Legal update on insolvency case law developments

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2 Legal update on insolvency case law developments Talk for Restructuring and Insolvency Faculty, HKICPA by Ludwig Ng, partner, ONC Lawyers 25 th April

3 Recent Case Updates 1. Cross-border Insolvency 2. Scheme of Arrangement 3. Void dispositions and Validation Order 4. Enforcing Examination Order by Contempt Proceedings 3

4 4 CROSS-BORDER INSOLVENCY

5 Cross-border Insolvency Re Joint Official Liquidators of Centaur Litigation SPC (in liquidation) HCMP 3389/2015, 3391/2015 and 3393/2015 Date of Decision: 10 March 2016 Brief Facts: The three Companies were incorporated in the Cayman Islands and have been put into liquidation there. The Liquidators, pursuant to a request issued by the Grand Court of the Cayman Islands, applied for recognition and assistance. One of the terms sought any person wishing to commence proceedings in Hong Kong against the Companies must obtain first the court s leave. 5

6 Re Joint Official Liquidators of Centaur Litigation SPC (in liquidation) HCMP 3389/2015 Points Decided: Section 186 of the CWUMPO: When a winding-up order has been made, or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company except by leave of the court, and subject to such terms as the court may impose. Section 97 of the Companies Law of the Cayman Islands, substantially the same as section 186 of the CWUMPO Making an order which extends to Hong Kong a control which exists in the Cayman Islands will assist in the orderly and cost effective liquidation of the Companies. It is also consistent with our own regime. Prudent creditor thinking of commencing proceedings should investigate the current position of the Companies Granted the order 6

7 Re Joint Official Liquidators of Centaur Litigation SPC (in liquidation) HCMP 3389/2015 Significance: This case follows the leading decision of The Joint Official Liquidators of Company A Co v B HCMP 902/2014 Date of Decision: 21 July 2014 (the first reported case on recognition of foreign liquidators pursuant to letter of request) and move on to elaborate the standard orders to be granted. The Court has set out the terms of the orders that will normally be granted in an application by foreign liquidators for recognition and assistance in Hong Kong (appendix of the judgment). This will eliminate the need to apply for ancillary winding-up orders in Hong Kong in some cases. 7

8 Appendix 1. The appointment of X and Y as Joint Official Liquidators (the Liquidators ) of [the Company] (In Liquidation) (the Company ) be recognised by this Court. 2. The Liquidators have and may exercise such powers as are available to them as a matter of Cayman Islands law and would be available to them under the laws of Hong Kong as if they had been appointed liquidators of the Company under the laws of Hong Kong and in particular, but without prejudice to the generality of the foregoing, for the following purposes: 2.1 to locate, protect, secure and take into their possession and control all assets and property within the jurisdiction of this Court to which the Company is or appears to be entitled; 2.2 to locate, protect, secure and take into their possession and control the books, papers and records of the Company including the accounting and statutory records within the jurisdiction of this Court and to continue their investigations into the assets and affairs of the Company and the circumstances which gave rise to its insolvency; 2.3 to retain and employ barristers, solicitors or attorneys and/or such other agents or professional persons as the Liquidators consider appropriate for the purpose of advising or assisting in the execution of their powers and duties; and 2.4 so far as may be necessary to supplement and to effect the powers set out at paragraphs 2.1 and 2.2 above, to bring legal proceedings and make all such applications to this Court, whether in their own names or in the name of the Company, on behalf of or for the benefit of the Company including any applications for ancillary relief such as freezing orders, search and seizure orders in any legal proceedings commenced, and/or for orders for disclosure, the production of documents and/or examination of third parties which it is anticipated may be made by the Liquidators to facilitate their ongoing investigations into the assets and affairs of the Company and the circumstances which gave rise to its insolvency. 3. Anything that is authorized or required to be done by the Liquidators is to be done by all or anyone or more of the persons appointed. 4. For so long as the Company remains in Liquidation in the Cayman Islands, no action or proceeding shall be proceeded with or commenced against the Company or its assets or affairs, or their property within the jurisdiction of this Court, except with leave of this Court and subject to such terms as this Court may impose. 5. The Liquidators do have liberty to apply. 6. The costs of the application be paid out of the assets of the Company as an expense of the liquidation. 8

9 Cross-border Insolvency Re Gulf Pacific Shipping Ltd (in creditors voluntary liquidation) and others [2016] SGHC 287 Date of Decision: 30 Dec 2016 Brief Facts: Gulf Pacific Shipping Limited ( the Company ) was incorporated in Hong Kong. In 2016, the Company was put into creditors voluntary winding up. Liquidators were appointed. The Company had a bank account with ABN AMRO Bank NV Singapore Branch. The Liquidators sought copies of bank statements from ABN Singapore. The Liquidators applied for recognition and powers to obtain information and documents relating to the bank account in Singapore. 9

10 Re Gulf Pacific Shipping Ltd [2016] SGHC 287 Issue: Whether recognition should be denied as the Company was liquidated through a voluntary winding up? Points Decided: Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675: common law powers of assistance to foreign liquidation did not extend to voluntary winding up. Voluntary winding up was characterized as an essentially private arrangement, and not of the same nature as insolvency involving officers of a foreign court. (Lord Sumption, Lord Clarke, Lord Neuberger disagreed). The foundational doctrine in recognition of foreign insolvency proceedings promotion and facilitation of the orderly distribution of assets, as well as the orderly resolution and dissolution of the affairs of entities being wound up No distinction should be drawn between voluntary and compulsory process Recognition granted 10

11 Re Gulf Pacific Shipping Ltd [2016] SGHC 287 Significance: The common law power of assistance to foreign liquidation also extends to voluntary winding-up The Singapore court was bold enough to depart from the dicta of the Privy Council in favour of the trend towards a liberal attitude of the unversalist approach in cross-border insolvencies 11

12 Cross-border Insolvency The Joint Provisional Liquidators of BJB Career Education Co Ltd (In Provisional Liquidation) v Xu Zhendong HCMP 1139/2016 Date of Decision: 18 Nov 2016 Brief Facts: BJB Career Education Company Limited ( the Company ) was incorporated in Cayman Islands. It provided vocational training It was put into liquidation by order of the Grand Court of the Cayman Islands. Pursuant to a letter of request issued by the Grand Court, the Provisional Liquidators of the Company sought orders for Mr Xu Zhendong, the former chairman and director of the Company, to produce documents, answer interrogatories and attend court for oral examination. 12

13 The Joint Provisional Liquidators of BJB Career Education Co Ltd (In Provisional Liquidation) v Xu Zhendong HCMP 1139/2016 Issue: Whether an order can be made for the oral examination of an officer of a foreign company? Points Decided: The common law power of assistance extends to ordering an oral examination if such a power (a) exists in the jurisdiction of liquidation and that is the jurisdiction of the place of incorporation; and (b) the power exists in the assisting jurisdiction. Cayman Islands court has powers to order the production of documents by a director of a company and an oral examination of a director: section 103 of the Companies Law in the Cayman Islands Similar powers in section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) The examination and order for production of documents is necessary 13

14 The Joint Provisional Liquidators of BJB Career Education Co Ltd (In Provisional Liquidation) v Xu Zhendong HCMP 1139/2016 Significance: The standard order in JOL of Centaur Litigation SPC HCMP 3389/2015 has not covered oral examination of former director. This is the first Hong Kong decision where the Hong Kong court has granted powers to foreign liquidators permitting them to orally examine a company director in Hong Kong pursuant to a letter of request made by a foreign court Note: the requirement of similar regulatory regimes is not always met. In The Joint Administrators of African Minerals Ltd (in administration) v. Madison Pacific Trust Ltd [2015] HKCFI 645; [2015] 4 HKC 215; HCMP 865/2015 (16 April 2015), the court refused recognition of the status of an administrator appointed under the English administration regime on the ground that there was no such procedure in HK. 14

15 Cross-border insolvency Re Opti-Medix Ltd (in liquidation) and another matter [2016] SGHC 108 Decision Date : 3 June 2016 Brief Facts: Medical Trend Limited and Opti-Medix Limited (collectively, the Companies ) were incorporated in the BVI. Their main business was in Japan. The proceeds of the business were however transferred to their bank accounts in Singapore. In late 2015, bankruptcy orders were granted by the Tokyo District Court. The Bankruptcy Trustee sought the recognition in Singapore of the foreign insolvency proceedings in respect of the Companies. 15

16 Re Opti-Medix Ltd (in liquidation) and another matter [2016] SGHC 108 Issue: Whether liquidation in a jurisdiction other than that of the place of incorporation should be recognized? Points Decided: The place of incorporation may be an accident of many factors, and may be far removed from the actual place of business For companies incorporated in an offshore island, they usually don't have real connection with the place: Re HIH Casualty and General Insurance Ltd [2008] 1 WLR 852 As a matter of practicality locating the primary place of insolvency proceedings at the center of main interest ( COMI ) of the company Japan was the only COMI for the Companies, and had moved in favor of liquidation. Granted the recognition (bearing in mind the orderly dissolution of the Companies) 16

17 Re Opti-Medix Ltd (in liquidation) and another matter [2016] SGHC 108 Significance: First decision in Singapore on the recognition of foreign liquidators from jurisdictions other than the place of incorporation of the companies concerned Also recognizes that nowadays, companies may have little connection with the place of incorporation 17

18 Cross-border Insolvency Joint and Several Liquidators of Pacific Andes Enterprises (BVI) Ltd HCMP 3563/2016 Date of Reasons for Decision: 27 January 2017 Brief Facts: Four companies incorporated in BVI were wound up by the Eastern Caribbean Supreme Court. Pursuant to a letter of request issued by the Eastern Caribbean Supreme Court, the Liquidators applied to the Hong Kong Court for recognition of the Liquidators appointment. One of the terms sought reads as follows: The Liquidators have and may exercise such powers for the following purposes: (a) to obtain from third parties such documents and information as concern the Company, including its promotion, formation, business dealings, accounts, assets, liabilities or affairs in order to facilitate the Liquidators investigations into the assets and affairs of the Company and the circumstances which gave rise to its insolvency 18

19 Joint and Several Liquidators of Pacific Andes Enterprises (BVI) Ltd HCMP 3563/2016 Points Decided: The Liquidators are not entitled to obtain documents from third parties without a court order under section 221(3) Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) The order granted reads as follows:- To request and receive from third parties documents and information concerning the Company and its promotion, formation, business dealings, accounts, assets, liabilities or affairs including the cause of its insolvency. Significance: Foreign liquidators rights to obtain documents from third parties in Hong Kong is not automatic Request must be made to the court 19

20 Cross-border Insolvency Re Rennie Produce (Aust) Pty Ltd [2016] HKEC 2012 Date of Decision: 26 August 2016 Brief Facts: Rennie Produce (Aust) Pty Ltd ( the Company ) was in liquidation in Australia. The Liquidators of the Company applied pursuant to a letter of request issued by the Federal Court of Australia for recognition, assistance as well as for production of documents by two banks in Hong Kong. 20

21 Re Rennie Produce (Aust) Pty Ltd [2016] HKEC 2012 Points Decided: The Hong Kong Companies Court may, pursuant to a letter of request from a common law jurisdiction with a similar substantive insolvency law, make an order of a type which is available to a liquidator or provisional liquidator under the insolvency regime in Hong Kong. Standard From of Order appended Significance: Practitioners may refer to the Standard Form of Order for Production of Documents by banks holding accounts of the company 21

22 Standard Form of Order 1. The Respondent produce copies of the following documents to the Applicants Solicitors by Monday, 19 September 2016: a. Documents identifying the account holders, contact details, contact persons, addresses and signatories, of the account listed in Schedule 1, including copies of the signatures of each of the signatories to that account. b. Documents identifying any accounts held by X in the name of or to the benefit of the persons or entities in Schedule 2, including documents identifying the account numbers, account names, account holders, contact details, contact persons, addresses and signatories of each such account including copies of the signatures of each of the signatories to those accounts. c. Statements or other documents recording or evidencing the movement of funds into and out of the account listed in Schedule 1 and any other accounts held in the name of or to the benefit of any of the persons listed in Schedule 2, for the period from 1 to 31 March The Respondent keep the documents sought in paragraph 1 in safe custody until copies of the documents are produced to the Applicants Solicitors. 3. There be liberty to apply by letter to the Clerk of the Honourable Mr Justice Harris. 4. The Applicants pay the reasonable photocopying costs of the Respondent for the production of the documents sought in paragraph 1, at a rate of no more than HK$7 per page. 22

23 Cross-border Insolvency In the matter of Z-Obee Holdings Limited and in the matter of the Companies Act 1981 [2017] SC (Bda) 16 Com Date of Decision: 21 February 2017 Brief Facts: Z-Obee Holdings Limited ( the Company ) is a company incorporated in Bermuda and listed on the Hong Kong Stock Exchange. Since 27 June 2014, the Company has been in provisional liquidation, but recently, the Hong Kong joint provisional liquidators ( the JPLs ) have found a potential investor to rescue the Company and hence the JPLs sought to have the Company restructured rather than wound up. The Company applied to Bermudian Court to appoint the JPLs as Bermuda JPLs for the explicit purpose of restructuring the Company and the HK provisional liquidation is to be discontinued. 23

24 In the matter of Z-Obee Holdings Limited and in the matter of the Companies Act 1981 [2017] SC (Bda) 16 Com Points Decided: It is the Bermudian Court s established practice to use provisional liquidation in a wide range of circumstances as a mechanism to implement financial or operational restructurings to effect corporate rescue. The Bermudian Courts have a broad discretion to order adjournment to enable alternatives to a winding-up to be explored The Court granted the Company s application to appoint JPLs for restructuring purposes. 24

25 In the matter of Z-Obee Holdings Limited and in the matter of the Companies Act 1981 [2017] SC (Bda) 16 Com Significance: It is well established in Hong Kong that the appointment of provisional liquidators to restructure a company is not allowed: Re Legend International Resorts Ltd [2006] 2 HKLRD 192 difficulty to provisional liquidators However, companies doing business in Hong Kong, but incorporated in Bermuda, can avoid being caught by Legend by appointing provisional liquidators in Bermuda for restructuring purposes. The Bermuda court expressly declined to follow Re Legend even though the wordings of the statutory provisions are the same. I respectfully declined to follow the contrary approach taken by the Hong Kong Court of Appeal in Re Legend International Resorts Ltd [2006] HKLRD 192, which I did not find persuasive for present purposes. 25

26 26 SCHEME OF ARRANGEMENT

27 Scheme of Arrangement Re Winsway Enterprises Holdings Limited HCMP 453/2016 Date of Decision: 17 May 2016 Brief Facts: Winsway Enterprises Limited ( the Company ) is incorporated in BVI and is registered as a non-hong Kong company. The Company convened a creditors class meeting to consider and vote on a proposed scheme of arrangement. Pursuant to an Restructuring Support Agreement entered into between consenting creditors and the company, they were to be paid 2% of outstanding debt as consent fee. The required statutory majority has been achieved. The Company applied to seek the Court s sanction of the scheme. 27

28 Re Winsway Enterprises Holdings Limited HCMP 453/2016 Issue: Whether the payment of a fee to the creditor for agreeing in advance to be bound by a proposed scheme creates a separate class? Points Decided: The lock-up fee was offered to all Scheme Creditors and it appears to have been a bona fide attempt to introduce certainty in the progress of restructuring. Thus it is unlikely to have material influence on how a Scheme Creditor voted: Re DX Holdings Ltd [2010] EWHC 1513 No need for Scheme Creditors to be divided into two classes for voting purposes 28

29 Re Winsway Enterprises Holdings Limited HCMP 453/2016 Significance: Winsway is important as this is the first decision in Hong Kong where the court considered whether the provision of a small consent fee to creditors who agree in advance to vote in favor of a scheme could fracture scheme classes for voting purposes Ultimately, the court will ask itself: Whether the right to be paid an additional sum is likely to influence materially a scheme creditor in deciding how to vote? Whether or not it may is likely to depend on whether or not the sum is substantial and has been offered in a manner which creditors are likely to consider fair regardless of whether or not they took advantage of the opportunity to agree in advance to vote in favor of the restructuring. Within a month, in another case Re Kaisa Group Holdings Limited HCMP 708/2016 (Date: 10 June 2016), a consent fee of 1% was also held to be a legitimate method to procure the success of the scheme and did not necessitate the constitution of a separate class. 29

30 Scheme of Arrangement Re Dee Valley Group plc [2017] EWHC 184 (Ch) Date of Decision: 8 February 2017 Brief Facts: Dee Valley Group plc ( the Company ) applied to the English High Court for sanction of a Scheme between the Company and its members. Shortly before the class meeting directed by the court to vote on the Scheme, a minority employee shareholder of the Company transferred one share each to 434 individual shareholders ("the Individual Shareholders ) by way of gift. The Chairman at the class meeting disallowed the votes of the Individual Shareholders. Had the Chairman allowed these votes, the Scheme would have failed, as it would not have been approved by a simple majority present and voting in the class meeting. 30

31 Re Dee Valley Group plc [2017] EWHC 184 (Ch) Issue: Whether the Chairman was right to disallow the votes of the Individual Shareholders? Points Decided: Members voting at a class meeting must exercise their power to vote for the purpose of benefiting the class as a whole. The Individual Shareholders joined the class with the perceived notion of voting down the Scheme. They gave no consideration to the interests of the class of members which they had joined. The Chairman was justified in disallowing the votes of the Individual Shareholders 31

32 Re Dee Valley Group plc [2017] EWHC 184 (Ch) Significance: In Re PCCW Limited [2009] 3 HKC 292, the share-splitting was used to support the scheme. But the reverse position, i.e. using share-splitting to vote down a scheme, has never been considered by the court. This has proved wrong. This decision demonstrates that the court will not allow manipulative practice, such as share splitting, which would undermine the underlying spirit of the dual requirements prescribed by the legislature as pre-condition for scheme approval. 32

33 Re PCCW vs. Re Dee Valley Group plc The Court considered that the Hong Kong case, Re PCCW Limited [2009] 3 HKC 292, was not direct on the point, since in PCCW, the share-splitting was used to support the scheme and would not, even potentially, have caused a situation in which there would have been no sanction hearing. Nevertheless, the court agreed the judgments in PCCW that voting manipulation achieved by share-splitting was improper and the fact that it had occurred could and should be taken into account. Further, the court agreed that share splitting undermines "the underlying spirit of the dual requirements prescribed by the legislature as pre-condition for scheme approval, and is thus objectionable. Headcount test is no longer important in HK in members scheme after However the case made clear that the principle against manipulation would very likely also apply in creditors schemes. 33

34 Scheme of Arrangement Re Conchubar Aromatics Ltd and another matter [2016] SGHC 279 Date of Decision: 20 December 2016 Brief Facts: Conchubar Aromatics Ltd convened a meeting of creditors for the purpose of considering and approving a proposed Scheme of Arrangement. The statutory requirements have been met and the Applicants sought court s approval of the Proposed Scheme. The Application was opposed by one creditor on the basis that three of the creditors were related to the Applicant and thus their votes should be disregarded completely. One creditor Conchubar Chemicals shared the same shareholder and director as the Applicant. (But they argued that both were investment funds with different ultimate beneficiaries.) The other two creditors got their debts by way of assignment from Conchubar Chemicals. 34

35 Re Conchubar Aromatics Ltd and another matter [2016] SGHC 279 Points Decided: Citing the HK CFA case of UDL Argos [2001] 3 HKLRD 634, and TT International Ltd and another appeal [2012] 2 SLR 213, court held that where voting is motivated by personal interest rather than based on consideration of the class s benefits, such vote should be discounted. In TT International, where the connection is being a wholly-owned subsidiary, the discount could be 100%. Other than that, the court would adopt a broad brush approach, taking into account: The relationships in question Previous conduct of the parties A discount of not more than 25% was applied to the vote of Conchubar Chemicals. The other two creditors were not shown to be related and no discount was applied. 35

36 Re Conchubar Aromatics Ltd and another matter [2016] SGHC 279 Significance: Members voting at a class must exercise their power to vote for the purpose of benefiting the class as a whole, and not merely to support those specific interests of individual members if they are different from the interests of the class Related parties have special interest Special interests are to be interpreted broadly. The court may adopt a broad brush approach and apply a discount to the value of the debts of related parties. 36

37 VOID DISPOSITIONS VALIDATION ORDER 37

38 Void Disposition and Validation Order Express Electrical v Beavis [2016] EWCA Civ 765 Date of Decision: 19 July 2016 Brief Facts: Express Electrical Distributors Ltd ( Express ) was a supplier to the Company. Since November 2012, Company started to pay late. On 29 May 2013, in response to a number of attempts by Express to press for payment, Company made a payment of 30,000 to Express in respect of goods already supplied. However, another creditor had issued a winding-up petition against Company on 22 May A winding-up order was subsequently made. The Liquidators demanded the repayment of 30,000. Express sought a validation order. 38

39 Express Electrical v Beavis [2016] EWCA Civ 765 Points Decided: It must be shown that special circumstances exist which makes a particular transaction one in the interests of the creditors as a whole before validation order will be made to override the usual application of the pari passu principle. Special circumstances: the creditor concerned has since the presentation of the petition helped to keep the company afloat, or has otherwise swollen the company s assets, salvage cases and etc. 39

40 Express Electrical v Beavis [2016] EWCA Civ 765 Application: The goods to which the 30,000 payment related had all been supplied by Express on credit prior to the making of that payment and were already available for use in Company s business regardless of whether that payment was made or not. Following the payment, Express only supplied goods worth 13,000 and by supply in the ordinary way, rather than on any specially advantageous terms. There is no evidence to suggest that those supplies were made in order to secure completion by Company of particularly profitable contracts so as to achieve a better overall result for the general body of creditors. Conclusion: it was not in the interests of the general body of creditors that Express should receive the 30,000 for the goods supplied, in breach of the pari passu principle. 40

41 Express Electrical v Beavis [2016] EWCA Civ 765 Significance: The Court of Appeal rejected the oft-cited presumption that the court will grant a validation order in cases apparently involving good faith payments made in ignorance of an outstanding winding-up petition. This ignores the importance of the pari passu principle. Must show special circumstances: the disposition in question will be or has been for the benefit of the general body of unsecured creditors, such that it is appropriate to override the usual pari passu principle. 41

42 Void Disposition and Validation Order Re AGI Logistics (Hong Kong) Ltd [2016] 5 HKLRD 737 Date of Decision: 2 November 2016 Brief Facts: On 8 December 2009, the Inland Revenue Department ( the IRD ) informed AGI Logistics (Hong Kong) Limited ( the Company ) that a tax refund letter would be sent. On the same day, the winding-up petition notice of the Company came to the attention of the IRD. The Company requested that the refund be made payable to Careship International Transportation Limited ( Careship ). IRD complied. On 10 Feb 2010, the Company was wound up. The liquidators contended that the tax refund due to the Company paid by IRD to Careship was void under section 182 of the CWUMPO. 42

43 Re AGI Logistics (Hong Kong) Ltd [2016] 5 HKLRD 737 Points Decided: There is no basis for reading section 182 to contain a qualification such that a disposition is only void if it has an impact on creditors, as this invites disputes Dispositions which constitutes an intermediary function are also caught by section 182 Any disposition that risks reducing the amount available for creditors is caught by section 182 It s not necessary to first exhaust remedies against the ultimate recipient of the assets. 43

44 Re AGI Logistics (Hong Kong) Ltd [2016] 5 HKLRD 737 Significance: There have been directly conflicting decisions in HK and UK on this issue: Hollicourt (Contracts) Ltd v Bank of Ireland [2001] Ch 555 (UK) and Bank of East Asia Ltd v Rogerio Sou Fung Lam [1988] 1 HKLR 181 (HK) Court of Appeal analyzed the cases in details and decided to depart from English decisions. After a winding-up petition is presented, all dispositions, regardless of its ultimate impact on creditors and whether it serves only an intermediary function, will be caught by section 182. It s also made clear that there s no requirement to first exhaust remedies against the ultimate recipient of the assets. 44

45 Void Disposition and Validation Order Akers and others (Respondents) v Samba Financial Group (Appellant) [2017] UKSC 6 Date of Decision: 01 February 2017 Brief Facts: Saad Investments Co Ltd ( SICL ) is a company incorporated in Cayman Islands. It went into liquidation in the Cayman Islands. Mr Al-Sanea, a Saudi Arabian citizen, was the legal owner of shares in five Saudi Arabian banks, valued at around US$318 million. SICL alleged that Mr Al-Sanea held the Saudi Arabian shares ( Disputed Shares ) on trust for SICL. Six weeks into the liquidation, Mr Al-Sanea transferred all the Disputed Shares to Samba Financial Group ( Samba ) Liquidators alleged disposition of the company s property made after the commencement of the winding up, thus is void 127 of the Insolvency Act 1986, equivalent to section 182 of CWUMPO 45

46 Akers and others (Respondents) v Samba Financial Group (Appellant) [2017] UKSC 6 Issues: Does SICL have an equitable interest in the Disputed Shares? The law of Saudi Arabia, where the Disputed Shares are sited, does not recognized the institution of trust Does the transfer constitutes disposition? Points Decided: 1 st issue - A common law trust may be created, come into existence and be enforced in respect of the Disputed Shares, even though Saudi Arabian law does not recognize trusts in any form: Lightning v Lightning Electrical Contractors Ltd (1998) 23 (1) Tru LI 35 Finding otherwise would lead to bizarre results, as the consequences of the same arrangement might then be different in relation to properties acquired in different jurisdictions. 46

47 Akers and others (Respondents) v Samba Financial Group (Appellant) [2017] UKSC 6 2 nd issue Where an asset is held on trust, the legal title remains capable of transfer to a third party. The disposition may be in breach of trust. The beneficiary s rights vis-à-vis the trustee are not disposed of. Such rights are the beneficiary s, not the trustee s. However, the beneficiary s rights over the assets in question may be extinguished vis-à-vis third party if the disposition of the legal title has the effect of overriding the protected trust rights, e.g. bona fide purchaser without notice. Mr Al-Sanea transferred his legal ownership of the Disputed Shares to Samba. Samba was a bona fide purchaser for value without notice. SICL s equitable interest in the Disputed Shares was effectively extinguished. Conclusion: There was no disposition of any rights of SICL in relation to the Disputed Shares by virtue of the transfer to Samba 47

48 Akers and others (Respondents) v Samba Financial Group (Appellant) [2017] UKSC 6 Significance: As far as UK (and HK) law is concerned, a trust could be created over property situated in jurisdictions that do not recognise trust. Transfer of legal title in breach of trust does not constitute disposition. Liquidators cannot use section 182 of CWUMPO to recover assets transferred. However, where the third party has notice of the breach of trust, it could be held liable to return the trust assets on the basis of knowing receipt. 48

49 49 ENFORCING EXAMINATION ORDER BY CONTEMPT PROCEEDINGS

50 Enforcing Examination Order by Contempt proceedings Bruno Arboit as Sole Liquidator of Highfit Development Co Ltd v Koo Siu Ying and Another HCMP 2749/2012 Date of Decision: 8 March 2016 Brief Facts: The defendants are directors of Highfit Development Co Ltd ( the Company ) which went into liquidation in late It was suspected to have transferred out a very important assets to a company controlled by the defendants before winding-up. The liquidator obtained a court order under section 221 of the CWUMPO requiring the defendants to produce all books, correspondence and documents in their custody or power relating to the business and affairs of the Company including the documents set out in Schedule 2 attached to the Summons. Defendants did not comply. Liquidator applied for an order of committal against the defendants for contempt of court in breach of the court order. 50

51 Defendants raised a number of defences to the contempt proceedings such as: Ignorance (everything was controlled by Mr. Lim, their husband and father), lack of specificity of the order for production (all documents being too broad), non-possession and non-existence of documents. The court rejected all defences but one non-existence. Liquidator was not able to prove existence of all the requested documents. 51

52 Bruno Arboit as Sole Liquidator of Highfit Development Co Ltd v Koo Siu Ying and Another HCMP 2749/2012 Points Decided: General principles A court order must be complied with strictly in accordance with its terms. But the burden is on the liquidator to prove a defendant s contempt beyond reasonable doubt A defendant cannot be regarded to be in contempt just because he did not have the means to comply with the court order, or it was impossible to comply: Kao, Lee & Yip v Koo Hoi Yan (2009) 12 HKCFAR 830; Concorde Construction v Colgan Co Ltd & Anor (No 2) [1984] HKC

53 Bruno Arboit as Sole Liquidator of Highfit Development Co Ltd v Koo Siu Ying and Another HCMP 2749/2012 Significance: Defendants produced none of the documents by the deadline. Plaintiff only succeeded to prove BRD existence of a portion of the requested documents. Costs were ordered on party and party basis instead of the conventional indemnity basis. It points to the need to prepare the s.211 questions and requests carefully and the importance in establishing the existence of specific documents before launching contempt proceedings 53

54 Enforcing Examination Order by Contempt proceedings Ip Pui Lam Arthur and Another v Alan Chung Wah Tang and Another CACV 214/2016 Date of Decision: 16 February 2017 Brief Facts: The Defendants were ordered by the Court to produce various documents to the trustees in bankruptcy. They failed to comply with the order. At first instance, the Court found that the Defendants willfully and intentionally disobeyed the court order by failing to provide the documents sought. Defendants convicted of contempt of court Defendants appealed to the Court of Appeal 54

55 Ip Pui Lam Arthur and Another v Alan Chung Wah Tang and Another CACV 214/2016 Points Decided: Burden of proof rests on the Plaintiffs, to show, beyond reasonable doubt, that the documents are in existence and that they are within the custody or power of the Defendants to produce them and the Defendants intended not to produce them There is no burden on Defendant to show a defence The Plaintiffs are only able to prove, beyond reasonable doubt, the existence of one category of the documents (allegedly on the defendant s own admission) and that the Defendants have power over that category of documents. There being no evidence of any dishonesty or personal benefits, an order of committal is too harsh. 55

56 Ip Pui Lam Arthur and Another v Alan Chung Wah Tang and Another CACV 214/2016 Significance: A court order to produce documents must be strictly complied. So long as D has the means to produce the documents, even with difficulty, D would be in contempt for not doing so. But the defendants have no evidential burden to show a defence. 56

57 57 Thank you!

58 19 th Floor, Three Exchange Square 8 Connaught Place, Central, Hong Kong Tel: (852) Fax: (852) ludwig.ng@onc.hk Website: Important: The law and procedure on this subject are very specialised and complicated. This seminar 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. 58

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