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October 2017

ONC Corporate Disputes and Insolvency Quarterly

In this issue, we have highlighted:

4 Corporate Insolvency Cases

3 Cross-border Insolvency Cases

2 Restructuring Cases

5 Corporate Disputes Cases

6 Bankruptcy Cases

HEADLINES OF THIS ISSUE

Corporate Insolvency Cases

1. Where a liquidator adjudicates on the validity or quantum of a debt

claimed by a creditor, the exercise of the Court’s power to control the

liquidator’s power is not circumscribed, as the liquidator is exercising a

quasi-judicial function

MWA Capital Pte Ltd v Ivy Lee Realty Pte Ltd (in liquidation) [2017] SGHC 216

2. In order to resist an application for security for costs, the liquidators must

provide the court with reasonably detailed information as to their

resources, and show not only that the company is unable to meet any

order for security from its own resources, but also that he is unable to

raise the funds from other resources. Impecuniosity alone would not

suffice

Wing Hong Construction Ltd (in compulsory liquidation) v Hui Chi Yung and Others

HCA 1423/2015

3. English High Court held a Director’s settlement agreement constitutes a

disposition of property and is therefore void under section 127 of the

Insolvency Act 1986

Officeserve Technologies Limited (in liquidation) and another v Anthony-Mike [2017]

EWHC 1920 (Ch)

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4. A Settlement Agreement having been sanctioned by the Court does not

afford liquidators immunity from being subsequently sued for negligence

and/or breach of duties

Re Wah Nam Group Limited (In Compulsory Liquidation) HCCW 166/2000

Cross-border Insolvency Cases

5. Connection of a foreign company with Hong Kong once established

remains even after the matters giving rise to that original connection have

ceased to exist

Penta Investment Advisers Ltd Allied Weli Development Ltd (formerly known as

Hennabun Capital Group Ltd) CACV 58/2016

6. Hong Kong Court moderates core requirements for winding up foreign

companies when the situation calls for it

Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd HCMP 3060/2016

7. English Court held in winding up foreign companies in the public interest,

the court need only be satisfied that the company against which the

petition has been presented has a real or sufficient connection with

England

Re Diffraction Diamonds DMCC [2017] EWHC 1368 (Ch)

Restructuring Cases

8. The Grand Court of Cayman Islands held in considering whether it is

appropriate to convene one or more meetings of creditors for the purpose

of voting on a scheme of arrangement, the test to be applied is as to rights

against the scheme company, not as against the other companies in the

same group

Re Ocean Rig UDW Inc (in provisional liquidation)

9. Singapore Court of Appeal set side an order sanctioning Schemes of

Arrangement after finding that some debts due from the Scheme

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Companies have been assigned through an artificial debt-splitting

exercise designed to circumvent the headcount test

SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal

[2017] SGCA 51

Corporate Disputes Cases

10. Applicant granted leave to issue a statutory derivative action without

determining the originating summons where the claims will shortly

become time-barred. But the applicant has to give an undertaking that he

will withdraw the writ which will not be served in the event that the

company is successful in its defence

L v X Ltd HCMP 1002/2017

11. Court made buy-out order against the delinquent directors/shareholders,

finding that their conduct falls far short of the standard one would expect

from directors and fiduciaries, and thus should not be entrusted with the

responsibility of managing the company

Choi Chi Wai v Cheng Ka Shing and Others HCMP 729/2012

12. A member of a company is not entitled to an absolute right to inspect the

register of members of the company. The exercise of such right is subject

to a narrow discretion of the court

Lam Kin Chung v Soka Gakkai International of Hong Kong Ltd HCMP 2685/2016

13. English High Court held that a policy of not paying dividends to

shareholders, despite the relevant company being in a financial position

to do so, coupled with excessive remuneration paid to directors, was

unfair prejudice

Booth and others v Booth and others [2017] EWHC 457 (Ch)

14. Shareholder denied inspection of documents of the company, as the Court

found it a fishing expedition in search for a cause of action

Wong Sau Man Samuel v Wong Kan Po, Wilson and Others HCMP 2250/2016

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Bankruptcy Cases

15. Costs awarded for application to set aside statutory demand when a

statutory demand is served prematurely

Alexandra Dunhill v Hughmans (a firm) [2017] EWHC 2073 (Ch)

16. A bankrupt cannot be regarded as person “aggrieved by” any act or

decision of a trustee in bankruptcy unless he can show that he would be

entitled to a surplus if not for the trustee’s act or decision

Chu Wai Tung v Wong Ka Sek and Another HCB 4839/2016

17. Taxed costs incurred in the presentation of the petition are to be paid first,

as a matter of priority, out of the estate of the Bankrupt, before the

payment of proved debts

Healthy Wharf Ltd v The Official Receiver and Trustee of the property of Leung Yat

Tung, a bankrupt HCB 2019/2000

18. The minimum debt threshold is to be considered as at the date of the

bankruptcy application and not the date of the bankruptcy order. But the

Court may dismiss or stay a bankruptcy application if the remaining debt

is a relatively small sum as at the date on which a bankruptcy order is to

be made

HSBC Bank (Singapore) Ltd v Shi Yuzhi [2017] SGHC 211

19. The annulment / setting aside of a bankruptcy order has the effect of

automatically restoring the individual who was subject to the order to his

original position, unless the parties contractually agree to depart from that

proposition

TYC Investment Pte Ltd v Chan Siew Lee Jannie and another [2017] SGHC 202

20. English High Court confirms that a Bankrupt retains legal professional

privilege in documents which form part of his estate and the trustee in

bankruptcy has no right to waive the privilege

Leeds and another v Lemos and others [2017] EWHC 1825 (Ch)

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Corporate Insolvency Cases

1. Where a liquidator adjudicates on the validity or quantum of a debt

claimed by a creditor, the exercise of the Court’s power to control the

liquidator’s power is not circumscribed, as the liquidator is exercising a

quasi-judicial function

MWA Capital Pte Ltd v Ivy Lee Realty Pte Ltd (in liquidation) [2017] SGHC 216

Ivy Lee Realty Pte Ltd (“the Company”) was in the business of property development. The

project it was developing at the material time ran into financial difficulties. The Company

entered into a loan agreement with MWA Capital Pte Ltd (“MWA”) for $10 million.

On 26 March 2015, MWA commenced proceedings against the Company following the

Company’s failure to repay MWA’s loan. Summary judgment was in favour of MWA. The

Company failed to pay and was ordered to be wound up.

Two creditors of the Company (“the Opposing Creditors”) brought a challenge against the

Liquidators’ decision to affirm the interest rates charged by MWA in its proof of debt.

MWA contended that the court should not interfere unless the liquidator is doing that which is

so utterly unreasonable and absurd that no reasonable man would so act: Leon v York-O-

Matic, Ltd and Others [1966] 1 WLR 1450; Re A Debtor (No 400 of 1940); Ex parte The

Debtor v Dodwell (The Trustee) [1949] 1 All ER 510.

The Singapore High Court, however, pointed out that the views expressed in the cited cases

were in the context of commercial decisions. Where a liquidator adjudicates on the validity or

quantum of a debt claimed by a creditor, he is not making a commercial decision. He is

exercising a quasi-judicial function. If a court’s decision on a similar issue may be set aside

on the basis that the decision is wrong, a similar approach should be adopted for a

liquidator’s adjudication. Accordingly, the Singapore High Court took the view that in the

circumstances, the exercise of the court’s power was not circumscribed.

In the circumstances, the Court found that the Opposing Creditors failed to discharge their

burden to establish that the interest charged by MWA was unconscionable or substantially

unfair.

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2. In order to resist the provision of security, the liquidators must provide

the court with reasonably detailed information as to their resources, and

show not only that the company is unable to meet any order for security

from its own resources, but also that he is unable to raise the funds from

other resources. Impecuniosity alone would not suffice

Wing Hong Construction Ltd (in compulsory liquidation) v Hui Chi Yung and Others

HCA 1423/2015

The Plaintiff, Wing Hong Construction Ltd (“the Company”), is a private company in

liquidation. The Liquidators brought an action in the name of the Company against the

directors (1st – 3rd Defendants) of the Plaintiff and its indirect wholly-owned parent company

(4th Defendant), alleging that during the period from 18 September 2009 to 10 March 2010,

the 1st – 3rd Defendants caused the Plaintiff to dispose of substantial assets to the 4th

Defendant for no legitimate commercial purpose or justification. And at the material time, the

Plaintiff was insolvent or alternatively of doubtful solvency. The Defendants applied for

security for costs. The Plaintiff did not dispute that it has no assets but nevertheless opposed

the application, contending, inter alia, that an order for security would stifle its meritorious

claim.

The Court considered that it should not infer too readily from the impecuniosity of the plaintiff

that proceedings will be stifled if security for costs is granted: China Smart Properties Ltd v

Manson Holdings Ltd, HCA 13913/1997. Rather, in order to resist the provision of security on

this ground, it is necessary for a plaintiff to do more than simply assert that he is not in a

position to provide security. Generally, it will be necessary for him to provide the court with

reasonably detailed information as to his resources, and to show not only that he is unable to

meet any order for security from his own resources, but also that he is unable to raise the

funds from other resources, whether through commercial borrowing, or from other backers:

Bart Willem Jozef Bost v Jerry Teng Mei Sheng & another, HCCW 141/2007.

The Court found that the Liquidators have been funding the litigation, as they were holding

over their fees. A similar arrangement was also made with the Plaintiff’s solicitors. Moreover,

the Court noted that at least HK$150,000 had been paid upfront to an accounting expert as

disbursement but the Liquidators have not explained who has been paying and agreeing to

pay for all such disbursements. Further, given the Liquidators’ support and their avowed

confidence on the merits of the Plaintiff’s case, the Court agreed with the Defendants that it

could not assume or infer that the Plaintiff will not be able to find funds for providing the

security if a failure to do so would prevent the claim from proceeding.

In conclusion, the Court found the Plaintiff has failed to establish any valid opposition to the

Defendant’s application. The Court ordered HK$2 million as security for costs.

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3. English High Court held a Director’s settlement agreement constitutes a

disposition of property and is therefore void under section 127 of the

Insolvency Act 1986

Officeserve Technologies Limited (in liquidation) and another v Anthony-Mike [2017]

EWHC 1920 (Ch)

The petition to wind up Officeserve Technologies Limited (“the Company”) was presented

on 26 October 2016. Before the petition could be dealt with, the respondent was ousted as a

director and executive chairman of the Company. On 23 December 2016, a Settlement

Agreement was entered into between the Company and the respondent.

Under the Settlement Agreement, the respondent agreed, among other things, to transfer,

8.325 million ordinary shares in the Company. The Company, in return, agreed to give up all

claims against the respondent “in connection with or arising from” the respondent’s

employment. A winding up order was subsequently made. The Liquidators of the Company

claimed, inter alia, that the Settlement Agreement was void under section 127 of the

Insolvency Act 1986 (which is substantially the same as section 182 of the Companies

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

The English High Court held that in considering what is and what is not a disposition for the

purposes of section 127, it is necessary not to be constrained by what, in formal terms, may

be the transfer of one interest in property to another person. There is nothing in the section to

require that the disposition of the company’s property should be one by which the same

identifiable property should leave the ownership of the company and become the identifiable

property of another person. The mischief against which the section is directed is clear. The

destruction, or at least the reduction in value, of a property right belonging to the company,

causing an immediate and equivalent accrual in value to another person, is well within that

mischief, even though that other person cannot necessarily be said to become the owner of

the same property.

The Settlement Agreement was held to be void, to the extent that it operated either to

release the respondent from those claims or to create an enforceable promise not to sue on

them.

In finding so, the Court declined to exercise it discretion to retrospectively validate the

Settlement Agreement, as it is not in the interests of the general body of creditors of the

Company to do so.

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4. A Settlement Agreement having been sanctioned by the Court does not afford

liquidators immunity from being subsequently sued for negligence and/or

breach of duties

Re Wah Nam Group Limited (In Compulsory Liquidation) HCCW 166/2000

Wah Nam Group Limited (“the Company”) was a company listed in Hong Kong. At all

material times, the Company owned Great Strategy Properties Limited (“Great Strategy”)

and Crystal Services Limited (“Crystal Services”), which in turn owned all the shares in

Summit Mass Limited (“Summit Mass”). Summit Mass owned a parcel of land situated in the

PRC, which was worth HK$45 million. The Company was put into compulsory winding up on

26 July 2000. Liquidators (“the Former Liquidators”) were appointed.

In or around June 2006, the shares in Summit Mass were misappropriated and were

subsequently transferred to a Mr. Chen. The Former Liquidators were not aware of the

misappropriation until sometime in about November 2007. On 15 February 2008, the Former

Liquidators commenced legal action in Hong Kong against Mr. Chen. On 5 August 2011, a

Settlement Agreement was reached amongst the parties, under which, Great Strategy and

Crystal Services agreed to give up their shares in Summit Mass for RMB3.35 million. The

Settlement Agreement was subsequently sanctioned by the Court (“the Sanction Decision”).

On 2 May 2012, on the application of one of the creditors of the Company, the Former

Liquidators were removed and released. Current Liquidators were appointed. On 30 April

2015, the Current Liquidators commenced legal proceedings against the Former Liquidators,

alleging, inter alia, that the Former Liquidators were negligent in safeguarding and realizing

the assets of the Company, i.e. the land. The Former Liquidators sought to have the actions

struck out on the ground that as the Sanction Decision was a final judgment sanctioning the

entering into of the Settlement Agreement, there is no prospect of the Current Liquidators

establishing that the entry into the Settlement Agreement was negligent or otherwise a

breach of the Former Liquidators’ duties.

The Court took the view that the reliance on the Sanction Decision is misplaced. The subject

matter in the Sanction Decision was whether in all the circumstances then existed, it was

right that the Settlement Agreement put forward by the Former Liquidators should be

approved / sanctioned. The Judge was not engaged in determining whether the Former

Liquidators were negligent in safeguarding and/or realizing the land. Accordingly, the Court

held that the Sanction Decision cannot realistically be regarded as affording the Former

Liquidators immunity from being sued for the liabilities arisen from the misappropriation of the

shares of Summit Mass. At best, the Sanction Decision was “probably the best solution that

can be achieved at that point and is one that it is in the creditors’ interest to accept.”

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Cross-border Insolvency Cases

5. Connection of a foreign company with Hong Kong once established

remains even after the matters giving rise to that original connection have

ceased to exist

Penta Investment Advisers Ltd v Allied Weli Development Ltd (formerly known as

Hennabun Capital Group Ltd) CACV 58/2016

Allied Weli Development Limited (“the Company”) was incorporated in the BVI and

registered in Hong Kong as a registered non-Hong Kong company. Disputes arose out of a

deed of guarantee (“the Deed”) entered into between the Company and Penta Investment

Advisers Limited (“the Petitioner”). On 14 October 2014, the Petitioner obtained a Hong

Kong judgment against the Company. Based on the judgment, on 24 July 2015, the

Petitioner issued a statutory demand against the Company, which was however not complied

with. The Petitioner then presented a winding up petition against the Company under section

327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32).

On 6 August 2015, the Company changed its management and moved its place of

registration to the Marshall Islands. Thereafter, the Company’s management and business

were said to be conducted in Taiwan and/or the Marshall Islands rather than Hong Kong. The

only issue before the Court was on the connection of the Company with Hong Kong. It was

argued that the matters relied on as demonstrating a substantial connection with Hong Kong

have ceased. As such, there is now insufficient connection between the Company and Hong

Kong to justify the Court exercising its direction to wind up the Company. This was firmly

rejected by Harris J. The Company appealed.

The Court of Appeal held that the connection once established remains even after the

matters giving rise to that original connection have ceased to exist. In other words, it is not

necessary to have the matters which give rise to the connection present at the time of the

petition. Holding otherwise would render the statutory scheme totally unworkable if shortly

before the presentation of the petition, a foreign company would decamp from Hong Kong

despite its previous substantial connection and plead the lack of connection at the time of

petition for the Hong Kong Court to found its discretionary jurisdiction.

The Court of Appeal found that there was a sufficient connection between the Company and

Hong Kong because:

(1) the Company had its principal place of business in Hong Kong until its recent move to

the Marshall Islands. Also, its past directors and company secretary were based and

resided in Hong Kong.

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(2) the Company’s ultimate parent company is a listed company in Hong Kong, principally

engaged in the Hong Kong financial services sector.

(3) the Company has more than 20 wholly-owned subsidiaries which are either incorporated

in Hong Kong or have their principal place of operation in Hong Kong. Officers of these

subsidiaries also reside in Hong Kong.

(4) the Deed underpinning the subject debt is governed by Hong Kong law and provides for

the non-exclusive jurisdiction of the Hong Kong Courts.

(5) the Deed was executed and the company seal affixed in Hong Kong by the Company’s

managing director.

Accordingly, the Court of Appeal dismissed the appeal. In relation to costs, the Court ordered

costs against the Company on indemnity basis. Further, noting that the appeal must have

been funded by a non-party, the Court ordered the names of those who have financed the

litigation be disclosed and joined as a party to the proceedings for the purpose of costs only.

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6. Hong Kong Court moderates core requirements for winding up foreign

companies when the situation calls for it

Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd HCMP 3060/2016

Shandong Chenming Paper Holdings Limited (“Shandong Chenming”) is incorporated in

the Mainland and registered as a non-Hong Kong company under Part 16 of the Companies

Ordinance (Cap 622). It has a dual primary listing of H shares on the HKEx. In 2005,

Shandong Chenming and Arjowiggins HKK 2 Ltd (“Arjo”) entered into a joint venture

agreement. Disputes subsequently arose. Arjo commenced arbitration proceedings against

Shandong Chenming and was awarded RMB 167,860,000. On 7 December 2015, Arjo

obtained leave from the Court to enforce the arbitral award in Hong Kong. Shandong

Chenming refused to pay. Arjo then served a statutory demand on Shandong Chenming. In

response, Shandong Chenming sought to restrain Arjo from submitting a winding-up petition,

contending that Hong Kong Courts lack the jurisdiction to wind it up.

In the context of winding up a foreign company, the Court will not exercise its jurisdiction

unless the following three core requirements have been satisfied:

(1) Where there is a sufficient connection with Hong Kong;

(2) There is a reasonably possibility that the winding up order would benefit those applying

for it; and

(3) There are persons who had a sufficient economic interest in the winding up and would

be subject to the court’s jurisdiction, other than by virtue of being the petitioner.

Shandong Chenming argued that the 2nd requirement was not satisfied because it has no

assets in Hong Kong and does not conduct business in Hong Kong. Its sole connection with

Hong Kong is its listing on the HKEx. A liquidator appointed in Hong Kong would be unable

to achieve anything and thus the winding-up order would be “an exercise in futility”.

Harris J accepted that the value of Shandong Chenming’s listing status in Hong Kong was

not capable of providing a material benefit to Arjo or other creditors of the company.

Nevertheless, his Lordship considered that Arjo would still benefit from a winding up order, in

that Arjo would be able to derive benefits from the leverage created by the prospect of a

winding-up petition or the appointment of a liquidator. Given the "immediate and severe"

consequences of a winding-up order, it would exert considerable pressure on Shandong

Chenming’s management to satisfy its debt to Arjo. Such leverage may constitute a benefit

indirectly and thereby satisfy the 2nd requirement under the three core requirements.

Further, the Court found that Shandong Chenming should be wound up as a matter of public

policy. Harris J considered that Shangdong Chenming, in refusing to pay the arbitral award,

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was trying to take advantage of Hong Kong’s financial system and the legal system that

underpins it. Such conduct was unacceptable. There was a clear public interest in

discouraging such behaviour and to make clear to foreign companies that they cannot benefit

from accessing Hong Kong's financial system without also accepting the burden of complying

with Hong Kong law. Therefore, even in the absence of the benefit of leverage, this would

have been enough to justify a winding-up order.

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7. English Court held in winding up foreign companies in the public interest,

the court need only be satisfied that the company against which the

petition has been presented has a real or sufficient connection with

England

Re Diffraction Diamonds DMCC [2017] EWHC 1368 (Ch)

The Secretary of State for Business, Innovation and Skills (the “Secretary of State”) brought

proceedings for the winding up of Diffraction Diamonds DMCC (“Diffraction”). It was alleged

that contrary to the public interest, Diffraction has been trading with a lack of commercial

probity by participating in and/or benefiting from a wider scheme involving the sale of fancy

coloured diamonds to members of the public as an investment opportunity.

Diffraction was incorporated in Dubai. It operated an internet based trading platform for fancy

coloured diamonds. The trading platform was operated by a Cambridge based company

called Itransact Limited (“Itransact”). Diffraction’s servers are located in Itransact’s offices

and Itransact liaised for Diffraction with various broker companies.

Three requirements have to be met before the English court will assume jurisdiction to wind

up foreign companies: Re Real Estate Development Co [1991] BCLC 210. The three so-

called core requirements are: (1) there must be sufficient connection with England; (2) there

must be a reasonable possibility that a winding-up order would benefit those applying for it;

and (3) the court must be able to exercise jurisdiction over one or more persons interested in

the distribution of the company’s assets.

Citing the Court of Appeal decision in Re Titan International Inc. [1998] 1 BCLC 102, the

English High Court took the view that in the case of a public interest petition, the court need

only be satisfied that the company against which the petition has been presented has a real

or sufficient connection with England so as to make it just and equitable that the company be

wound up. The 2nd and 3rd core requirements do not apply in public interest winding-ups.

The Court considered that the matters relied on by the Secretary of State do provide a

substantial connection with the United Kingdom and are ample to found jurisdiction. In

particular, the Court regarded the role performed by Itransact, in setting up the trading

platform and ensuring the smooth operation of the business thereafter through liaison with

brokers as central to the internet based trading model adopted by Diffraction.

In conclusion, the Court ordered Diffraction be wound up in the public interest.

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Restructuring Cases

8. The Grand Court of Cayman Islands held in considering whether it is

appropriate to convene one or more meetings of creditors for the purpose

of voting on a scheme of arrangement, the test to be applied is as to the

rights against the scheme company, not as against the other companies in

the same group

Re Ocean Rig UDW Inc (in provisional liquidation)

Ocean Rig UDW Inc (in provisional liquidation) (“UDW”) formed part of a group of companies

(“the Group”) carrying on business as an offshore ultra-deep water drilling contractor. UDW

and the other Group companies proposed a scheme of arrangement to their creditors

seeking to compromise the Group’s US$3.7 billion debt (“the UDW Scheme”). For the

purpose of voting on the UDW Scheme, a group of creditors with secured claims against

various companies in the Group and substantial claims against UDW pursuant to guarantees

(“the Guarantee Creditors”) considered that a single class of creditors was appropriate.

However, it was opposed by another creditor, Highland, which held notes in UDW and held

claims only against UDW.

The basis of Highland’s contention is as follows:-

(1) the Guarantee Creditors had secured claims against other members of the Group while

the UDW noteholders only had an unsecured claim against UDW;

(2) the Guarantee Creditors were to receive inducements to vote for the Schemes including

consent fees and professional fees and expenses, however, Highland was not to receive

any such inducements; and

(3) pursuant to the terms of the UDW Scheme, all creditor claims would be vested in an

independent trustee. As such, Highland would not be able to continue its claim under the

New York Debtor and Creditor Law.

The Grand Court of Cayman Islands held that a single class of creditors was appropriate. In

relation to the Guarantee Creditors’ claim against other members of the Group, the test to be

applied is as to rights against the scheme company, i.e. UDW, not as against third parties.

Further, in relation to the alleged inducements to the Guarantee Creditors, the Court

considered that they were immaterial given the almost US$4 billion debt. Lastly, the Court

held that no unfairness would result from creditors’ claims being pursued by an independent

trustee. The Scheme was subsequently approved by 96% of UDW’s creditors and

sanctioned by the Court.

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9. Singapore Court of Appeal set side an order sanctioning Schemes of

Arrangement after finding that some debts due from the Scheme

Companies have been assigned through an artificial debt-splitting

exercise designed to circumvent the headcount test

SK Engineering & Construction Co Ltd v Conchubar Aromatics Ltd and another appeal

[2017] SGCA 51

In the January issue of ONC Corporate Disputes and Insolvency Quarterly this year, we have

discussed the Singapore High Court decision in Re Conchubar Aromatics Ltd and another

matter [2016] SGHC 279, in which the High Court approved two schemes of arrangements

and granted a moratorium on all pending, contingent or fresh actions against two companies,

Conchubar Aromatics Ltd and UVM Investment Corporation (“Conchubar” and “UVM”

respectively, and “the two Scheme Companies” collectively) for one year with effect from

29 August 2016. The Schemes were opposed by SK Engineering & Construction Co Ltd

(“SKEC”), a judgment creditor of the two Scheme Companies. Having lost in the High Court,

SKEC appealed. SKEC’s opposition was based mainly on the ground that the creditors that

had voted in favor of the Schemes were related to the two Scheme Companies and their

votes should therefore be wholly discounted.

At the time of the meeting of Conchubar’s creditors to vote on the Conchubar Scheme,

Conchubar owed a total debt of US$76,277,818.33 to the following parties:

Creditor Debts (US$) Vote For (%) Vote Against (%)

Conchubar Chemicals Ltd

(“Chemicals”)

50,000,000.00 65.5% -

Universal Petrochem Corp Ltd

(“Universal”)

10,599,174.00 13.9% -

Estanil Assets Ltd (“Estanil”) 1,150,912.00 1.5% -

SKEC 14,527,732.33 - 19%

Chemicals is the major creditor of Conchubar. Chemicals allegedly owed money to Universal.

On 30 April 2015, Chemicals assigned to Universal its receivables of US$10.422 million from

Conchubar. Chemicals also allegedly owed money to Estanil. On 30 April 2015, Chemicals

assigned to Estanil its receivables of US$1,131,673 from Conchubar.

On the other hand, at the time of the meeting of UVM’s creditors to vote on the UVM Scheme,

UVM owed a total debt of US$32,583,446.57 to the following parties:

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Creditor Debts (US$) Vote For (%) Vote Against (%)

MacNair Group Inc

(“MacNair”)

28,000,000.00 86.8% -

Shefford Investment Holdings

Ltd

317,651.00 - -

Emirates Resources Inc

(“Emirates”)

136,462.00 0.4% -

SKEC 4,129,333.57 - 12.8%

MacNair is the major creditor of UVM pursuant to a Convertible Bond Agreement. MacNair

allegedly owed money to Emirates. On 30 April 2015, MacNair assigned to Emirates its

receivables of US$134,181 from UVM.

The Singapore Court of Appeal disagreed with the Judge, finding that the creditors were not

related to the two Scheme Companies. The meaning of this sentence is ambiguous As such,

the question regarding the appropriate discount to apply to related creditors’ votes did not

arise. However, the Court of Appeal, in obiter, observed that once a creditor is found to be

related to the scheme company, its votes on the scheme should be entirely disregarded.

Notwithstanding the findings that the creditors are not related to the two Scheme Companies,

the Court of Appeal found that the assignments of some of the debts were made for the

purpose of circumventing the headcount test in section 210(3AB)(a) of the Companies Act.

The Court noted that vote-splitting device in relation to shareholders’ schemes of

arrangement has been disapproved in many other jurisdictions, e.g. Re PCCW Ltd [2009] 3

HKC 292 and Re Dee Valley Group Plc [2017] EWHC 184 (Ch). The Court considered that

the general concern with vote-splitting in respect of shareholders’ schemes of arrangement

would not be any different in relation to creditors’ scheme of arrangement. The assignments

to Universal, Estanil and Emirates had the effect of allowing the two Schemes to be passed

when they otherwise would not, and therefore merited some consideration.

The Court observed that there is no audited confirmation to support that the alleged debts

were genuine and the assignments of receivables to Universal, Estanil and Emirates were

genuine transactions entered into at arm’s length. In the circumstances, the Court of Appeal

was not persuaded that Chemicals and MacNair owed genuine debts to these three

companies. The appeal was thus allowed and the Judge’s order sanctioning the Schemes as

well as his order for a one-year moratorium was set aside.

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Corporate Disputes Cases

10. Applicant granted leave to issue a statutory derivative action without

determining the originating summons where the claims will shortly

become time-barred. But the applicant has to give an undertaking that he

will withdraw the writ which will not be served in the event that the

respondent is successful in its opposition

L v X Ltd HCMP 1002/2017

The applicant applied for leave to issue a statutory derivative action. The claims which the

applicant wishes to pursue on behalf of the respondent company will shortly become time-

barred. The respondent opposed the application.

Harris J noted that it is not possible to determine the application before the suggested

limitation period expires. The parties thus agreed that the applicant be granted leave to issue

the writ without determining the originating summons against an undertaking by the applicant

to withdraw the writ which will not be served in the event that the respondent is successful in

its defence.

As Harris J considered that this is an issue which is likely to arise in the future, the form of

the order is appended to the judgment.

Order

Upon the Plaintiff by counsel undertaking:

(a) not to serve any writ issued pursuant to paragraph 1 of the summons without leave of

the court; and

(b) to withdraw any writ issued pursuant to paragraph 1 of the summons if an order is not

granted on the hearing of the originating summons dated [ ] giving the Plaintiff leave to

commence a statutory derivative action substantially in the form sought in the originating

summons against the Respondents

1. Leave be granted for the Plaintiff to issue a writ endorsed with a statement of claim

substantially in the form of the draft appended to this Order on behalf of the Respondent

against the following persons:

……

2. The writ of summons be placed in a sealed envelope and not available for inspection by

the public and the names of the parties in the writ of summons not be entered into the

cause book or published by the Court Registry without the leave of the court.

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3. The originating summons dated [ ] be adjourned for argument with 1 day reserved in

consultation with counsel’s diaries.

4. The Applicant has leave to file evidence in reply within 28 days.

5. Normal directions for submissions and hearing bundles.

6. Costs be reserved.

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11. Court made buy-out order against the delinquent directors/shareholders,

finding that their conduct falls far short of the standard one would expect

from directors and fiduciaries, and thus should not be entrusted with the

responsibility of managing the company

Choi Chi Wai v Cheng Ka Shing and Others HCMP 729/2012

The dispute arose out of the affairs of Hong Kong Agriculture Special Zone Limited (“the

Company”). The Company was incorporated on 19 June 2006. The Company has always

been equally owned by three shareholders, namely Mr. Choi Chi Wai (“Mr. Choi”), Mr.

Cheng Ka Shing (“Mr. Cheng”) and Mr. Lee Pak Kee (“Mr. Lee”). They are all experienced

businessmen engaging in farming business in Hong Kong. Upon incorporation, they were

appointed as directors of the Company.

On 16 April 2012, Mr. Choi presented an “unfair prejudice” petition, alleging that Mr. Cheng

and Mr. Lee have conducted the affairs of the Company in an unfairly prejudicial manner.

On 31 August 2007, the China Chamber of Commerce of Foodstuffs and Native Produce (中

國食品土畜進出口商會) (“CCCFNP”) announced that it would appoint a Hong Kong company

to be its third authorized agent, and invited companies with the relevant experience and

financial capability to submit their applications. Mr. Cheng and Mr. Lee were not willing to use

the Company to pursue the application. Nonetheless, they agreed to let Mr. Choi give it a try

and put in an application in the name of the Company to CCCFNP.

On 22 October 2007, the Ministry of Commerce announced that the CCCFNP decided to

appoint the Company as the third authorized agent to import and sell live pigs from the

Mainland into Hong Kong. Between 22 October 2007 and 28 November 2007, Mr. Choi, with

the assistance of his family members managed to establish the entire network and business

model required for the agency business. Since then, the Company has been carrying on its

agency business using the same business model established by Mr. Choi.

During the period from 28 November 2007 to 31 December 2007, the Company was

managed and operated by Mr. Choi alone. He was assisted by Mrs. Choi and other family

members. Mr. Cheng and Mr. Lee had no involvement in the day-to-day operation of the

Company or its business. At the Board of Directors’ meeting on 20 December 2007, Mr.

Choi agreed to gradually return the operation of the Company to Mr. Cheng and Mr. Lee from

1 January 2008. At the EGM on 8 March 2008, resolutions were passed by Mr. Cheng and

Mr. Lee to remove Mr. Choi as director of the Company.

Shortly after Mr. Lee and Mr. Cheng had taken control over the Company, they caused the

Company to enter into an agreement dated 1 May 2008 with Hong Kong Agriculture Special

Zone Management Ltd (“Management Company”). The Management Company was

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20

incorporated by 8 individuals of Hong Kong Agriculture Special Zone Development

Association (“the Association”). The appointment of the Management Company was made

to satisfy the requests of the members of the Association to share the business and profit of

the Company.

In May 2009, it was discovered that the Management Company had overcharged its

remuneration. Despite the discovery of the overcharge, Mr. Cheng did not take any step to

recover the amount overpaid from the Management Company. Instead, he continued to

retain the Management Company. The appointment of the Management Company was only

terminated on 15 September 2010, and no step had been taken by the Company to recover

the overcharged balance for about 2 years until 27 September 2012. After obtaining default

judgment against the Management Company on 7 November 2012, no step was taken to

enforce the default judgment.

First of all, the Court found that the Company was formed on the basis of personal

relationship involving trust reposed by the shareholders on each other, and upon the mutual

understanding that they would work as equal partners in running its business together. It

follows that the Company is a quasi partnership and Mr. Choi is entitled to participate in

managing its business as an equal partner in the same way as Mr. Cheng and Mr. Lee did.

Therefore, it is not fair or equitable for Mr. Cheng and Mr. Lee to exclude Mr. Choi from

participating in the management of the Company.

Secondly, the Court held that the members of the Association have no interest or right in the

Company. It is a misuse of their power to appoint the Management Company for the

purposes of satisfying the requests of the members of the Association still less to benefit

them. In exercising their power for the purposes of the members of the Association, Mr.

Cheng and Mr. Lee have put the interest of the members of the Association ahead of the

interests of the Company and, therefore, acted in breach of their fiduciary duties owed to the

Company.

Thirdly, the Court found that the Management Company did not carry out any substantive

work for the Company. As such, the remuneration paid to it, viewed objectively, was

excessive and wholly unjustified. Further, the failure on the part of Mr. Cheng and Mr. Lee to

recover the amount overcharged by the Management Company and their decision to retain

the Management Company after discovery of the overcharge constituted a further breach of

their fiduciary duties as it was incumbent upon them to protect the interest of the Company

by taking all possible steps to recover the amount overcharged.

Fourthly, as the entire modus operandi of the business had been established by Mr. Choi,

and after Mr. Cheng and Mr. Lee took control of the Company, Mr. Cheng simply followed

the same mode in operating the business. The Court considered the remuneration Mr.

Cheng and Mr. Lee paid to themselves were excessive. Adjustment was thus ordered.

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Lastly, during the 9 years when the Company has been under the control of Mr. Cheng and

Mr. Lee, no dividends has been declared or paid to the Shareholders. In light of the

Company’s substantial retained profits and the absence of any proper justification as to why

they did not declare dividends, the Court considered that the failure on the part of Mr. Lee

and Mr. Cheng to cause the Company to declare any dividends to the shareholders was both

unfair and prejudicial to the interests of Mr. Choi.

In conclusion, the Court found that Mr. Cheng and Mr. Lee have conducted the affairs of the

Company in an unfairly prejudicial manner towards Mr. Choi. Given that Mr. Choi has single

handedly obtained the agency business and established the modus operandi in less than 3

months, and managed to generate profits in excess of $11 million in the first 5.5 months, the

Court consider that he is more suitable in managing the business of the Company. Further,

since the conduct of Mr. Cheng and Mr. Lee falls far short of the standard one would expect

from directors and fiduciaries, they should not be entrusted with the responsibility of

managing the Company. The Court ordered Mr. Choi to buy out Mr. Cheng and Mr. Lee.

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12. A member of a company is not entitled to an absolute right to inspect the

register of members of the company. The exercise of such right is subject

to a narrow discretion of the court

Lam Kin Chung v Soka Gakkai International of Hong Kong Ltd HCMP 2685/2016

The Applicant is a member of the Respondent company, Soka. Soka is a company limited by

guarantee incorporated in Hong Kong. It is a non-profit making organization with the main

objective of furthering the cause of Buddhism. Being concerned about the absence of any

right of members to nominate and/or be elected as members of Soka’s management

committee and the excessively high salaries and wages of its staff, the Applicant requested

Soka for access to the register of members for the purpose of calling for an EGM to address

and vote on these matters. According to section 631 of the Companies Ordinance (Cap 622),

a member is given a statutory right to inspect the register and the index of members’ names

and, on payment of a prescribed fee, to be provided with a copy.

The issue before the Court is whether, on the true construction of section 631, a member of

the company is entitled to an absolute right to a copy of the register or whether the exercise

of that right is subject to the court’s discretion.

The Court held that as a general rule, it will make a mandatory order to give effect to a legal

right, but it, nevertheless, has a narrow discretion to refuse making the order: Dr Michael

John Pelling v Families Need Fathers Limited [2001] EWCA Civ 1280; Democratic Party v

Secretary for Justice [2007] 2 HKLRD 804. The court will not order inspection or provision of

a copy, if disclosure is impossible, or is sought for an improper purpose, or would serve no

useful purpose, or would amount to an abuse. The burden is on the company seeking to

resist disclosure to persuade the court that it is appropriate to exercise that discretion.

On the facts, the Court considered that the Applicant’s request for a copy of the register to

enable him to call for an EGM to discuss the issues was clearly made in the exercise of a

membership right and for a proper purpose. Soka, on the other hand, failed to make out a

case of improper motive.

In conclusion, the Court allowed the application and ordered inspection of the register and

provision of a copy on the Applicant’s undertaking to use the information contained therein

solely for the purpose of communicating with the other members in relation to the stated

purposes; not to use the said information after the forthcoming AGM; and to destroy the copy

or any copies made therefrom, whether in the form of hard copies or soft copies or in

whatever form, within one month after the said meeting.

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13. English High Court held that a policy of not paying dividends to

shareholders, despite the relevant company being in a financial position

to do so, coupled with excessive remuneration paid to directors, was

unfair prejudice

Booth and others v Booth and others [2017] EWHC 457 (Ch)

C F Booth Limited (“the Company”) was incorporated in 1949 to carry on the family scrap

metal business established by Clarence Booth in 1920. The current shareholders of the

Company are all descended from Clarence. The petitioners own 27% of the Company

between them. The respondents own 65% and four of them are directors of the Company

(“the Booth Directors”). The petitioners complained that the affairs of the Company have

been conducted to their unfair prejudice because the Booth Directors have taken excessive

remuneration whilst causing the Company to pursue a policy of not paying dividends.

The business of the Company was successful and profitable. Substantial dividends were

paid every year from incorporation until 1985. In 1986, the Company suffered a loss and no

dividend was paid. Despite returning to healthy profitability between 1987 and 2013, no

dividend was ever again declared.

After a detailed analysis of the expert report prepared by the petitioners, which is not

contradicted by the respondents, the English High Court found that the Booth Directors’

remuneration far exceeded the amount that reasonable directors acting in the best interest of

the company could have thought fair for the work they undertook: Irvine v Irvine [2007] 1

BCLC 349.

In relation to the dividend policy, the Court observed that the directors have a discretion

whether to recommend a distribution of profits. The test is whether an intelligent and honest

man in the position of a director of the company in question could in all the circumstances

have reasonably believed that the non-payment of dividends was appropriate: Irvine v Irvine.

The Booth Directors claimed that all spare cash was needed for the business. The Court,

however, found that there would have been sufficient distributable profit if the Booth Directors

were not excessively remunerated. Further, the Court observed that the no-dividend policy

was intended to help the Booth Directors acquire the minority shares at a favorable price,

which made the shares less attractive. The Booth Directors thus breached their duties to use

the power to recommend a dividend for the purposes for which the power was conferred; to

make the recommendation they considered most likely to promote the company’s success

for the benefit of its members as a whole; and to exercise independent judgment.

The respondents further contended that the petition is premature, relying on the pre-emption

provisions in the Articles of the Company. The Articles provide that no share shall be

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transferred to any person who is not a member of the Company so long as any member is

willing to purchase the same at the fair value, to be fixed by the Company’s Auditors.

The Court accepted that the Articles are terms upon which the members agreed to associate

and so members cannot usually complain if, wishing to sell, they are faced with

disadvantageous pre-emption provisions. However, the Court pointed out that it cannot be

right where there has been unfair prejudice which might have a negative uncorrected impact

on the value of the shares. Following the procedure prescribed by the Articles would have

committed the petitioners to a sale whatever price was deemed fair by the Auditors, which

might well have reflected the no-dividend and remuneration policies of which the petitioners

are complaining. Accordingly, the petition cannot be said to be premature or an abuse of

process.

In the circumstances, the Court ordered the Booth Directors to buy out the petitioners at a

valuation that would reflect the unfair prejudice suffered by the petitioners.

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14. Shareholder denied inspection of documents of the company, as the Court

found it a fishing expedition in search for a cause of action

Wong Sau Man Samuel v Wong Kan Po, Wilson and Others HCMP 2250/2016

The case concerns a dispute between a father, the 1st Defendant (“the Father”), and his

eldest son, the Plaintiff. In 1992, the Father established a business of insurance and

reinsurance. In the same year, the Father acquired Bright Focus International Limited (“the

Company”) to acquire and hold various real properties. The Plaintiff was and is the

registered owner of 17% shareholding in the Company since 1992. The Plaintiff was also the

director of the Company until the end of 2015.

The Plaintiff relied heavily on the financial assistance of the Father. After the Father suffered

a stroke in 2012, the Father realized that he could not financially support the Plaintiff forever.

Upon the Father’s cessation of financial assistance to the Plaintiff in April 2015, the Plaintiff

took out the action seeking, inter alia, an order under section 740 of the Companies

Ordinance (Cap 622) for inspection of a wide range of documents of the Company.

There is no dispute that the Plaintiff is a registered shareholder of the Company. It is well-

established that the inspection must be sought in good faith and for a proper purpose. An

applicant is not entitled to go on a fishing expedition in search of a cause of action to support

his or her mere suspicion of wrongdoings: Wong Kar Gee Mimi v Hung Kin Sang Raymond

[2011] 5 HKLRD 241; Lehman & Co Management Ltd v Efficient Ltd [2011] 5 HKLRD 668.

The Court observed that the scope of the application is very wide. The Plaintiff is asking for

various categories of documents commencing from 1992 to 2015, which strongly suggests a

case of a fishing expedition. In particular, the Court found that the Plaintiff stated in his

affidavit that “[i]t is therefore warranted that I be allowed to carry out a thorough investigation

on the affairs of the Company.” The Court considered that it is not a proper purpose under

section 740 and on this ground alone, the application should be dismissed.

In addition, the Court found that the Plaintiff did have access to the Company’s documents in

his capacity as a director for all the years prior to 31 December 2015. The fact that he did not

bother to inspect the company’s documents is a relevant factor for the Court to take into

consideration in the exercise of its discretion against ordering an inspection.

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Bankruptcy Cases

15. Costs awarded for application to set aside statutory demand when a

statutory demand is served prematurely

Alexandra Dunhill v Hughmans (a firm) [2017] EWHC 2073 (Ch)

There have been ongoing proceedings in the High Court between the appellant and the

respondent, her former solicitors. The respondent claimed for unpaid fees against the

appellant. The appellant counterclaimed that the respondent was negligent in handling her

case and as a result she suffered substantial losses.

In September 2014, the respondent obtained summary judgment on its claim. But the trial

judge granted a stay of the judgment and costs order. On 29 May 2016, permission to appeal

was refused on papers by the Court of Appeal and the lower court stay was lifted. On the

same day, the appellant renewed her application for permission to appeal to the Court of

Appeal. On the next day, the respondent served a statutory demand on the appellant for the

judgment sum plus interest up to date.

On 10 September 2016, the Court of Appeal re-imposed the stay until the disposal of the

permission to appeal application. The appellant wrote to the respondent, asking the statutory

demand be set aside in the light of the stay that had been re-imposed. On 9 December, the

Court of Appeal granted the appellant permission to appeal and continued the stay. The

respondent finally conceded on 11 February 2017 to set aside the statutory demand.

However, the respondent did not agree to give the appellant her costs as there had been no

stay in place at the time the demand was served.

The Chief Bankruptcy Registrar refused to award the appellant the costs of her application to

set aside the statutory demand. The appellant appealed. The English High Court found that

the Chief Bankruptcy Registrar had erred in failing to place sufficient weight on the parties’

conduct and restricted the exercise of his discretion to simply reviewing whether the

respondent was entitled to serve the statutory demand.

The High Court considered that while the respondent was entitled to serve the statutory

demand as it did, it acted unreasonably in setting in motion parallel bankruptcy proceedings.

With effect from the grant of permission to appeal by the Court of Appeal, it should have

become clear to the respondent that there was a triable issue on the appellant’s counterclaim

and it was open to the respondent to withdraw the statutory demand. But it did not.

In light of all the circumstances, the High Court found that the appellant should have the

costs of her application to set aside the statutory demand.

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16. A bankrupt cannot be regarded as person “aggrieved by” any act or

decision of a trustee in bankruptcy unless he can show that he would be

entitled to a surplus if not for the trustee’s act or decision

Chu Wai Tung v Wong Ka Sek and Another HCB 4839/2016

On 7 July 2016, Chu Wai Tung (“the Bankrupt”) applied for his own bankruptcy. On 16

August 2016, a bankruptcy order was made against the Bankrupt and Trustees in

Bankruptcy (“TiB”) were appointed. The Bankrupt claimed that his wife was also made

bankrupt on the same day in HCB 4840/2016. The Bankrupt and his wife (“the Couple”)

were joint owners of a Property. The Couple contended that pursuant to a Living Trust

Agreement, the beneficial interest of the Property was vested in the Couple’s Son with the

result that the Property did not form part of the Estate. The TiB refused to accept the Living

Trust Agreement, but no reason was given. The Bankrupt then issued a Summons, pursuant

to sections 43D and 83 of the Bankruptcy Ordinance (Cap 6) (“BO”), seeking to reverse the

TiB’s decision.

Section 83 of the BO provides that if the bankrupt or any of the creditors or any other person

is aggrieved by any act or decision of the trustee, he may apply to the court, and the court

may confirm, reverse or modify the act or decision complained of, and make such order in

the premises as it thinks just. However, a bankrupt cannot be regarded as person

“aggrieved by” any act or decision of the trustee unless he can show that he would be

entitled to a surplus if not for the trustee’s act or decision: Re a Debtor, ex p the Debtor v

Dodwell [1949] Ch 236. Upon reading the affirmation evidence, the Court took the view that it

did not appear the Bankrupt would be entitled to any surplus, rather the Estate remained

hopelessly insolvent.

Section 43D of the BO, on the other hand, allows a bankrupt or a creditor to apply to the

trustee for particular items of property to be included in, or excluded from, the estate. The

Court considered the Bankrupt had locus standi to make the application under this provision.

However, the Court found that on the express terms of the Living Trust Agreement, the Son

would only be entitled to distribution after the death of the Couple. The legal title remained

with the Couple and they were the only persons to benefit during their lifetimes.

For the reasons above, the Court held that the TiB was correct in deciding that the Property

was within the Bankrupt’s Estate. However, the Court ordered that only half of the costs of

the Summons be paid by the Bankrupt personally to the TiB. The Court took into account the

fact that no reason was given by the TiB for their decision in relation to the Living Trust

Agreement until the trial and it was only at the hearing that the TiB conceded the Bankrupt

had locus to bring the application.

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17. Taxed costs incurred in the presentation of the petition are to be paid first,

as a matter of priority, out of the estate of the Bankrupt, before the

payment of proved debts

Healthy Wharf Ltd v The Official Receiver and Trustee of the property of Leung Yat

Tung, a bankrupt HCB 2019/2000

The Petitioning Creditor applied to reverse or vary the Official Receiver’s decision to reject as

a provable debt the Petitioning Creditor’s taxed costs incurred in the presentation of the

petition (the “Petition Costs”) for the bankruptcy of Leung Yat Tung (the “Bankrupt”).

The basis of the Official Receiver’s rejection is that the Petition Costs are costs of the petition

for bankruptcy, and as such, they are to be paid under s.37 of the Bankruptcy Ordinance (the

“Ordinance”) as part of the costs and charges of the bankruptcy, as distinct from other debts

proved in the bankruptcy which are to be paid pari passu out of the assets of the bankrupt

under s.38 of the Ordinance. The Petitioning Creditor, on the other hand, contended that if it

is not allowed to prove for the costs it incurred in presenting the petition for bankruptcy, it

would be unfairly prejudiced, as it would be deprived of the right to vote in accordance with

the full amount of its proved debt, and of the right to receive interest from any surplus of

assets remaining after the payment of debts which are proved in bankruptcy.

Under s.37 of the Ordinance, after payment of the expenses properly incurred in preserving,

getting in or realizing any of the assets of the bankrupt, the assets remaining “shall first be

liable to” various payments. These payments include, firstly, the prescribed fees, charges

and percentages payable to the Official Receiver, and costs, charges and expenses incurred

or authorized by the OR, and then, secondly, “the taxed costs of the petition, including the

taxed costs of any person appearing at the hearing of the petition whose costs are allowed

by the court by excluding the interest on such costs”: s.37(1)(b) of the Ordinance.

It is thus clear that the taxed costs of the bankruptcy petition are to be paid first, as a matter

of priority, out of the estate of the Bankrupt, before the payment of other proved debts.

Since the Petitioning Creditor is to be paid the Petition Costs in full before the claims of the

other creditors, the Court considered that it is not unjust that it should not be entitled to a vote

on matters relating to the administration of the bankruptcy, in respect of the Petition Costs.

The right to vote should be reserved for the creditors who will be competing for payment on

pari passu basis.

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18. The minimum debt threshold is to be considered as at the date of the

bankruptcy application and not the date of the bankruptcy order. But the

Court may dismiss or stay a bankruptcy application if the remaining debt

is a relatively small sum as at the date on which a bankruptcy order is to

be made

HSBC Bank (Singapore) Ltd v Shi Yuzhi [2017] SGHC 211

HSBC Bank (Singapore) Ltd (“the Plaintiff”) petitioned the bankruptcy of Mr Shi Yuzhi (“the

Defendant”) on 27 December 2016 based on a debt of $22,719.70 due and owing by the

Defendant as at 22 December 2016.

The Bankruptcy Application was however adjourned several times due to the Defendant’s

non-attendance and in order to give the Defendant more time to fully satisfy his debt. The

Defendant made certain repayments. As at the date of 1 June 2017, an amount of $3,519.99

was still outstanding. A bankruptcy order was subsequently granted in respect of the

Defendant. The Defendant filed an appeal on 6 July 2017 against the Bankruptcy Order.

The Defendant alleged that the minimum debt in respect of which a bankruptcy order could

be made was $15,000. The minimum debt threshold was not satisfied at the time the

Bankruptcy Order was made. Accordingly, the Judge has no power to grant the Bankruptcy

Order and even if he does, he erred in exercising his discretion to make such order.

The Singapore High Court held that the minimum debt threshold was to be considered as at

the date of the bankruptcy application and not the date of the Bankruptcy Order. Accordingly,

it was within the Judge’s power to have granted the Bankruptcy Order.

However, the Court noted that under sections 65(2)(e) 64(1) of the Bankruptcy Act, the court

may dismiss the application or make an order staying the proceedings on a bankruptcy

application if it is satisfied that there is sufficient cause to do so. Accordingly, a court may, in

some situations and in its discretion, dismiss or stay a bankruptcy application if the remaining

debt outstanding is a relatively small sum (here, of about $3,000) as at the date on which a

bankruptcy order is to be made. However, it does not follow that a court should always

exercise its discretion to dismiss or stay the bankruptcy application if the remaining debt is

relatively small. The Court considered the Judge did not err in the exercise of his discretion

to make a Bankruptcy Order, taking into account in particular the Defendant’s repeated non-

attendance of the court hearings.

The Court dismissed the appeal but expressly qualified that the dismissal did not preclude

the Defendant from subsequently applying for an annulment order.

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19. The annulment / setting aside of a bankruptcy order has the effect of

automatically restoring the individual who was subject to the order to his

original position, unless the parties contractually agree to depart from that

proposition

TYC Investment Pte Ltd v Chan Siew Lee Jannie and another [2017] SGHC 202

The 1st defendant, Jannie Chan (“JC”), and the 2nd defendant, Henry Tay (“HT”), established

the plaintiff company, TYC Investment Pte Ltd (“TYC”), and were its two directors. In

September 2016, JC was made a bankrupt. She appealed against the bankruptcy order. By

the time the appeal was heard on 1 December 2016, JC had reached a settlement

agreement with the petitioning creditor. As a result, the bankruptcy order was set aside by

consent. The dispute essentially centers on the effect of the bankruptcy order, and the

subsequent setting aside of it, on JC’s directorship in TYC.

The Articles of the TYC, by incorporating the model articles, provide, inter alia, that the office

of director shall become vacant if the director becomes bankrupt. The Singapore High Court

held that it was plain from the wording of the Articles that the director automatically vacates

his office on the occurrence of a triggering event. Accordingly, JC’s office was automatically

vacated on 29 September 2016, when the bankruptcy order was made.

However, the Court considered that as a general proposition under bankruptcy law,

annulment of a bankruptcy order operates retrospectively to restore the individual who was

subject to the order to his original position as though no bankruptcy order has ever been

made against him. However, such general proposition does not apply where the parties

contractually agree to depart from that proposition.

Thus, the fact that the bankruptcy order has been set aside on appeal should have the effect

of automatically restoring JC to her original position as though no bankruptcy order has ever

been made against her. In the present case, the Court considered that there is nothing in the

TYC Articles that evinces a contractual agreement to depart from the general position under

bankruptcy law of retrospective operation of annulment or setting aside. In particular, the

Court took into account the fact that TYC is a family company with considerable assets and

does not depend on any financial contributions by JC as a director. Also, damage to

reputation caused by a stigma upon a member who had once been adjudicated bankrupt is

not material in this case. Therefore, it is unlikely for JC and HT to have wanted a choice

whether to reinstate a director, taking into account the circumstances of his or her earlier

bankruptcy.

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20. English High Court confirms that a Bankrupt retains legal professional

privilege in documents which form part of his estate and the trustee in

bankruptcy has no right to waive the privilege

Leeds and another v Lemos and others [2017] EWHC 1825 (Ch)

Mr. Lemos was adjudged bankrupt on 11 March 2015. The Trustees in Bankruptcy

(“Trustees”) obtained certain documents from Withers, the former solicitors of Mr. Lemos.

The Trustees believe that a number of the Withers documents are likely to be useful as

evidence for the purposes of proceedings under section 423 of the Insolvency Act 1986

relating to transactions defrauding creditors. Those proceedings, if successful, would result in

the recovery of what is said to be an extremely valuable asset for the benefit of Mr. Lemos’s

creditors. The Trustees applied for directions on what use the Trustees can make of such

potentially privileged documents.

Citing the Court of Appeal decision in Avonwick Holdings Limited and others v Shlosberg

[2016] EWCA Civ 1138, the English High Court held that legal professional privilege is such

a fundamental human right, and basic tenet of common law, that only an express statutory

power to waive it would confer jurisdiction on the court. There is, however, no such statutory

power contained in the proper interpretation of the Insolvency Act 1986. The Court dismissed

the Trustees’ application, finding that such privilege is peculiarly personal to the bankrupt.

The Court also confirmed that legal professional privilege is not the property of a bankrupt

and does not automatically pass to their trustee in bankruptcy.

Further, the Court considered that, absent an express power to waive privilege in the

legislation, it has no jurisdiction to direct a bankrupt, still less a third party, to waive privilege

in any documents.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: enquiry_cdniq@onc.hk T: (852) 2810 1212 W: www.onc.hk F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very

general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2017