24 August, 2012
Most people familiar with the corporate insolvency process will be aware of the existence of Section 221 of the Companies Ordinance (Cap 32), which gives liquidators power to apply for orders to examine and obtain documents from parties connected with a company in liquidation. Section 221 has been considered by the Hong Kong courts many times over the last decade and there are a number of decisions examining the uses and limits of the powers contained in the section. Less well known, and less frequently used, is the equivalent power appearing in Section 29 of the Bankruptcy Ordinance (Cap. 6) ("BO"), which allows Trustees in Bankruptcy to make similar applications.
The recent decision of Mr Recorder Anderson Chow SC in Re Lee Priscilla Hwang & Re Lee Raymond Cho Min  HKCU 1536 is the first decision concerning Section 29 of the BO in over four years, since the Court of Appeal in Re Hau Po Man Stanley (In Bankruptcy)  1 HKC 256 gave detailed guidance as to the factors to consider when a Section 29 order is sought. This recent decision is therefore not only an example of how that guidance is to be applied, but was also an opportunity for the court to consider whether recent developments in Section 221 cases should also be applied to Section 29 applications.
The bankrupts, RL and PL, are husband and wife. The Trustees issued summonses in both sets of bankruptcy proceedings for the following relief:
- an order for discovery of documents by O, a Hong Kong company of which RL and PL were formerly directors and with which they had various dealings both pre and post bankruptcy;
- an order for discovery of documents against C, a partner of a law firm who had acted for RL and other members of his extended family in relation to certain litigation and probate matters; and
- an order for the discovery of documents and the examination of R, the former general manager of O who had assisted RL and PL with their personal affairs and represented them in their dealings with the Trustees.
The Trustees had obtained certain information from RL and PL, but argued that there were gaps in this information which could be filled by these three parties, and that this information was required in order to administer the estates of RL and PL.
In response to the summonses, O, R and C had all confirmed that certain categories of documents sought by the Trustees did not exist, and O had agreed to disclose some documentation, but O and C opposed discovery of other categories of documents and R resisted the application for his examination, having declined to answer questions on the basis that the questions put to him related to matters which might have come to him in his capacity as an employee of O and were confidential.
Section 29(1) of BO provides that:
"The court may, on the application of the Official Receiver or trustee, at any time after a bankruptcy order has been made against a bankrupt summon before it the bankrupt or his spouse, or any person known or suspected to have in his possession any of the estate or effects belonging to the bankrupt or supposed to be indebted to the bankrupt, or any person whom the court may deem capable of giving information respecting the bankrupt, his dealings or property, and the court may require any such person to produce any documents in his custody or power relating to the bankrupt, his dealings or property."
In determining the Trustees' applications, the Recorder relied heavily upon the dicta in the Stanley Hau case, noting that the Court of Appeal had held that the purpose of section 29 is to enable the Court to help a trustee discover the truth and circumstances connected with, and to gather information about, the bankrupt's property, affairs and dealings, so that the trustees can effectively and with as little expense as possible complete their function, and that before the Court exercises its discretion in deciding a Section 29 application the applicant must (a) satisfy the court of the essential condition that the provision of information or documents is reasonably required for him to carry out his functions and (b) also establish a prima facie case that the respondent is able to provide such information or documents. If these two conditions 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. The burden is on the applicant to satisfy the court, after balancing all the relevant factors, that there is a proper case for such an order to be made.
The Recorder also noted that the Court of Appeal in the Stanley Haucase considered that an application under section 29 of the BO may not be made for the purpose of a mere "fishing expedition" irrespective of costs or proportionality. He also considered, however, the Court of Final Appeal's decision in Joint and Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766, relating to examination orders made under section 221 of the Companies Ordinance, where Lord Millet NPJ suggested that liquidators must necessarily engage in fishing expeditions and the purpose of section 221 is to enable such expeditions to be carried out effectively. The Recorder rationalised this apparent conflict by noting that the Court of Appeal in Stanley Haureferred to a "fishing expedition" as one made irrespective of costs or proportionality, and held that whatever may be the true position, there was no dispute that the Tustees were required to show that the documents or information sought were reasonably required for them to carry out their functions and that this was the test he proposed to apply.
Decision regarding disclosure of documents
In ordering discovery of all but one category of documents sought by the Trustees, the Recorder held that the Trustees had managed to satisfy him that such documents were reasonably required, and also commented as follows:
a) The fact that RL and PL had co-operated with the Trustees was irrelevant. Generally, speaking, a trustee in bankruptcy is entitled to seek information from different sources in order to thoroughly carry out his investigations, and is not confined to obtaining information from the bankrupt himself.
b) In ordering disclosure of documents relating to past loans made by RL and PL to O and documents relating to any repayments made in respect of these loans and their status or purpose, the Court did not accept evidence that the level of indebtedness had been admitted, as it was clear that the Trustees did not accept that this was necessarily the true amount owed, and that where there is doubt as to the true amount of indebtedness owed to the bankrupt it was reasonable for the Trustees to request such documentation explaining the position of the loans in order for the trustees to carry out their investigations and functions.
C) Similarly, in ordering disclosure of O's management or audited accounts and documents evidencing O's sources of income, the Recorder considered that these documents would enable the Trustees to determine the recoverability of the debts owing by O to RL and PL, and that an application can be properly made to decide whether it is worth pursuing those debts against O.
d) In ordering disclosure by C of an agreement to which RL was a party, the Recorder noted that RL was prima facie entitled to receive a copy of the document. Therefore, no question of confidentiality could arise and the Trustees, by virtue of their appointment, had stepped into RL's shoes and were also entitled to receive a copy of the agreement and determine for themselves what RL's entitlements were under it.
e) The Recorder also ordered the disclosure of a non-redacted and complete copy of the Grant of Probate relating to the Estate of RL's late grandmother, ruling that since RL was a specific legatee under the will and a beneficiary of a discretionary trust of the residuary estate, the Trustees were entitled to consider the full and complete version of the will in order to determine what rights or benefits RL was entitled to.
Decision requiring Oral examination of R
In considering the application for the examination of R, the Recorder held that by virtue of his previous roles it was apparent that R was able to provide answers to the questions which the Trustees wished to put to him and that such questions were relevant to the Trustees' exercise of their functions. He also held that it was irrelevant that RL and PL themselves might not be entitled to seek information from O, and reaffirmed that an application could properly be made for examination to determine whether it is worth pursuing O for the debts it owed to RL and PL. Accordingly, an Order was made for the oral examination of R.
The Recorder's decision provides useful guidance to trustees as to how the Court will exercise its discretion when it considers a section 29 application, and acts as reminder to third parties that they may be susceptible to such an application if the Court finds them capable of giving information relating to a bankrupt's affairs and that such information is reasonably required for the trustees to carry out their functions.
For further information, please contact:
Richard Hudson, Partner, Deacons
Cathy Wu , Deacons