The full text of §1 of 29/7 Order is as follows:
“The Nominee do carry out independent investigation and verification of the Debtor’s statement of assets and liabilities as set out in the Statement, including but not limited to matters raised in paragraphs 15(5) and 16(3) of the Petitioning Creditor’s Skeleton Submissions dated 25 July 2024, and file and serve on the Petitioning Creditor a further nominee’s report on the Proposal as aforesaid on or before 16 September 2024;
11.Before considering what is the default event of the Unless Order, it is worth to note that unlike the aforesaid Silver Universe case, the Unless Order is not made to secure the Debtor’s compliance of the Rules of the High Court, but to secure the compliance of §1 of 29/7 Order, which has been specified in clear wording in the Unless Order.
12.When looking at the procedural history, it is important to note the purpose of directing the Debtor to provide a further nominee’s report at the first hearing of the IO Application on 29 July. It is undeniable that §1 of 29/7 Order was made as a result of the queries and the attack by the Creditor’s counsel on the first nominee’s report[1]. In light of the deficiencies of the first report, I agreed that it called for a supplemental report and the direction as per §1 of 29/7 Order was made in such clear wording that the Nominee has to carry out independent investigation and verification of the Debtor’s statement of assets and liabilities as set out in the Statement and matters raised by the Creditor’s counsel in §§15(5) and 16(3) of C’s 1st Skeleton.
13.Besides, the Debtor’s counsel did not oppose to the direction of submitting a further nominee’s report in terms of §1 of 29/7 Order, and assured the court that a further nominee’s report would sufficiently satisfy the concerns of the Creditor.
14.When the Debtor took out the summons on 16 September 2024 for extending the time for filing and serving a further nominee’s report, it did specify the further report to be made under §1 of 29/7 Order.
15.In light of the aforesaid procedural history and the clear wording specifying that a further nominee’s report should be made under §1 of 29/7 Order, the Debtor is not allowed to lodge any further nominee’s report as he thinks fit. I disagree with the Debtor’s counsel that independent investigation and verification by the Nominee is a “highly nebulous concept” and “plainly not suitable as a default event”[2].
16.By the same token, I also do not agree with the Debtor’s counsel that the Unless Order shall be construed as a mere time order, but an order imposing a qualitative requirement of carrying out independent investigation and verification of the Debtor’s statement of assets and liabilities for the further nominee’s report with sanction for failure to comply.
ANY BREACHES OF THE UNLESS ORDER
17.In paragraphs 22 to 24 of the Skeleton Submissions for the Debtor dated 6 February 2025, counsel for the Debtor summarized the investigation and verification carried out by the Nominee as stated in the 2nd Nominee’s Report as follows:
(a) conducted a land search for the Tai Po Property;
(b) questioned the Debtor’s financial position at the time of the sale of his Tai Po Property;
(c) requested the Debtor to provide supporting documents for the transactions shown in his bank statements;
(d) inquired the Debtor about the Shatin Creditors who are sharing the same address.
18.Debtor’s counsel submitted that paragraph 1 of the Unless Order has been complied with and the compliance is not illusionary. As to whether the evidence adduced so far is sufficient for the court to grant an interim order, the Debtor’s counsel suggested that it should be dealt with at the substantive hearing of the IO Application.
19.Notwithstanding the claim of compliance with the Unless Order relying on the summary of work done by the Nominee in paragraph 17 above, the following excerpts of the 2nd Nominee’s Report seem to suggest otherwise:
(a) Regarding the disposal of Tai Po Property:
“… The Debtor further informed me that the remaining surplus after repayment of the three mortgages was utilised to settle his debts. However, he was unable to provide further supporting documentation given the time of sales was two years ago.” (§13)
(b) Regarding the bank statements:
“Nevertheless, I have noted from the bank statements that there were a large number of transactions made during the period, and I have requested the Debtor to provide the nature of and supporting documentation of these transactions (“Requested Information”). Given the volume of the transactions made, the Debtor has yet to provide the Requested Information as of the date of this report. However, the Debtor believe that there was no transaction at an undervalue, preference and extortionate credit transaction which would fall under section 49, 50 and 71A of the Ordinance.” (§17)
(c) Regarding the Shatin Creditors:
“I noted that the Petitioning Creditor questioned the existence of Creditors No.5 to No.12 from the SOA given that they shared the same address in Shatin (collectively the “Shatin Creditors”). In preparing the 1st Nominee Report, I have enquired the Debtor on the Shatin Creditors, and the Debtor had explained that the debt for Creditors No.6 to No.11 originally belonged to Creditor No.5, namely Mr Lam Wing Tak (“Mr Lam”). In or around 2021, Mr Lam sold the debt to Creditors No.6 to No.11, respectively. The Debtor further confirmed that Chan Siu Lan, i.e. Creditor No.12, is in fact the wife of Mr Lam (Creditor No.5).” (§20)
“I further questioned the Debtor about the reason the Shatin Creditors share the same address. The Debtor explained that he does not have knowledge of the contacts details for Creditors No. 6 to No. 11 as the debt was sold by Mr Lam (Creditor No.5). Nevertheless, the Debtor had reached out to Mr Lam and Mr Lam had confirmed that he acts as an agent for Creditors No. 6 to No. 12.” (§21)
“After considering the above, I do not consider the Debtor had omitted any information in relation to Creditors No.5 to No.12 that would suggest those creditors not being genuine and thus the SOA being not full and frank.” (§22)
(d) Regarding the conclusion:
“The Debtor has fully co-operated with me during my involvement in the preparation of the Proposal. Save and except the Requested Information, he has supplied me with all information and documents that I have requested. He has attended meetings whenever required.” (§24)
“From the information and documents available to me and subject to the review of the Requested Information, I do not consider the Debtor’s SOA being not full and frank. On this basis, it is my opinion that a meeting of creditors should be convened to consider the Proposal and that Notices convening the meeting of creditors, together with supporting documentation, be sent to the creditors in accordance with the Ordinance and the Rules.” (§25)
20.The above excerpts indicate that:
(a) The Nominee has accepted Debtor’s mere assertion in respect of (i) the surplus after the disposal of Tai Po Property, (ii) all transactions not being at an undervalue, unfair preferences and extortionate credit transactions, and (iii) the issue of Shatin Creditors without any supporting documents and the Requested Information from the Debtor, but just relying on the Debtor’s belief (§17 refers).
(b) The Nominee has failed to verify the Debtor’s assertion regarding the Shatin Creditors independently from any of the Shatin Creditors or from any documents.
(c) The Nominee concedes that his acceptance of the Debtor’s Statement being full and frank is subject to review of the Requested Information to be provided by the Debtor (§25 refers).
(d) Given the Debtor’s failure to provide the Requested Information, the Nominee’s qualified conclusion plainly does not sit well with his recommendation for convening a creditors’ meeting to consider the proposal.
21.In light of the above, I am of the view that the Nominee has not carried out independent investigation and verification of the Debtor’s Statement as required by the Unless Order. Therefore, I find that the Debtor has been in breach of such order.
RELIEF FROM SANCTION (if any)
22.O.2 r.4 of the Rules of the High Court provides:
“Where a party has failed to comply with a rule or court order, any sanction for failure to comply imposed by the rule or court order has effect unless the party in default applies to the Court for and obtains relief from the sanction within 14 days of the failure.”
23.As the Debtor has not made any formal application for relief from sanction accordingly, the sanction of the Unless Order should have taken effect automatically. However, the Creditor’s counsel has drawn my attention to the case of Li Yulong v Liu Jing [2024] HKCFI 3163 at §4.1 where Deputy High Court Judge Jonathan Wong followed Daimler AG v Leiduck [2012] 3 HKLRD 119 at §§57-67 and held that a court may grant relief from sanction even in the absence of a formal application of the same.
24.All along the Debtor’s stance is that the Unless Order has been complied with and there are no breaches. The Debtor has therefore made no application for relief and adduced no evidence to explain for his failure to comply, or to demonstrate that his failure to comply was not intentional or contumelious. Further, no such application has been mentioned as an alternative in the skeleton submissions for the Debtor lodged by his counsel on 6 February 2025.
25.In the circumstances, there is no basis for this court to make any findings in favour of the Debtor upon considering the factors as per O.2, r.5(1).
26.Besides, unlike Chan Luen v Chan Kwong Chi [2019] HKCFI 2829 and Li Yulong v Liu Jing [2024] HKCFI 3163 which are cases dealing with partial non-compliance of an unless order, the present application is not. The consideration of the question of proportionality of the sanction in this application is therefore different from the aforesaid partial non-compliance.
27.Having considered the all the circumstances, I am of the view that it is not appropriate to exercise my discretion to grant relief from sanction against the Debtor for the following reasons:
(a) The nominee’s independent investigation and verification is essential in assisting the court to decide whether the proposal is serious and viable and whether the court shall direct a creditors’ meeting to be held.
(b) The main reason for requiring the Debtor to submit a further report is because of the failure of the first report to demonstrate that Nominee has carried out his duty of independent investigation and verification of the Debtor’s statement of assets and liabilities. Despite the alleged extra effort made by the Nominee, the 2nd Nominee’s Report again fails to demonstrate that the Nominee has carried out his most important duty. Thus such non-compliance is far from substantial compliance.
(c) Therefore, the sanction of dismissal of the IO Application for the non-compliance of the Unless Order which requires the Nominee to carry out his essential duty is not disproportionate in the circumstances.
(d) Further, as there is a public interest in bankruptcy proceedings which would affect the third parties, the present application should be processed quickly. It is thus inappropriate to give the Debtor another chance to submit a third Nominee’s Report by granting relief from sanction with conditions pursuant to O.2, r.3.
CONCLUSION
28.For the aforesaid reasons, the sanction of dismissal of the IO Application shall take effect for the Debtor’s failure to comply the Unless Order without any relief from sanction granted.
29.Since the IO Application is dismissed, it is unnecessary to further consider the Creditor’s other two applications of Discovery Summons and EoT Summons. Subject to the issue of costs to be decided, no order is made in respect of these two summonses.
COSTS
30.As costs should follow the event, the Debtor shall pay the Creditor costs of the IO Application.
31.Regarding the issue of costs of the Discovery Summons, I think it was premature to take out such application on 25 September 2024 when the Debtor had not yet complied with the §1 of 29/7 Order to file and serve the 2nd Nominee’s Report and the Debtor’s summons for extending the time to comply with the 29/7 Order had also not been heard by then.
32.It is pertinent to consider the 2nd Nominee’s Report when the court is to decide whether it is necessary to grant leave to the Creditor to obtain specific discovery or administer interrogatories against the Debtor.
33.As the IO Application is dismissed for the aforesaid reasons, it is now academic to discuss if it is necessary to grant leave for the Discovery Summons either for disposing fairly of the cause or matter or for saving costs. Therefore, it is appropriate to make no order as to costs.
34.Despite the intended costs order as per paragraph 2 of the EoT Summons being costs of the application to the Debtor, I also make no order as to costs, as this application is now water under the bridge.
DISPOSITION
35.For the above reasons, the following order is made:
(a) The Debtor’s IO Application is dismissed on the ground that the Debtor is in breach of paragraph 1 of the Unless Order.
(b) No order is made in respect of the Creditor’s Discovery Summons and the EoT Summons (and as to costs).
(c) There be an order nisi that the Debtor shall pay the Creditor costs of the IO Application (including the costs of the Dismissal Summons and reserved costs if any), to be summarily assessed.
(d) The Creditor shall lodge and serve a statement of costs for summary assessment within 7 days hereof and the Debtor shall lodge and serve a statement of objections within 7 days thereafter, and the summary assessment will be dealt with by paper disposal.
(e) The costs order nisi shall become absolute after 14 days from the date hereof, unless parties make any applications by way of inter-partes summons to vary it within such time.
(f) No order is made as to paragraph 3 of the Dismissal Summons. The Creditor shall make such application in HCB 2619/2024.
(g) The adjourned hearing of the IO Application scheduled for 17 June 2025 be vacated.
36.Lastly, I thank Mr Yip and Mr Leung for their assistance rendered to this court.
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(S P Yip) |
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Master of the High Court |
Mr Richard Yip and Ms Winky Wong, instructed by Eviana Leung & Partners[3] for the Debtor
Mr Raphael Leung, instructed by H Y Leung & Co LLP for the Creditor
[1] See paragraph 2 above.
[2] Paragraph 19 of the Skeleton Submissions For the Debtor dated 6 February 2025.
[3] The Debtor’s solicitors have been changed to Eviana Leung & Partners pursuant to the Notice of Change of Solicitors filed on 20 January 2025 and the Notice of Change of Name of the Debtor’s Solicitors filed on 21 March 2025.
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