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October 2019

ONC Corporate Disputes and Insolvency Quarterly

Dear Clients and Friends,

This special newsletter aims to regularly update practitioners on important and noteworthy cases in the areas of corporate disputes and insolvency in Hong Kong, the UK and other common law jurisdictions. In this issue, we have highlighted:

8 Corporate Insolvency Cases

2 Cross-border Insolvency Cases

1 Restructuring Case

6 Corporate Disputes Cases

7 Bankruptcy Cases

Our selection of cases and our analysis of them may not be exhaustive. Your comments and suggestions are always most welcome. Please feel free to contact me at ludwig.ng@onc.hk

Best regards,

Ludwig Ng Partner, Solicitor Advocate ONC Lawyers

HEADLINES OF THIS ISSUE

Corporate Insolvency Cases

1. Does removing an insolvent party from a joint venture infringe the anti-

deprivation rule?

Re Hsin Chong Construction Co Ltd [2019] 3 HKLRD 367

2. Where a CVL is already in progress and the majority of the creditors it to

continue, the petitioner must show some valid reason or special

circumstance if the petitioner wishes to convert the CVL to compulsory

liquidation

Re China City Construction (International) Co Ltd [2019] HKCFI 1617

3. A company is prevented from arguing that it has a bona fide defence on

substantial grounds to oppose a winding-up petition, if it previously has

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had the opportunity to argue, but decided entirely for its own reasons not

to do so

Re C. Mahendra Exports (H.K.) Ltd [2019] HKCFI 1556

4. Hong Kong Court refuses to stay a shareholder dispute petition to

arbitration, finding that the substance of the dispute between the parties

concerns breach of the articles and of the fiduciary duty of directors,

which are governed by ordinary company law

Dickson Holdings Enterprise Co Ltd v Moravia CV and Others [2019] HKCFI 1424

5. Court appointed provisional liquidators to Hua Han Health Industry

Holdings Ltd, noting significant grounds for concern about the Company,

and its operation and management over recent historical periods

Cypress House Capital Ltd v Hua Han Health Industry Holdings Ltd [2019] HKCFI 1826

6. The Privy Council upheld the decisions of the Cayman Islands Grand

Court and Court of Appeal in finding that certain redemption payments

received by Skandinaviska Enskilda Banken AB (Publ) from Weavering

Macro Fixed Income Fund Ltd shortly prior to the Company’s liquidation

constituted voidable preferences

Skandinaviska Enskilda Banken AB v Conway & Shakespeare (as joint official

liquidators of Weavering Macro Fixed Income Fund Ltd) (Cayman Islands) [2019]

UKPC 36

7. English Court of Appeal allowed damages in addition to setting aside void

disposition in insolvency

Ahmed and others v Ingram and another [2018] EWCA Civ 519

8. Arbitration or Winding up? Lasmos and But Ka Cho considered by the

High Court

Re Golden Oasis Health Ltd [2019] HKCFI 2173

Cross-border Insolvency Cases

9. English High Court held that section 236 of the Insolvency Act 1986 (the

private examination provision) has extraterritorial effect

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Philp Stephen Wallace (as Liquidator of Carna Meats (UK) Limited) v George Wallace

[2019] EWHC 2503 (Ch)

10. Singapore Court of Appeal set out the test for recognising a foreign

bankruptcy order

Re Heince Tombak Simanjuntak & 2 Ors [2019] SGHC 216

Restructuring Cases

11. Modifications to a scheme and scheme document are unobjectionable, if

the modifications are either sufficiently explained prior to a scheme

meeting, or if at the scheme meeting they are sufficiently minor

Re The Hong Kong Building and Loan Agency Ltd [2019] HKCFI 2088

Corporate Disputes Cases

12. Singapore Court of Appeal rejected the suggestion that third-party offers

invariably represent the “best evidence” of the shares’ fair market value

Abhilash s/o Kunchian Krishnan v Yeo Hock Huat and another [2019] SGCA 14

13. Court of Appeal upheld that reasons are not required for the removal of a

director

Yeung Bing Kwong Kenneth v Mount Oscar Ltd [2019] HKCA 688

14. The Court has power to grant interim payment order under ss.724 and 725

of the Companies Ordinance (Cap 622)

Xu Liu Chun v Wu Chang Jiang and Another [2019] HKCA 975

15. Moulin director found to be in breach of her duty to exercise care and skill

in performing her roles, as she failed to enquire and investigate in the face

of red flags

Moulin Global Eyecare Holdings Ltd v Lee Sin Mei Olivia [2019] 3 HKLRD 833

16. English High Court held directors’ liability as to unlawful distribution is

fault-based rather than strict

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Burnden Holdings (UK) Limited (In Liquidation), Stephen John Hunt (as Liquidator of

Burnden Holdings (UK) Limited) v Gary John Fielding, Sally Anne Fielding [2019]

EWHC 1566 (Ch)

17. Proving dishonesty and “blind-eye knowledge” in fraud-related causes of

action against bank creditor

Re Galleria (Hong Kong) Limited [2019] HKCFI 1877

Bankruptcy Cases

18. Is arbitration clause an absolute bar to winding-up petition?

- The latest position after the Lasmos case

But Ka Chon v Interactive Brokers LLC [2019] HKCA 873

19. Court ordered co-trustee be removed where it is clear that the working

relationship between the joint and several trustees has completely broken

down

Tsim Che Kong v Kwok Kwan Ying [2019] HKCFI 1822

20. Court held that it is not right to invoke section 29 of the Bankruptcy

Ordinance, where no assets can be recouped to enhance the value of the

bankruptcy estate

The Joint and Several Trustees of the Property of So Ching Wan v Assen Ltd (in

liquidation) and others [2019] HKCFI 1491

21. Material non-disclosure in applying for an order for substituted service of

the bankruptcy petition could result in the bankruptcy order being

annulled

Re Sung Sze Yin Daniel [2019] HKCFI 2264

22. The general fitness of a trustee in bankruptcy is a disciplinary matter. It is

not open to the Official Receiver to apply administrative actions to

suspend the trustee’s practice without invoking the disciplinary

proceedings

Re Chan John Loong Fai [2019] HKCFI 1886

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23. In determining whether a creditor is a secured creditor in the context of

the bankruptcy legislation, the Court shall look at whether their security

would benefit the general bankruptcy estate if it was surrendered

Promontoria (Chestnut) Limited v Charles Phelan Bell, Angela Bell [2019] EWHC 1581

(Ch)

24. English High Court found a second application brought by a bankrupt to

annul his bankruptcy an abuse of process where the first application had

been struck out for the bankrupt’s failure to comply with court directions

Philip John Lambert v Forest of Dean District Council, Andrew James Nichols, John

William Butler [2019] EWHC 1763 (Ch)

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Corporate Insolvency Cases

1. Does removing an insolvent party from a joint venture infringe the anti-

deprivation rule?

Re Hsin Chong Construction Co Ltd [2019] 3 HKLRD 367

Hsin Chong Constriction Co Ltd (the “Company”) and Build King Construction Ltd (“BK”)

established an unincorporated integrated joint venture (the “JV”) in November 2013 to submit

a tender for executing a major government design and construction project with the

Company taking a 65% interest and BK the remaining 35%. The government awarded the

contract (the “Contract”) to the JV on 22 June 2016. The Company found itself in financial

difficulties commencing in 2017/2018. On 27 August 2018, a winding up petition was issued

against the Company. On 13 December 2018, BK exercised its right under clause 17 of the

JV Agreement to exclude the Company from the JV. In gist, clause 17 of the JV Agreement

confers a contractual right on the innocent party to exclude the defaulting party from the JV

(but without releasing the defaulting party from its obligation to bear its proportionate share of

any loss) and carry on the JV on its own, in the absence of the defaulting party, and to

complete the project. Following the exclusion, BK and the Company entered into a

Supplemental Agreement whereby BK acquired the Company’s residual rights under the JV

Agreement for the sum of $53.6 million, such that, inter alia, the Company would have no

further involvement in the JV save for its rights under the Supplemental Agreement and so

released from the obligation to bear a proportionate share of any loss resulting from the

Contract. BK applied for an order, among other things, that BK’s exercise of the right to

exclude the Company from the JV did not constitute a disposition within section 182 of the

Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap 32).

The Court held that the exercise of exclusion rights under the JV Agreement by BK did not

involve any disposition of the property of the Company contrary to section 182. The section

was designed to avoid dispositions of a company’s property but it was not designed to

prevent third parties who were not the company’s agents from exercising their contractual

rights. The provisional liquidators of the Company submitted that prior to the exclusion, the

Company had a 65% interest in whatever profit was generated by the JV. It was said that this

was a chose in action belonging to the Company which was stripped away from the

Company as a result of the exercise of the exclusion rights and thus a disposition of the

Company’s property. The Court rejected such argument and held that in determining whether

there was any “dealing” in an asset of a company, or any other act reducing or distinguishing

its rights in that asset, the “asset” or “rights” in question must be identified. The Court

considered it wholly artificial to view a share of future profits that had yet to be generated as

an existing “asset” of the Company when the Company, being insolvent, was in no position to

perform its own contractual obligations.

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Even if the exercise of the exclusion clause had been a disposition contrary to section 182,

the Court considered that it did not infringe the anti-deprivation principle. The application of

the anti-deprivation principle to contracts has to be considered on a case by case basis and

one has to differentiate between a commercial rearrangement of rights to reflect the

economic consequences of insolvency and an attempt to pre-empt the distribution of assets

in a bankruptcy estate. Where (a) the asset of the insolvent company was a chose in action

representing the quid pro quo for something already done before the onset of insolvency,

then the court would be slow to permit the insertion, even ab initio, of a flaw in that asset

triggered by the insolvency process. By contrast, where (b) the right consisted of quid pro

quo for services yet to be rendered by the insolvent company in an ongoing contract, then

the court would readily permit the insertion, ab initio, of such a flaw, there being nothing

contrary to insolvency law in permitting a party either to terminate or adjust an ongoing

relationship with the insolvent company. Since (b) was applicable here, the Court held that

the disposition was valid.

The Court then went on to consider whether clause 17 itself infringed the anti-deprivation

principle. In applying the anti-deprivation rule, it is necessary to look at the substance of the

agreement rather than its form and to consider whether the provision in question amounted

to an illegitimate attempt to evade the relevant bankruptcy law or had some legitimate

commercial basis: Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd

& Anor [2012] 1 AC 383; Lomas v JFB Firth Rixson Inc [2012] 2 All ER (Comm) 1076. The

relevant factors include the effect of the clause, the intention of the parties and etc.

The Court held that it was clearly sensible and in the interest of the parties to provide for the

contingency that has in fact occurred, namely, the insolvency of one of the parties. Both

parties are seasoned players in the construction industry: they have similar bargaining

strengths and access to legal advice. Of the five events of default that could trigger the

exclusion, four concerned non-insolvency event. This factor, of itself, suggested an absence

of any deliberate intention to evade insolvency law. It was a commercial bargain entered into

freely by the parties. It is not the function of the court to rewrite a commercial bargain. It was

difficult to discern any scheme or plan to evade insolvency laws. The Court concluded that

clause 17 did not offend the anti-deprivation rule.

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2. Where a CVL is already in progress and the majority of the creditors it to

continue, the petitioner must show some valid reason or special

circumstance if the petitioner wishes to convert the CVL to compulsory

liquidation

Re China City Construction (International) Co Ltd [2019] HKCFI 1617

By a shareholders’ resolution dated 11 January 2019, China City Construction (International)

Co, Limited (the “Company”) was put into creditors’ voluntary liquidation (“CVL”). Patrick

Cowley and Tiffany Wong were subsequently appointed as the liquidators of the Company.

One of the Company’s creditors, Amuse Peace Limited (“Amuse Peace”), applied for an

order that the creditors’ voluntary liquidation should be converted into a compulsory

liquidation and new liquidators appointed, relying on the following reasons:-

(1) It is desirable to have an earlier commencement date of winding up in order to extend

effectively the claw-back period.

(2) The Company has provided no explanation for putting the Company into CVL rather

than allowing it to go into compulsory liquidation.

(3) There are a number of dubious transactions that need investigation.

(4) There is no supervision by the Official Receiver of a CVL, which is undesirable.

(5) Concerns about KPMG’s independence.

It is well established that as between a petitioner and a company, the petitioner is entitled ex

debito justitiae to a compulsory winding-up order notwithstanding that the company is already

in voluntary liquidation: Section 257 of the Companies (Winding Up and Miscellaneous

Provisions) Ordinance (Cap 32); Joint Silver Limited (unrep., HCCW 1/2016, 16 December

2016). However, if a CVL is already in progress and the majority of the creditors in value

prefer it to continue, the petitioner will have to show some valid reason or special

circumstance why the majority view should not prevail. Less weight is to be given to creditors

who are related to the management of the company. The liquidators must not only act

impartially but be seen to act impartially. The court is entitled to have regard to general

principles of fairness and commercial morality and not leave substantial creditors with a

legitimate sense of grievance. Lastly, questions of additional expense including ad valorum

fees payable to the Official Receiver are best left to the majority of creditors.

China City Construction Holding Group Company (“CCCH”), the parent of the Company, is

also the largest creditor of the Company. The Court noted that the majority in value of

creditors wish the Company to remain in CVL. However, this is in large part because of the

size of CCCH’s debt. As CCCH is the Company’s shareholder and the management of the

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Company related to CCCH, the significance of its views is not as great as they would

otherwise be. However, Harris J considered it still necessary for Amuse Peace to identify a

valid reason for converting the CVL into a compulsory liquidation, particularly because it is

estimated that ad valorum fees of HK$4,000,000 will have to be paid if the CVL is converted

into compulsory winding up.

On the facts, Harris J considered that there is no fair reason for the liquidators’ impartiality to

be doubted and the concern about the lack of supervision by the Official Receiver is also of

little substance. In relation to the dubious transactions, the Judge considered that a

compulsory liquidation is not required in order for an investigation to be undertaken. There is

no credible and fair reason to think such investigation cannot be carried out by the liquidators

in the CVL. So far as the commencement date of the winding up is concerned, there is

nothing in the evidence to suggest that anything will turn on this.

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3. A company is prevented from arguing that it has a bona fide defence on

substantial grounds to oppose a winding-up petition, if it previously has

had the opportunity to argue, but decided entirely for its own reasons not

to do so

Re C. Mahendra Exports (H.K.) Ltd [2019] HKCFI 1556

The Petitioner presented a winding-up petition against C Mahendra Exports (H.K.) Limited

(the “Company”), relying on an unsatisfied statutory demand. The Company contests the

petition on the grounds that it has a bona fide defence on substantial grounds to the debt. 11

months had passed between the service of the statutory demand and the presentation of the

petition. After service of the statutory demand, the Company made an application ex-parte to

obtain an injunction to enjoin the Petitioner from presenting a petition. The Petitioner

subsequently gave an undertaking not to present a petition until determination of an inter

partes summons for an order to restrain presentation of the petition. An inter partes

summons was issued and a date for hearing was fixed. Shortly before the hearing, the

Company proposed to withdraw the summons, which was accepted by the Petitioner. As a

consequence, the summons was dismissed.

In order for the Company to have obtained the injunction that it sought by its inter partes

summons, it would have been necessary for the Company to satisfy the Court that it had a

bona fide defence on substantial grounds to the debt relied on by the Petitioner. Harris J

took the view that although there was no determination of the application for an injunction,

the Henderson v Henderson principle of res judicata applies and prevents it now seeking to

argue what it now wishes to argue in the petition proceedings. The Company had the

opportunity in the application which it commenced to argue that it had a bona fide defence on

substantial grounds and the matters on which it wished to rely in support of such an

argument were the same as it now wishes to rely on. In the circumstances, Harris J held that

the Company should not be allowed to argue what it previously had the opportunity to argue,

but decided entirely for its own reasons not to do so. To allow otherwise would result in delay

and waste of costs and the misuses of Court resources.

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4. Hong Kong Court refuses to stay a shareholder dispute petition to

arbitration, finding that the substance of the dispute between the parties

concerns breach of the articles and of the fiduciary duty of directors,

which are governed by ordinary company law

Dickson Holdings Enterprise Co Ltd v Moravia CV and Others [2019] HKCFI 1424

Moravia CV (“Moravia”) and Dickson Holdings Enterprise Company Limited (“DHE”) set up a

joint venture called Dickson Valora Group (Holdings) Co Ltd (the “Company”) in Hong Kong

in 2010 for the purpose of pursuing a business opportunity of building a shopping mall and

hotel complex in Mainland China. On 24 December 2010, DHE, Moravia and the Company

entered into a shareholders’ agreement, which contains an arbitration clause, requiring any

dispute, controversy or claim arising out of or relating to this Agreement, or the breach,

termination or invalidity thereof, to be settled by arbitration pursuant to the HKIAC Rules (the

“Shareholders’ Agreement”).

Following the breakdown of the joint venture relationship, the Company cancelled DHE’s

shares. DHE subsequently presented a petition against, inter alia, Moravia and the Company,

in which it complains against the forfeiture of its shares and seeks relief from unfairly

prejudicial conduct under ss 724 – 725 of the Companies Ordinance (Cap 622). DHE

complained that no notice of the board meeting as required under the articles of association

had been given to DHE. Secondly, DHE complained that Moravia wrongfully applied the

forfeiture provisions in the Company’s articles of association to shares which had in fact been

paid up. DHE further alleged that the share forfeiture scheme was an exercise of directors’

powers for wrongful purposes, and therefore in breach of fiduciary duties. The respondents

applied for, among other things, an order that further proceedings in the petition be stayed in

favour of arbitration pursuant to an arbitration agreement in the Shareholders’ Agreement.

Section 20(1) of the Arbitration Ordinance (Cap 609) provides that “a court before which an

action is brought in a matter which is the subject of an arbitration agreement shall, if a party

so requests no later than when submitting his first statement on the substance of the dispute,

refer the parties to arbitration unless it finds that the agreement is null and void, inoperative

or incapable of being performed.” In approaching an application for stay under section 20(1),

the Court will consider the following four questions: (i) is the arbitration clause an arbitration

agreement?; (ii) is the arbitration agreement null and void, inoperative or incapable of being

performed; (iii) is there in reality a dispute or difference between the parties? and; (iv) is the

dispute or difference between the parties within the ambit of the arbitration agreement? To

determine whether the dispute falls within the ambit of the arbitration agreement, the correct

approach is to identify the substance of the dispute between the parties, and ask whether or

not that dispute is covered by the arbitration agreement: Re Quicksilver Glorious Sun JV Ltd

[2014] 4 HKLRD 759.

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The Court noted that the nature of DHE’s complaint is, first, a breach of the articles of

association, in a form of failure to give notice of the proposed directors’ resolution and

wrongful application of the forfeiture provisions to shares which had in fact been paid up and,

second, the petition alleged an exercise of directors’ powers for wrongful purposes. The

Court thus found that the principal contentions revolved around questions of notice, payment,

and purpose and accordingly, the dispute did not appear on its face to have any direct

connection with the Shareholders’ Agreement.

Citing Fiona Trust and Holding Corporation v Privalov [2007] UKHK 40; [2007] EWCA Civ 20,

Moravia contended that the arbitration clause was to be construed broadly, such that the

parties are to be taken to intend that any dispute arising out of the same relationship is to be

decided by the same tribunal. In this respect, even bearing in mind the principles favouring a

broad construction, the Court found it impossible to ascribe to the clause the meaning

contended for. First, although the Shareholders’ Agreement is expressed to have been

entered into for the purpose of governing the parties’ relationship as shareholders in relation

to the Company and for managing the affairs of the Company, it makes only relatively limited

provisions with regard to the affairs of the Company. Second, the Court held, the

presumption of one-stop adjudication must be approached having regard to the special

features of company law. Once the parties became shareholders in the Company, they did

not only enter into a contractual relationship arising from and governed by the Shareholders’

Agreement, but also a relationship governed by the company law of Hong Kong as well as

the articles of the Company arising simply from the fact that they were shareholders in the

Company. There are various rights and obligations associated with membership of a

company that exist independently of any shareholders’ agreement. There can be various

types of disputes between shareholders on questions on which their shareholders’

agreement, as such, makes no provision at all.

In the present case, the complaint is based on a breach of the articles and of the fiduciary

duty of directors. The Shareholders’ Agreement makes no provision concerning notice of

board meetings, payment for shares or forfeiture of shares. The proprietary rights of a

member to its shares in the Company is not the subject matter of the Shareholder’

Agreement at all, but governed by ordinary company law. The Court therefore concluded that

the dispute could not be said to have arisen out of or to relate to the Shareholders’

Agreement or its breach, termination or invalidity. Accordingly, as Moravia had not shown,

even on a prima facie basis that the matter or substance of the dispute fell within the ambit of

the arbitration clause, the Court refused to strike out the petition.

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5. Court appointed provisional liquidators to Hua Han Health Industry

Holdings Ltd, noting significant grounds for concern about the Company,

and its operation and management over recent historical periods

Cypress House Capital Ltd v Hua Han Health Industry Holdings Ltd [2019] HKCFI 1826

Hua Han Health Industry Holdings Ltd (the “Company”) is a company incorporated in the

Cayman Islands, registered as a non-Hong Kong company pursuant to Part 16 of the

Companies Ordinance (Cap 622), and listed on the Main Board of the Hong Kong Stock

Exchange. A creditor presented a winding-up petition against the Company on the basis of

an unsatisfied statutory demand. The petitioner’s debt was subsequently satisfied by one of

the Company’s shareholders, Bull’s-Eye Ltd (“Bull’s-Eye”). The petitioner agreed to

withdraw the petition. Another shareholder of the Company, Haw Par Corporation Ltd (“Haw

Par”) (holding 10.03% of the shares) applied to be substituted as petitioner (“Substitution

Summons”) as well as the appointment of provisional liquidators to the Company (“PL

Summons”). Both Summons were opposed by the Company and Bull’s-Eye.

Haw Par contended that the Company had falsely inflated its revenue on a massive scale,

fabricated sales, and overstated the value of its assets to conceal the falsification of its profits.

Trading in the Company’s shares was suspended on 27 September 2016 and trading has not

resumed since that date. Grant Thornton (“GT”) was appointed as the independent financial

adviser. However, there has not been much progress in GT’s work, as GT was not able to

obtain much assistance from the Company. The Hong Kong Stock Exchange imposed

various conditions upon the resumption and trading of the Company’s shares. However,

given the lack of progress in addressing those resumption conditions, it seems that the

Company’s listing will be cancelled on 1 August 2019. The SFC has also been investigating

the Company and its executives since at least 2018, and on 20 November 2018 issued a

direction to the HKSE to suspend all trading in the Company’s shares on the basis that “false,

incomplete or misleading information” had been published in the Company’s financial

statements. Haw Par also alleged that since the SFC actions in late 2018 and early 2019,

executives of the Company have taken steps to dissipate its assets. It was alleged that there

was a registration of share charge over a Mainland subsidiary of the Company in favor of

third parties on 13 March 2019, which transactions were not approved by the Company’s

board.

Rule 33 of the Companies (Winding-Up) Rules (Cap 32H) provides that for the court to

exercise its discretion to substitute the petitioner, the person seeking to be substituted must

satisfy the court that he (a) is a creditor or contributory; (b) would have the right to present a

petition; and (c) is desirous of prosecuting the petition. If the criteria are satisfied, the court

has a broad discretion to permit substitution, though it is clear that the discretionary

jurisdiction to order substitution would clearly not be exercised in favor of a would-be

petitioner who would not be able successfully to invoke the jurisdiction to make a winding-up

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order, or where the grounds for winding up are plainly unsustainable or would amount to an

abuse of the Court. Further, for a contributory, it is sufficient if it can demonstrate the need

for an investigation into the affairs of the company, as that is itself a sufficient advantage to

justify the making of a winding up order.

The Court noted that Haw Par is a 10% shareholder, having held its shares since 2005, with

the right to present a petition. Haw Par is desirous of prosecuting the petition on the grounds

set out in its draft re-amended petition, where it is said the circumstances cry out for

investigation. The Court is thus satisfied that the circumstances might justify the winding up

of the Company in Hong Kong, thereby putting in motion the full machinery of winding up in

respect of it, notwithstanding its incorporation elsewhere. The Court is satisfied that this is an

appropriate case of the exercise of its discretion in favor of the order sought by Haw Par for

substituting it as the petitioner.

As to the PL Summons, the Court needs to be satisfied that first it is likely that a winding up

order will be made on the hearing of the petition (“threshold requirement”), and second that

in the circumstances of the case it would be right that a provisional liquidator be appointed

(“discretionary requirement”). The discretionary requirement may be satisfied if it is

demonstrated to the satisfaction of the court that there is a need to safeguard against the risk

of dissipation of the company’s assets or if there is a need for independent investigation.

Specifically, where what is sought is a winding up order on the grounds that there has been

contravention of regulations and winding up is in the public interest, the solvency or viability

of the business of the company is not of itself significant, the principal concern may be the

interests of the investing public and the integrity of the market, and the appropriate sanction

where there has been fraud in the promotion of the company will normally be liquidation of

the company.

The Court noted that there are significant grounds for concern about the Company, and its

operation and management over recent historical periods. It is also unclear where the

Company’s and its subsidiaries’ cash is, and who remains in control of the bank accounts.

What is also missing is any suggestion that there has been contact with the HKSE, or that

there is any realistic or viable plan to meet the stringent conditions which must be met before

resumption of trading could ever take place. There is actually no evidence to suggest any

realistic or reasonable possibility that the HKSE will not make a decision on or soon after 1

August 2019 that the Company should be de-listed. The Court accepted that while PLs might

not achieve greater cooperation from some management, with the powers conferred on PLs,

they would overall likely have greater power and so greater practical ability to investigate and

take over management and to take all necessary steps ultimately in the best interests of the

Company. Balancing all the circumstances on the basis of the commercial realities, the

degree of urgency and need established by Haw Par, and the balance of convenience

according to the overall circumstances, the Court granted the application for the appointment

of PLs.

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6. The Privy Council upheld the decisions of the Cayman Islands Grand

Court and Court of Appeal in finding that certain redemption payments

received by Skandinaviska Enskilda Banken AB (Publ) from Weavering

Macro Fixed Income Fund Ltd shortly prior to the Company’s liquidation

constituted voidable preferences

Skandinaviska Enskilda Banken AB v Conway & Shakespeare (as joint official

liquidators of Weavering Macro Fixed Income Fund Ltd) (Cayman Islands) [2019]

UKPC 36

Weavering Macro Fixed Income Fund Ltd (“Weavering”) was an open-ended investment

company incorporated in the Cayman Islands. Skandinaviska Enskilda Banken AB (Publ)

(“SEB”) issued a redemption notice of Weavering’s shares in October 2008 for shares

redemption effective on 1 December 2008. SEB was acting in the capacity of a nominee of

SEB’s clients in issuing the notice.

SEB was paid just over US$1 million by the Company on 19 December 2008. It received a

second payment of 25% of the balance of the redemption amounts on 2 January 2009 and a

third and final payment of the remaining 75% on 11 February 2009. In total, SEB received

approximately US$8.2 million in redemption payments (the “SEB Redemption Payments”)

and has paid out the proceeds to its clients.

Weavering subsequently went into liquidation on 19 March 2009, prompted by the discovery

of fraud on the part of Weavering’s principal investment manager, Magnus Peterson. The

liquidators brought proceedings against SEB on the ground that the SEB Redemption

Payments were invalid for preference under section 145(1) of the Companies Law (2013

Revision) of the Cayman Islands.

The Board considered, among other things, the following issues and rejected the appeal from

SEB. The issues are set out below:

a) The Intention to Prefer Point: It is a condition of section 145(1) that the payment

must be made to a creditor “with a view to giving such creditor a preference over

other creditors”. The Privy Council held that “with a view” requires a “dominant

intention to prefer” from the authorities. The fact that SEB’s redemption claim had

been fully discharged whereas the three other December Redeemers received only

25% of their claims, was, in the view of the court, sufficient to demonstrate a

dominant intention to prefer SEB. In addition, SEB also enjoyed an advantage over

subsequent redeemers (regarding the second and third installments), given Magnus

Peterson was aware that the January and February Redeemers were unlikely to be

paid. Nonetheless, it is still open to a preference defendant to establish that the

payment was made with a different intention (e.g. made under pressure exerted by

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the defendant or threats of litigation), but SEB had failed to produce any evidence to

that effect.

b) The Repayment Issues: As the Cayman Law does not explicitly direct that payments

found to be preferential be repaid to the insolvent company, the Privy Council

declared that the liquidators were only entitled to restitution of an “invalid” payment

under section 145 at common law on the ground of unjust enrichment, subject to any

defences available to SEB.

a. Firstly, the Privy Council distinguished the position of an agent (where a claim

in restitution could be made against its principal) from a trustee acting as a

principal in respect of its dealings. The latter, which is SEB’s position in the

case, should be regarded as having been enriched by a payment which it

receives in that capacity, even if it has fiduciary obligations to account to its

clients for any funds received.

b. Secondly, on the defence of “change of position”, the Board first affirmed that

in a claim by a liquidator for restitution of money under section 145, the

common law gives priority to the operation of the statutory scheme of

distribution over the detrimental impact which recovery may have upon the

preferred creditor. The Board then explained their decision with the rationale

that “to allow a change of position defence to a claim for the recovery of a

preferential payment would run counter to the statutory scheme for the

division of the insolvent company’s property among its creditors”: Ernst and

Young Inc v Anderson (1997) 147 DLR (4th) 229.

It is to be noted that Hong Kong has a different statutory position on remedies available to

liquidators in an unfair preference claim. Under the Companies (Winding Up and

Miscellaneous Provisions) Ordinance (Cap. 32) section 266(3), upon an application to void

an unfair preference transaction, Hong Kong court has the jurisdiction to make an order that

it thinks fit for restoring the position to what it would have been if the unfair preference had

not been given. Thus, liquidators were not limited to restitution on common law unjust

enrichment ground only under Hong Kong law.

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7. English Court of Appeal allowed damages in addition to setting aside void

disposition in insolvency

Ahmed and others v Ingram and another [2018] EWCA Civ 519

The bankrupt and the appellants are siblings. In the period between the presentation of a

bankruptcy petition in January 2007 and the making of a bankruptcy order in April 2009, the

bankrupt transferred his minority shareholdings in three private companies (the “Share(s)”)

to the 1st appellant. The 1st appellant subsequently transferred the Shares to the 2nd – 4th

appellants at unknown times between 2008 to 2009, which were eventually re-transferred to

the 1st appellant by no later than the end of June 2010. During the period after the bankrupt’s

initial disposal of the Shares, the Shares had diminished in value.

The trustees in bankruptcy (the “TIBs”) (i) applied for a declaration that the Share transfers

were void pursuant to section 284 of the English Insolvency Act 1986; and (ii) sought

recovery for loss arising from diminution in value of the Shares. Shortly before trial, the

appellants accepted that the Share transfers were void and delivered Share transfer forms

executed by the 1st appellant in end February 2015. The remaining issue in dispute related to

monetary claim from the trustees. The High Court ordered each of the appellants jointly liable

to pay the difference in fair value of Shares between the date of the initial transfer of Shares

from the bankrupt to the 1st appellant and the date the Shares were delivered to the trustees.

The appellants appealed.

The English Court of Appeal held that the TIBs’ right to recovery under section 284 is

“restitutionary”, meaning that the TIBs are entitled to claim equitable compensation only in

respect of any actual loss that the estate had suffered as a result of the breach of trust. In the

present case, specific restitution of the trust property is not possible due to diminution in

value of Shares despite the appellants having returned the Shares to the bankruptcy estate.

To make good a loss in fact suffered which is caused by the breach of trust, one has to pay

sufficient compensation to the bankruptcy estate to restore it to the position it would have

otherwise been had the breach not been committed.

The Court further held that as from the date the bankruptcy order was made, the 1st appellant

(and the 2nd to the 4th appellants, at appropriate timings) held legal title of the Shares on

trust for the bankrupt with title vested in the trustee in bankruptcy upon his appointment. The

1st appellant’s obligation to return the Shares arose at the time he had knowledge of the

facts that made him a bare trustee (i.e. that a petition had been presented and bankruptcy

order had been made) and once the trustee in bankruptcy had been appointed, he had an

immediate obligation to restore the estate and was under a duty to tender the Shares. To

discharge such obligation of the 1st appellant, he should have notified the trustee in

bankruptcy of his possession of the Shares and tender the same immediately.

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In terms of the calculation of the loss, the Court accepted that the loss occurred, or flowed

from, the date at which the trustee in bankruptcy would have actually sold the shares, having

regard to the circumstances of the case. In the present case, there was evidence to show

that a sale of the Shares would have taken place within three to six months from the

appointment of the TIBs. It was therefore ruled that the appropriate timing for valuation of the

Shares was 30 June 2010, i.e. at or around the time when the Shares were re-transferred to

the 1st appellant.

Lastly, the 2nd to the 4th appellants were held to be jointly liable for the loss suffered by the

bankruptcy estate, despite having re-transferred the Shares to the 1st appellant. Their

obligations did not conclude upon their transfer of shares back to the 1st appellant, as their

obligations were to transfer the Shares to the trustees in bankruptcy instead.

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8. Arbitration or Winding up? Lasmos and But Ka Cho considered by the High

Court

Re Golden Oasis Health Ltd [2019] HKCFI 2173

This latest decision concerns a summons (the “Summons”) filed by New Health Elite

International Ltd (“NHE”) for an order that all further proceedings in the winding up petition

(the “Petition”) against Golden Oasis Health Ltd (the “Company”) be stayed pending

arbitration pursuant to an arbitration clause (the “Arbitration Clause”) contained in a

shareholders’ agreement (the “Shareholders’ Agreement”) made between the petitioner,

Gold Swing Enterprises Ltd (“GSE”), NHE and others.

The Petition was based on a debt (the “Debt”) owed by the Company to Smart Even

Ventures Ltd (“SEV”), which was assigned to GSE by a deed of assignment (the “Deed”).

The Deed was part of a transaction whereby SEV sold its 20% shares in the Company to

GSE by a sale and purchase agreement (the “SPA”), and the Debt represented the

shareholder’s loan due from the Company to SEV. At issue was whether NHE was entitled to

rely on the agreement to arbitrate to stay the Petition.

Mr. Justice Anthony Chan dismissed the Summons for the simple reason that there was no

relevant arbitration clause to support it. The contract(s) under which the Debt arose was the

Deed and possibly also the SPA. Neither the Deed nor the SPA contained any arbitration

clause. On the contrary, both the Deed and the SPA contained a jurisdiction clause which

conferred jurisdiction on the Hong Kong courts. Further, although the SPA and the Deed

were executed on the same day as the Shareholders’ Agreement, the SPA was unrelated to

the Shareholders’ Agreement except that GSE became a shareholder of the Company by the

SPA and with that status the Shareholders’ Agreement became related to GSE. The Debt

was a claim by GSE against the Company which was not a party to the Shareholders’

Agreement.

Moreover, the Court found that the 3rd requirement enunciated in the Re Southwest Pacific

Bauxite (HK) Ltd [2018] 2 HKLRD 449, i.e. the company takes steps required under the

arbitration clause to commence the contractually mandated dispute resolution process, is not

satisfied. No arbitral proceedings had been commenced by either the Company or NHE

pursuant to the Arbitration Clause. Mr. Justice Anthony Chan agreed the Court of Appeal’s

view expressed in But Ka Chon v Interactive Brokers LLC [2019] HKCA 873 that “it would

make no sense to dismiss or stay an insolvency petition on the mere existence of an

arbitration agreement when the debtor has no genuine intention to arbitrate”. On the facts,

the Judge found that it was “very difficult to see any genuine intention to arbitrate on either

the part of the Company or NHE”. The Summons was dismissed.

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Cross-border Insolvency Cases ______________________________

9. English High Court held that section 236 of the Insolvency Act 1986 (the

private examination provision) has extraterritorial effect

Philp Stephen Wallace (as Liquidator of Carna Meats (UK) Limited) v George Wallace

[2019] EWHC 2503 (Ch)

Carna Meats (UK) Limited (the “Company”), a company incorporated on 4 May 2010, was

ordered to be wound up on 8 December 2015. The Applicant, Mr. Philip Stephen Wallace

was appointed as the liquidator of the Company. The Applicant’s investigation into the

Company’s affairs was hampered by the lack of books and records. The Applicant thus

applied pursuant to section 236 of the Insolvency Act 1986 (which is substantially similar to

section 286B of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap

32) – private examination) for an order against the Respondent, Mr. George Wallace, the

former bookkeeper of the Company, requiring him to deliver up all documents, books and

records of the Company in his control or possession to the Applicant. The relevant part of

section 236 provides:

“(2) The court may, on the application of the office-holder, summon to appear before it -

(a) any officer of the company,

(b) any person known or suspected to have in his possession any property of the company or

supposed to be indebted to the company, or

(c) any person whom the court thinks capable of giving information concerning the promotion,

formation, business, dealings, affairs or property of the company.

(3) The court may require any such person as is mentioned in sub-section 2(a) to (c) to

submit to the court an account of his dealings with the company or to produce any books,

papers or other records in his possession or under his control relating to the company or the

matters mentioned in paragraph (c) of the sub-section."

Since the Respondent was resided in the Republic of Ireland, this application raised an issue

as to whether section 236 of the Insolvency Act 1986 has any extraterritorial effect so that it

empowers the court to make an order against a Respondent abroad. The Judge held that the

power under section 236(3) is a standalone power, divorced from the power to summon

parties in section 236(2). In other words, the power to require the production of documents

and information under section 236(3) may be exercised even if no summons is issued under

section 236(2).

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Further, in considering whether or not to grant relief under section 236, the Court held that it

should ask itself whether, in respect of the relief sought against him, the respondent is

sufficiently connected with the jurisdiction for it to be just and proper to make an order

despite the foreign element.

In the present case, the Respondent, as a bookkeeper, was an important part of the

Company's operations. Apart from him, no one has or may have documents and information

which are critical to the Liquidator properly administering the winding-up of the Company.

The Court therefore held that a person who takes on the role of bookkeeper to an English

company, and in that capacity has possession of the company's books and records, cannot

complain that an order requiring him to make those books and records available on a

winding-up involves any excess of jurisdiction by the English Court. The Judge concluded

that there was a sufficient connection between the respondent and the jurisdiction so that the

order sought by the Applicant was justified. The Respondent was ordered to deliver all

documents, books and records of the Company in his control or possession to the Applicant

within 42 days.

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10. Singapore Court of Appeal set out the test for recognising a foreign

bankruptcy order

Re Heince Tombak Simanjuntak & 2 Ors [2019] SGHC 216

Bankruptcy orders were granted against the Respondents in Indonesia (the “Indonesia

Bankruptcy Orders”). The Applicants, who are the receivers and administrators appointed

in Indonesia, applied to the Singapore court for recognition of the Indonesian Bankruptcy

Orders, so that they can administer, realise and distribute the Respondents’ property in

Singapore. The recognition was granted at first instance. The Respondents appealed.

The Singapore Court of Appeal noted that the UNCITRAL Model Law on Cross-Border

Insolvency, which was implemented in Singapore through the Companies (Amendment) Act

2017, does not extend to personal bankruptcy. As such, the recognition of foreign bankruptcy

orders has to be considered on the basis of common law. The Singapore Court of Appeal

considered that the following requirements must be met before a foreign bankruptcy order

could be recognised in Singapore:

(i) The foreign bankruptcy order is made by a court of competent jurisdiction;

(ii) That court must have jurisdiction on the basis of:

a. The debtor’s domicile or residence; or

b. Submission by the debtor to the jurisdiction of the court;

(iii) The foreign bankruptcy order must be final and conclusive; and

(iv) No defences to recognition apply.

Further, the Singapore Court of Appeal was of the view that it may be appropriate to impose

restrictions or requirements when recognising foreign bankruptcy orders, as the recognition

has potentially extensive effects on third parties.

On the facts, the Singapore Court of Appeal found that (i) the Indonesian Court had

jurisdiction on the basis of submission by the Respondents; (ii) The Indonesian Bankruptcy

Orders were final and conclusive, as the Respondents had failed to show that there was a

substantive appeal underway; and (iii) The Respondents had failed to prove their alleged

defences against the recognition of the Indonesian Bankruptcy Orders. The Court thus

upheld the order to grant recognition and assistance to the Applicants. The Applicants were

empowered to administer the Respondents’ property in Singapore, save that leave of court

should be obtained for transfers of real or immovable property and for the repatriation of any

assets out of Singapore.

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Restructuring Cases _______________________________________

11. Modifications to a scheme and scheme document are unobjectionable, if

the modifications are either sufficiently explained prior to a scheme

meeting, or if at the scheme meeting they are sufficiently minor

Re The Hong Kong Building and Loan Agency Ltd [2019] HKCFI 2088

The Hong Kong Building and Loan Agency Limited (the “Company”) applied for an order

sanctioning a Scheme of Arrangement between it and some of its creditors. The Company is

incorporated in Hong Kong and listed on the Main Board of the Hong Kong Stock Exchange.

The Scheme was passed at the creditors’ meeting with an overwhelming majority in number

and in value.

At issue is whether the court should decline to sanction a scheme where modifications are

made to the Scheme and Scheme document after the Scheme document was distributed to

the Scheme Creditors. Amendments were made at two stages, the first was before the

meeting took place. Further amendments were also made during the meeting itself.

The Court noted that there are no decision in Hong Kong which has dealt with the question of

amendment after the distribution of the Scheme document. As held in Re Mongolian Mining

Corp [2018] 5 HKLRD 48, it is necessary for creditors to be given sufficient information about

the Scheme to enable them to make an informed decision whether or not to support it. If

modifications are either sufficiently explained prior to a meeting, or if at the meeting they are

sufficiently minor that they are not likely to infringe this principle, the modifications are

unobjectionable. The Scheme was accordingly sanctioned.

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Corporate Disputes Cases

12. Singapore Court of Appeal rejected the suggestion that third-party offers

invariably represent the “best evidence” of the shares’ fair market value

Abhilash s/o Kunchian Krishnan v Yeo Hock Huat and another [2019] SGCA 14

The appellant, Mr. Abhilash is a minority shareholder of a company incorporated in

Singapore called JCS-Vanetec Pte Ltd (“JCSV”). The first respondent, Mr. Yeo Hock Huat

(“Mr. Yeo”) is the majority shareholder of JCSV. Mr. Abhilash initially brought an oppression

action against JCSV and Mr. Yeo, alleging that Mr. Yeo had conducted the affairs of JCSV in

a manner oppressive to him. The parties subsequently came to an agreement that Mr. Yeo

would purchase Mr. Abhilash’s shares and recorded a consent order to the effect that the

issue of liability for minority oppression would be dispensed with, and that the court shall

proceed to determine, at the trial, the fair market valuation of JSCV for the purposes of sale

and purchase of Mr. Abhilash’s shares in JCSV.

Before the High Court, Mr. Abhilash’s principal submission was that JCSV should be valued

on an income basis. The High Court Judge took the view that the income approach was

inapplicable as JCSV was not a going concern, and accepted Mr. Yeo’s submission that the

net assets basis of valuation was the applicable approach. Mr. Abhilash appealed to the

Court of Appeal against the High Court Judge’s decision.

Mr. Abhilash’s case on appeal is largely premised on an offer by a third-party to purchase all

the shares in JCSV for $50m. Mr. Abhilash claims that this offer was the best evidence of

JCSV’s market value. The offer was from a Chinese entity named Shanghai Ossen Aviation

Technology Co, Ltd. The $50m offer comprised $10m in cash and $40m in equity in

Shanghai Jiashi Aerospace Power Technology Co, Ltd (“Shanghai Jiashi”), a wholly-owned

subsidiary of Shanghai Ossen. Further, the offer was not an unconditional offer, but was

subject to due diligence. The key issue before the Singapore Court of Appeal is whether a

third-party offer in fact represents the best evidence of the fair market value of the shares

and if not, what probative weight, if any, should be ascribed to such an offer.

The Singapore Court of Appeal took the view that the court will not exclude evidence of a

third-party offer to be admitted. However, fair market valuation is a fact-sensitive exercise.

Evidence of a third-party offer is relevant but the appropriate weight to be ascribed to such

offers has to be determined on the facts of each case – specifically the terms and nature of

the offer. A distinction has to be drawn between (a) what a (hypothetical) genuine purchaser

is willing to pay; and (b) what the specific offeror was prepared to pay on the facts of a

particular case. The Court concluded that where there is evidence of a third-party offer to

acquire shares, and that offer is shown to have been made at arm’s length, is genuine, and

not speculative or conditional, the court can, and ought to, take that offer into account in

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25

determining the fair market value of the shares. These conditions are merely pre-conditions

before the court can even attribute any informational value to a third-party offer. The Court

however firmly rejected the suggestion that such offers invariably represent the “best

evidence” of the shares’ fair market value.

The Court then went on to state that the features of the Shanghai Ossen offer precludes the

Court from treating it as reliable evidence of JCSV’s “fair market value”. The Shanghai Ossen

offer was not an unconditional offer capable of immediate acceptance. It was subject to due

diligence which was never carried out. Further, the offer was not on a cash basis, while Mr.

Abhilash seeks a payout on the basis of an immediate payment of $50m. In conclusion, the

Singapore Court of Appeal held that Mr. Abhilash failed to prove that JCSV had a fair market

value of $50m and dismissed the appeal.

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13. Court of Appeal upheld that reasons are not required for the removal of a

director

Yeung Bing Kwong Kenneth v Mount Oscar Ltd [2019] HKCA 688

In the March issue of ONC Corporate Disputes and Insolvency Quarterly 2019, we discussed

the Court of First Instance decision in Yeung Bing Kwong Kenneth v Mount Oscar Ltd [2018]

HKCFI 2763. Mount Oscar Ltd (the “Company”) is a private company incorporated in Hong

Kong. It is beneficially owned by Yeung Chi Shing Estates Limited (“YCSEL”). The Company

had four directors, including the Applicant. On 26 January 2018, YCSEL, as the Company’s

majority shareholder, requested the board of directors to call an EGM to consider the

removal of the Applicant as a director.

Section 463 of the Companies Ordinance (Cap 622) (the “Ordinance”) affords a director who

is faced with a proposed resolution to remove him an opportunity to be heard and to make

representations at the meeting. The Applicant complained that no reasons had been given

for the proposal to remove him despite repeated demands. Hence he had not been given a

real, genuine or reasonable opportunity to make meaningful representations at the EGM. The

Applicant thus brought proceedings seeking (i) a declaration that the ordinary resolution to

remove him as director is invalid, and (ii) an injunction to restrain the Company from

implementing the resolution.

At first instance, Ng J dismissed the application and ordered the applicant to pay the costs of

the Company on an indemnity basis as the judge had taken the view that the originating

summons is wholly unmeritorious and should never have been bought. The Applicant

appealed.

The Court of Appeal noted that the shareholders have a statutory right of dismissal of

directors by ordinary resolution notwithstanding anything in the articles of association in any

agreement between the company and the director, which is a “very strong provision”:

Gower’s Principles of Modern Company Law at §14-49. It enables the shareholders to assert

themselves against the directors if need be by a simple majority and makes it clear that the

ultimate control is in the hands of the proprietors of the company. This power given to the

shareholders is unfettered and it allows the shareholders by ordinary resolution at any time to

remove any or all of the directors from office without having to assign a reason for so doing.

Further, the Court of Appeal held that the court will not interfere with the internal

management of companies acting within their power and in fact has no jurisdiction to do so:

Burland v Earle [1902] AC 83; Kwok Ping Sheung Walter v Sun Hing Kai Properties Ltd

[2009] 2 HKLRD 11. In particular, the court will not interfere for the purpose of forcing

companies to conduct their business according to the strictest rules, where the irregularities

complained of can be set aside at any moment: Browne v La Trinidad (1887) 37 Ch D 1.

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Lastly, the Court of Appeal agreed with the trial judge that it is entirely conceivable that there

will be situations in which a company does not know the reasons why a particular

shareholder proposes the resolution to remove a particular director, for instance, because

the shareholder has not disclosed and/or refused to disclose the reason to the company. In

that situation, the additional requirement of providing reasons to the affected director will put

the company in an impossible situation - on the one hand, the directors have no choice but to

call the general meeting requested by the shareholder, while on the other hand, the company,

acting by its directors, cannot meet the additional requirement of providing reasons to the

affected director prior to or at the meeting. The appeal was thus dismissed.

In relation to costs, the Court of Appeal took the view that whilst the trial judge is correct in

holding that there is no legal basis whether statutory or otherwise in support of the

application, the argument put forward do require some consideration how the statutory

provisions should be construed in the relevant context. The Court of Appeal did not find there

was an abuse of process and considered that the Applicant should not be penalized with

indemnity costs. The Court thus set aside the order for indemnity costs by the judge and

replace it with an order that the Applicant should pay all the costs of the Company in the

court below on a party and party basis.

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14. The Court has power to grant interim payment order under ss.724 and 725

of the Companies Ordinance (Cap 622)

Xu Liu Chun v Wu Chang Jiang and Another [2019] HKCA 975

The petitioner is the minority shareholder of Jiang Yuan International Development Limited

(the “Company”), holding 40% of its shares, while the respondent holds the remaining 60%.

Upon the petitioner’s application pursuant to sections 724 and 725 of the Companies

Ordinance (Cap 622) (the “Ordinance”) for a buy-out order, the Court found that the

petitioner had established unfair prejudice based on the withdrawal of US$4.4 million from

the Company by the respondent in favor of a company owned by the respondent and his wife

and the denial of financial information concerning the Company to the petitioner. DHCJ Lee

ordered that the respondent should buy out the shares in the Company held by the petitioner.

Subsequently, upon the petitioner’s application, DCHJ Patrick Fung SC ordered the

respondent to make an interim payment into the court in the sum of US$1.2 million. The

respondent appealed, contending that the Court has no jurisdiction to order interim payment.

The Court held that sections 724 and 725 of the Ordinance are in extremely wide terms.

Section 724(1)(a) provides that where the court considers that the affairs of a company are

or have been carried on in an unfairly prejudicial manner, the court may make an order

pursuant to section 725(1)(a), which in turn authorizes the court to make any order that it

thinks fit to deal with the unfairly prejudicial conduct. Provided that the court is satisfied that

there has been unfairly prejudicial conduct, its powers to grant relief are extremely wide.

Nothing in the relevant provisions of the Ordinance suggests that the power should be so

limited as to preclude the possibility of interim relief being given pending the final

determination of the price at which a buy-out should take place, when one is ordered. The

court thus has the jurisdiction to make an order for interim payment under sections 724-725

of the Ordinance.

The respondent further submitted that it was wrong for the judge to value the shares by

reference to the paid up capital of the Company. The Court rejected such argument and held

that the lack of a valuation does not preclude the court from arriving at a figure for interim

payment. Given that the finding of unfair prejudice was in large part based on the withdrawal

of US$4.4 million from the Company by the respondent, and that the valuation is to be

conducted on the basis that this amount is to be taken into account, there is at least a prima

facie case that the petitioner’s shares will be worth at least 40% of the US$4.4 million (i.e.

US$1.76 million). As the US$1.76 million figure mentioned above is substantially greater than

the amount of interim payment ordered, the Court considered that there is no reasonable

basis for the respondent to contend that he has been prejudiced by the deputy judge’s

approach to valuation. In conclusion, the Court dismissed the appeal.

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15. Moulin director found to be in breach of her duty to exercise care and skill

in performing her roles, as she failed to enquire and investigate in the face

of red flags

Moulin Global Eyecare Holdings Ltd v Lee Sin Mei Olivia [2019] 3 HKLRD 833

Moulin Global Eyecare Holdings Ltd (“Holdings”) was the parent company and listing vehicle

of the Moulin Group companies. Before its collapse in mid-2005, the Moulin Group was

apparently a highly successful eyewear manufacturer and distributor. Holdings was ordered

to be wound up in 2006. It was discovered that the Moulin Group’s financial statements had

been falsified by its senior management for many years by, inter alia, the creation of fictitious

sales to non-existent entities alleged to be customers in North America (the “North

American Debtors”). The falsification was to conceal the fact that the Moulin Group was

insolvent and loss-making. The senior management involved were subsequently convicted

and imprisoned for fraud. The defendant, Lee Sin Mei Olivia, was Holdings’ former non-

executive director, a member of Holding’s audit committee and principal adviser to Holdings.

The liquidators of Holdings commenced action against the defendant in 2008 on the basis

that had she performed her duty properly and required proper explanation for the numerous

irregularities, the fraud perpetrated by Holding’s senior management and its insolvency

would have been exposed much earlier. Some of the claims were subsequently abandoned

by the liquidators and the claim against the defendant at trial was limited to the aggregate

sum that was paid out in cash dividends and via share repurchase during the defendant’s

tenure as director. The defendant did not attend the trial.

The Court found that the North American Debtors did not exist and no products were ever

sold to them. The sales to them as recorded in Moulin Group’s financial statements were

entirely fictitious. The turnover and profits of Moulin Group were thus significantly overstated.

To determine the insolvency of Holdings and the Moulin Group, the financial statements for

Moulin Group and Holdings had to be revised/adjusted by reversing the accounting treatment

of transactions and assets identified as fictitious or faked in the evidence. The

revised/adjusted financial statements revealed that Moulin Group and Holding were insolvent

between 2001 and 2004 (the Relevant Period), and Holding did not have any distributable

reserves in the form of retained earnings or contributed surplus.

The Court found that the defendant, as legal adviser of Moulin Group, a director and a

member of the audit committee, had prior to and throughout her tenure, acquired knowledge

of matters and irregularities which ought to have caused her serious concern and prompted

further enquiry. However, in breach of her duty of care and skill as a director, the defendant

had failed to take any follow-up action and proper investigations which would have exposed

the senior management’s fraud.

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According to Holdings’ bye-law, Holdings could not lawfully pay dividends if it was insolvent

and repurchase of shares by Holdings while insolvent was also contrary to its bye-law and

the Bermuda Companies Act 1981.

The Court held that where dividends have been paid unlawfully, the effect is that there has

been an unauthorized return of capital and the directors are liable to replace the amounts so

paid out: Re Exchange Banking Company (1882) 21 Ch.D 519; Bairstow v Queens Moat

Houses plc [2001] 2 BCLC 531. Similarly, where shares have been repurchased by a

company in circumstances amounting to an unauthorized reduction of capital, the repurchase

is ultra vires: Trevor v Whitworth (1887) 12 App Cas 409. A director, as trustee of the

company property, is answerable as a trustee for any misapplication of the company’s

property in which he participated and which he knew or ought to have known to be a

misapplication. The Court further held that a director’s liability for the misapplication of

company property involving unlawful payment of dividends was strict. In the absence of any

defence under section 358 of the Companies Ordinance (Cap 32) or section 281 of the

Bermuda Companies Act 1981, the defendant is strictly liable to account to Holdings for the

unlawfully paid out dividends. In relation to the unlawful share repurchases, the Court was

not minded in the absence of considered argument from both sides to hold the defendant

strictly liable. However, the Court found that the defendant was in breach of her duty of care

and skill as a director. No share repurchases would have been made but for her breach.

Regarding the quantum of the damages, the Court found that Holding’s claim in respect of

the dividends paid in 2001 and share repurchased before 28 January 2002 were prima facie

time-barred. However, under section 32 of the Limitation Ordinance (Cap 347), for claims in

negligence, the limitation period could be extended to three years after the date when

Holdings had the knowledge required to bring an action against the defendant for the loss

suffered.

The earliest possible date that the fraud could have been uncovered by Holdings was on 12

May 2005 when investigating accountants were appointed and the review of the Moulin

Group commenced. The writ issued on 29 January 2008 was within time. Knowledge of

senior management of their own fraudulent misconduct should not be attributed to Holdings

in these proceedings, as the company is itself the target of the dishonesty: Morris v Bank of

India [2005] 2 BCLC 328.

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16. English High Court held directors’ liability as to unlawful distribution is

fault-based rather than strict

Burnden Holdings (UK) Limited (In Liquidation), Stephen John Hunt (as Liquidator of

Burnden Holdings (UK) Limited) v Gary John Fielding, Sally Anne Fielding [2019]

EWHC 1566 (Ch)

The liquidator of Burnden Holdings (UK) Limited (the “Company”) brought proceedings

against the Company’s two former directors, Mr. Fielding and Mrs. Fielding (the “Directors”)

alleging that they breached their fiduciary duties in respect of two transactions, namely (i) the

grant of security to themselves for loans made by them to the Company (the “Grant of

Security”); and (ii) a distribution in specie by the Company of its shareholding in a subsidiary

(the “Distribution”).

The Grant of Security was alleged to be a dishonest breach of a fiduciary duty, in the

absence of a board meeting to authorise it, and a transaction defrauding creditors. The

Distribution, on the other hand, was said to be unlawful and in breach of fiduciary duty

because it did not meet the requirements of the English Companies Act 1985, in particular

sections 263 and 270m, which requires that distributions could only be made from profits and

must be justified by reference to accounts.

In relation to the Grant of Security claim, the Court was satisfied on facts that all the directors

of the Company had effectively approved the loan agreement and the Grant of Security at a

properly convened board meeting. Further, the Court considered that the grant had been for

the company’s benefit and could not therefore be a transaction defrauding creditors. Such a

transaction had to be for “no” consideration: Re MC Bacon Ltd (No.1) [1989] 11 WLUK 409.

As to the Distribution claim, the Court first considered whether the liability was fault-based or

strict. The Court noted that the authorities on this conflicted over the past 150 years. After a

review of the relevant authorities, the Judge considered that the law was established to be as

follows. First, directors, although not trustees, were to be treated as if they were trustees in

relation to the company's funds. Second, if they knew the facts which constituted an unlawful

dividend, then they would be liable as if for breach of trust irrespective of whether they knew

that the dividend was unlawful. Third, however, if they were unaware of the facts which

rendered the dividend unlawful then provided they had taken reasonable care to secure the

preparation of accounts so as to establish the availability of sufficient profits to render the

dividend lawful, they would not be personally liable if it turned out that there were in fact

insufficient profits for that purpose. Fourth, they were entitled to rely in this respect upon the

opinion of others, in particular auditors, as to the accuracy of statements appearing in the

company's accounts. In particular, the Judge cited the comments of Nelson J in Bairstow v

Queen’s Moat Houses plc [2000] BCC 1025, in which his Lordship said that “no repayment of

an improperly paid dividend will however be ordered where the payment was made without

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fault on the part of the directors.” Nothing in the authorities cited as the leading authorities for

the strict liability view, said the Judge, undermines the above conclusion. In preferring a fault-

based approach, the Judge effectively departed from the views expressed by the Supreme

Court in Holland v Revenue and Customs and another; Re Paycheck Services 3 Ltd [2010]

UKSC 51.

On the facts, the Court found that the Distribution was made at a properly convened board

meeting. Furthermore, even if the value of any asset in the said interim accounts ought to

have been written down, or other liabilities should have been included, and even if that would

have resulted in there being insufficient reserves for a lawful distribution, the Court found that

the Directors were not culpable as it was reasonable for the Directors to rely on other

professionals in preparing the interim accounts.

The Court also rejected the liquidator’s allegation that the Directors knew that the Company

was, or was likely to become, insolvent at the time of making the Distribution and had failed

to consider the creditors’ interests. The “balance sheet test”, i.e. whether the company’s

assets are sufficient to discharge its liabilities, was applied in this case as there was very little

in the way of debts falling due from time to time to third parties given that the Company was

a holding company funded primarily by lending from the Directors so the alternative “cash

flow or commercial insolvency test” is not applicable. On the evidence, the Court decided that

the liquidator failed to discharge its burden to satisfy the balance sheet test. In any event,

even if the Company was insolvent or likely to be insolvent when the Distribution was made,

the Directors were not aware of any insolvency of the Company. The claims were thus

dismissed.

In our view, notwithstanding the finding that the Directors were not culpable as they

reasonably relied on other professionals in preparing the interim accounts, the Directors, who

were also the recipients of the Distribution, had no doubt received an unjustified benefit, i.e.

the shareholding of the subsidiary, at the expense of the Company. Had the liquidators

brought an unjust enrichment claim against the Directors, it is submitted that there is a real

likelihood that they could succeed.

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17. Proving dishonesty and “blind-eye knowledge” in fraud-related causes of

action against bank creditor

Re Galleria (Hong Kong) Limited [2019] HKCFI 1877

Galleria Group, comprising Galleria Inc (USA) and Galleria (HK) Ltd (“GHK”) (in liquidation),

had a business history of more than 20 years. The business of GHK was financed by

borrowings from multiple banks, including but not limited to one of its largest creditors DBS

Bank Ltd (Hong Kong Branch) (“DBSHK”). From 2004 to 2009, GHK’s directors fabricated

and submitted fraudulent bills of lading to lenders and DBSHK. In around March 2016,

DBSHK inquired the authenticity of B/L with International Maritime Bureau of the International

Chamber of Commerce and was informed that some of the bills of lading were false while

some appeared to be genuine in various IMB Reports (“IMB Reports”). After receiving the

IMB Reports, DBSHK did conduct an internal investigation but eventually decided to increase

its lending to GHK. Since January 2008 and in the context of the Subprime Crisis, DBSHK

considered a reduction in financing to GHK, and did thereafter manage to considerably

reduce its lending to GHK from US$34.9 million in March 2006 to approximately US$7.7

million in February 2010 whereas other lenders had substantially increased their lending in

the meantime.

The liquidators of GHK (“Liquidators”) commenced proceedings against DBSHK on the

grounds of (a) knowing receipt, (b) dishonest assistance, and (c) fraudulent trading (“3

Causes of Action”), relying mainly on that DBSHK must have known of, or deliberately

turned a blind-eye to, GHK’s fraud, but failed to inform other lenders and therefore causing

them a loss of about US$185.5 million.

Each of the Three Causes of Action requires the proof of mental elements on the part of the

wrongdoer. The Court found that this action is a case of dishonesty which requires proof

based on cogent or “compelling evidence”. The applicable principles of dishonesty are both

subjective and objective. Although the question of a person’s state of mind, which concerns

what the person actually knows, is subjective, the Court shall objectively assess whether the

person is honest or dishonest given what he knows. Carelessness or negligence are not in

themselves manifestations of dishonesty. Knowledge of a fact may be imputed to a person if

he suspects certain facts may exist but turns a blind eye to it, namely deliberately or

consciously (not negligently) abstaining from enquiry so as to avoid certain knowledge of

what he already suspects to be the case. The suspicion must be firmly grounded and

targeted on specific facts: Group Seven Ltd v Notable Services LLP [2019] EWCA Civ 614.

After taking a holistic view of the evidence, the Court rejected the Liquidators’ case on

knowledge of fraud or dishonesty on the part of DBSHK. It is of the view that DBSHK has

not seen the IMB Reports as fraud risk since it was told that the findings that some bills of

lading are false or not in order are not unusual. DBSHK was also told that GHK account was

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operating normally. It achieved 26% sale growth in 2005 and did make some repayments.

DBSHK did not want to raise a false alarm of fraud. Although DBSHK reduced its lending to

GHK after IMB Report, the Court considered it was against the backdrop of the Subprime

Crisis that the facilities granted to GHK were restructured. The Court also indicated that the

wide circulation of the IMB Reports is a fundamental weakness in the Liquidators’ case. It is

inconceivable that one will think of turning a blind-eye to a fraud which many of his

colleagues know and all colleagues were at the same time turning a blind-eye to it.

Based on the finding that DBSHK was a victim of GHK’s fraud, the Court found it difficult to

see (a) how knowledge of a number of fraudulent transactions practised on DBSHK can be

equated with knowledge that GHK’s business was being carried on with intent to defraud

creditors or for a fraudulent purpose; and (b) how knowledge that one is being defrauded can

translated into being a party to such fraud. In particular, the proposition that DBSHK

dishonestly induced or assisted in a breach or fraud on itself defies all common sense. The

action was thus dismissed.

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Bankruptcy Cases

18. Is arbitration clause an absolute bar to winding-up petition?

- The latest position after the Lasmos case

But Ka Chon v Interactive Brokers LLC [2019] HKCA 873

Mr. But, an experienced trader, opened an online portfolio margin account with Interactive

Brokers LLC (“IB”), an online broker-dealer, which provides a platform for online trading in,

among other things, currency futures. In about January 2015, Mr. But’s account suffered a

large loss when the Swiss Franc/Euro exchange rate was unpegged in 2015. IB issued a

margin call but Mr. But failed to inject funds into the account to resolve the margin deficit. IB

accordingly proceeded to liquidate Mr. But’s assets and positions and served a statutory

demand on Mr. But for the balance of the deficit plus interest at margin interest rates. Mr.

But’s solicitors then wrote to IB’s solicitors disputing the debt in the statutory demand and

further stated that they were instructed to initiate arbitration between the parties pursuant to

an arbitration clause in Mr. But’s contract with IB. Mr. But subsequently took out an

application to set aside the statutory demand on the basis that, among other things, the

dispute should be arbitrated pursuant to the arbitration clause. The first instance judge

dismissed the application. Mr. But appealed to the Court of Appeal.

The Court of Appeal noted the decision of Harris J in Re Southwest Pacific Bauxite (HK) Ltd

[2018] 2 HKLRD 449 (the “Lasmos” case), which made a substantial departure from

previous authorities at first instance in Hong Kong. By the new approach in Lasmos, it was

held that a petition to wind up a company on insolvency grounds should “generally be

dismissed” when these three requirements are met:

(1) If a company disputes the debt relied on by the petitioner;

(2) The contract under which the debt is alleged to arise contains an arbitration clause that

covers any dispute relating to the debt; and

(3) The company takes steps required under the arbitration clause to commence the

contractually mandated dispute resolution process (which might include preliminary

stages such as mediation) and files and affirmation in accordance with rule 32 of the

Companies (Winding-Up) Rules (Cap 32H), demonstrating this.

The Court of Appeal agreed with the judge below finding that the new approach in Lasmos

was inapplicable, as there was no genuine dispute to be arbitrated. Further, even if the

Lasmos approach was applicable, the Court of Appeal agreed with the trial judge that the

application to set aside the statutory demand should still be refused for want of the fulfillment

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of the third requirement in Lasmos, in that Mr. But had not taken any steps to commence the

contractually mandated dispute resolution process.

In particular, the Court of Appeal noted that in the letter dated 16 December 2016 from Mr.

But’s solicitors to IB’s solicitors, it was stated that Mr. But’s solicitors were instructed “to

initiate arbitration between the parties” and requested IB’s solicitors to reply if they had

instructions “to accept service of our client’s Notice of Arbitration”. When IB’s solicitors did

not respond to the inquiry if they had instructions to accept service of such “Notice of

Arbitration”, Mr. But’s solicitors did not take that up ever again or effect service of any

document on IB that may be regarded as a “Notice of Arbitration”. In these circumstances,

the Court of Appeal took the view that the letter of 16 December 2016 can hardly be

regarded as proper notice of an intention to arbitrate.

The Court of Appeal also made the following obiter observations on the Lasmos approach

given the importance of this issue to insolvency proceedings. First of all, the Court of Appeal

recognized that the insolvency proceeding does not come within the wording of article 8(1) of

the UNCITRAL Model Law (which has effect by virtue of section 20 of the Arbitration

Ordinance (Cap 609)). It follows that there is no automatic mandatory or non-discretionary

stay under that provision. The court has a discretionary power under insolvency legislation

whether to dismiss or stay a petition where the alleged debt arises out of a transaction

containing an arbitration agreement. Creditors have statutory rights to petition for bankruptcy

or winding up on the ground of insolvency. It is contrary to public policy to preclude or fetter

the exercise of this statutory right: Re Greater Beijing Region Expressways Ltd [1999] 4 HKC

807; Re Sit Kwong Lam (Debtor) [2019] 2 HKLRD 924. The Court of Appeal observed that

even though the Lasmos approach (which follows the English case Salford Estates (No 2)

Ltd v Altomart Ltd (No.2) [2015] Ch 589) may not be regarded as totally precluding a creditor

from invoking the insolvency jurisdiction of the court, it is a substantial curtailment of his

statutory right.

It was further noted that in the BVI case of Jinpeng Group Ltd v Peak Hotels and Resorts Ltd,

the Eastern Caribbean Court of Appeal declined to adopt the Salford approach holding that

the BVI court’s statutory jurisdiction to wind up a company based on its inability to pay its

debts as they fall due unless the debt is disputed on genuine and substantial grounds is “to

firmly a part of BVI law” to now require a creditor exercising the statutory right to prove

exceptional circumstances to establish his status to apply to wind up a company. The Court

of Appeal therefore had reservations if the discretion under the insolvency legislation should

be exercised only one way to substantially curtail the right of the creditor to present a petition.

However, the Court of Appeal did recognized that considerable weight should be given to the

factor of arbitration in the exercise of the Court’s discretion and such discretion should not be

exercised in a way that would inevitably encourage parties to an arbitration agreement to

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seek to bypass the arbitration agreement/legislation by presenting a winding-up petition. The

court is not powerless to deal with such tactics. Possible ways of exercising this discretion

include requiring the debtor to establish in the normal way that there is a bona fide dispute on

substantial grounds, failing which, the debtor can only expect a short adjournment to enable

it to commence arbitration and then, if sufficient evidence to establish a genuine dispute is

still absent it can expect to have to give an undertaking to proceed with the arbitration with all

due dispatch. The debtor cannot simply put up its hands and say: “You, the court, have no

jurisdiction because of my contract.” That is not what the contract says, and the court is

entitled to be satisfied that there is a proper dispute.

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19. Court ordered co-trustee be removed where it is clear that the working

relationship between the joint and several trustees has completely broken

down

Tsim Che Kong v Kwok Kwan Ying [2019] HKCFI 1822

The applicant is one of the joint and several trustees in bankruptcy in 918 bankruptcy cases.

The applicant applies for the removal of the respondent as the other co-trustee. Application is

also made for the appointment of a replacement trustee, namely, Miss Kwok Nga Yin, Irene.

The applicant alleged, among things, that it is impracticable for the respondent to continue as

one of the trustees. The court’s power to remove trustees under section 96 of the Bankruptcy

Ordinance (Cap 6) is well established. Under section 96(2)(3) of the Ordinance, the court

may remove a trustee from office and appoint another person in his place if the court is of

opinion that the interests of the creditors require it.

The Court noted that it is quite clear that the working relationship between the applicant and

the respondent has completely broken down. The applicant and the respondent are not on

speaking terms. They cannot realistically be expected to carry on together as joint and

several trustees in an ongoing bankruptcy. The respondent has indicated that she is

prepared to resign. In the circumstances, the Court held that it would be in the interests of

the creditors and the administration of the estates for the respondent to step down. It was

thus ordered that the respondent be removed and Miss Kwok Nga Yin Irene be appointed in

the respondent’s place as one of the joint and several trustees with the applicant in the

estates in question.

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20. Court held that it is not right to invoke section 29 of the Bankruptcy

Ordinance, where no assets can be recouped to enhance the value of the

bankruptcy estate

The Joint and Several Trustees of the Property of So Ching Wan v Assen Ltd (in

liquidation) and others [2019] HKCFI 1491

Mr. So Ching Wan (the “Discharged Bankrupt”) was adjudicated bankrupt on 19 August

2002. The Discharged Bankrupt used to be a director and is still a shareholder of Assen

Limited, the 1st respondent, which has been wound up. The 2nd to 4th respondents were

directors and are still shareholders of the 1st respondent. On 27 July 2015, the Joint and

Several Trustees of the Property of the Bankrupt (the “Trustees”) took out a summons under

section 29(1) of the Bankruptcy Ordinance (Cap 6) to direct that the 1st respondent and/or

each of the 2nd and 4th respondents to answer a list of questions and to provide a list of

documents primarily to help the Trustees to ascertain the real worth of the Discharged

Bankrupt’s shareholding in the 1st respondent. On 7 June 2016, Chung J made an order

that:-

“The 1st respondent and/or each of the 2nd and 4th respondents, being directors of the

1st respondent, do provide the Applicant the answer(s) and/or document(s) as set out in

the schedules attached to this Order marked as ‘Annex A’ and ‘Annex B’ within a

reasonable period (in any event, not more than 21 days from the date of this Order.”

(“Chung J’s Order”)

In particular, in Chung J’s decision, it was stated that “such investigation would help the

trustees’ determination of (among other things) whether the suit properties still belong to

Assen.

With a view that Chung J’s Order was not complied with, the Trustees took out another

summons on 22 November 2018, seeking to enforce Chung J’s Order pursuant to Order 45.

Rule 6 of the Rules of the High Court (Cap 4A). However, in addition to seeking the

production of the documents as directed in Chung J’s Order, the Trustees also sought oral

examination and for the respondents to file an affidavit/affirmation to state the reasons for not

being in such a position to produce the documents as required under Chung J’ Order. The

respondents contended that this is not an enforcement application of Chung J’s Order, but

rather an entirely new application.

The Court agreed that the reliefs sought in the renewed application, such as the oral

examination of the 2nd to 4th respondents, go beyond the ambit of Chung J’s Order. The

Court thus held that this is a new application under section 29 of the Bankruptcy Ordinance

(Cap 6). Since Chung J’s Order, there have been two significant developments. Firstly, the

1st respondent has been wound up by an order of the court on 2 November 2016 and

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liquidators were appointed to take over and investigate the affairs of the 1st respondent.

Further, on 25 August 2016, Kingston Capital Investment Limited (“Kingston”), as

mortgagee in possession, sold the suit properties by auction to one Ample Sparkle

Development Limited.

In relation to an application under section 29 of the Bankruptcy Ordinance, the applicant

must satisfy the court (1) the provision of information or documents is reasonably required for

him to carry out his functions; (2) a prima facie case that the respondent is able to provide

such information or documents. If these criteria are met, the court must carefully strike a

balance between the applicant’s reasonable requirements and the need to avoid making an

order which is wholly unreasonable, unnecessary or oppressive to the person concerned:

Hau Po Man Stanley (in bankruptcy) v Joint and Several Trustees [2008] 1 HKC 256.

Having considered the parties’ respective submissions, the Court considered that the new

section 29 application should be dismissed for the following reasons. Firstly, the 1st

respondent has been wound up. Liquidators were appointed into the 1st respondent. The

affairs of the 1st respondent are under the supervision of the liquidators of the 1st respondent.

The liquidators of the 1st respondent has confirmed that the 1st respondent has duly

recovered all its assets and distributed to its creditors. Secondly, the Court accepted that in

contrast to the circumstances existed at the time when Mr. Justice Chung made his orders,

presently, based on the evidence before the Court, there are no assets to be recouped which

can enhance the value of the Discharged Bankrupt’s shareholding in the 1st respondent. As

such, the Court took the view that it is not right to invoke section 29 of the Bankruptcy

Ordinance to order the respondents to carry out a futile exercise. Thirdly, the Court

considered that a large part of the documents sought under Chung J’s Order are not

concerned with dealings with the Discharged Bankrupt. They all relate to the internal affairs

of the 1st respondent. Lastly, the Court held that it is oppressive to require the 2nd to 4th

respondents to provide information and documents and to commit themselves on oath when

the Trustees positively allege that the 2nd to 4th respondents have committed the crime of

perjury and are in contempt of court: Cloverbay Ltd v BCCI Ltd [1991] Ch 90. For the above

reasons, the Court declined to accede to the Trustees’ application.

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21. Material non-disclosure in applying for an order for substituted service of

the bankruptcy petition could result in the bankruptcy order being

annulled

Re Sung Sze Yin Daniel [2019] HKCFI 2264

Mr. Sung Sze Yin Daniel (the “bankrupt”) had been the insurance agent of the petitioner, an

insurance company, but their agreements were terminated on 8 March 2018. Thereafter the

bankrupt failed to repay the advance bonus and interest to the petitioner after several

demands. Unable to effect personal service of the bankruptcy petition on the bankrupt, the

petitioner applied for an order for substituted service of the bankruptcy petition so that the

same was effected on the bankrupt by an advertisement in newspaper and ordinary post to

the last known address (the “Kowloon City Address”) of the bankrupt. A bankruptcy order

was subsequently made against the bankrupt. The bankrupt applied to have the bankruptcy

order annulled. In short, the bankrupt said that the petitioner knew that he was no longer

living at the Kowloon City Address and the phone number the petitioner used to contact him

was incorrect.

In an application to annul a bankruptcy order, the bankrupt has to show on balance that the

bankruptcy order ought not to have been made. If the court is satisfied that the order ought

not to have been made, it is not bound as a matter of course to annul the bankruptcy order,

but must consider in the light of all the circumstances whether the order ought to be annulled:

Re Chan Chi Ho, ex p Strong Well International Ltd [2008] 5 HKLRD 871.

On the facts, the Court accepted that the petitioner was informed that the bankrupt was no

longer residing in the Kowloon City Address. The petition was thus not properly served upon

the bankrupt, notwithstanding the substituted service having been made. Further, the Court

considered that the petitioner failed to disclose to the court all the material information in its

hands during the application for substituted service. The Court accepted that the bankrupt

had no knowledge of the petition and making of bankruptcy order until sometime in late

March 2019.

The petitioner further alleged that the bankrupt had not shown a strong prima facie case that

the underlying debt was disputed. The bankrupt made assertions as to an appeal process

which might impact the debt but had adduced no evidence on the same. The bankrupt also

claimed that he was able to pay but had not produced any evidence. Balancing the

petitioner’s arguments against the material non-disclosure of the petitioner at the time when

he asked for order of substituted service, the Court considered it appropriate to have the

bankruptcy order annulled but it made no order as to costs as both parties succeeded on

only some of the issues argued before the Court.

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22. The general fitness of a trustee in bankruptcy is a disciplinary matter. It is

not open to the Official Receiver to apply administrative actions to

suspend the trustee’s practice without invoking the disciplinary

proceedings

Re Chan John Loong Fai [2019] HKCFI 1886

A bankruptcy order was made against the bankrupt on 17 January 2018. The Official

Receiver was appointed the provisional trustee of the estate of the bankrupt. The creditors’

meeting subsequently passed a resolution to appoint Mr. Alan Chung Wah Tang (“Mr.

Tang”), Mr. Kan Lap Kee, and Ms. Anita Hou, all of SHINEWING Specialist Advisory

Services Ltd, as the joint and several trustees of the bankrupt’s estate. The Official Receiver

(“OR”) took out an application pursuant to section 17 of the Bankruptcy Ordinance (Cap 6)

and rr. 157 and 158 of the Bankruptcy Rules (Cap 6A) for directions as to whether Mr. Tang

is a fit and proper person to be appointed as one of the joint and several trustees in this case.

Section 17(1) of the Bankruptcy Ordinance provides “the power to appoint some fit persons

as trustee (whether the first such trustee or a trustee appointed to fill any vacancy) is

exercisable, except at a time when an order for the summary administration of the bankrupt’s

estate is in force, by a general meeting of the bankrupt’s creditors.”

Rule 158 of the Bankruptcy Rules further provides “In any case of doubt or difficulty or in any

matter not provided for by the Ordinance or any rules thereunder relating to any proceedings

in court, the Official Receiver may apply to the court for directions.”

Relying on the fact that Mr. Tang has been found guilty of contempt of court in Ip Pui Lam

and Anor v Alan Chung Wah Tang and Anor (HCMP 450/2016 and CACV 214/2016), the OR

contends that the conduct of Mr. Tang, whether as a professional accountant, a liquidator or

an officer of the court, has been seriously questioned by the court and there is a serious

doubt on his fitness for appointment as liquidator and trustee in bankruptcy. The OR also

referred to miscellaneous grounds of his stubbornness and unnecessarily confrontational

behavior in court.

The Court found that although the OR said that she opposed Mr. Tang’s appointment “in this

case”, her grounds are against his fitness to be appointed as trustee or liquidator in general.

The OR has not cited any special cause or reasons that has made Mr. Tang unfit particularly

for this case. Furthermore, the Court held that rule 158 is for application for directions in case

of doubt or difficulty or in any matter not provided for by the Bankruptcy Ordinance or any

rules thereunder. It is not intended for removal of trustee for misconduct.

Even if rule 158 is applicable, the Court considered that save and except his contempt of

court, Mr. Tang has been performing his duties as trustee and liquidator without any problem

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since 1986. For his contempt of court, he had been duly punished. It is not open to the OR to

administer further punishment on Mr. Tang for his contempt. His fitness in general is a

disciplinary matter. It is a matter for the disciplinary committee of the professional body that

he belonged. The OR cannot apply administrative actions to suspend his practice either

generally or selectively and either permanently or temporarily without invoking the

disciplinary proceedings. The OR’s application was thus dismissed.

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23. In determining whether a creditor is a secured creditor in the context of

the bankruptcy legislation, the Court shall look at whether their security

would benefit the general bankruptcy estate if it was surrendered

Promontoria (Chestnut) Limited v Charles Phelan Bell, Angela Bell [2019] EWHC 1581

(Ch)

Mr. and Mrs. Bell were directors and shareholders of a company called 34 Julian Road Dev

Limited (the “Company”). Clydesdale bank (the “Bank”) advanced facilities to the Company

in a sum not exceeding £783,000. Mr. and Mrs. Bell then entered into a personal guarantee,

in respect of the Company's present and future borrowing from the Bank, up to a limit of

£170,000. In addition, Mr. Bell executed a mortgage over a property owned by him, and Mr.

and Mrs. Bell executed a mortgage over a property owned jointly by them, in both cases to

secure the Company's lending to the Bank. Each of the mortgages contained a clause

negating any personal liability on the part of Mr. and Mrs. Bell to pay to the Bank any of the

Company's liabilities.

The Company failed to repay the loan. By a deed of assignment, Promontoria (Chestnut)

Limited (the “Creditor”) acquired the Bank’s rights under the facility, the guarantee and the

mortgages. The Creditor issued demand letters to Mr. and Mrs. Bell demanding repayment of

£170,000 under the guarantee. In the absence of payment, the Creditor then served statutory

demands on Mr. and Mrs. Bell. The statutory demands were subsequently set aside on the

basis that the Creditor had failed to specify the nature of the security held in respect of the

debt and its value in the statutory demands, contrary to Rule 6.1 (5) of the English Insolvency

Rules 1986. The Creditor appealed.

The Creditor contended that the judge below failed to distinguish between two different debts,

i.e. the Company’s debt to the Creditor and the debt owed by Mr. and Mrs. Bell under the

personal guarantee. The Creditor contended that the security it held over Mr. and Mrs. Bell’s

properties by way of mortgages was in respect of the Company’s indebtedness and did not

secure the personal debt Mr. and Mrs. Bell owed under the guarantee. As such, the Creditor

did not hold any security in respect of the debt claimed in the statutory demands.

On appeal, the Court agreed with the judge below that the mortgages provided by Mr and

Mrs Bell for the indebtedness of the Company to the Creditor are security in respect of the

debt upon which the statutory demand were based. The long-standing principle in bankruptcy

proceedings was that they were intended as a method of collective realisation of the assets

of a debtor, to be distributed for the benefits of all creditors, not a means for a single creditor

to enforce their debt. Although there are two different debts, one owed by Mr. and Mrs. Bell

and one owed by the Company, both forms of security provided by Mr. and Mrs. Bell are

rooted in the same debt. If the security of the Creditor was given up it would augment the

bankruptcy estate of Mr. and Mrs. Bell: see White v Davenham Trust Ltd [2011] EWCA Civ

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747, [2011] Bus. L.R. 1443, [2011] 6 WLUK 672. It is for this reason the definition of secured

creditors could extend to circumstances where the creditor held security in respect of another

party’s debt. Accordingly, the Court upheld the decision that the statutory demands served

on Mr. and Mrs. Bell shall be set aside for failure to specify the nature and value of security.

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24. English High Court found a second application brought by a bankrupt to

annul his bankruptcy an abuse of process where the first application had

been struck out for the bankrupt’s failure to comply with court directions

Philip John Lambert v Forest of Dean District Council, Andrew James Nichols, John

William Butler [2019] EWHC 1763 (Ch)

The applicant, Mr Philip Lambert (“Mr. Lambert”) owed the Forest of Dean District Council

(the “Council”) unpaid council tax as well as non-domestic rates in respect of several

properties owned by Mr Lambert at Linear Business Park, Cinderford. The Council obtained

liability orders from Gloucester Magistrates’ Court totalling £72,752. The Council then served

a statutory demand at the office of one of Mr. Lambert’s businesses. In the absence of

payment, the Council presented a bankruptcy petition against Mr. Lambert. A bankruptcy

order was subsequently made against Mr. Lambert.

The present application is Mr. Lambert’s second annulment application made under section

282(1)(a) of the English Insolvency Act 1986. Mr. Lambert contends that the liability orders

on which the petition was based, the statutory demand and the petition were served on an

address to which he had no connection. Therefore, the bankruptcy order ought not to have

been made.

The Court dismissed Mr. Lambert’s application for the following reasons. First, the Court

found that the present application is an abuse of process as Mr. Lambert had demonstrated

a wholesale disregard for court orders and the procedures designed to deal with cases justly

and at proportionate cost. The Judge pointed out that when Mr. Lambert’s first annulment

application had been struck out for failure to comply with an unless order, he should have

applied for relief from sanction under rule 3.9 of the Civil Procedure Rules. By bypassing this

process and still without attempting to comply with the costs order, Mr. Lambert had abused

the court’s process. The Court added that, even had Mr. Lambert applied for relief from

sanction, this would still have been refused due to the seriousness of his failures to comply

with court directions. Further, even if taking into account the merits of the application, it would

have been refused as the bankruptcy order was founded on statutory debts that were

indisputably due and owing, with no evidence that those debts could be paid. The absence of

fraud or miscarriage of justice in the present application gave no justification for a bankruptcy

court to go behind the liability orders: see Yang v Official Receiver [2017] EWCA Civ 1465.

There was also no evidence as to how the debts could be paid.

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Published by ONC Lawyers © 2019