Insolvency Law — Court dismisses Trustees-in-Bankruptcy’s applications for disclosure against third parties
The case of Chen Yung Ngai Kenneth and Chen Mei Mei v China New Investments Limited & others [2024] HKCFI 3169 was the most recent episode in the complex and long-running saga of proceedings and applications arising from the controversial bankruptcy of Ho Yuk Wah David (“David Ho”), who was adjudged bankrupt in 2011 and whose bankruptcy was discharged in 2019.
Notwithstanding the discharge, the Trustees-in-Bankruptcy had continued to press and sought disclosure orders under s.29 of the Bankruptcy Ordinance (Cap. 6) and s.21 of the Evidence Ordinance (Cap. 8) against several respondents, including China New Investments Limited (“CNIL”) and its director Mr. Cheung (the 1st and 2nd Respondents respectively), and sought an order for Mr. Cheung to be orally examined in relation all relevant matters and transactions. The Trustees alleged, inter alia, that the source of CNIL’s funding of various legal actions was linked to David Ho and the 1st and 2nd Respondents were nominees of David Ho. However, the High Court, upon extensive review of evidence, dismissed the Trustees’ application for disclosure with costs awarded to CNIL and Mr. Cheung, finding, inter alia, that there was no reasonable basis to suspect the source of funding or to believe that CNIL or Mr. Cheung were acting as David Ho’s nominees whereby that they had, at critical times, actually acted against David Ho’s interest.
Patrick Szeto instructed by Messrs. Cheng, Yeung & Co represented the successful 1st and 2nd Respondents.
Emily Ting considers the decision below.
Facts
Upon his own petition, David Ho was declared bankrupt in August 2011, with his bankruptcy discharged in 2019. The current Trustees were appointed in January 2020 succeeding former trustees. The Trustees alleged that CNIL’s funding of various legal actions was linked to Ho, particularly in three key areas:-
HCA 806 of 2006 (the “806 Action”), which was commenced by Asia-Pac Infrastructure Development Limited (“APIDL”) and three other companies in the Asia-Pac Group controlled by David Ho against their former legal advisers for negligence and breach of duty. APIDL was adjudged to be beneficially owned and controlled by David Ho in HCA 971/2012.[1] After APIDL was placed into creditors’ voluntary liquidation in 2013, its liquidations decided to continue the 806 Action.
The personal bankruptcy of Lee Siu Fung Siegfried (“LSF”) whence part of LSF’s personal debts were purchased by Keentrade Investments Limited in August 2005. Keentrade received a settlement sum from the liquidation of CWT Textile Supplies Company Limited (“CWT”) which was said to have been funded by David Ho. Part of the settlement was used to fund the bankruptcy proceedings of LSF. Keentrade assigned the LSF debts to Heartbest Commercial Company Limited which had agreed to fund the LSF proceedings, who later, in 2015, in turn assigned the LSF debts to CNIL which had also agreed to fund the LSF proceedings.
The liquidation of Siu Fung Ceramics Holdings Limited (“SFC”) whereby in 2006, David Ho purchased, through Keentrade, the debts of SFC and its subsidiaries for a sum of HK$3 million which originated from David Ho after going through various corporate nominees of his. In 2012, Keentrade assigned the SFC debts to Heartbest, who subsequently assigned them to CNIL.
The parties’ respective contentions
The Trustees sought production of voluminous documents and information from the Respondents, arguing that there was reasonable suspicion that CNIL’s funding in the said three areas were all related to David Ho, and that the subject fundings were David Ho’s money and were provided by him.
The application was opposed by CNIL and Mr. Cheung, who argued that they were innocent and independent litigation funder(s) unrelated to David Ho. They objected on four main grounds, namely: –
1. There was no basis to suggest David Ho was hiding funds which he could use for litigation funding purposes.
2. CNIL and Mr. Cheung were bona fide funders not under David Ho’s control. They had acted contrary to the interests of David Ho.
3. The Trustees should enforce the orders made by the Court of Appeal against the APIDL liquidators rather than burdening innocent parties with such a substantial application.
In light of the dismissal of the 806 Action, any order to be made would be unreasonable, unnecessary and oppressive.
The Court’s analysis
There was no dispute that the Trustees must satisfy the Court that the information or documents “relate to the bankrupt, his dealings or property”; that the provision of information or documents is reasonably required for them to carry out the Trustees’ functions; and that the respondent is able to provide such information or documents. The threshold in law and on evidence is reasonable suspicion.
In respect of the 806 Action, the Court found that the second ground of opposition was made out. The Court was satisfied that CNIL and Mr. Cheung were bona fide funders not under the control of David Ho and had acted against David Ho’s interest at a critical moment. Once that was established, the suspicions on the part of the Trustees as to the fund flows could no longer be regarded as “reasonable” and the s.29 application for disclosure should be dismissed. The Court based its decision mainly on the following matters:-
– Mr. Cheung was not David Ho’s subordinate or family member, but was and is a man of means who could afford the litigation funding. David Ho had never been a shareholder or director of CNIL which was incorporated in 2009 as an investment vehicle. There was no reason for Mr. Cheung to act as a nominee of a bankrupt whom he did not know until December 2014.
– The change of funder from the previous funder True Treasure Enterprises Ltd to CNIL, at the eleventh hour just before the deadline for APIDL to pay security for costs to keep the 806 Action alive, was indicative that CNIL was not a nominee of David Ho. If David Ho had hidden funds, he would not have risked the dismissal of the 806 Action.
– Before CNIL stepped in, another funder Fidelity Insurance Co Ltd had taken an interest in co-funding with CNIL and Mr. Cheung. If CNIL and Mr. Cheung had indeed been David Ho’s nominee, Mr. Cheung would not have approached Fidelity, a regular business partner of CNIL’s and an innocent third party, to co-invest, and there would have been no reason why Mr Cheung had to withdraw his investment with Fidelity to fund the 806 Action, instead of using money from David Ho.
– The funding for 6 years caused CNIL and Mr. Cheung to suffer a total loss of HK$14.74 million, which consisted of mostly legal fees. The evidence showed that the payments in to CNIL and Fidelity were from sources unrelated to David Ho.
– CNIL terminated the funding agreement for the 806 Action in January 2021 at a crucial stage in the 806 Action. If CNIL/Mr Cheung were indeed David Ho’s nominees, David Ho would have done everything he could to ensure that there would be funding for that trial.
– Even if the funding provided by CNIL eventually went to David Ho from the APIDL liquidators’ hands, that would be a matter beyond the control of CNIL or Mr. Cheung and was for the APIDL liquidators to explain.
The third ground of opposition was also made out in respect of the 806 Action. The Court noted that it may not grant a s.29 Bankruptcy Ordinance order if the trustee has not exhausted available alternative sources of information or documents which he can readily obtain without incurring trouble or expense appreciably greater than what would be incurred under a new s.29 application: Re Castle New Homes Ltd [1979] 1 WLR 1075. The Court noted that pursuant to the Court of Appeal’s order in another application filed by the Trustees,[2] the APIDL liquidators were required under s.29 Bankruptcy Ordinance to produce information and documents relating to litigation funding in the 806 Action and other proceedings in which APIDL was a party. The APIDL liquidators had not completely refused to provide further documents or information, but merely asked for further justification for providing additional documents, and the Trustees should at least have tried to address such query before they took out the present application. The Court exercised its discretion to decline the s.29 relief on this basis.
The Court also accepted the fourth ground of opposition on the 806 Action. The Trustees had not ascertained the progress of the 806 Action before this hearing. The 806 Action had actually been dismissed by consent before this hearing, which meant the Action would not bring in value for David Ho’s estate at all. In light of such circumstances, the Court held it would be an abuse of the Trustees’ powers to insist on disclosure and it would not be fair and just to CNIL and Mr. Cheung for a s.29 Order to be made against them in the light of the dismissal of the 806 Action and their evidence that the source of money for funding came from them.
As regards the LSF and SFC actions, while it was no secret that CNIL had funded these, following from the above reasons, there was no basis to draw the inference that CNIL was related to David Ho.
Conclusion
The rejection of the Trustees’ application in HCB 3819/2011 underscores the necessity of robust evidence to found “reasonable suspicion” in s.29 Bankruptcy Order applications. The trustee was not entitled to embark on expeditions that ignore costs and proportionality. This case serves as a reminder of the importance of maintaining a balance between a trustee’s investigative responsibilities and protecting third parties from unwarranted scrutiny based on mere suspicion.
[1] By a judgment of Mr. Justice Ng in [2020] HKCFI 2518 (unreported, HCA 971/2012, 28 September 2020).
[2] Chen Yung Ngai Kenneth v Alan Chung Wah Tang [2022] HKCA 110 (unreported, CACV 83/2020, 19 January 2022).
Patrick Szeto
Patrick studied law at the University of Hong Kong and was admitted to the Hong Kong Bar in 1995. He served pupillage in Denis Chang’s Chambers and joined as a tenant in 1996 upon completion of pupillage. Patrick has developed a general mixed practice in both civil and criminal matters.
Patrick has appeared in the Court of Final Appeal on constitutional matters (adoption and right of abode), land matters (adverse possession), contract matters (conveyancing fees arrangement) and employees’ compensation matters (Wo Chun Wah v Employees Compensation Assistance Fund Board (2019) 22 HKCFAR 495 – court’s jurisdiction on costs and power of the ECAS Board to enter into settlement).
Visit Patrick’s profile for more details.
Emily Ting
Called to the Bar in 2019, Emily has a broad civil practice with an emphasis on chancery matters. She is active in the area of land law (including land compulsory sale applications, adverse possession, mortgage actions, building planning, and advising on easements and governments leases) and has co-authored the articles Summary possession of land under Order 113: Practical tips (with Mr. Ross Yuen) and Exemption clauses in the Deed of Mutual Covenant: A built-in shield against liability for building managers? (with Ms. Isabel Tam).
Emily’s recent compulsory sale cases include:
• Ever Great Development Limited v Fong Yau Shun & Ors[2023] HKLdT 50 where the Lands Tribunal considered the issue of whether a 100%-owned lot can be included in the application and used to calculate the average ownership to meet the statutory percentage (case commentary here).
• Peace Ever Limited & Ors v Au Kai & Ors [2023] HKLdT 41 (with Mr. Ross Yuen) involving objection to order for sale on the ground of undue hardship; inclusion of private lane in calculation of site coverage and plot ratio; and record-breaking reserve price of HK$6.31 billion set by the Lands Tribunal.
• China Orchid International Limited & others v Fujitec (HK) Company Limited & others [2023] HKLdT 38 (with Mr. Ross Yuen) where the Tribunal gave value to unauthorized building works and set record-breaking reserve price of HK$5.125 billion (case commentary here).
Emily was recently recognised by Legal 500 Asia-Pacific 2025 as a Rising Star – Competition.
More details can be found in Emily’s profile.
This article was first published on 13 December 2024.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photographs which appear in this article are included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related. The views and opinions expressed in this article/material are solely those of the members authoring it and do not necessarily reflect the official policy or position of Denis Chang’s Chambers, or of any other member or members of Denis Chang’s Chambers.