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HCB7469/2010
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
BANKRUPTCY PROCEEDINGS NO.7469 OF 2010
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BETWEEN
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| Re: |
CHIN WAI KAY GEORDIE (錢偉基), the Debtor |
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and
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| Ex Parte: |
MOK YU HON, the Petitioner |
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Before : Deputy High Court Judge Coleman SC in Court
Date of Hearing : 9 June 2011
Date of Judgment : 9 June 2011
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JUDGMENT
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Introduction
1.This is the hearing of a Bankruptcy Petition for Default in Connection with Voluntary Arrangement dated 18 October 2010, brought by Mr Mok Yu Hon as Petitioner, and it seeks a Bankruptcy Order to be made against Mr Chin Wai Kay Geordie.
2.The Petition is presented by Mr Mok as creditor under section 3(1)(c) of the Bankruptcy Ordinance Cap. 6(“the Ordinance”), relying upon the provisions of section 20L of the Ordinance. (Unless the context otherwise makes clear, all references in this judgment to numbered sections are to sections in the Ordinance.)
3.Mr Chin had previously applied for an interim order pursuant to sections 20 and 20A on the grounds that he intended to make a proposal to his creditors for a voluntary arrangement under the Ordinance. There were two meetings of creditors at which no arrangements were approved, but at a third creditors meeting held on 17 March 2009, a voluntary arrangement was approved.
4.Subsequently, as one of the Challenging Creditors, Mr Mok sought to challenge the decision made approving the voluntary arrangement, on the grounds of suggested material irregularities at or in relation to the meeting on 17 March 2009. The hearing of that application came before Harris J on 27 April 2010, and the application was dismissed in a Judgment dated 11 June 2010.
5.It is in the light of the dismissal of that application, and the reasons given for the dismissal, that Mr Mok now makes application for a bankruptcy order against Mr Chin under section 3(1)(c).
6.Mr Mok was represented at today’s hearing by Ms Josephine Tjia of counsel. She had not acted in the previous application heard by Harris J. Mr Chin was represented at today’s hearing by Mr Ivan Cheung, who also conducted the hearing before Harris J on behalf of Mr Chin. The attendance of the Official Receiver had been excused.
Background
7.A detailed review of the background of the matters up until April 2010 is set out in the judgment of Harris J dated 11 June 2010 (reported at [2010] 3 HKLRD 456). I gratefully adopt that review for the purposes of these proceedings.
8.Under the heading “Background”, Harris J said as follows:
3. On 17 July 2008 Mr Lui Wing Sing Raymond, who supports the present application, issued a bankruptcy petition against the debtor. The debtor responded to the petition by filing on 22 September 2008 both a notice of intention to oppose the petition and also an application for an interim order under sections 20 and 20A of the Ordinance. The proposal dated 22 September 2008 produced by the debtor in support of the application for an interim order recorded him as having 3 unsecured creditors. The application was supported by a nominees’ report dated 8 December 2008 as well as a supplemental proposal for a voluntary arrangement that had been filed on 5 December 2008. The nominees are 2 certified public accountants, Leung Wing On, Louis and Cheung Hok Hin, Alan. They were appointed by the debtor. The petitioner and the applicants filed notices of opposition. Master J Wong granted an interim order on 9 December 2008.
4. A meeting of creditors was summoned for 6 January 2009 pursuant to section 20E of the Ordinance. At the time of the preparation of the nominees’ report the debtor apparently had told the nominees that he had total debts of $5,400,000 and they estimated that the recovery under the proposed arrangement would be 23.69%. In paragraph 6 of their report the nominees state that they are satisfied that the proposal complies in all material respects with the Ordinance. According to the Chairman’s report dated 23 March 2009 (the Chairman was Alan Cheung, one of the nominees) dealing with meetings on 6 January, 13 January and 23 March 2009 it was apparent that the requisite statutory majority of 75% in value of debts voted by creditors present in person or by proxy as required by rule 122Q of the Bankruptcy Rules would not be obtained at the meeting on 6 January if the proposed arrangement were put to a vote. Six creditors attended that meeting in person or in proxy: (1) Lui Wing Shing Raymond (2) Reliable Cargo Agency Ltd. (3) Wong Ying Sheung (4) Mok Yu Hon (5) So Kam Hung (6) Garwin Engineering Limited. The total value of the debt owed to these 6 creditors as estimated by the debtor was HK$9,599,861 and the amounts claimed by the creditors was HK$15,247,107. The schedule to the report containing this information records, for reasons that are not apparent, how these creditors voted on the substantive resolution. I assume that in fact what were recorded were the indications as to how they intended to vote. Raymond Lui, Mok Yu Hon and Garwin, who represented 49.3% of the debtors, indicated that they would vote against the resolution.
5. According to the report the Chairman adjourned the meeting. It would appear that the meeting itself did not vote on the question of an adjournment as Rule 122S(2) requires. The nominees did not report the decision of the meeting to the court as required by section 20G of the Ordinance until 23 March 2009.
6. The adjourned meeting took place on 13 January 2009. An additional creditor, Yip Wai Kuen, attended by proxy. The resolution was put to a vote. Mr Yip voted in favour, but this was still insufficient to achieve the statutory majority. Only 62.95% of creditors voted in favour of the proposal. According to the Chairman’s report dated 23 March 2009 the debtor placed no value on Mr Yip’s claim (as was the case with Garwin’s claim) but the amount of the claim voted was HK$5,083,014 and it increased the total claims to HK$20,330,121.
7. On 20 January 2009 the debtor applied to extend the period of the interim order made on 9 December 2008. The application was supported by the debtor’s 4th affirmation and a supplemental report from the nominees dated 18 February. The debtor stated in his 4th affirmation, and this was confirmed by the nominees in their report, that a new creditor had come forward, Becentral International Limited (‘Becentral’), with an estimated claim of HK$11,700,000. Becentral supported the proposal, which meant that the statutory majority would be achieved. Presumably in the light of this information on 23 February 2009 Master Wong ordered that the interim order be extended until 21 April 2009 to enable a further meeting of creditors to re-consider the debtor’s proposal. The meeting took place on 17 March 2009. Three new creditors attended this meeting in person or in proxy: (1) Becentral claiming HK$15,081,998 (2) Cheery Group Limited (‘Cheery’) claiming HK$4,139,344 (3) Ng Tak Chi claiming HK$1,691,633. Becentral and Cheery voted in favour of the proposal and Mr Ng voted against. As a result 78.75% of creditors voted in favour and the statutory majority was obtained. I note that the debtor (once again according to the Chairman’s report dated 23 March) did not include an estimate for the claim of Mr Ng but he accepted the claim of Becentral and Cheery in full. This increased the debtor’s estimate of his debt to HK$33,002,898 and the amount claimed by creditors who voted at the meeting on 17 March to HK$94,400,696.
8. The applicants (supported by Mr Lui) challenge the decision at the meeting on 17 March 2009 on the basis that the interim voluntary arrangement regime has been manipulated. Rule 122C(2)(c) of the Rules requires a debtor to include in his proposal details of his creditors. The way in which information about creditors has been revealed suggests that the debtor was deliberately withholding information about his creditors. The implication is that the new creditors, in particular Becentral and Cheery with whom the debtor is connected, were only brought forward when they were needed to secure the statutory majority. They point to the fact that in his first statement of affairs dated 22 September 2008 the debtor only listed 3 creditors, Mr Lui (who petitioned for bankruptcy), Reliable Cargo Agency Limited and Wong Ying Sheung with total claims of HK$7,237,935.38. In his 2nd statement of affairs dated 5 December 2008 he added 2 more creditors: Mok Yu Hon and So Kam Hung. This increased his estimated debt to HK$9,599,861.62. On 19 January 2009 after the rejection of his proposal the debtor amended his statement of affairs again and added Garwin, Mr Yip and Becentral thus increasing his estimated debt to HK$32,030,121,74. This was increased again when during the hearing on 17 March 2009 Cheery and Mr Ng submitted their claims increasing the debt to HK$43,400,696. The applicants point to the massive increase in the debtor’s estimate of his debt that took place between 22 September 2008 and 17 March 2009 as demonstrating a troubling lack of candour in the way the debtor has approached the introduction of the voluntary arrangement. They say that the debtor clearly did not comply with his obligation under Rule 122C(2)(c) and that the court should revoke the approval of the voluntary arrangement.
9. Further they complain that the debtor failed to comply with Rule 122C(2)(c)(ii) and identify in the proposal a liability owed to an associate, in this case Cheery. Section 51B(4), (6) and (8) of the Ordinance define associate as follows [definition redacted].
10. The applicants say that various matters demonstrate that Cheery is an associate of the debtor and that Cheery should have been identified as an associate of the debtor. I summarise these below along with the debtor’s evidence in relation to them.
(a) The registered shareholder of Cheery, which is a BVI company, is Miss Wong Po Chu Annike Rkina. However, in an affirmation made on 27 June 2007 filed in proceedings in the High Court brought by the debtor against Mr Lui she describes herself as the debtor’s secretary. In paragraph 4 of his 5th affirmation and paragraphs 4 to 6 of his 6th affirmation the debtor describes Miss Wong and his relationship with her as follows:
‘4. To the best of my information and belief and as revealed from the certificate of incumbency dated 26th June 2007, Cheery Group Limited was owned by Ms Wong Po Chu Annike Rkina (‘Ms Wong’). Ms Wong and I had business dealings from time to time. Due to our business relationships, Cheery Group Limited made various loans to me totaling HK$2.9 million in 2007 and 2008 as included in my Further Supplemental Proposal for Voluntary Arrangement (‘My Proposal’). I also acted as guarantor for the loan of US$1.5 million made by Becentral International Limited to Cheery Group Limited in 2007 which was also included in My Proposal.
4. As mentioned in my 5th Affirmation filed herein on 23 July 2009, I had business dealings with Ms Wong Po Chu Annike Rkina (‘Ms Wong’) from time to time. I have known Ms Wong since around 2004 when we both worked in the Dickson Group. In fact both Mr Lui Wing Shing Raymond and Mr Mok Yu Hon, one of the challenging creditors, worked in the Dickson Group at the material time and they both knew about Ms Wong. At the time when we worked at Dickson Group, I was the Chief Executive Officer, Mr Lui Wing Shing Raymond was the Contract Manager, Mr Mok Yu Hon was the Project Manager and Ms Wong was the Business Coordinator. Mr Lui, Mr Mok, Ms Wong and I were all colleagues and business associates. In about 2006, Ms Wong and I left the Dickson Group and started to work under Sky Holdings Group Limited (‘Sky Holdings’), my present employer. Currently Ms Wong is a senior manager of Sky Holdings. She has been primarily responsible for business development and her duties also include providing secretarial assistance to me and another director of Sky Holdings.
5. Against this background, I made the application to authorize Ms Wong to appear for the hearing and making the application for adjournment on my behalf for the appeal case CACV38 of 2006 in June 2007. Ms Wong also filed the affirmation to the court in the capacity of my secretary for seeking adjournment of hearing for the said case.
6. To the best of my information and belief, Ms Wong is a businesswoman and has engaged in various business activities besides her employment with Sky Holdings.’
(b) Cheery purchased a property at Monte Carlton on 18 February 2008. Although the debtor says he is in no way related to Cheery he was the person who signed the sale and purchase agreement. The debtor’s evidence in relation to this matter is in paragraph 5 of his 5th affirmation and paragraph 7 of his 6th affirmation.
‘5. In about February 2008, Ms Wong informed me that Cheery Group Limited intended to make a property investment by purchasing the Property. Ms Wong also invited me to rent the Property at a favourable rental. I accepted Ms Wong’s suggestion. At the time of signing of the SP Agreement, Ms Wong was out of town and therefore she authorized me to sign the SP Agreement on behalf of Cheery Group Limited. After completion of the purchase of the Property, I rented the Property as agreed.
7. As explained in my 5th Affirmation filed herein on 23 July 2009, Ms Wong authorized me to sign the agreement for sale and purchase and the assignment in respect of ‘Flat A, 1st Floor, Block 7, Monte Carlton, No. 363 Tai Po Road, Kowloon, Hong Kong’ (‘Monte Carlton’) for convenience sake due to our working relationship. The property was purchased by Cheery Group Limited which was owned and controlled by Ms Wong.’
(c) The debtor and his Family lived in the property purchased by Cheery, which is not in dispute.
(d) Cheery mortgaged a property to a Mr Tang Tzu Kuang on 12 December 2008, but under the loan agreement the debtor is described as the borrower. This was after the bankruptcy petition was issued on 17 July 2008. The debtor’s evidence in relation to this matter is in paragraphs 6and 7 of his 5th affirmation.
‘6. I refer to paragraph 3(b) of Mok’s Affirmation where it was mentioned that I entered into a Mortgage dated 12 December 2008 (‘Mortgage’) as borrower, Cheery Group Limited as the mortgagor and Tang Tzu Kuang (‘Lender’) as mortgagee.
7. The Mortgage was to secure a loan made by the Lender to Cheery Group Limited. The loan was arranged by me. Since the Lender did not know about Cheery Group Limited, the Lender insisted that I be added as a party to the transaction. Although I was named as ‘borrower’ in the Mortgage, in fact the loan from the Lender were advanced to Cheery Group Limited for its use. It was intended that the Lender will go after Cheery Group Limited for repayment of the said loan. The Lender was aware of my application for interim order herein and agreed not to take any actions against me regarding the Mortgage. Therefore I did not include the Mortgage in My Proposal.’
(e) On 6 June 2009 Cheery assigned the property to Wealthy Eagle Investments Limited (‘Wealthy Eagle’) of which Miss Wong was the director and the debtor was the company secretary. On 15 June 2009 Wealthy Eagle purported to sell the property to Net Pacific Finance Limited (‘Net Pacific’) for HK$2,800,000, but the completion date was 1 year after the date for the payment of the purchase price. Miss Wong and the debtor guaranteed Wealthy Eagle’s performance of the sale and purchase agreement and in particular repayment of the purchase price. The applicants characterise this transaction as being in reality a secured loan. The debtor comments on these transactions in paragraphs 8 and 9 of his 6th affirmation.
‘8. To the best of my information and belief, Wealthy Eagle Investment Limited (‘Wealthy Eagle’) was also a company owned and controlled by Ms Wong. I was asked by Ms Wong to assist her by acting as the secretary of Wealthy Eagle.
9. I was further asked by Ms Wong to provide a guarantee in favour of Net Pacific Finance Limited (‘Net Pacific’) for the performance of Cheery Group Limited’s obligations for the sale of Monte Carlton to Net Pacific. In view of my business relationship with Ms Wong, I agreed to provide such guarantee.’
(f) The place of residence given by the debtor in his 5th affirmation is not Monte Carlton but another property at The Parcville, which is registered in the name of Miss Wong. The debtor says that Miss Wong rented this to him when Cheery sold Monte Carlton for HK$6,000 per month.
(g) The information disclosed about the debts owed by the debtor to Cheery record him as having borrowed HK$2,900,000 between 18 July 2007 and 19 December 2007, but not repaying anything.
(h) The debtor guaranteed a loan of US$1,500,000 by Becentral to Cheery; which is the loan that gives rise to Becentral’s claim against him.
11. The applicants also complain that the debtor failed to disclose 2 liabilities, namely, that he had borrowed money secured on a property owned by Cheery and guaranteed a transaction between Wealthy Eagle and Net Pacific on 15 June 2009 in other words after the bankruptcy petition was issued on 17 July 2008. Mr Cheung who appeared for the debtor argued that as the debt arose after the presentation of the petition it did not have to be mentioned because if the creditor had notice of the petition by virtue of section 34(2) of the Ordinance he could not prove in the bankruptcy. There is, however, no evidence that Net Pacific knew of the bankruptcy petition.
12. In addition to the debtor’s failure to disclose all his liabilities the applicants also point out that he failed to disclose assets, namely, an overseas bank account with the United Overseas Bank in Singapore, through which he handled significant payments including those with Cheery and a membership of the Chinese Recreation Club. The debtor’s response is that he forgot about the bank account because of lapse of time and the fact that it only had Sing $225 in it and that he had sold his membership of the Chinese Recreation Club to his present employer, Sky Holdings, for HK$600,000 with the continued right to use it and an option to buy it back at HK$360,000 or 60% of the market price, whichever is the higher. Miss Wong also works at Sky Holdings.
13. As I have mentioned above one of the debtor’s creditors is Reliable Cargo. That debt arises under a deed dated 10 April 2008 guaranteeing a loan allegedly advanced to Zotos Investments Limited (‘Zotos’) under a loan agreement of the same date. However, Zotos has been in liquidation since 18 December 2007 and the liquidator, Stephen Liu of Ernst & Young, has confirmed that Zotos did not enter into any such arrangement after it was wound up. The debtor’s explanation for this is that the payments were made in 2006, as demonstrated by cheques he has produced, and that he gave an oral guarantee at that time. What is not explained is why he saw fit to sign a guarantee at a time when he must have known Zotos could not pay and it was likely to be called. Neither has he explained why there was no apparent demand for repayment.
14. Finally, the applicants have raised concerns about the claim by Madam Yip Wai Kuen under a guarantee given by the debtor of loans made by her to the Dickson Group Holdings Limited. They had originally asked whether this is the same person (which it is now known she is) mentioned in an announcement by Dickson Group Holdings Limited, which is now in liquidation, signed by the debtor. The concern was that the assessment of her claim ignored repayment of HK$454,500 made to her under a scheme of arrangement in respect of Dickson’s debt thus reducing the amount guaranteed by the debtor; which as it transpired it did.”
9.Following the handing down of Harris J’s judgment on 11 June 2010, there was a period of approximately 4 months before the current petition was issued on 18 October 2010.
Harris J’s decision
10.At the hearing before Harris J, counsel then acting for the Challenging Creditors (including Mr Mok) submitted that there were three ways in which the court could properly interfere with the decision made at the meeting: first, under the inherent jurisdiction; secondly, under section 20J of the Ordinance (which allows the court to revoke any approval if a material irregularity has been demonstrated to have occurred in relation to a meeting); thirdly, under section 20L of the Ordinance (which allows the court to make a bankruptcy order even if creditors have approved an interim voluntary arrangement if it is satisfied that information, which was false or misleading in any material particular, was contained in a statement of affairs supplied by the debtor under sections 20 to 20K).
11.Harris J held that as interim voluntary arrangements and the bankruptcy regime generally are entirely creatures of statute, there is no residual inherent jurisdiction which might allow the court to revoke the arrangement simply because the court might conclude that it is desirable or right to do so. There must be a statutory remedy.
12.As to the challenge under section 20L, Harris J set out the provisions of the section, which are:
“20L. Default in connection with voluntary arrangement
(1) The court shall not make a bankruptcy order on a petition under section 3(1)(c) (nominee of, or person bound by, voluntary arrangement proposed and approved) unless it is satisfied—
(a) that the debtor has failed to comply with his obligations under the voluntary arrangement; or
(b) that information which was false or misleading in any material particular or which contained material omissions -
(i) was contained in any statement of affairs or other document supplied by the debtor under sections 20 to 20K to any person; or
(ii) was otherwise made available by the debtor to his creditors at or in connection with a meeting summoned under those sections; or
(c) that the debtor has failed to do all such things as may for the purposes of the voluntary arrangement have been reasonably required of him by the nominee of the arrangement.”
13.He then pointed out, at [19], that the section is engaged “on a petition under section 3(1)(c)”, but that no such petition had been presented in the case. As a result, it followed that the court could not make a bankruptcy order under section 20L.
14.Nevertheless, Harris J pointed out, at [18], that he agreed with the submission that the various matters to which he made reference in his “Background” section (which I have adopted in this decision: see above) came within subsection 20L(1)(b). Therefore, but for the technical difficulty arising from the lack of a petition under section 3(1)(c), he would have made a bankruptcy order.
15.Harris J expressed his findings as to the suggested irregularities as follows:
“As I have explained earlier the applicants argue that there are a number of different irregularities that have arisen in the present case, which can be divided into 3 categories. First, a failure to provide accurate information in the statement of affairs and the proposal; secondly a failure to comply with Rule 122(2)(c)(ii) and identify a liability owed to an associate (Cheery) and thirdly a further failure to disclose liabilities arising after the presentation of the petition, namely, as a borrower of money secured on a property owned by Cheery and as a guarantor of a transaction between Wealthy Eagle and Net Pacific. I accept that the debtor’s undisputed failure to include all creditors in the statement of affairs and proposal is an irregularity. I also accept that Cheery is an associate of the debtor and that the failure to include this information in the proposal was an irregularity.”
16.He then explained why he reached that conclusion, though I do not think I need to set out the full reasoning in this judgment, as it can be read. In short, as regards Cheery for example, he considered that the underlying facts which are not in dispute allowed him to infer that on the balance of probabilities Cheery is a company over which the debtor has control. It was, therefore, an associate of the debtor and this should have been stated in the proposal. This conclusion suggests that Cheery is the debtor’s nominee and that Cheery should have been included as an asset in his statement of affairs.
17.Ultimately, Harris J also declined to make an order under section 20J. He did so on the basis that he was not satisfied that the irregularities were “material” within the meaning of that section. He accepted the submission, at [26], that “it has not been shown that it is likely that if the irregularities had not occurred the result of the meeting would have been different and that they are not material in the sense described in Cadbury Schweppes plc v. Sonji”. (This is a reference to a decision reported at [2001] 1 WLR 615, in which Robert Walker LJ, as he then was, set out at [25] some guidance as to how “materiality” in this context should be assessed.)
18.Harris J then seemed (on what I consider to be the correct reading of what he said) to draw a distinction between the approach as regards section 20J and that as regards section 20L. He said, at [26]:
“I do not think that “materiality” in [section 20J] can fairly be read as extending to more general considerations concerning manipulation of the statutory regime. Section 20L provides a remedy in cases in which the court concludes, as I have, that a debtor has provided information which is false or misleading or which contains material omissions in the documents supplied by the debtor under sections 20 to 20K and consequently that it would be inconsistent with the provisions and intent of the Ordinance to allow the debtor to avoid bankruptcy and implement a voluntary arrangement. The difficulty in the present case is that the applicants have not formulated their application properly and this is why, unfortunately, they must lose.”
19.In the report of the judgment, the square-bracketed reference to “section 20J” in the first line of the above quote is actually written as a reference to “section 20L”. However, for the reasons upon which I will expand below (and in line with the view of Ms Tjia but contrary to the submission made by Mr Cheung) it seems to me that that is a typographical error, and the correct reference in that line is to “section 20J”.
20.Harris J then went on, at [27], to add some general comments about the introduction of voluntary arrangements. He pointed out that:
“The statutory scheme for voluntary arrangements is an attempt to balance the rights of creditors and a more general social interest in debtors being given the opportunity to resolve their financial problems constructively. There will be many cases in which viewed objectively creditors are not advantaged by a debtor being bankrupted as this may affect his ability to continue to work or to maximise the value of his assets. It is undesirable in these circumstances both from the perspective of the bankrupt and his creditors for him to be bankrupted. The voluntary arrangement regime allows 75% of creditors in value to accept a proposal from a debtor to avoid bankruptcy. It prevents one creditor with a minority of the debt who could otherwise insist on bankruptcy, perhaps for no other reason than malevolence, insisting on a bankruptcy order being made. It is, however, important that the regime is not abused. It is important that creditors are not left feeling for legitimate reason that the process has been manipulated unfairly to relieve a debtor of his obligations and deprive them of their prima facie right to have a bankruptcy order made against him. Most creditors will be dependant upon the good faith of the debtor and the diligence of the nominees to ensure that they are provided with all relevant information and that the regime is not abused. They will normally have limited opportunity independently to scrutinise the veracity of the information provided to them and in my view there is no reason why they should be expected to spend much in the way of time and money doing so. It also needs to be borne in mind in this context that the nominees are proposed by the debtor and have a financial stake in the process because they are paid if a proposal is adopted. They must be scrupulous to ensure that they act fairly and properly. In the present case they should have put the question of an adjournment of the first meeting to the creditors who were present. They should have reported what would have probably been the rejection of the proposal to the court. In my view their reports to the court should have clearly identified the unsatisfactory way in which the debtor had compiled his statement of affairs and proposals and that as a consequence it is uncertain, as in my view it is, whether he had been frank and revealed all his assets and liabilities.”
21.Harris J also accepted that it was quite understandable that the applicants in the case felt disquiet about the way in which the debtor had gone about introducing a voluntary arrangement. He agreed that it does look like the debtor has added friendly creditors when he needed them to vote for the voluntary arrangement. He pointed out that there were certain unanswered questions, and the generally unsatisfactory way in which the debtor compiled his statements of affairs and proposal, which led him to conclude that there is good reason to question whether he has dealt honestly with his creditors. He again pointed out that had application been properly made under section 20L these considerations would have led him to make a bankruptcy order.
The current petition
22.Ms Tjia relies on the comments and findings of Harris J as the basis of the current application.
23.In short, she submits that where Harris J has already found that the actions of Mr Chin would fall within section 20L, and where the procedural problem has been rectified by bringing a new petition under section 3(1)(c)so that section 20L is now properly engaged, an order under that section can be made, and a bankruptcy order should be made.
24.Ms Tjia also makes the persuasive point that if the behaviour of Mr Chin had been made clear to the court at an earlier stage, it is probable that Master J Wong would not have granted the time extension at all after Mr Chin failed to convince the creditors to agree to a voluntary arrangement in the first two meetings of creditors. But I place no particular reliance on this point.
25.She also points out that in opposing this Petition, Mr Chin has simply provided the same reasons which he previously offered to Harris J, all of which material had been thoroughly considered by Harris J and in the light of which he formed his views.
26.In her skeleton argument filed for this hearing, Ms Tjia invited me to look at the same material and come to the same conclusion. She did not go so far as to say that I was in any event bound by the findings of Harris J. Nevertheless, where Harris J clearly looked at the materials in detail, and where he carefully set out his reasoned conclusions, I think I would need to be cautious in reaching different conclusions on the same materials.
27.In any event, having looked at the materials, I am in full agreement with Harris J both as to his conclusions and comments, and as to the underlying reasons for them. Even looking at the matter entirely afresh, it seems to me that there is real force in Ms Tjia’s submissions that Mr Chin has acted in a way which fulfils the criteria set out in section 20L(1)(b), in that the information contained in the statement of affairs or other documents supplied by Mr Chin under sections 20 to 20K was false or misleading in material particulars or contained material omissions.
28.In response, Mr Cheung first emphasises that there was no appeal from the judgment of Harris J dated 11 June 2010. However, I do not think that undoubted fact is to the point. It does not seem surprising to me that there was no appeal from the dismissal of the previous application in so far as it was based upon the inherent jurisdiction or section 20J, and the failure of the argument under section 20L was upon the technical difficulty which undoubtedly existed as a matter of fact. But, that does not mean that the various findings and comments made by Harris J somehow disappear; they do not. In any event, I have agreed with them on the evidence.
29.Mr Cheung then refers generally to the test of “materiality” under section 20L, by way of analogy with the similar provisions to be found in section 276 of the Insolvency Act 1986. He refers to Re Tack [2000] BPIR 164, where Rimer J observed by reference to that section:
“I consider that information in a proposal or statement of affairs will be false or misleading in a material way for the purposes of s. 276(1)(b) if, had the truth been told, it would be likely to have made a material difference to the way in which the creditors would have considered and assessed the particular arrangement to which they were being invited to agree. I consider that whether there have been material omissions for the purposes of s. 276(1)(b) is to be approached in the like way.”
30.This passage was approved by Robert Walker LJ in the passage in the Cadbury Schweppes case to which I have already made reference.
31.This reasoning is clearly entirely apposite to consideration of whether or not there is a good challenge to an approval of a voluntary arrangement at a creditors meeting. Such challenges are made, in Hong Kong, under section 20J, which provides that:
“20J. Challenge of meeting’s decision
(1) Subject to this section, an application to the court may be made, by any of the persons specified in subsection (2), on one or both of the following grounds—
(a) that a voluntary arrangement approved by a creditors’ meeting summoned under section 20E unfairly prejudices the interests of a creditor of the debtor;
(b) that there has been some material irregularity at or in relation to such a meeting.
(2) The persons who may apply under this section are—
…
(b) a person entitled, in accordance with the rules, to vote at the creditors’ meeting.
…
(4) Where on an application under this section the court is satisfied as to either of the grounds mentioned in subsection (1), it may do one or both of the following—
(a) revoke or suspend any approval given by the meeting;
(b) give a direction to any person for the summoning of a further meeting of the debtor’s creditors to consider any revised proposal he may make or, in a case falling within subsection (1)(b), to reconsider his original proposal.”
32.That is why I think that Harris J intended to refer to section 20J when he said, at [26], immediately after his acceptance that it had not been shown that it is likely that if the irregularities had not occurred the result of the meeting would have been different:
“I do not think that “materiality” in section 20L [which I read as being section 20J] can fairly be read as extending to more general considerations concerning manipulation of the statutory regime.”
33.It seems to me that the paragraph only makes sense if it goes on to draw a distinction between sections 20J and 20L, when it says:
“Section 20L provides a remedy in cases in which the court concludes, as I have, that a debtor has provided information which is false or misleading or which contains material omissions in the documents supplied by the debtor under sections 20 to 20 K and consequently that it would be inconsistent with the provisions and intent of the Ordinance to allow the debtor to avoid bankruptcy and implement a voluntary arrangement. The difficulty in the present case is that the applicants have not formulated the application properly and this is why, unfortunately, they must lose.”
34.If no distinction was being drawn between the two sections as to the question of materiality, it is difficult to see, when Harris J had held that the irregularities were not material for the purposes of the challenge to the meeting under section 20J, how he could then have gone on to say that but for the technical problem in the application under section 20L he would have made a bankruptcy order.
35.In any event, whether or not that distinction was being drawn by Harris J, it seems to me that it is a distinction which can properly be drawn.
36.It is certainly a distinction which sits happily with Harris J’s comments, at [27], (with which I am in full agreement) that although the voluntary arrangement regime prevents one creditor with a minority of the debt who could otherwise insist on bankruptcy, perhaps for no other reason than malevolence, insisting on a bankruptcy order being made:
“It is, however, important that the regime is not abused. It is important that creditors are not left feeling for legitimate reason that the process has been manipulated unfairly to relieve a debtor of his obligations and deprive them of their prime officially right to have a bankruptcy order made against him. Most creditors will be dependent upon the good faith of the debtor and the diligence of the nominees to ensure that they are provided with all relevant information and that the regime is not abused. They will normally have limited opportunity independently to scrutinise the veracity of the information provided to them and in my view there is no reason why they should be expected to spend so much in the way of time and money doing so.”
37.In other words, at least under section 20L the court might be concerned with possible abuses of the procedure by which the debtor seeks to avoid, and succeeds in avoiding, the bankruptcy order as would otherwise have been made. This is simply to recognize that the question to be answered under the two sections 20J and 20L are different. One relates to a challenge to a decision made at a meeting, where it is relevant to consider if the decision would have been different if the irregularity had not occurred. The other relates to an application for the court to make a bankruptcy order (notwithstanding that the creditors might have agreed a voluntary arrangement) because the debtor has provided false or misleading information (by addition or omission), and as found by Harris J it would be inconsistent with the provisions and intent of the Ordinance to allow the debtor in such circumstances to avoid bankruptcy and implement a voluntary arrangement.
38.In the latter case, the focus is not on whether or not the decision would have been the same anyway, but whether the consideration which led to the decision is likely to have been materially influenced. This is looking not just to the decision made, but to the process by which any decision was considered. Hence, in contrast to the other approach under section 20J, regard may be had to more general considerations concerning manipulation of the statutory regime.
39.If necessary, even the passage from the Cadburys Schweppes case upon which Mr Cheung relies identifies that the court will ask itself “whether, had the truth been told, it would be likely to have made a material difference to the way in which the creditors would have considered and assessed the terms of the proposed IVA” (my emphasis). This is pointing not just at the result of the consideration and assessment, but at the process of consideration and assessment.
40.I also draw some support from what was said by Cheung J in Re Leung Yat Tung [2001] 2 HKC 168, at 172B to D:
“The starting and fundamental point in an application of this nature [namely, an application relating to a voluntary arrangement] must be that the debtor should make a full and frank disclosure of his finance. This, in my view, is of the utmost importance because unless this duty is discharged, the court is not in a position to say that the proposal is serious and viable and, hence, should exercise the discretion in making an interim order. In considering whether a full and frank disclosure has been made, the approach is not to use a fine comb to see whether there are some discrepancies or miscalculation of figures here and there, but rather one should consider the case as a whole and see whether there are in fact serious deficiencies in the disclosure by the debtor.”
41.In this regard, it seems to me that the events preceding the third creditors meeting on 17 March 2009 are relevant. I, therefore, reject Mr Cheung’s submission that the 1st and 2nd Statements of Affairs, and the events at the first two creditors meetings are not relevant. At the very least, those matters provide context within which to view the overall approach of Mr Chin to his provision of information to those persons whom he wished to support his proposal for a voluntary arrangement.
42.As Ms Tjia pointed out, the first proposal for a voluntary arrangement was rejected at a creditors meeting when, by reference to a total debt of over $7 million on the terms of repayment of $40,000 per month for 48 months, the proposed recovery rate came to 25.12%. A second proposal was also rejected at a second creditors meeting when, by reference to a slightly greater total debt of over $9 million and revised repayment terms over 60 months, the proposed recovery rate came to 23.69%.
43.That the third creditors meeting dealt with a proposal, in which the total debt had leapt to a figure in excess of $32 million, with unchanged terms for repayment of $40,000 over 60 months, giving a proposed recovery rate of just 5.24%, are precisely the circumstances which give the flavour identified by Harris J, and which might bluntly be described as rigging the process.
44.Indeed, in any event it can be pointed out that section 20L requires the court to assess whether information was false or misleading as was contained in “any statement of affairs or other documents supplied by the debtor under sections 20-20K” (my emphasis). This seems to be a statutory requirement (or at least the ability) to consider all of the materials provided by a debtor and to consider whether they contain information which was false or misleading in any material particular or which contained material omissions.
45.Lastly, as Ms Tjia correctly points out, section 20L allows the court to make a bankruptcy order notwithstanding the approval of a voluntary arrangement if satisfied that any information in the relevant documents was false. If there is a finding of false information, it may not be necessary even to go on to consider whether or not that or other information was also misleading in any material particular or contained material omissions.
46.Mr Cheung then made submissions as to each of the individual grounds underpinning the current application for a bankruptcy order. I accept there is some merit in his points that the grounds go beyond the grounds previously canvassed before Harris J, but it is not necessary to go beyond the points dealt with before, and by, Harris J (with which I have expressed my agreement).
47.There is, of course, also something of a mismatch in Mr Cheung’s attempts to restrict the arguments to those run before Harris J, whilst at the same time wanting me to ignore what Harris J found after his careful consideration of the matters put in evidence before him (and now repeated before me).
48.Nor do I think the answer to the identified irregularities is to be found by attempting fine arithmetical exercises as to the differences in dividends as might have flowed from the proposal depending on whether or not certain matters were excluded. As I have held, the court is entitled to look not just at the result of the process but at the integrity of the process itself.
49.Where that process is impugned, as here I find it to have been, the court is entitled to interfere.
50.The question then arises as to whether, in the exercise of the discretion, the court will interfere.
51.It is in this context that questions of timing or delay or prejudice might arise. I have already pointed out that there was a period of some 4 months following the judgment of Harris J before the current petition was issued.
52.During the hearing, I asked Ms Tjia as to any explanation for this period of 4 months or so. She told me that the time was taken up by a consideration as to whether or not a further application might be made, precisely how it would be made, and who might make it. The latter point gave rise to questions of funding for any proposed application, and she pointed out that only one of the previous challenging creditors has become a petitioner for the purposes of the current application. (There was also, apparently, an attempt to prevent the Master formally approving the voluntary arrangement in that 4-month period.)
53.I understand that some period of weeks might reasonably be taken in considering the position following the judgement of Harris J, and in deciding whether or not any further step might be taken, and who might take it. In any event, I do not think that this delay of itself need be in any way fatal to the application made by the petition.
54.But, Mr Cheung says that this period is only part of the relevant timetable. He points out that it must have been known from at least as early as April 2010 that there ought to have been a petition under section 3(1)(c), and no explanation has been offered as to why no such petition was issued then. The answer is probably that the hearing before Harris J took place in that month, and the argument was not resolved until his judgment in June 2010.
55.But Mr Cheung also says that even if I am satisfied that I could make a bankruptcy order, I should not do so because of the greater passage of time since the coming into effect of the voluntary arrangement following the creditors meeting in March 2009. He submits that where the arrangements have already been in place for more than two years (indeed, almost half of the period of 60 months of the voluntary arrangement) it would not be fair or appropriate now to make a bankruptcy order. Not only would Mr Chin have been living under the terms of the voluntary arrangement, he would then face the period of bankruptcy. It is also suggested that if Mr Chin became bankrupt he would lose his job.
56.Ms Tjia’s answer to the submission is first to point to the nominees’ report, which only identifies Mr Chin having told the nominees that a bankruptcy order “may” affect his job. Further, if there is any hardship to be suffered by Mr Chin, she says that is simply the result of his own behaviour which gives rise to the ability to make the bankruptcy order under section 20L.
57.Ultimately, I prefer the submissions of Ms Tjia in this respect. If, as I have held, section 20L does permit the court to prevent a debtor avoiding bankruptcy and implementing a voluntary arrangement in circumstances where he has provided information which is false or misleading or which contains material omissions in the documents supplied by him, there would not likely be many cases in which the debtor can then rely on his own default as giving rise to a prejudice which might tip the discretionary of balance in favour of not making a bankruptcy order.
58.Looking at the matters put forward in this case, the balance seems to me to be firmly in favour of making a bankruptcy order.
Conclusion
59.In all the circumstances, just as was Harris J, I am satisfied that information put forward by Mr Chin which was false or misleading in a material particular and/or which contained material omissions was contained in the statements of affairs or other documents supplied by him as debtor, or was otherwise made available by him to his creditors at or in connection with a relevant meeting.
60.As the current petition is properly brought under a section which triggers an appropriate consideration under section 20L, there is no technical impediment to making a bankruptcy order.
61.In the light of my findings of default, and in the exercise of my discretion, I shall make a bankruptcy order on the petition.
[Submissions on costs]
62.There is no argument on costs, as it is accepted that costs should follow the event. So I order the debtor to pay the petitioner’s costs, to be taxed if not agreed.
[Submission on stay]
Stay
63.After my ruling, Mr Cheung told me he has instructions to appeal any bankruptcy order made, and he sought a stay pending appeal.
64.Ms Tjia said in response that it was difficult to address useful submissions to the court on this point, as Mr Cheung had not laid out any materials as might underpin a stay application.
65.As I do not think I yet have proper materials to be able properly to consider an application for a stay pending appeal, I am only prepared to grant a stay of 14 days, within which time Mr Cheung can take full and informed instructions as to whether or not Mr Chin does in fact wish to appeal, and the basis for any such proposed appeal, and if he wishes also to apply for a stay pending appeal. Any such application can then be made to me (if necessary, on short notice) within the 14-day period.
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(Russell Coleman SC)
Deputy High Court Judge |
Ms Josephine Tjia, instructed by Messrs Y.C. Lee, Pang, Kwok & Ip, for the Petitioner
Mr Ivan Cheung, instructed by Messrs Tang Tso & Lau, for the Debtor
Please refer to CACV118/2011 for the relevant appeal(s) to the Court of Appeal. |