YEUNG LUI MING AND LAI KAR YAN as the Joint and Several Trustees of the Property of WONG YUK TUNG (a bankrupt) v. TANG MO LIN, IRENE AND ANOTHER

HCA 1197/2015

[2019] HKCFI 1848

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1197 OF 2015

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JUDGMENT

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INTRODUCTION

Introduction

1.  This is an action by the joint and several trustees (the “Trustees”) of the property of Wong Yuk Tung (“the Bankrupt”) against the defendants concerning a sale and purchase agreement dated 23 January 2007 between the Bankrupt as vendor and the 1^st defendant (“Tang”) as purchaser (the “Agreement”) of 300,000 Class B shares (“the Sale Shares”)in the 2^nd defendant (“Cheong Tai”) for a consideration of $60 million and a deed of transfer dated 7 June 2007 (“the Deed”) which the Bankrupt for nil consideration and pursuant to the Agreement procured Bright Success Management Company Limited (“Bright Success”) to enter into.  Both the Agreement and the Deed were entered into, on my finding, within a period of two years prior to presentation of the bankruptcy petition of the Bankrupt on which he was adjudged bankrupt. 

2.  The Trustees seek a declaration that the transfer of the Sale Shares under the Agreement and the transfer of 38 graves under the Deed are transfers at an undervalue within the meaning of section 49 of the Bankruptcy Ordinance (Cap 6) and/or dispositions with intent to defraud creditors within the meaning of section 60 of the Conveyancing and Property Ordinance (Cap 219) and that as such are void as against the Trustees.  They also seek an order for the defendants to repay them as joint and several trustees of the Bankrupt the shortfall in the consideration which Tang gave to the Bankrupt under the Agreement or such sums as the court thinks fit in respect of the benefits received by the defendants from the Bankrupt pursuant to section 49 of the Bankruptcy Ordinance and/or section 60 of the Conveyancing and Property Ordinance.

Dramatis personae

3.  Wong Yuk Tung (the Bankrupt):  The Bankrupt had been engaged in the garment and fabric industry since 1970s.  He was a director and shareholder of Cheong Tai from 28 May 1982 until 28 May 2007 when the Sale Shares were transferred to Tang.  He was also a director and shareholder of Bright Success at the time of its transfer of the 38 cemetery sites to Tang’s nominee, Wintop Inc Ltd (“Wintop”).  The Bankrupt and his son (“Wong”) were directors and shareholders of Perfecta Dyeing, Printing & Weaving Works Limited (“Perfecta”) and Silver Yield Industries Limited (“Silver Yield”) until 4 May 2009 and 22 December 2009 respectively.  On 6 February 2009, a bankruptcy petition was filed against the Bankrupt.  A bankruptcy order was issued against him on 1 June 2009.  Since his bankruptcy, he worked as a consultant in one of Tang’s companies and was accommodated in a luxurious property in Magazine Gap Road provided by Tang.  The Bankrupt passed away on 28 May 2014.

4.  Thierry Kouan Kian Wong (“Wong”):  Wong is the son of the Bankrupt.  He was a director and shareholder of Perfecta up until 1 June 2009 when a bankruptcy order was issued against him and the Bankrupt.  Since his bankruptcy he was employed as a consultant in one of Tang’s companies.

5.  Wong Tang Mo Lin Irene (“Tang”):  Tang is the 1^st defendant herein.  She joined Cheong Tai in May 1982.  She and the Bankrupt were co-shareholders and co-directors until the transfer of the Sale Shares to her and the Bankrupt’s resignation as director on 28 May 2007.  Thereafter, Tang became the sole shareholder of Cheong Tai.  At the material time she was and she still is a director of Bright Success and Wintop.   She has a chain of other companies.

6.  Ho Ka Chun Kelvin (“Ho”):  Ho is a director of Messrs Deloitte Touche Tohmatsu, Certified Public Accountant.  He works under the supervision of the Trustees and is responsible for the overall administration of the affairs of the Bankrupt.

7.  Cheong Tai International Holdings Limited (“Cheong Tai”): It is the 2^nd defendant herein.  It was incorporated by the Bankrupt in 1980, then under a different name.  In 1982, Tang acquired 20% shareholding in the company.  Since then the Bankrupt and Tang were the sole shareholders and directors of the company until 28 May 2007.  Through successive acquisitions,Tang held 80% of its shareholding.  Up until 28 May 2007, Cheong Tai had a total authorized share capital of $15 million divided into 1,200,000 Class A shares which were all held by Tang and 300,000 Class B shares which were all held by the Bankrupt.  Despite the disparity in shareholding, under the articles of association of Cheong Tai, the Bankrupt’s 300,000 Class B shares had equal voting rights as Tang’s 1,200,000 Class A shares so that the Bankrupt and Tang had equal control of the board of directors.  Thereafter, Tang became its sole shareholder of the company.  On 13 March 2013, the two classes of shares were consolidated (the “consolidated shares”).

8.  Guangzhou City Cheong On Garment Company Limited (“Cheong On”):  It is a wholly own subsidiary of Cheong Tai in the PRC.

9.  Panyu Tanzhou Cheong Wah Garment Manufacturing Company Limited (“Cheong Wah”):  It is a subsidiary company owned and operated by Cheong Tai in Panyu.  It is the manufacturing arm of Cheong Tai.

10.  Bright Success Management Company Limited (“Bright Success”): It is a company held by the Bankrupt and Tang in the ratio of 80:20.  Prior to 7 June 2007, it held 115 cemetery sites in Da Peng Bay (大鵬灣) of the People’s Republic of China (the “PRC”).

11.  Perfecta Dyeing, Printing & Weaving Works Limited (“Perfecta”):  The company was set up by the Bankrupt.  It was primarily engaged in manufacture and trading of fabrics in the PRC.  The Bankrupt and Wong were its sole directors and shareholders until 4 May 2009 when it was ordered to be wound up following the presentation of a winding up petition on 6 February 2009.

12.  Panyu Tanzhou Perfecta Weaving and Dyeing & Printing Limited (“Panyu Perfecta”):  It is a wholly owned subsidiary of Silver Yield Industries Limited.

13.  Silver Yield Industries Limited (“Silver Yield”):  It is a company set up by the Bankrupt.  It is the holding company of Panyu Perfecta. The Bankrupt and Wong were its sole directors and shareholders until 22 December 2009.  The company was ordered to be wound up on 17 August 2011 following the presentation of a petition for its winding up on 15 June 2009.

14.  Wintop Inc Ltd (“Wintop”):  It is a company owned and controlled by Tang.  She and her brother are its sole directors.

The background

15.  Prior to 28 May 2007, the Bankrupt and Tang were the sole shareholders and directors of Cheong Tai.  Tang held 1,200,000 Class A shares, representing 80% of the issued share capital of the company.    The Bankrupt held 30,000 Class B shares representing 20% of the issued share capital of the company.

16.  The Bankrupt and his son, Wong, were at all material times the sole directors and shareholders of Perfecta and Silver Yield until their winding up in 2009.  Silver Yield was the holding company of Panyu Perfecta. The Bankrupt was also a shareholder and director of Bright Success up until 29 May and 1 June 2009 respectively.

17.  By the Agreement purportedly dated 23 January 2007 (the exact date of making of the Agreement is in dispute), the Bankrupt sold all the Sale Shares to Tang for a consideration of $60 million.  Under clause 2 of the Agreement, the consideration comprised of:

(i)   a set-off portion in the sum of $46,027,413 being allegedly used to set-off a debt of that amount owed by Perfecta and Panyu Perfecta (collectively, the “Perfecta Group”) to Cheong Tai which was assumed by the Bankrupt; and

(ii)   a cash portion in the sum of $13,972,587 (the “cash portion”).

Paragraph 5 of the preamble of the Agreement stated that the Bankrupt would at no consideration procure Bright Success to transfer the legal and beneficial ownership of 38 cemetery sites in Da Peng Bay to Tang or her nominee.

18.  On 7 June 2007 pursuant to the Agreement, the Bankrupt caused Bright Success to execute the Deed transferring 38 cemetery sites to Tang’s nominee, Wintop at a total consideration of $1,805,680.20, ie at the average price of $47,517.90 each.  On 8 June 2007, 47 of the remaining cemetery sites were transferred to the Bankrupt, his wife and Wong by two deeds of transfers at the price of $46,500 each.  Those 47 cemetery sites were further transferred to Wintop at the price of $90,000 or $110,000 each.

19.  On 28 May 2007, Cheong Tai filed Form SC7 stating that it provided financial assistance to Tang in the sum of $60 million on that date.

20.  It is the Trustees’ case that the Agreement, the sale and transfer of the Sale Shares, the Deed and the transfer of the 38 cemetery sites to Wintop form one composite transaction.

21.  On 10 September 2007, about four and a half months after the transfer of the Sale Shares, a major fire broke out in Panyu Perfecta, as a result of which the factory was completely shut down for approximately six months.  It reopened for a few days and ceased production again for the Chinese New Year holidays.  Then it closed down in June 2008.  The business of Perfecta ceased as a result.

22.  Within 21 months of the transfer of the Sale Shares, ie on 6 February 2009, a winding up petition was presented against Perfecta and a bankruptcy petition was presented against the Bankrupt.  A bankruptcy order was issued against the Bankrupt on 1 June 2009.

23.  On 15 June 2009, a winding up petition was presented against Silver Yield.

24.  On 3 September 2009, the Trustees were appointed as joint and several trustees-in-bankruptcy of the estate of the Bankrupt.

25.  On 17 August 2011, an order to wind up Silver Yield was issued.

26.  Since 8 June 2010, the Trustees have been pursuing the defendants for information regarding the transfer of the Sale Shares, including taking out two summonses under section 29 of the Bankruptcy Ordinance on 18 December 2012 against Tang and her brother who has since become a director of Cheong Tai holding one share and a director of Bright Success and another one in 2015 seeking information regarding the transfer of the Sale Shares.

27.  On 14 January 2013, after two and a half years and under threat of the 2012 section 29 application, Tang’s solicitors, Messrs Y S Lau & Partners (“YSL”) provided for the first time the Agreement and some information and documents to the Trustees. 

28.  On 17 January 2013, a section 29 Order under the Bankruptcy Ordinance was made by the court against Tang.  On 30 January 2013, Tang filed an affirmation pursuant to the section 29 Order repeating the same information supplied by YSL’s letter of 14 January 2013 plus a set of management accounts for Cheong Tai from 1 April to 31 December 2006.  Still, she failed to address most of the questions and/or provide most of the documents/information sought by the Trustees.

29.  On 13 March 2013, ie one and a half months after filing her affirmation, Tang caused Cheong Tai to consolidate the Class A and Class B shares, increased the share capital and adopted a new memorandum and articles of association.  Since that date, Tang holds 1,999,999 consolidated shares in Cheong Tai.  As result of the change, the Sale Shares have been diluted and lost their identity.

30.  The Trustees’ pursue of information relating to the transfer of the Sale Shares continued.  Eventually, on 8 July 2014, seven and a half years after the date of the Agreement or three years since the Trustees’ inquiries,Tang alleged for the first time that the debt under the set-off portion of the consideration for the Sale Shares comprised of loans of $17,603,694.90 owed by Panyu Perfecta to Cheong Wah.

31.  The second section 29 summons under the Bankruptcy Ordinance was taken out on 20 January 2015 against Tang after her repeated refusal to provide further information sought since January 2014.  It was under the threat of this summons that YSL provided some further information in a letter dated 18 March 2015.  But explanation to justify the consideration of the Sale Shares is still outstanding.

32.  In the meantime, the Bankrupt’s bankruptcy order was discharged on 1 October 2013.

THE LAW

33.  The court has jurisdiction upon an application by the trustee-‌in- bankruptcy to set aside a transaction entered into by a bankrupt with any person and to make such order as it thinks fit for restoring the position before that transaction.

34.  First, it has jurisdiction under section 49(1) and (2) of the Bankruptcy Ordinance, if the transaction was entered into during the period of five years ending with the day of the presentation of the bankruptcy petition on which the debtor is adjudged bankrupt at an undervalue.  ‘Undervalue’ is defined in section 49(3).  The Trustees rely on section 49(3)(c) which defines the term to mean “a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the debtor”.

35.  Section 51(2) requires the trustee to prove that the debtor is insolvent at that time or becomes insolvent in consequence of the transaction. But, if the transaction was entered into during the period of two years ending with the day of the presentation of the bankruptcy petition on which the debtor is adjudged bankrupt, the requirement under section 51(2) is presumed,unless the contrary is shown by the party seeking to rely on the transaction.

36.  Under this limb, the Trustee has to prove:

 (1)      that the transaction is at an undervalue within the meaning of section 49(3)(c); and

 (2)      that it was entered into either:

    (a)     within two years of the presentation of the Bankrupt’s bankruptcy petition; or

    (b)     within five years and the Bankrupt is insolvent at that time or becomes insolvent in consequence of the transaction.

37.  “Transaction at an undervalue” is defined in section 49(3).  The Trustees rely on paragraph (c) of sub-section (3).  The elements required in proving transaction at an undervalue under the equivalent section 238(4)(b) of Insolvency Act 1986 has been succinctly summarized by Millett J (as he then was) in Re MC Bacon Ltd [1] as follows:

“ To come within that paragraph the transaction must be (i) entered into by the company; (ii) for a consideration: (iii) the value of which measured in money or money’s worth; (iv) is significantly less than the value; (v) also measured in money or money’s worth; (vi) of the consideration provided by the company. It requires a comparison to be made between the value obtained by the company for the transaction and the value of consideration provided by the company. Both values must be measurable in money or money’s worth and both must be considered from the company’s point of view.”

THE PARTIES’ CASE AND ISSUES

The Trustees’ case

38.  The Trustees’ case is that Tang and the Bankrupt had a close and tight business relationship built up over the course of three decades.  The Agreement and the Deed were part of a scheme among them and Cheong Tai to put the Bankrupt’s assets out of reach of the Bankrupt’s creditors.  As part of the transaction, Bright Success transferred 38 cemetery sites to Wintop pursuant to the Deed on 7 June 2007.  The sale of the Sale Shares and the transfer of the 38 cemetery sites were at an undervalue within the meaning of section 49 of the Bankruptcy Ordinance and/or a disposition with intent to defraud creditors within the meaning of section 60 of the Conveyancing and Property Ordinance. 

39.  The Agreement purportedly dated 23 January 2007, the transfer documents of the Sale Shares, the Deed and the transfer of the 38 cemetery sites form one composite transaction which was entered into within two years of the presentation of the Bankrupt’s bankruptcy petition on which the Bankrupt was adjudged bankrupt.  Hence, by reason of section 51(2) of the Bankruptcy Ordinance, there is no need for the Trustees to prove that the Bankrupt was insolvent at the time of Agreement or the Deed or became insolvent in consequent of the transactions. 

40.  It is also the Trustees’ further and alternative case that Tang was an associate of the Bankrupt.  One would expect that was to laid the foundation for a claim of unfair preference under section 50 by raising the presumption under section 50(5) of the Bankruptcy Ordinance so that the Trustees do not have to prove that the Bankrupt had been influenced to enter into the transaction by a desire to put Tang in a better position than the position she would be in had that transaction not been entered into; and by raising the presumption under section 51(2) that the Bankrupt was insolvent at the time of the Agreement or became insolvent as a result.  But no claim for unfair preference has been pleaded.  Thus, the evidence if established is only evidence of the factual background.  It is not a material issue in this case.

The defendants’ case

41.  The defendants’ case is one of denial.  The Agreement and the Deed were transactions at arm’s length and not at an undervalue.  The Bankrupt had received the full consideration.  The Bankrupt sold the Sale Shares so as to concentrate in the business of his Perfecta Group.  The price was offered by the Bankrupt.  The defendants disputed that the Bankrupt, Silver Yield and the Perfecta Group were insolvent at the time of the making of the Agreement and Deed.  They claimed that the Perfecta Group was an expanding and highly profitable business.  The Bankrupt and the Perfecta Group failed because of a fire on 10 September 2007, which burned down Panyu Perfecta.

The principal issues

42.  The principal issues in this case are:

 (1)      (a) whether the Agreement was entered into within two years of the presentation of the bankruptcy petition of the Bankrupt; or (b) whether the Agreement and the Deed form one composite transaction; such that the transactions therein took place within two years of the presentation of the bankruptcy petition of the Bankrupt;

 (2)      (a) whether there is a need to prove the Bankrupt was insolvent at the time of entering into the Agreement and the Deed or became insolvent as result of the transactions; and if there is, (b) whether insolvency is proven;

 (3)      whether the transfers are at an undervalue;

 (4)      whether the transfer of the Sale Shares and the 38 cemetery sites were dispositions with intent to defraud creditors within the meaning of section 60 of the Conveyancing and Property Ordinance; and

 (5)      whether the claim based on section 60 of the Conveyancing and Property Ordinance is somehow time-barred.

43.  If the Trustees succeed in proving issue (1), they have no need to prove issue (2).  The Bankrupt’s insolvency at the time of the transactions is presumed: section 51(2) of the Bankruptcy Ordinance.  The burden is shifted to Tang to prove the contrary: section 51(2) of the Bankruptcy Ordinance.   Issues (3) to (5) are questions of fact.

CREDIBILITY OF WITNESSES

44.  This case turns very much on the intention of the Bankrupt and Tang.  The Bankrupt has passed away and is not available to testify.  Kevin Ho (“Ho”) testified on behalf of the Trustees.  Tang and Wong testified on behalf of Tang and Cheong Tai.  As always, the most reliable test of credibility is inherent probability of the witness’ evidence and its consistency with contemporaneous documents when viewed against the surrounding circumstances.

45.  Ho is a professional accountant and director of Messrs Deloitte Touche Tohmatsu, a firm of certified public accountants (“Deloitte”).  The Trustees are partners of Deloitte.  Ho is a staff of the Trustees working under their direct supervision.  He is responsible for the overall administration of the affairs of the estate of the Bankrupt, including investigation of the transactions entered into by the Bankrupt on and after the presentation of the bankruptcy petition against him.  Ho gave evidence in a straight forward manner.  His evidence on the primary facts are not in serious dispute. His suggestions on inferences to be drawn on the primary facts are guarded and cautious.  I am satisfied that he was trying his best to assist the court with his professional knowledge.  Notwithstanding vigorous cross examination, his evidence emerged unscathed.  I accept his evidence.

46.  Wong is the son of the Bankrupt.  He was a co-shareholder and co-director with the Bankrupt in their Perfecta Group, which collapsed. After the Bankrupt’s and his own bankruptcy, Tang provided them with employment and a home in one of her luxurious apartment in Magazine Gap Road.  Wong had every reason to be grateful to Tang and has as much the same reason to support the legality of the Agreement and the Deed as has Tang.  On an objective view, he was a defensive and exaggerating witness.  He was prone to blame others, including his auditors, in-house accounting staff and even the present solicitors on record, whenever his testimony clashed with common sense or was contradicted by contemporaneous documents.  He painted a rosy picture of Perfecta being a very profitable and growing business and blamed Lehman Brothers’ downfall, the fire and minimum wages in China for its collapse.  He was unable to explain away the audited financial statements, which he unconvincingly said were practically ignored by the lending banks; and the Bankrupt’s solicitor’s affidavit making a reference to the Bankrupt’s attempt to ‘save’ Perfecta.  He is not an impartial or sincere witness.  He is not credible.  I reject his evidence.

47.  Tang has a direct financial interest in having this action dismissed.  She resisted the Trustees’ requests for information regarding the transfer of the Sale Shares for two and a half years.  It was only when a section 29 Bankruptcy Ordinance examination was looming that she started providing as little information as possible.  She was unable to explain why she stonewalled.  She said she had given all information to her solicitors and was acting on legal advice.  Reading the contemporaneous correspondence between the parties’ solicitors, it is manifestly clear that her solicitors were acting on her instructions to resist providing the information. The only reasonable inference to be drawn by such stonewalling is that Tang had something to hide about the Agreement and the Deed.  When assessing the reliability of her evidence, I shall take that into account.

48.  When litigation became imminent, Tang merged the Class A and Class B shares and triggered a chain of corporate actions including increase in share capital which would practically prevent the recovery of the Class B shares.  Tang could offer no explanation for these corporate actions. Since the transfer of the Bankrupt’s Class B shares to her, Tang remained the only shareholder of Cheong Tai.  The consolidation would serve no purpose.  At the time, the Trustees were pressing for answers in relation to the Agreement and the Deed and litigation was imminent.  The Sale Shares were at risk of being recovered by the Trustees.  In the absence of an explanation, such corporate actions are inexplicable except for the purpose of preventing recovery of the Class B shares and diluting their value.  Tang has much to hide and is far from telling the truth.

49.  She was an unimpressive witness.  When she was unable to answer questions put to her, she excused herself by saying that she was acting on what she was told by her accounting staff.  But her accounting staff was not called.  She was obviously trying to hide behind someone who could not be cross-examined.  She was an evasive witness.  I do not find her credible.

THE FACTS

The date when the Agreement was entered into

50.  The date when the Agreement was entered into is the single most crucial issue in this case.  On the face of the Agreement, it was entered into on 23 January 2007, coincidentally a fortnight before the lapse of the period of two years prior to the presentation of the bankruptcy petition against the Bankrupt.  The Trustees bear the burden of proof that the Agreement was executed after 9 February 2007 so that it was entered into within two years of presentation of the bankruptcy petition against the Bankrupt.  On the face of the Agreement, the Trustees’ burden to overturn this prima facie evidence is a very onerous one. 

51.  The Agreement was prepared by YSL, the defendants’ then and present solicitors.  It was a typewritten document with the date of the Agreement on the cover page and the first page left blank.  It was signed by the Bankrupt as vendor and Tang on her own behalf as purchaser and on behalf of Cheong Tai.  Their signatures were witnessed by Lau Yue Sum,the principal or consultant of YSL.  There was no date on the signature page.  The cover page and the first page of the Agreement was hand dated “23 January 2007”.  Tang said that the date was not written by her and she did not know who put the date on the Agreement.  Her evidence is that the Agreement was entered into on the date as stated on the Agreement. It was put to Tang in cross-examination that the Agreement was not signed in January 2007 but in May 2007.  She replied that she did not remember.  When it was put to her whether it was possible that it was signed in May, she repeated that she really did not remember.  Thus, despite her assertion, she was actually uncertain as to when the Agreement was entered into.

52.  It was the defendants’ case that the two cheques issued on 26 and 28 May 2007 in the sum of $5 million each were Tang’s payment of the first sum of $10 million under the cash portion of the consideration.  Under clause 2(a) of the Agreement, that sum was to be paid on execution of the Agreement and receipt of the payment was acknowledged by the Bankrupt in the Agreement.  That suggests that the Agreement was entered into on 28 May 2007.  However, Tang asserted that the Agreement was indeed signed on 23 January 2007.  She explained that as it was close to Chinese New Year she wished to defer payment of the first portion of the cash consideration.  Hence, as agreed by the Bankrupt, payment was delayed until May 2007. 

53.  That explanation was problematic.  An insurmountable difficulty is that the Agreement had not been amended to accommodate the deferment.  The sum of $10 million was supposed to be paid upon execution of the Agreement.  The cheque was supposed to be on the table when the Agreement was signed.  If Tang was not prepared to make the payment on that day, she must have agreed with the Bankrupt to defer payment before that day or at the latest when they appeared before YSL when signing the Agreement on that day.  Whichever the scenario, they would have to inform YSL that no payment would be made on that day as YSL had to witness the execution of the Agreement and the receipt of the payment.  The need to amend clause 2(a) of the Agreement must have become very obvious. The Agreement could have been easily revised and reprinted, but it was not. Tang’s explanation was a half cooked defence concocted in the witness box. 

54.  There were three other related and contemporaneous documents. I shall deal with the straight forward ones first.  First, there was Director’s Report of Cheong Tai for the year ended 31 March 2007.  The Agreement was a major agreement, involving transfer of 20% of the shareholding in Cheong Tai, resulting in Tang being its sole shareholder.  If the Agreement had been entered into on 23 January 2007, it must have been reported in the Director’s Report, but it was not.

55.  Second, Form SC7 – Statement of Financial Assistance for the Acquisition of Shares was executed on 28 May 2007 stated that Cheong Tai provided assistance to Tang for the acquisition of the Sale Shares for the full amount of $46,027,413 on that day. The Bankrupt also resigned as director also on that date. This is more consistent with the Agreement having been executed on 28 May than on 23 January 2007.

56.  Third and most significantly, there was the Deed of transfer between Bright Success and Tang dated 7 June 2007, relating to the transfer of the 38 cemetery sites.  It contained a recital stating that it was executed pursuant to an agreement dated 28 May 2007.  It is important to note that both the Agreement and this Deed were prepared by YSL. It was signed by the Bankrupt on behalf of Bright Success as transferor and by Tang as transferee.  The execution was also witnessed by Lau Yue Sum.  Paragraph 1 of the recital reads:

“ This Deed is executed in pursuance of an agreement dated 28^th May 2007 and made between [the Bankrupt] as Vendor and [Tang] as Purchaser for the [Sale Shares] (‘the Agreement’) and in this Deed words and expressions defined in the Agreement have the meanings so defined.”

57.  There is no dispute that this Deed was executed pursuant to the Agreement.  The Bankrupt’s obligation under the Agreement was to cause Bright Success to vest legal and beneficial ownership of the 38 cemetery sites to Tang or her nominee as set out in paragraph 5 of the Agreement. 

58.  Tang could not explain why the Deed identified the Agreement as “an agreement dated 28^th May 2007”.  YSL or more specifically Lau Yue Sum was responsible for the drafting and execution of the Deed and the Agreement.  It was he who stated on the Deed that the Agreement was “dated 28^th May 2007”.  However, he was not called to tender any explanation.  The maxim omnia praesumuntur contra spoliatorem applies.  It is open to the court to draw adverse inference against the defendants for failing to call YSL or Lau Yue Sum to explain why the Agreement was so dated: Tullett & Tokyo International Securities Ltd v APC Securities Co Ltd [2] and Ip Man Shan Henry v Ching Hing Construction Co Ltd (No 2) [3].

59.  The Deed was prepared by a firm of solicitors.  Whoever drafted the Deed must have exercised reasonable diligence and care.  He would not have picked a date from the air.  He must have had reference to the Agreement or verified it with Tang and/or the Bankrupt before describing it as “an agreement dated 28^th May 2007” in the Deed.  If the handwritten date was in the Agreement when he drafted the Deed, he must have written that date down instead of “28^th May 2007”. There are three possible scenarios.  First, the draftsman had an agreement dated 28 May 2007 in front of him when he drafted the Deed in June 2007. Second, he had an agreement with the date in blank in front of him and he sought and obtained instruction from the Bankrupt and/or Tang that it was entered into on 28 May 2007.  Third, by some mistake, which he would owe a very onerous burden to explain, he erroneously put down “28^th May 2007” instead of “23 January 2007”.  In the absence of evidence from the draftsman or from any credible source, this third scenario can be ruled out.  

60.  The draftsman was not identified and was not called to testify.  He was most probably Lau Yue Sum who was the principal or consultant responsible for the drafting and execution of the Deed.  Even if not, he must have supervision over the drafting of the Deed.  He was the one in the best position to explain the inconsistency and to testify to the fact that the Agreement was entered into on 23 January 2007, if that was the case.  But he was not called to testify and no explanation was given as to why he was not called. 

61.  YSL had the conduct of this litigation.  The reference in the Deed to the Agreement being dated 28 May 2007 is most damaging to the defendants’ case.  Yet, against such damaging evidence, the defendants were unable to explain and failed to call YSL or Lau Yue Sum to explain why the Agreement was so described in the Deed.  In the face of such failure, the contemporaneous documents and all the circumstances, it is open to the court to draw as the only reasonable inference that the Agreement was indeed entered into on 28 May 2007 and the adverse inference that the agreement for sale and purchase of the Sale Shares with the handwritten date was a subsequent concoction.  Accordingly, I find that the Agreement was entered into on 28 May 2007, ie within two years of presentation of the Bankrupt’s bankruptcy petition on which the Bankrupt was adjudged bankrupt.  Pursuant to section 51(2) of the Bankruptcy Ordinance, there is no need to prove the Bankrupt’s insolvency or that he became insolvent as result of the Subject Transaction.

Whether the Agreement, the Deed and the transfer of the 38 cemetery sites constituted one composite transaction

62.  Having reached the conclusion that the Agreement was entered into on 28 May 2007, it is obvious that the Agreement, the Deed and the transfer of the 38 cemetery sites were contemporaneous transactions all taking place within two years of the presentation of the Bankrupt’s bankruptcy petition.  The following discussion is made on the assumption that the Agreement was entered into on 23 January 2007 as alleged by Tang.

63.  The Agreement was for the sale and purchase of the Sale Shares. Paragraph 5 of the preamble reads:

“ The [Bankrupt] and [Tang] are shareholders of [Bright Success] holding respectively 80% and 20% of and in the share capital of Bright Success. Bright Success held several cemetery site in xxxx (‘the Cemetery’) and the [Bankrupt] and [Tang] have agreed that upon execution of this Agreement, the [Bankrupt] shall at nil consideration cause Bright Success to vest legal and beneficial ownership of 38 Cemetery site, namely, … to [Tang] or her nominee free from incumbrance of any kind.”

64.  The above obligation of the Bankrupt under the Agreement is reflected in paragraph 2 of the recital of the Deed, which reads:

“ In the said agreement for sale and purchase, the [Bankrupt] covenants with [Tang] that he shall at nil consideration cause [Bright Success] to vest legal and beneficial ownership of 38 cemetery sites in the Cemetery, namely…to [Tang] or her nominee free from incumbrance of any kind. …”

65.  The Bankrupt’s obligation to cause Bright Success to vest title in the 38 cemetery sites to Tang was not made an express term of the Agreement.  Despite that, it was an express obligation or undertaking of the Bankrupt, a party to the Agreement, in favour of Tang, the other party to the Agreement.  Howsoever this obligation is worded and despite it was placed in the preamble instead of in the main body of the Agreement, in reality it forms part of the consideration for the Agreement.  If upon execution of the Agreement, the Bankrupt failed to procure Bright Success to vest title in the 38 cemetery sites, it would be as much a breach of the Agreement as would his failure to resign from the various companies as required under clause 4 of the Agreement.  Thus, the Deed and transfer of the 38 cemetery sites were part of the subject matter of the Agreement.  These transactions were related transactions.

66.  However, Mr Smith SC argues that the parties to the Deed were different from the parties to the Agreement and the transfer of the 38 cemetery sites were effected by Bright Success and not the Bankrupt.  The same issue was considered by the House of Lords in Phillips v Brewin Dolphin Bell Lawrie Ltd [4].  The House of Lords was concerned with a complex series of linked transactions, in one of which the company had sold its business, worth £1.05 million, to B for a nominal consideration of £1 and the assumption by B of redundancy costs of £325,000, and by a contract executed contemporaneously B’s parent company which had agreed to lease computers from the company for four quarterly payments of £312,500. The House of Lords held that there was no reason why the consideration for a transaction could not be provided by a third party and that, on the facts, the agreement for the sale of the business had been entered into for a consideration which included the benefit of the leasing agreement.  Lord Scott, delivering the only speech, concluded that the critical issue was to identify the “consideration” within section 238(4).  His Lordship held (at 150G–H):

“ The subsection does not stipulate by what person or persons the consideration is to be provided. It simply directs attention to the consideration for which the company has entered into the transaction. The identification of this ‘consideration’ is in my opinion, a question of fact. It may also involve an issue of law, for example, as to the construction of some document. But if a company agrees to sell an asset to A on terms that B agrees to enter into some collateral agreement with the company, the consideration for the asset will, in my opinion, be the combination of the consideration, if any, expressed in the agreement with A and the value of the agreement with B.”

67.  Applying the above principle, there was no issue of third party consideration.  The Bankrupt’s obligation to procuring Bright Success to vest title in the 38 cemetery sites was also part of the consideration under the Agreement.  Bright Success’ passing of the resolution on 31 May 2007 to transfer the 38 cemetery sites to Tang followed by the execution of the Deed on 7 June 2007 was the Bankrupt’s performance of his obligation or undertaking under the Agreement.  The subsequent transfer of the 38 cemetery sites on the same day was to give effect to the Deed.  Naturally, they all form one composite transaction.  These transactions took place, on my finding within ten days of execution of the Agreement, or on the defendants’ case within four and a half months.  Whichever the period, they constituted one composite transaction.  The composite transaction was not completed until 7 June 2007 when the 38 cemetery sites were transferred.  Thus, the Agreement and the Deed and the related transactions formed a composite transaction entered into within the two-year period of the presentation of the bankruptcy petition against the Bankrupt. 

68.  Another very telling piece of evidence is the terms of payment under the Agreement.  Under clause 2(b), the balance of $3,972,587 of the cash portion of the consideration was not to be released to the Bankrupt unless and until title to the 38 cemetery sites to be transferred by Bright Success has been vested on Tang and/or her nominee.  The Agreement and the transfer under the Deed are obviously tied transactions and formed one composite transaction.

69.  The Agreement was for sale of the Sale Shares.  The transaction consisted of three steps before Tang could acquire the full title, both the legal and equitable title, of the Sale Shares, namely, the signing of the Agreement,the execution of the instrument of transfer and entry of Tang’s name as the holder of the Sale Shares in Cheong Tai’s register of members.  On the part of the Bankrupt, his part of the transaction was completed when he executed the transfer documents was paid the full purchase price.  On the defendants’case, that was 28 May 2007. There is no evidence when Tang’s name was entered in the register.  It could not be earlier than 28 May 2007 when the parties executed the bought and sold notes and instrument of transfer.  On this analysis, the Agreement was not completed until 28 May 2007.  Furthermore,by reason of the above analysis, the composite transaction was not concluded until the transfer of the 38 cemetery sites on 7 June 2007.  Thus, even if the Agreement were executed on 23 January 2007, completion of the Agreement did not take place until 28 May or 7 June 2007.  Thus, the Agreement and the Deed were entered into within two years of presentation of the Bankrupt’s bankruptcy petition.

70.  The Trustees are entitled to rely on section 51(2) that the relevant time is within two years of presentation of the Bankrupt’s bankruptcy petition without the need of proving his insolvency or his becoming insolvent in consequence of the Agreement.  No evidence has been adduced by the defendants on the Bankrupt’s solvency.  The petition for the Bankrupt’s bankruptcy was presented on the basis of his inability to indemnify Chong Hing Bank in respect of Perfecta’s debt in the sum of $19 million.  Besides, through Cheong Tai and its wholly owned subsidiary, Cheong On, Tang had acquired debts owed by the Bankrupt in the total sums of $211,811,353.53 and RMB 314,406,346.82 as evidenced in the proof of debt form submitted by Cheong Tai and Cheong On against the Bankrupt’s estate.  The indebtedness on these three debts alone amounted to about $530 million.  The Bankrupt was heavily in debt.  Though the petition was presented in February 2009, the indebtedness must have been incurred well before that and possibly around the time of the Agreement.  If not, he must have become insolvent in consequence of the Agreement.  The defendants have utterly failed to discharge the burden of proving that the Bankrupt was not insolvent at that time or did not become insolvent in consequence of the Agreement. 

Whether Tang was an associate of the Bankrupt

71.  One of the thrust of the Trustees’ case is that Tang was a business partner and an associate of the Bankrupt within the meaning of section 50(5) of the Bankruptcy Ordinance.  The word ‘associate’ is defined in section 51B as:

“ (1) For the purposes of sections 49 to 51A, any question whether a person is an associate of another person shall be determined in accordance with this section.

…

(3) A person is an associate of a debtor with whom he is in partnership, and of the spouse or a relative of any debtor with whom he is in partnership.” (emphasis added)

72.  ‘Partnership’ is defined under section 3 of the Partnership Ordinance (Cap 38) as follows:

“ (1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.

(2) But the relation between members of any company or association which is—

(a) registered as a company under any Ordinance relating to the registration of joint-stock companies; or

(b) formed or incorporated by or in pursuance of any other Ordinance, or any enactment or instrument,

is not a partnership within the meaning of this Ordinance.”

73.  If persons are carrying on a business with a view of profit, then there is a presumption that there is a partnership: Partnership Law [5].  The situation becomes complicated if the persons carry on business through corporate vehicles.  The exclusion under subsection (2) has no application to the definition of ‘associate’ as that term shall be determined in accordance with section 50(5) of the Bankruptcy Ordinance.  In determining whether there exists a partnership, the court should look at the true relationship of the parties instead of the label: Stekel v Ellice [6].  

74.  Usually, members of a company are not in a partnership relation. In Chahal v Mahal [7], the Court of Appeal expressed the view that where a partnership business is incorporated and shares are issued to the partners in proportion to their partnership interests, it will usually be appropriate to infer that a dissolution has occurred, but the position is likely to be otherwise if the shares become partnership property or if one partner has been kept in ignorance of the incorporation: Lindley & Banks on Partnership [8].  In the absence of a separate partnership agreement, as distinct from a shareholders’agreement, the court will not lightly infer a partnership: Partnership Law [9].  Absent a partnership agreement, the court is more ready to infer that the shareholders are not partners: Otuo v Brierley [10].  But the existence of a partnership cannot be denied simply because of the presence of interposing corporate vehicles.  However, members of a company may nevertheless be associates notwithstanding the principle of corporate personality.  It is a question of fact not appropriate for summary determination: Reeves v Sprecher [11]. 

75.  The Bankrupt and Tang had a long business relationship.  It first began in 1982 when Tang joined Cheong Tai as a 20% shareholder which, until then, was wholly owned by the Bankrupt.  As time went by, their scope of business expanded and relationship tightened.  They became co-directors and co-shareholders of 12 companies listed below:

Period	Name of company	Shareholding between the Bankrupt and Tang
28 May 1982 – 28 May 2007	Cheong Tai	20/80
18 December 2000 – 1 June 2009	Bright Success	80/20
21 February 2003 – 28 May 2007	Nara Camigie International Limited	Cheong Tai/Tang: 99/1 Effectively, 20/80
7 December 2004 – 28 May 2007	Sino Profit International Development Limited	Cheong Tai Effectively, 20/80
26 May 2005 – 28 May 2007	Cheong Tai International Trading Limited	Cheong Tai Effectively, 20/80
26 May 2005 – 28 May 2007	Cheong Tai Corporation Limited	Cheong Tai Effectively, 20/80
26 May 2005 – 28 May 2007	Cheong Tai Property Limited	Cheong Tai Effectively, 20/80
27 October 2005 – 30 June 2009	Nara Camigie Corporation Limited	20/80
7 November 2005 – 28 May 2007	Cheong Tai Investment Company Limited	Cheong Tai Effectively, 20/80
10 August 2001 – 28 May 2007	Global Leader Development Limited	99/1
30 September 2003 – 1 June 2009	Nara Camigie Holdings Limited	51/49
2003 – 2006	Good Success International Development Ltd (dormant and de-registered since 2005)	Nara Camigie Holdings Ltd/Tang:  99/1 Effectively, 50/50

76.  The last three of these companies were either inactive, dormant,de-registered or only property holding companies for Tang.  The names of these three companies are italicised in the above table for easy identification. The first nine companies have the following features in common.  They were co-owned by the Bankrupt and Tang or by Cheong Tai and Tang or by Cheong Tai solely.  Except for Bright Success, they maintain an effective shareholding structure of 20/80 as between the Bankrupt and Tang. The Bankrupt and Tang were the only directors of these companies.  The registered office of these companies were all at Regent Centre.  Besides these 12 companies, Tang has her own list of companies of which the Bankrupt was not a shareholder.  The Bankrupt ceased to be a co-director in respect of eight of the companies on 28 May 2007 which was the date of one of the cheques issued in payment of the cash portion of the consideration under the Agreement.  It was only upon his bankruptcy that the Bankrupt ceased to be co-director of the remaining three companies. 

77.  The table shows the tight business relationship between the Bankrupt and Tang which was built over the course of three decades. As evidenced in the proof of debt form against the Bankrupt’s estate submitted by Cheong Tai and Cheong On, Tang had acquired debts owed by the Bankrupt in the total sums of about $530 million.  This huge debt cannot be explained save on their close relationship.  Upon his bankruptcy, Tang employed the Bankrupt and his son, Wong, as consultants in one of her companies, namely Cheong Wah, and provided them with rent free accommodation in her luxurious property in Magazine Gap Road.  Though these were employment arrangements, they are evidence on which inference of their tight relationship may be drawn.  Tang helped the Bankrupt through thick and thin.  I have no doubt that they have a very close and tight business relationship.

78.  It is the Trustees’ submission that the Bankrupt and Tang were in partnership in respect of the first nine companies.  They carried on business with a view to making profit.  The Bankrupt and Tang received their share of dividends arising from the business of these companies, particularly, Cheong Tai.

79.  Tang’s evidence is that she and the Bankrupt were just co-investors in a number of companies.  Tang joined Cheong Tai which was then solely owned and controlled by the Bankrupt.  There is no evidence of their prior engagement in other partnership business.  There is no dispute that they had not entered into any partnership agreement.  I am unable to infer a partnership between the Bankrupt and Tang in the operation of Cheong Tai. 

80.  The Trustees referred me to the following dicta in Reeves v Sprecher [12]:

“ Where two or more persons are preparing to set up a company and intend to become members of the company after its formation, they will not be regarded as partners if this is their only business association. Admittedly they may share a common object which is,ultimately, the acquisition of profit, but their immediate object is the formation of the company. On the other hand, persons who together carry on the business of promoting companies, with a view to making profits therefrom will unquestionably be partners.”

(emphasis by Mr Maurellet SC)

I do not think those dicta could assist the Trustees.  Those dicta refer to persons carrying on business of promoting companies with a view to making profits from such promotion and not to persons operating a number of companies with a view to making profit from the operation of those companies.

81.  Given the underlying purpose of an undervalue transaction action is to protect creditors from schemes designed to confer benefits on others, the Trustees submit that the word “partnership” shall also have a broad meaning and encompass both actual and quasi-partnership, even though quasi-partnership is not a partnership in the traditional sense.  It exists between intimate shareholders who all contribute in managing the company and place mutual confidence on each other: Ebrahimi v Westbourne Galleries Ltd & Ors [13]. 

82.  As submitted by Mr Smith SC, quasi-partnership is a creation of equity to enforce a prior bargain between the shareholders which has not been fully covered in the shareholders’ agreement, if it would be inequitable not to do so.  Mutual confidence, which exists almost in every case of a small or private company is not enough.  In the absence of proof of a mutual understanding as to those partner-like obligations, the member raising a quasi-partnership must show that it would be unjust not to impose this partner-like obligation owed by each member to the others.  Whether there is a quasi-partnership is a matter of evidence.  Peter Gibson J held in Re a company (No 005685 of 1988) (No 2) [14] :

“ No doubt in almost every case of a small or private company persons coming together to form a new company would not do so without placing trust and confidence in those who are to be the directors and managers of the company. But the fact that the company is small or private is not enough and that mutual trust and confidence would not in itself be sufficient to make the members’association in substance a partnership with partner-like obligations owed by each member to the others in the absence of proof of a mutual understanding as to those obligations.”

Quasi-partnership makes good the inadequacy of a partnership agreement where it would be unjust not to do so.  It does not create one which does not exist.  I agree with Mr Smith SC that this equitable principle has no application in the present case.

83.  In conclusion, the Bankrupt and Tang started off a business relation as co-investors in Cheong Tai, not as a partnership under a corporate vehicle.  In the course of time, Cheong Tai’s business grew.  The Bankrupt and Tang ventured into other businesses and incorporated the other eight companies.  There was a total absence of evidence of any partnership agreement in respect of those eight companies and the business they conducted.  There was also no evidence of pooling profits and sharing loss among the nine companies.  I am unable to infer the existence of a partnership agreement between the Bankrupt and Tang. The Trustees have failed to prove that Tang was an associate of the Bankrupt.  However, the evidence established the very close and tight relation between the Bankrupt and Tang.

Solvency of Perfecta and Silver Yield at the time of the Agreement and the Deed

84.  The insolvency of Silver Yield, Perfecta and Panyu Perfecta is the underlying basis of the Trustees’ case that the transaction was a disposition with intent to defraud creditors and at an undervalue in the sense that as a result of the transaction the Bankrupt exchanged his good assets for bad assets and Cheong Tai exchange its bad assets for good assets.  The good assets were the Sale Shares.  The bad assets were Perfecta’s and Panyu Perfecta’s debts owed to Cheong Tai and Cheong Wah respectively, which stood no chance of ever being repaid.  The basis of Perfecta’s insolvency, which turns on its holding company Silver Yield’s insolvency, was pleaded in detail at paragraphs 46 – 55 of the Amended Statement of Claim under the heading ‘the Bankrupt exchanged his good assets for bad assets’.  In the Amended Defence, no positive case was pleaded.  There was only a bare denial in paragraph 38 that “to the best of [the defendants’] knowledge at the time of the Agreement, the Perfecta Group (Note not Perfecta itself) operated a profitable business”.  Hence, the defendants have not denied the Trustees’ case of Perfecta’s insolvency but averred that they did not know if the Perfecta Group was solvent or otherwise, but believed it was ‘profitable’; which is irrelevant.

85.  According to the audited financial statements for the years ending 31 March 2006, 2007 and 2008, Silver Yield was balance sheet insolvent.  Its loss had been accumulating since 2006.  Its balance sheets recorded a deficit of $158.1 million, $160.5 million and $167.2 million in those three years, respectively.  In the audited financial statement for the year ended 31 March 2007 (just two months before the date when the Agreement was signed), the auditors opined that there was fundamental uncertainty as to its going concern. 

86.  In paragraph 5 of the Affidavit of Gordon Chan, the Bankrupt’s solicitor, filed under HCB 1592/2009, Gordon Chan deposed on behalf of the Bankrupt that the Bankrupt became bankrupt due to pledging his own credit to secure financing for Silver Yield which in turn supported Perfecta.  Due to losses at Perfecta it was unable to repay Silver Yield which also became insolvent.  A winding-up petition was presented against Silver Yield on 15 June 2009 and the company was ordered to be wound up on 17 August 2011.  While the affidavit was about the financial condition of the Bankrupt and Silver Yield prior to June 2009, their dire financial condition would not have developed overnight, but must have been a gradual process which started much earlier.  It probable started in the year 2005/2006 when its financial statement showed a deficit of $158.1 million.  Silver Yield was insolvent at the time of the Agreement and the Deed in 2007.

87.  Perfecta’s audited financial statement for the three years ended 31 March 2006, 2007 and 2008 showed net assets of $204 million, $175.5 million and $90 million, respectively.  However, it included trade amounts due from Silver Yield in the amount of $427 million, $399.8 million and $408 million in those three years respectively.  According to Wong, the sum was lent to Silver Yield “to do business”.  As Silver Yield was insolvent, the debts were bad debts.  Excluding the said bad debts, Perfecta would have recorded total net liability of $223 million, $224.3 million and $318 million respectively for those three years.  Perfecta is therefore balance sheet insolvent.

88.  However, based on the turnover of Perfecta, Mr Smith SC argues that not only were Silver Yield and Perfecta not insolvent at the time of the Agreement and the Deed, they were, on the contrary, enjoying a period of financial success.  He referred to the turnover for the three years ended 31 March 2006, 2007 and 2008 of the amount of $562.8 million, $716.8 million and $417.3 million respectively.  Perfecta recorded a 27% year-on-year increase in its turnover.  It recorded a turnover of $417.3 million for the first five months of 2007/2008.  Thereafter the business ceased due to outbreak of the fire. That turnover would translate to an annual turnover of $1 billion.  He therefore argues that had it not been for the fire and the series of unfortunate events which followed, Perfecta would have continued to prosper.  The fallacy in Mr Smith SC’s argument is that turnover is not an indicator of profitability or solvency.  If a company’s operation is unprofitable, turnover is irrelevant.  A company can have high or even growing turnover and yet be unprofitable and insolvent.  Net asset value is a more reliable indicator of solvency.

89.  Mr Smith SC next referred to the profits of Perfecta.  The audited financial statement for the year ended 31 March 2006 showed a net profit of $19.3 million which was increased to $20.7 million for the year ended 31 March 2007.  He therefore argues that there is no basis for any suggestion that Perfecta was doomed to fail.  While profitability reflects the state of health of the company’s operation, it is not an indicator of solvency. A perfectly operating company generating profit may for one reason or another be insolvent.  A not uncommon reason is that it was unable to recover its debts due from its insolvent debtors, which brought about its own insolvency.  Obviously this is what the present case is about.

90.  As I said, the net asset value is a more reliable indicator of solvency.  The audited financial statements of Perfecta showed a positive figure for its net asset.  It is not enough to merely look at figures, which are the result of accounting manipulation.  To obtain a true picture, it is necessary to look at the nature of the asset. Here, Perfecta’s major asset is a debt due from Silver Yield which is insolvent.  Given Silver Yield’s financial position, the debt is unlikely to be recoverable.  It is worthless and should be discounted.  A debt which has no prospect of recovery is unreal.  It should have been written off.  As indicated above, if this debt of $399.8 million is excluded, Perfecta’s liability far exceeded its asset.  It was balance sheet insolvent. 

91.  Mr Smith SC further argues that the Perfecta Group should be considered as a whole.  If one were to ‘write off’ the amounts due from Silver Yield to Perfecta, an equivalent ‘writing off’ must also take place on Silver Yield’s account, resulting in a net equity position of negative $224.3 million for Perfecta and $239.4 million for Silver Yield.  When the two companies are considered together, they were not insolvent.  That argument defies logic and the reality that the money represented by the debt was not there.

92.  Even if the consolidated figures are to be considered, the three companies were still insolvent.  This is because from July 2002 to May 2006,Lise Wong provided a loan of $40 million to Perfecta which had apparently not been repaid and was not recorded in Perfecta’s audited financial statement in the year ended 31 March 2007.  This liability has to be taken into consideration as well.  Thus, even when the consolidated figures of Perfecta and Silver Yield for the year ended 31 March 2007 are considered together, the two companies were still balance sheet insolvent. Silver Yield had a net liability of $160.5 million.  Excluding the $399.8 million debt due to Perfecta, Silver Yield would have recorded a total net asset of $239.3 million [15]. Likewise, excluding this amount receivable from Silver Yield, Perfecta would have recorded a total liability of $224.3 million.  Taking Lise Wong’s loan into account, the consolidated figure of the two companies would still record a total liability of $24.9 million [16].

93.  In addition, Perfecta was also cash flow insolvent.  As asserted by Tang, since 2005 Perfecta’s business started to slow down and she extended loans to ease its cash flow problems.  She and Cheong Tai had been providing frequent, interest free and maturity free loans to Perfecta. It is at least the defendants’ case that Perfecta owed Tang and Cheong Tai a total debt of $46 million which was set-off under the Agreement.

94.  In paragraph 16 of the Affidavit of Gordon Chan made on behalf of the Bankrupt due to his ill health, it was stated that the sum of $13.9 million cash consideration received under the Agreement was used to“save” Perfecta.  These may be taken as the words of the Bankrupt, the very person who ran Perfecta to the ground.  These words reflect that at the time of the Agreement Perfecta was in dire financial hardship and need to be saved. There is also no dispute that the Bankrupt instructed Cheong Tai to pay the purchase price for the 47 cemetery sites to Perfecta instead of to Wong and himself.  That is another piece of evidence of Perfecta’s insolvency.

95.  In addition, as accepted by Wong under cross-examination, her mother, Lise Wong, had been providing frequent loans to Perfecta.  Her loan of $40 million advanced since 2002 had never been repaid.

96.  It should also be recalled that Chong Hing Bank petitioned for the Bankrupt’s bankruptcy because of his failure to indemnify Perfecta’s indebtedness to the Bank in the sum of $19 million.  Though the petition was presented in June 2009, the financial condition must have developed much earlier.

97.  Next, Mr Smith SC argues that there was some understatement in the financial statements of Silver Yield for the year ended 31 March 2007,which if adjusted would show that the financial position of Silver Yield and Perfecta was extremely healthy.  He was referring to the item described as “interest in a subsidiary” in the balance sheet.  “Note 8” of the same financial statement shows that “interest in a subsidiary” includes the unlisted shares of Panyu Perfecta, recorded at cost with a value of $163,950,000.  However,according to the audited financial statements of Panyu Perfecta for the year ended 31 December 2007, the total net equity of Panyu Perfecta was stated to be RMB 911 odd million.  Thus, Mr Smith SC submits that if this value had been recorded in the financial statements of Silver Yield, the net equity of Silver Yield, even if the amount due to Perfecta is retained, would be in excess of $580 million; or almost $1 billion if the amounts due to Perfecta are written off.

98.  Mr Maurellet SC argues that the ‘erroneous’ records in the accounts cannot be taken seriously given that neither of the defendants’ witnesses had any primary knowledge of those matters and not having called those who prepared those accounts.  In my view, the auditor’s comment in the financial statement for the year ended 31 March 2007 that there was fundamental uncertainty as to the company as a going concern is fatal to Mr Smith SC’s submission.  In making such a damaging statement as an auditor, the auditor must have exercised due diligence and verified the accounts.  He must have cautiously considered the value of this subsidiary which was probably the most valuable asset of Silver Yield and the very reason for its own existence. Furthermore, if the auditor was wrong about it,the Bankrupt and Wong would have jumped up, protested and caused the auditor to put it right.  The auditor was not called to testify.  I give no weight to Mr Smith SC’s argument.

99.  Perfecta Group was laden with debts.  It owed Cheong Tai and Cheong Wah $46 million.  It owed Lise Wong $40 million since 2002.   The Bankrupt had been pouring money into the companies to keep them afloat which led to his own bankruptcy.  The cash portion of the consideration under the Agreement and the proceeds of sale of the 38 cemetery sites were paid to Perfecta.  In the face of these facts, any suggestion based on the financial statements of Panyu Perfecta that the three companies were extremely financially healthy must be viewed with grave suspect.  This is particularly so as the defendants have not denied the Trustees’ case of Perfecta’s insolvency and has not pleaded any positive case to the contrary.  The defendants only pleaded that they have no personal knowledge as to Perfecta’s insolvency and thought it was ‘profitable’.

100.  Next, Mr Smith SC argues that the financial condition of Perfecta in 2007 was so healthy that it declared an interim dividend of $600 per share totaling almost $50 million.  If Perfecta were indeed in dire financial hardship and on the brink of insolvency as suggested by the Trustees, it begs the question how Perfecta was able to pay out dividends.  The dividends were paid to the Bankrupt and Wong.  As averred by Gordon Chan, the Bankrupt had been trying to ‘save’ Perfecta and pledging his own credit to secure financing for Silver Yield which in turn supported Perfecta.  The dividends were probably set-off against existing loans or ploughed back to Perfecta by way of loan.  The declaration of dividend was just a paper exercise.  It does not reflect on the financial condition of Perfecta.

101.  Mr Smith SC referred to Wong’s evidence.  Wong said that he had first-hand knowledge of the business of Perfecta as he was primarily responsible for its manufacturing business.  He said that the business of Perfecta was flourishing at the time of and immediately after the Subject Transaction.  The factory was completely booked out with manufacturing orders.  Turnover and profit continued to increase.  Various banks provided credit lines after making due diligence studies on the financial statements. He asserted that the banks’ willingness to continue to extend credit lines to Perfecta and Silver Yield is strong indication of their solvency.  He said that apart from banks, Perfecta also borrowed from Cheong Tai, Cheong Wah and other persons and companies within the industry.  He said that the loans showed that Perfecta’s business was expanding and needed funds to cope with expansion.  He refuted any suggestion that loans from Cheong Tai and Cheong Wah reflected Perfecta had cash flow problems.  He put the blame on the fire in Panyu Perfecta, the lack of insurance and minimum wage law in the PRC for Perfecta’s collapse.

102.  In the face of the evidence I mentioned above, I am not the least impressed with Wong’s evidence.  Wong painted a very rosy picture of Perfecta’s business.  Turnover and profits increased.  Banks and people in the industry were willing to lend because Perfecta was expanding and had a promising future.  On the other hand, the incontrovertible evidence is that before the fire Perfecta was already suffering from cash flow problem caused by Panyu Perfecta’s or Silver Yield’s inability to repay their debt to Perfecta.  Perfecta owed Lise Wong $40 million.  Perfecta Group owed Cheong Tai and Cheong Wah $46 million.  Perfecta probably also owed the Bankrupt $13.9 million under the cash portion of the consideration and the proceeds of sale of the 38 cemetery sites which were paid to Perfecta instead of the Bankrupt.  All these took place before the fire.  

103.  About two years after the fire, a petition was presented for the bankruptcy of the Bankrupt for his inability to indemnify Chong Hing Bank for the loan of $19 million advanced to Perfecta.  He was bankrupted as a result of pledging his credit to keep the companies afloat.  In addition to all the debts I have mentioned above, the proofs of debt by Cheong Wah and Cheong On showed that these companies had assumed the Bankrupts’ debts to the tune of $530 million.  

104.  When Wong’s picture is tested against the incontrovertible evidence, the irresistible inference is that it is a fiction created by Wong.  Probably he did so to reciprocate Tang for her financial support to Perfecta prior to his and the Bankrupt’s bankruptcy and for providing them employment and a roof afterwards.  Perfecta Group was heavily laden with debts which it was unable to pay.  The fire was only a timely event being put blame on by Wong.  The rosy picture painted by Wong is far from reality.   In fact, his demeanour was insincere, playful and not serious.  I do not accept his evidence.

105.  In conclusion, I find that Perfecta Group was insolvent at the time of the Agreement and the Deed.  The debts owed by Perfecta to Cheong Tai and by Panyu Perfecta to Cheong Wah were bad debts which stands little chance of being repaid.  By setting off these debts in the sum of $46,027,413 against part of the consideration for the Sale Shares, the Bankrupt was exchanging his good assets for bad.  He was preferring Tang to his other creditors.  Though no claim of unfair preference under section 50 of the Bankruptcy Ordinance was made, this is, nevertheless, evidence of intent to defraud creditors.  

Ownership of the 38 cemetery sites

106.  According to Tang, she and the Bankrupt each purchased 38 and 77 cemetery sites and paid $1,767,000 and $3,580,500 respectively.  Their shareholdings in Bright Success did not correctly reflect their respective ownership of the cemetery sites.  In other words, Bright Success held the cemetery sites on trust for her and the Bankrupt.  She took the occasion of the Agreement to regularize the situation by providing in paragraph 5 of the preamble of the Agreement that the Bankrupt shall procure Bright Success to transfer the 38 cemetery sites to her or her nominee.  The cemetery sites were then transferred to Wintop as her nominee on 7 June 2007 for a consideration of $1,805,680.20. 

107.  However, not only was Tang’s alleged trust arrangement and her beneficial ownership of the 38 cemetery sites not evidenced in writing, it is inconsistent with the contemporaneous documents.  Tang was unable to explain the following inconsistencies.  

108.  First, in paragraph 5 of the preamble of the Agreement, it was stated that the Bankrupt shall at nil consideration cause Bright Success to vest legal and beneficial ownership of 38 cemetery sites to Tang or her nominee. If what Tang said was true, the preamble should have made clear that she was the beneficial owner of the 38 cemetery sites and the Bankrupt was to procure Bright Success to transfer only their legal title.  The Deed was drafted by YSL.  YSL must have taken full instructions from the Bankrupt and Tang before drafting the Deed. 

109.  Second, in the Deed, it was stated that Bright Success conveys as “beneficial owner”.  This negates Tang’s case that she was the beneficial owner of the 38 cemetery sites.

110.  Third, the same phrase appeared in the other deeds of transfer of the remaining 77 cemetery sites.  This indicates that all the 115 cemetery sites were legally and beneficially held by Bright Success.  The Deed must represent the true position as to legal and beneficial ownership of the 38 cemetery sites.

111.  Fourth, the Deed recorded payment of $1,805,680.20 by Tang to Bright Success for the transfer of the 38 cemetery sites.  If she was the beneficial owner of the cemetery sites, there was no need for her to pay.

112.  Fifth, Tang explained that the consideration of $1,805,680.20 paid by her as recorded in the Deed were money she paid in 2001. This is untenable as her solicitors stated in their letter dated 14 January 2013 that she provided $1,767,000 to Bright Success for the purchase of the cemetery sites.  Even if she had paid that sum, it was a shareholder’s loan and she acquired no beneficial interest in any of the cemetery sites.

113.  Lastly, the Trustees argued that in the board resolution of Bright Success which approved the sale of the cemetery sites to Wintop, the Bankrupt, his wife and Wong, it was stated that the cemetery sites “owned” by Bright Success were being sold.  This may be a small point.  It could be explained on the basis that the draftsman of the resolution, being a layman, was imprecise with the language.  In the light of the totality of the evidence, the draftsman was probably correct.

114.  For the above reasons, I reject Tang’s evidence.  I find that the 115 cemetery sites were all legally and beneficially owned by Bright Success.  The Bankrupt and Tang contributed to the purchase price of the cemetery sites by way of shareholders’ loans.  They did not acquire any beneficial interest in the cemetery sites.  The loans were repaid upon receipt of consideration for the transfer of the cemetery sites.  I accept the Trustees’argument that the 38 cemetery sites were legally and beneficially owned by Bright Success before their transfer to Wintop on 7 June 2007.

Value of the 38 cemetery sites

115.  Pursuant to the preamble of the Agreement, the Bankrupt procured Bright Success to pass a board resolution on 31 May 2007 to transfer 38 cemetery sites to Tang or her nominee and to enter into the Deed on 7 June 2007 for that purpose.  The 38 cemetery sites were transferred for a consideration of $1,805,680.20, ie at the average price of $47,517.90 each. On the following day, 35 of the 47 cemetery sites transferred to the Bankrupt,his wife and Wong at cost, ie $46,500 each, were then transferred to Wintop at a consideration of $90,000 or $110,000 each, ie average price of $100,000 each.  That must be the average price which the 38 cemetery sites transferred to Wintop the day before could have fetched on the open market.  Accordingly,they should have a value of between $3,420,000 [17] to $4,180,000 [18] or an average value of $3,800,000. 

Whether Panyu Perfecta’s debt owed to Cheong Wah formed part of the set-off portion of the consideration

116.  The defendants’ case is that the consideration was made up of a set-off portion of $46,027,413 and a cash portion of $13,972,587.  The set-off portion was made up of three components: (1) various loans totaling $23,300,000 owed by Perfecta to Cheong Tai; and (2) trading debts in the sum of $5,1123,718.10 owed by Perfecta Group to Cheong Tai; and (3) two loans of RMB 8 million and RMB 9 million, totaling RMB 17 million, which is equivalent to $17,603,694.90, owed by Panyu Perfecta to Cheong Wah.

117.  In respect of the two loans owed by Panyu Perfecta to Cheong Wah in the sum of RMB 17 million, the Trustees argue that on a strict interpretation of the Agreement, these loans do not fall within the set-off portion and were not covered by the Agreement.  In gist, their argument is that according to paragraph 4 of the preamble of the Agreement,the indebtedness to be set-off was those owed by the Perfecta Group as defined therein to the “Company” as defined in paragraph 1 of the preamble,ie Cheong Tai.  It does not cover loans owed by the Perfecta Group to Cheong Wah, a subsidiary of Cheong Tai.  This argument raises a point of construction of contract.

118.  Mr Smith SC admirably dealt with that issue.  He referred to paragraphs 1 and 2 of the preamble to the Agreement which respectively defined the “Company” as Cheong Tai and the subject matter of the Agreement as the “Sale Shares”.  The combined effect of those two paragraphs is that the sale relates to the Bankrupt’s 300,000 Class A shares in Cheong Tai, the company identified in paragraph 1. Thus, the definition of “the Company” in paragraph 1 is a necessary ingredient in the definition of the Sale Shares in paragraph 2.

119.  “Perfecta Group” was defined in paragraph 4 of the preamble as referring to Perfecta and Panyu Perfecta.  The paragraph recites that the Bankrupt was a director of these two companies which were indebted to Cheong Tai in the sum of HK$46,027,413 and that the Bankrupt will assume the liabilities of Perfecta and Panyu Perfecta for the said debt of HK$46,027,413 which will be set-off from the consideration payable for the Sale Shares in satisfaction of the Cheong Tai’s claim against the Perfecta and Panyu Perfecta. 

120.  Although not expressly stated in the Agreement, the indebtedness of $46,027,413 was arrived at by adding together the amounts due from Perfecta to Cheong Tai and from Panyu Pefecta to Cheong Wah.  No part of the sum of $46,027,413 was due from Panyu Perfecta to Cheong Tai.  Thus if paragraph 4 of the recital is to be understood as stipulating that the consideration by way of set-off comprises only sums due to Cheong Tai,this would mean that no reference should have been made in that paragraph to Panyu Perfecta.

121.  The principles on which a contract or other instrument are to be interpreted have been summarized by Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [19] as follows:

“ [T]he question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.”

This principle of construction apply even where the issue relates to a defined term in a contract: see Starlight Shipping v Allianz Marine (“The Alexandros T”) [20].

122.  In the present case, the background knowledge available to the parties must include the facts relevant to the existence of the debt of $46,027,413 that was due from Perfecta and Panyu Perfecta collectively referred to as the Perfecta Group.  The parties must have intended a clean break so that the entirety of that debt should be assumed by the Bankrupt and then set-off to that extent against the consideration payable for the shares. This intention of the parties is also reflected in the Form SC7 which shows that financial assistance was given by Cheong Tai in the full amount of $46,027,413 in respect of the set-off part of the consideration.

123.  Because part of that debt was due to Cheong Wah and not to Cheong Tai, it was apparent that the use of the term “the Company” as defined in paragraph 2 of the preamble was inaccurate to describe an indebtedness of $46,027,413 due from the Perfecta Group.  This is obviously a case where,in the words of Lord Hoffmann in Chartbrook [21]that “something must have gone wrong with the language” and “[i]n such a case, the law [does] not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had”.  The court will, in such a case, construe the contract in accordance with what a reasonable person would have understood the parties to have meant.

124.  Furthermore, with the transfer of the Sale Shares, the Bankrupt would resign from his directorship in a list of companies related to Cheong Tai as set out in Appendix D to the Agreement, including Cheong Wah.  He would have nothing more to do with Cheong Tai and Cheong Wah.  It can be inferred that the parties were aiming to achieve a clean break.  The setting- off of Perfecta Group’s debts must be part of the same process for achieving a clean break.  It would have made no sense if the debt due from Panyu Perfecta to Cheong Wah had not been taken into account for the purposes of the set-off arrangement in the Agreement.

125.  Mr Maurellet SC argues that though dressed up as an issue of construction, the defendants are in effect seeking rectification of a contractual document.  To that end, the test is stricter.  Whether the issue is one of construction or rectification, as Lord Hoffmann NPJ put it in Kowloon Development Finance Ltd v Pendex Industries Ltd [22], “objective interpretation of contractual agreements is a fundamental principle of the common law.”  I think Mr Smith SC’s submission has passed the stricter test.  I find that the definition of “Company”, which was needed to identify the shares being sold,has been mistakenly used in a different context when referring to the debts to be set-off.  In the words of Lord Hoffmann in Chartbrook, “the drafting was careless and no one noticed”.  I construe paragraph 4 of the recital to the Agreement as referring to debts due from the Perfecta Group not only to Cheong Tai but to Cheong Wah as well.

Some general observations on the defendants’ case on the set-off portion

126.  Mr Maurellet SC argues that the defendants’ case about the set-off is questionable as not being supported by the relevant company’s consolidated financial statements.  He suggests that the debts were just made up after the Agreement and the amounts were made to match the debts alleged in the Agreement by cheating on the exchange rate in respect of two alleged loans in Renminbi.  I shall refer to these observations before dealing with the various amounts allegedly set-off.

127.  First, the consolidated financial statement of Cheong Tai for the year ended 31 March 2007, which the auditors confirmed was a “true and fair view of the state of affairs”, show that the amounts due from related companies to Cheong Tai group was merely $215,775 in 2007 and $0 in 2006.  That the $46 million indebtedness was not listed on Cheong Tai’s balance sheet suggests that it was not due directly to Cheong Tai.  This amount does not tally with the Agreement, even on the defendants’ case that the Agreement was entered on 23 January 2007.  These financial statements cast real serious doubt whether the alleged indebtedness set-off was real.

128.  Second, Mr Maurellet SC also drew my attention to the consideration for the Sale Shares as stated on the instrument of transfer and bought and sold notes stamped on 9 June 2007, which was $13,972,587 only. Most probably, the defendants understated the consideration by quoting only the cash portion of the consideration for saving stamp duty.  I decline to draw any adverse inference based on those documents.

129.  Third, the consolidated financial statement of Cheong Tai for the year ended 31 March 2008, showed that the turnover of Cheong Tai was$2,247,240 for the year 2007/2008 and $38,344,053 for the year 2006/2007. This financial statement should have recorded the transactions under the Agreement since the completion date was 30 May 2007.  As obvious and as confirmed by Ho in his evidence under re-examination, the alleged assignment of debts owed by Perfecta Group to Tang in the sum of $46 million would be a material amount in which the auditor, in preparing the financial statement, the auditors would have asked for audit confirmation.  However, the Trustees were unable to find any such audit confirmation recording such assignment.  Hence, Mr Maurellet SC submits that it is questionable whether such set-off existed.

130.  Third, after the date of the Agreement, the sum of $46 million set-off should have become a shareholder’s/director’s loan owed by Perfecta and Panyu Perfecta.  As Perfecta and Panyu Perfecta were balance sheet and cash flow insolvent, the loan became a bad debt.  The Bankrupt had exchanged good assets represented by the Sale Shares in the profitable Cheong Tai for bad debts from insolvent Perfecta and Panyu Perfecta.

131.  Mr Maurellet SC also queries the veracity of the defendants’ evidence about existence of a breakdown of the $46 million set-off because in her evidence in court Tang first said she did not remember if there was a table of breakdown provided to her but later changed her version that there was a calculation by the accounting staff with a table.  Her testimony was not meant to be a test of memory.  I give little weight to such inconsistency in her evidence.

132.  The financial statements do not support the defendants’ case of the value of the indebtedness set-off.  However, the amount to be set-off and the cash payment were stated in the Agreement.  The cash amount was, on my finding, actually paid.  The consideration under the set-off portion and the cash portion were specific sums.  The parties must have worked out these amounts in January (according to the defendants) or May 2007 (on my finding). They must have some basis, correctly or incorrectly, for the figure of $46 million.  Even if the figures were not correct, they may not be entirely fictitious.

The $23.3 million indebtedness

133.  It has all along been the defendants’ case that the $23.3 million indebtedness encompasses 17 cheques advanced to Perfecta in the period from 28 September 2005 to 28 November 2006 as supported by various loan agreements.  These 17 payments have been summarized in Appendix B attached to the Trustees’ closing submission.  Logically, to set-off this indebtedness, the loans making up this indebtedness must be due as at the date of the Agreement, be it 23 January 2007 according to the defendants’ case, or 28 May 2007 as the evidence suggests; and remain due on the date of completion, ie 30 May 2007.  Any loan making up this indebtedness which had somehow been settled during the interim period should not be treated as part of the consideration received by the Bankrupt.

134.  Included in the indebtedness was a loan in the sum of $6 million actually advanced by Grow Up Trading Ltd, which was an unrelated company.  Tang’s explanation was rather convoluted.  In gist, her evidence is that Grow Up Trading was a company owned by her brother and she caused her brother to make the payment on behalf of Cheong Tai.  I accept it was a loan owed to Cheong Tai by Perfecta.

135.  There are three loan agreements in the sums of $3.5 million, $1.2 million and $1.6 million dated 28 September 2005, 29 September 2005 and 18 November 2005, respectively.  The first loan was recorded in the 8^th,9^th and 10^th entries in page 1 of the General Ledger of Cheong Tai for the period from 1 April 2005 to 31 March 2008.  The second loan was recorded in the 11^th entry in page 1 of the General Ledger.  The third loan was recorded in the 2^nd to 6^th entries in page 4 of the General Leger.  These loans totaled $6.3 million were paid to Perfecta by nine cheques.  However, the 2^nd entry in the General Ledger dated 7 December 2005 showed a repayment by Perfecta in the sum of $457,300 and the 1^st entry dated 21 March 2006 showed transfer of a sum of $5,842,700 from Perfecta to Cheong Tai, leaving an outstanding balance of $417,100 owing to Cheong Tai.  Then at the 4^th entry on page 4 of the General Ledger dated 31 March 2006, the said outstanding balance was set-off against transportation charges under Debit Note no DN05/0478. That resulted in a nil balance, suggesting that these loans had been fully settled on or before the date of the Agreement.  These loans did not exist as at the date of the Agreement, be it 23 January or 28 May 2007.  Under cross-‌examination, Tang accepted this was the case. 

136.  However, Mr Smith SC submits that by comparing Cheong Tai’s General Ledger with the Vendor Account Statement between Cheong Tai and Perfecta, it is obvious that the 4^th last entry in page 4 of the General Ledger dated 31 March 2006 was a mistake.  He identified the two entries in the General Ledger showing two purported payments which made up $6.3 million.  The first one was made on 7 December 2005 in the sum of $457,300 (voucher no RV05120125).  The second entry was made on 21 March 2006 in the sum of $5,842,700 (voucher no JV06030038). 

137.  In respect of the sum of $457,300 under the first entry, it was first booked in the Vendor Account Statement on 1 November 2005 as amount due to Perfecta in relation to Debit Note 05/0093 (voucher no P105111479).  Then on 7 December 2005, the General Ledger between Cheong Tai and Perfecta displayed a purported repayment of the sum of $457,300 from Perfecta to Cheong Tai, which obviously corresponded to Debit Note 05/0093.  Hence, the same amount has been entered twice.   Mr Smith SC rightly identified the double entry.  He then referred to another entry in the Vendor Account Statement (entry no JV06090101) on 30 September 2006 with a specific reference made to the entry in the General Ledger, ie voucher no RV05120125 also in the same amount of $457,300.  He submits that this entry was made to reconcile the above error and the entry in the General Ledger was an error.  I agree. 

138.  Then, he made a quantum jump to the conclusion that the sum of $457,300 had never been repaid.  With greatest respect to his keen observation, Mr Smith SC’s submission is misleading.  There is no factual basis to support his conclusion.  He is correct in identifying the double entry and the reconciliation entry in the Vendor Account Statement on 30 September 2006.  That reconciliation entry was in the negative sum of $457,300. Obviously, it was to cancel the entry on 1 November 2005 in the positive sum of $457,300.  As a result, the amount due to Perfecta under the Vendor Account Statement was therefore reduced.  With this reconciliation entry, the entry in the General Ledger stands correct.  The delivery charge under Debit Note 05/0093 in the amount of $457,300 had therefore been used to set- off this part of the $6.3 million loan.  This part of the loan had been repaid.

139.  In respect of the entry dated 21 March 2006 in the sum of $5,842,700, Mr Smith SC submits that it was not a repayment from Perfecta to Cheong Tai.  He argues that this entry is unique in that there is no documentary support for this entry, but instead it contains a bare description as ‘Balance TRF FM Perfecta’.  He further argues that this entry can be distinguished from all the other entries in the General Ledger where there had been actual flow of funds and voucher numbers etc, as in the nine cheques making up the loan of $6.3 million. 

140.  Mr Smith SC then submits that based on the above explanation,it is clear that the sum of $6.3 million was removed from the General Ledger not as a result of repayment from Perfecta, but instead, merely as a result of the two abovementioned accounting entries without any actual passage of funds.  He submits that to reconcile this and to make clear that the nine cheques totaling $6.3 million were not repaid, one simply needs to refer to the 7^th entry in the General Ledger dated 30 November 2006 which recorded a sum of $6.3 million with the entry description ‘Re-allocation A/C’ and a total outstanding balance of $24.3 million.

141.  The nine cheques making up the loan of $6.3 million are not in dispute.  What is in issue is whether the sums of $457,300 and $5,842,700 had been repaid or set-off.  The 4^th entry on the 4^th page of the General Ledger is prima facie evidence that these sums had been repaid or set-off.  The burden is on the defendants to show by credible evidence that they had not. The maker of the entries in the General Ledger has not been called.  I have already rejected Mr Smith SC’s submission that the sum of $457,300 had not be repaid.   Mr Smith SC’s submission is based on his own speculation on the accounts which is inconsistent with a reasonable reading of the accounts.

142.  As for the second entry dated 21 March 2006 in the sum of $5,842,700, it is supported by a voucher.  The description, ‘Balance TRF FM Perfecta’ against the entry, suggests there was cash payment from Perfecta or some kind of set-off against Cheong Tai’s liability which Cheong Tai gave credit to and reduced the outstanding balance due from Perfecta to $417,100. Mr Smith SC’s argument is that this entry is not supported by actual fund flow.   In my view, there is nothing so particular about the absence of fund flow when the repayments were by way of set-off, which is what these entries were about.  As for the 7^th entry on the 5^th page of the General Ledger, it is only a re-allocation of the account when a sum of $6.3 million was allegedly re-allocated.  It is self-serving and deserves little weight.  The repayment by way of set-off of the two sums making up the total of $6.3 million is documented.  What the defendants could have done was to call their accounting staff to explain with reference to supporting documents what that entry was all about.  They did not.  Probably, there was no credible explanation.  Mr Smith SC’s submission was again his own speculation.  The description ‘Re-allocation A/C’ and a total outstanding balance of $24.3 million stated in the 7^th entry on the 5^th page of the General Ledger is neither here nor there in the face of the 4^th entry on the 4^th page of the General Ledger stating a zero outstanding balance.  The 4^th entry on the 4^th page of the General Ledger deserves more weight. 

143.  In conclusion, I accept Mr Maurellet SC’s submission that the sum of $6.3 million had been repaid and should not have been included in the set-off portion of the consideration.  From the documents provided by the defendants, there were other minor indebtedness in the sum of $1.3 million not included as part of the set-off before 23 January 2007.  Excluding this sum of $6.3 million from Appendix B, and adding the sum of $1.3 million not included in Appendix B, the $23.3 million indebtedness should be revised down to $18.3 million.

The $5.123 million trading debts

144.  Part of the set-off portion includes trading debts of $5,123,718.10.  These debts are set out in Appendix C annexed to the Trustees’ closing submission.  The appendix is also annexed to this Judgment and forms part of this Judgment.  Mr Maurellet SC submits that these debts are problematic when viewed against the Vendors Account Statement and the General Ledger of Cheong Tai.

145.  First, Mr Maurellet SC submits that the indebtedness owed by Cheong Tai to the Perfecta Group have been excluded.  This is contrary to the defendants’ claim that the parties to the Agreement intended a “clean break”. At trial, Tang failed to explain why Cheong Tai’s indebtedness were ignored. She simply said that her accounting staff told her that $5.123 million was owed by Perfecta.  That member of her staff was not called.  Her evidence deserves little weight.  In the cross-examination of Ho, Mr Smith SC sought to explain that the Bankrupt and Cheong Tai agreed that only trading debts related to sewing machine and transportation fees would be taken into account for the purpose of the set-off.  Be that as it may, Ho said in re-examination that there was no mention in the Vendor Account Statement that DN05/0279 and DN05/0453 were related to transportation fees and he only first came to know from correspondence of YSL that these two debit notes were related to transportation fees, without any documentary proof.  Ho’s evidence does not support the explanation advanced by Mr Smith SC. In any event, this explanation is not supported by evidence and is contrary to the defendants’ clean break theory.  With the parties’ intention of achieving a clean break, an ordinary person in the circumstances would have understoodthe word “indebtedness” to mean Perfecta’s indebtedness net of any trading debts due from Cheong Tai to Perfecta.

146.  The Trustees exhibited Appendix D which shows Perfecta’s indebtedness up to 31 March 2007 after discounting Cheong Tai’s indebtedness to Perfecta.  The appendix is also annexed to this Judgment and forms part of this Judgment.  Mr Maurellet SC submits that based on Appendix D, Cheong Tai’s indebtedness as at 23 January 2007 was only $2,187,981.29.  Mr Smith SC has made no submission on Appendix D. He only argues that the difference was not ‘significantly less’ and did not amount to undervalue.

147.  On my finding that the Agreement was entered into on 28 May 2007, which is a finding favourable to the Trustees, Perfecta’s indebtedness should also be calculated up to 28 May 2007. However, Appendix D was only updated to 31 March 2007 with a total indebtedness of $3,708,788.11.  I would therefore add onto this amount an indebtedness related to DN07/0004 in the amount of $754,800 entered on 30 April 2007.  The indebtedness under the last item of Appendix C, namely DN07/0006, was incurred on 1 July 2007 well after the date of the Agreement.  It shall not be counted.  Accordingly, the total indebtedness of Perfecta should be reduced to $4,463,588.11 [23].

148.  Second, Mr Maurellet SC submits that there are no corresponding entries in Cheong Tai’s General Ledger showing the various indebtedness.  Presumably, he is suggesting that the indebtedness is dubious.  For the same reasons as I have explained when dealing with Mr Smith SC’s argument relating to the loan of $457,300 about double entry, a second entry should not be made in the General Ledger.  To make an entry in the General Ledger would produce a double entry.  Hence, in relation to the loan of $457,300, a reconciliation entry had to be made in the Vendor Account Statement to cancel out the first of the two entries.  Whether the entry should be made in the Vendor Account Statement or in the General Ledger, I would defer to expert opinion.  But only one entry should be made in either of these statements.

149.  In conclusion, I find that the total indebtedness under this head is $4,463,588.11, which is $660,129.99 short of the amount asserted by the defendants.

The RMB 17 million indebtedness

150.  This indebtedness comprises of a loan of RMB 8 million under a loan agreement dated 30 September 2005 and another loan of RMB 9 million under a loan agreement dated 15 January 2007.  The Trustees’ primary submission is that these loans totaling RMB 17 million were owed by Panyu Perfecta to Cheong Wah and are not covered by the Agreement.  As a matter of construction, I agree with the defendants that these loans form part of the consideration under the set-off portion. 

151.  The second argument of the Trustees is that it is doubtful if the second loan of RMB 9 million was intended to be covered by the Agreement.  The loan agreement was entered on 15 January 2007 which, according to the defendants’ case, was eight days before the date of the Agreement.  However,under the loan agreement, the loan was advanced on 24 May 2007 which was one day after the alleged date of the Agreement.  Mr Maurellet SC points out the absurdity that by the Agreement the parties were trying to set-off a loan which had not even been advanced.  He submits that such setting-off of yet to be advanced debt casts doubt as to whether the defendants only included such a loan for the purpose of justifying and meeting the $46 million set-off in the Agreement.  

152.  On my finding, the Agreement was not entered on 23 January 2007, but on 28 May 2007 as mentioned in the recital of the Deed and when the parties actually executed the bought and sold notes and the instrument of transfer.  In the light of this finding, this RMB 9 million loan had been advanced before the date of the Agreement and the parties had taken that loan into account when entering into the Agreement.  If so, Mr Maurellet SC’s argument collapses.  This loan agreement also pins down the date of the Agreement to a date after 24 May but on or before 28 May 2007.

153.  Thirdly, the Trustees argue that it is questionable as to whether the sum of RMB 9 million was a loan as it was stated in YSL’s letter dated 8 July 2014, as distinct from the RMB 8 million loan, to be “by way of setoff in Cheong Wah’s account”.  At trial, Tang never mentioned that the terms of the Agreement had been altered to accommodate the set-off of loans between Cheong Wah and Panyu Perfecta.  Hence, the Trustees argue that this loan ought not be included as part of the consideration.  The Trustees’ argument is highly technical.  The defendants’ case is supported by a cheque issued by Cheong Wah in the sum of RMB 9 million to Panyu Perfecta and an account statement from Guangzhou City Village Credit Co-operative Society evidencing the clearance of the cheque.  In the face of this incontrovertible evidence, the loan was by way of cash and not by way of set-off.  YSL was obviously mistaken when they issued their letter.  The loan should be fairly treated as part of the consideration under the set-off portion. 

154.  That these loans were owed by Panyu Perfecta to Cheong Wah is not in dispute.  On the true construction of the Agreement as I have found it, the only outstanding issue is whether these loans in Renminbi are worth $17,603,694.90 as alleged by the defendants or less.  The thrust of the Trustees’ case is that the defendants were drumming up the loans in Hong Kong dollars by cheating on the exchange rate so as to meet the total amount of indebtedness of $46,027,413 under the set-off.

155.  The defendants’ case is that the exchange rate had been agreed between the Bankrupt and Tang.  On the defendants’ case, the agreed exchange rate of Renminbi to Hong Kong Dollars was 1:0.9657.  This is absurd because according to the historic exchange rate, Hong Kong dollar was stronger than Renminbi at all material times.  The exchange rate at the alleged date of the Agreement on 23 January 2007 was 1:0.9970 (1:1.0030) and the average rate of that month was 1:0.9979 (1:1.0021).  The agreed exchange rate according to the defendants was more than 3% above the actual market rate.  Though small in number, it is significant in currency exchange terms. 

156.  Tang’s evidence is that the exchange rate was provided by her accounting staff, Colin Ng.  However, Collin Ng was not called to testify and there was no explanation why he was not called, though it was not the defendants’ case that he could not be located. 

157.  In the course of his final submission, Mr Smith SC produced a general journal voucher allegedly posted on 20 September 2007.  The voucher showed a detailed breakdown of the composition of the consideration, including the two RMB loans of 17 million in the sum of $17,603,694.90, which is identical to the figure subsequently disclosed in correspondence from YSL; the trading debt of $5,123,718.10; and the total sum of $37,272,587, making up the $23.3 million loans plus the three cheques in the sum of $13,972,587.  Mr Smith SC submits that this voucher is produced in response to the Trustees’ suggestion to Tang during cross-‌examination about drumming up the two loans of RMB 17 million in Hong Kong dollars by cheating on the exchange rate.  He argues that the Trustees’suggestion of cheating on exchange rate was nowhere to be found in the pleading or in Ho’s witness statement.  Hence it is open to the defendants to rely on the voucher in rebuttal on the principle of Kenneth Merrall Fox v General Medical Council [24].  In that case, Lord Radcliffe said:

“ If in cross-examination a witness’s account of some incident or set of facts is challenged as being a recent invention, thus presenting a clear issue as to whether at some previous time he said or thought what he has been saying at the trial, he may support himself by evidence of earlier statements made by him to the same effect. Plainly the rule that sets up the exception cannot be formulated with any great precision, since its application will depend on the nature of the challenge offered by the course of cross-examination and the relative cogency of the evidence tendered to repel it. Its application must be, within limits, a matter of discretion, and its range can only be measured by the reported instances, not in themselves many, in which it has been successfully invoked.”

Mr Smith SC submits that this general journal is significant.  It was posted three years before the Trustees’ enquiries in June 2010.  It refutes the suggestion that the composition of the set-off portion was only drummed up after the Trustees’ enquiries.  It also refutes the Trustees’ suggestion about cheating on the exchange rate.

158.  However, there is no evidence as to how the document was found and who was its original author.  Mr Maurellet SC argues that the authenticity of this general ledger voucher is doubted and that both hard and soft copies might require to be examined by experts.  Worse still, its existence contradicts the defendants’ position expressed in YSL’s letter dated 29 May 2015 in which YSL confirmed that there were no other documents in the possession of the defendants on these issues. 

159.  I have no doubt about the principle set out by Lord Radcliffe, but as was said by his Lordship, its application is a matter of discretion.  The discretion should only be exercised if it is fair to do so. If a party wishes to rely on a previous consistent statement to rebut an allegation of recent fabrication against his witness, he should produce the document while the witness is still in the witness box or, if not, seek leave to recall him, and ask him to testify on the document.   If the witness is not the maker of the document or if the authenticity is disputed, the document should be properly produced in evidence by the maker of the document so that his evidence may be tested by cross-examination.  It puzzles me why the value of Perfecta’s debts owing to Cheong Wah agreed under the Agreement between the Bankrupt and Tang should find its way in the general journal voucher of Cheong Tai.  If this voucher had existed, it puzzles me why Tang took more than two years to answer the Trustees’ query about this debt.  There are really serious questions to be asked about the authenticity of this document. I agree with Mr Maurellet SC’s objections.  It would be unfair to admit the document in evidence without the maker of the statement being called and cross-examined.

160.  Mr Smith SC argues that when the rate was agreed, whether it is correct becomes moot and that the difference is insignificant.  Firstly, the defendants’ evidence of agreed exchange rate was equivocal.  Tang said that the rate was given by Collin Ng and that it was agreed between her and the Bankrupt, but Collin Ng was not called. 

161.  It is not clear from Tang’s evidence whether the exchange rate was agreed at the time of making of the loans or at the time of the making of the Agreement.  If the rate had been agreed at the time of the making of the loan, the equivalent amount in Hong Kong dollars would have been shown in the General Ledger of Cheong Wah in just the same way as the various loans making up the $23.3 million indebtedness owing to Cheong Tai were shown in the General Ledger of Cheong Tai.  If the rate was agreed at the time of the Agreement, some accounting manipulations would have to be made in the General Ledger of Cheong Wah showing how the loan had been converted into Hong Kong dollars and then set-off.  Such evidence is wholly lacking.  Tang’s evidence is just bare assertion, unsupported by documentary evidence which is reasonably called for.  It is not credible.  As for Mr Smith SC’s argument that the difference was insignificant and is no evidence of undervalue, he missed the point that the difference casts doubts on the veracity of the evidence about the agreed exchange rate and the Trustees’ argument that the indebtedness had been drummed up such that the Bankrupt had not received the full consideration.

162.  The Trustees submit that the exchange rate at the date of the loan agreement on 30 September 2005 and 15 January 2007 were 1:0.960 (1.0413) and 1:0.9979 (1.0021) respectively.  Based on these exchange rates,the value of the RMB 8 million loan was $7,682,704 and that of the RMB 9 million loan was $8,998,155 at the respective date of the loan agreements. The total value of these loans was $16,680,859, which is less than the value as asserted by the defendants by about $1 million.  In my view, based on the Agreement, the loans should be valued as at the date of the Agreement.  On 28 May 2007, the market rate for buying Reminbei was 0.985168 [25]. At that rate, the loans were only worth $16,747,856 [26], which is $855,838.90 short of that alleged by the defendants. 

The cash portion of the consideration

163.  The consideration for the Sale Shares includes a cash payment of $13,972,587.  The terms of payment as set out in clause 2 of the Agreement are as follows:

“ Upon setting off of the said sum of HK$46,027,413.00, the total consideration payable for the Sale Shares (‘Consideration’) shall be Hon Kong dollars 13,972,587.00 which shall be paid by the Purchaser in the following manner:-

(a) a cheque in the sum of HK$10,000,000.00 drawn on a licensed bank in Hong Kong in favour of the Vendor or as directed by the Vendor to Perfecta Dyeing Printing & Weaving Works Limited receipt whereof the Vendor is hereby acknowledged;

(b) a cheque for the balance of HK$3,972,587.00 drawn on a licensed bank in Hong Kong in favour of the Vendor but the same shall not be released to the Vendor by the solicitors for the Purchaser unless and until title to the Property has been vested on the Purchaser and/or her nominee and the obligation of the Vendor pursuant to Clause 4.4 has been fulfilled.”

164.  It is stipulated in the Agreement that the cash consideration was to be paid by two cheques, one in the sum of $10 million upon signing of the Agreement; and one in the sum of $3,972,587 which shall not be released to the Bankrupt until title to the 38 cemetery sites has been vested in Tang or her nominee. 

165.  The defendants sought to justify its payment of the cash consideration by two cheques in the sum of $5 million issued on 26 and 28 May 2007 and another one in the sum of $3,972,587 issued on 28 May 2007.  The payment by these cheques are not disputed.  However, the Trustees question whether these cheques were really payments pursuant to the Agreement.

166.  There is no dispute that Tang had not issued any cheque to the Bankrupt in the sum of $10 million pursuant to the Agreement.  These cheques of $5 million are not referable to any other payments.  No evidence has been adduced as to how they were booked in the accounts of Perfecta.  The cheques were issued on 26 and 28 May 2007.  On my finding, the Agreement was signed on 28 May 2007.  Tang and the Bankrupt had a very close and tight relationship.  Most probably, they had agreed to the terms of the Agreement before execution but adopted a very casual attitude about execution and performance.  Most probably, Tang gave the Bankrupt a cheque in the amount of $5 million on 26 May 2007 and then another one on 28 May when they signed the Agreement.  At the same time, she also released the cheque in the sum of $3,972,587 representing the second payment under the cash portion of the consideration, which according to clause 2(b) of the Agreement should only be released after the title of the 38 cemetery sites had been vested in Tang or her nominee.  They deliberately left the date in the Agreement in blank to be filled in at a future time according to the needs of the circumstances.  So long as the parties agree, the terms of payment were not required to be perform to the letter.  I accept that these two cheques were paid for the purpose of discharging the Bankrupt’s obligation under clause 2(a) of the Agreement.

167.  As for the cheque of $3,972,587, it was also not referable to any other payment.  No evidence has been adduced as to how the sum was booked in the accounts of Perfecta.  The cheque is in an odd sum which, on the evidence available, is only referable to the payment under clause 2(b) of the Agreement.  It was released to the Bankrupt on 28 May 2007 before he had satisfied the conditions under clause 2(b).  Given the very close and tight relation between him and Tang, it must have been their common intention that despite the written terms, the Agreement need not be performed to the letter.  The Bankrupt was in a dire financial condition.  It was probable that the cheque was issued and released to him before he met the conditions in clause 2(b).

168.  In conclusion, I am satisfied that the cash portion was fully paid.

TRANSACTION AT UNDERVALUE

Introduction

169.  The Trustees’ case on transaction at undervalue is three-fold:

 (1)      The value of the Class B shares was more than the stated consideration of $60 million;

 (2)      The Bankrupt did not receive all or any of the consideration; and

 (3)      The value of the 38 cemetery sites received by Tang was not included in the consideration.

170.  Tang’s case is that the transactions under the Agreement and the Deed were genuine transactions.  The Sale Shares were not undervalued. The consideration for the Sale Shares was fully paid and received by the Bankrupt.  According to Tang, the Bankrupt approached her with a view to selling his shareholding in order to enable him to focus on the business of Perfecta.  After a series of negotiations, the Bankrupt proposed a price of $60 million which was accepted by Tang.  The price was based on the net asset value of the company without calling for a valuation report.  The Bankrupt agreed that the consideration to be made up of a set-off portion in the amount of $46,027,413 in respect of debts owing by Perfecta Group to Cheong Tai and Cheong Wah and a cash portion of $13,972,587, which was paid by three cheques.  The Bankrupt had received the full consideration.

Valuation of the Sale Shares

171.  The Trustees’ case on transaction at undervalue begins with the valuation of the Sale Shares being more than the $60 million as stated in the Agreement.  To prove transaction at undervalue, the Trustees have to show that the Bankrupt entered into the Subject Transaction, including the Agreement with the defendants for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the Bankrupt.  However, despite the vigorous attack on the valuation of the Sale Shares, the Trustees adduced no expert evidence on valuation.  They relied on the evidence of Ho who is not a valuation expert and whose evidence on valuation is just his personal conjecture.  In the end the Trustees had to concede that the Sale Shares “had a value of more than or at least $60 million”.  In the absence of expert evidence, I have to accept that the valuation of the Sale Shares at $60 million is not significantly less than their true open market value.  The Trustees’ case would have to proceed on this basis.  Hence, hereunder I shall only deal with the Trustees’ argument on the valuation of the Sale Shares very briefly.

172.  First, the Trustees complain that notwithstanding the substantial size of the consideration, there was no valuation report prepared on the value of the Sale Shares.  The consideration was arrived at 20% of the net asset value of Cheong Tai as stated in its 2007 consolidated financial statement which was $209,172,416; and 20% thereof equals $41,834,483.20.

173.  According to Tang, the Bankrupt approached her about the sale of the Sale Shares.  She asked her then accounting manager, Collin Ng to make an approximate valuation.  Based on Cheong Tai’s 2006 accounts, Collin Ng assessed the Sale Shares at about $40 million.  Then she had a further discussion with the Bankrupt and asked the Bankrupt to state a price. The Bankrupt suggested $60 million; and she agreed.  Tang and the Bankrupt had been long business partners for three decades.  The sale was negotiated between the only two shareholders and directors who had knowledge and management of Cheong Tai.  They were also shareholders and directors in other companies.  The price asked by the Bankrupt was 50% higher than Cheong Tai’s net asset value attributable to the Sale Shares.  It was not unreasonable to arrive at that price without expert valuation.

174.  Second, the Trustees complain that as Cheong Tai was a profitable going concern, a price based on net asset value represents its breakdown value and does not represent its true market value.  They argue, quoting Choi Chi Wai v Cheng Ka Shing [27],that Cheong Tai should be valued as a whole and that value is the open market value assuming a hypothetical willing but not anxious seller and buyer.  But in the absence of expert evidence on such valuation, I think the 50% margin has taken care of those considerations.

175.  Third, the Trustees complain that the net asset value was understated as three substantial properties in Hong Kong and Mainland China were valued at costs in the total amount of $54 million.  Be that as it may, the Trustees offered no expert evidence on the valuation of those properties.

176.  Fourth, the Trustees argue that as the Sale Shares representing 20% of the shareholding had equal voting right as the Class A shares representing 80% of the shareholding, they should be assessed at 50% of the net asset.  This is purely speculative.  The absurdity of that argument is amply demonstrated when Mr Smith SC put to Ho that if there were just one Class B share, would that share be worth 50% of the net asset of the company?  Ho answered in the affirmative.  That answer showed the fallacy of the Trustees’ argument.  In my view, the value of the shares is not solely determined by its voting right.  The equity it represents is also an important consideration.  It is reasonable that the value of the Sale Shares should be increased by reason of its voting rights.  But there is no expert evidence or reasoned argument as to how much.  Again, the 50% margin appeared to have adequately covered that added value.

177.  In the absence of expert evidence on valuation, the Trustees have to live with the valuation of $60 million as a valuation which was not substantially less than the value in money’s worth of the Sale Shares.   Thus,the first limb of the Trustees’ case on undervalue fails.

Whether the Bankrupt received the full value of the consideration under the Agreement

178.  The consideration consisted of the set-off portion of $46,027,413 and a cash portion of $13,972,587.  I am satisfied that the Bankrupt had received the full value of the cash portion. 

179.  On the defendants’ case, the set-off portion consisted of three components, namely (1) various loans from Cheong Tai to Perfecta Group in the total sum of $23.3 million; (2) Perfecta’s trading debts totalling $5,123,718.10; and (3) two loans owed by Panyu Perfecta to Cheong Wah in the total sum of RMB 17 million.  In the analysis above, the defendants have only succeeded in proving this three indebtedness in the amounts of $18,300,000, $16,747,856 and $4,463,588.11, making a total of $39,511,444.10.  In total, the Bankrupt did not receive the full value of the set-off portion of the consideration to the extent of $6,515,968.89 [28].

180.  But, in respect of the value which the Bankrupt received, it is unsecured debt owed to him by Perfecta Group.  Perfecta Group was a failing group at the time of the Agreement.  The Bankrupt and Tang must have knowledge of the financial condition of Perfecta Group.  Perfecta was ordered to be wound up on 4 May 2009 following the presentation of a petition for its winding up and a petition for the Bankrupt’s bankruptcy on 6 February 2009.  Silver Yield, the holding company of Panyu Perfecta was ordered to be wound up on 17 August 2011 following the presentation of a winding-up petition on 15 June 2009.  The effect of the Agreement was that the Bankrupt exchanged his shareholding in a profitable company with the debts of Perfecta Group which was in a net current liabilities position.  It was in fact insolvent and would be unable to repay the debts assumed by the Bankrupt.  The debts of Perfecta Group assumed by the Bankrupt is worthless.  This part of the consideration is illusory.  For this reason, the Bankrupt has not received the entire value of the set-off portion of the consideration, not just short of $6,515,968.89 as calculated above.

Consideration moving from the Bankrupt in respect of the disposition of the 38 cemetery sites

181.  The Trustees argue that the Bankrupt suffered a loss in the value of his 80% shareholding in Bright Success by reason of the transfer of the 38 cemetery sites to Wintop pursuant to paragraph 5 of the preamble to the Agreement. The 38 cemetery sites had a market value of $90,000 or $110,000 each.  For easy quantification, I assess their total value at $3,800,000.  They were transferred to Wintop for $1,805,680.20.  Bright Success therefore suffered a loss in the value of its equity equivalent to the difference between the market value and the amount it received, ie $1,994,319.80 [29].  Hence, the value of the Bankrupt’s 80% interest in Bright Success was diminished by $1,595,455.84 [30].  The Trustees claim this loss as value not received by the Bankrupt under the Agreement.

182.  Mr Smith SC submits that the Trustees’ claim of transfer at undervalue must fail as the impugned transaction was entered into by Bright Success and not by the Bankrupt.  For the purpose of section 49 of the Bankruptcy Ordinance, the transfer must be one which the Bankrupt has himself entered into: Re Ovenden Colbert Printers [31]and Re Brabon [32]. Further, even though the Bankrupt held 80% of the shares in Bright Success,it is not possible to treat the transaction as the Bankrupt’s because of the principle of separate corporate personality: Prest v Prest [33].

183.  With respect, those arguments are misconceived.  This loss is claimed as part of the consideration not paid under the Agreement.  The disposition in issue is the Sale Shares under the Agreement, which was by the Bankrupt.  The Trustees are claiming an undervalue represented by the loss in value of the Bankrupt’s shareholding in Bright Success. The Bankrupt or the Trustees in his shoes are not claiming loss in value of shares. Thus the principle of reflective loss has no relevance.  This head of claim is about consideration not received.

184.  Though the transfer of the 38 cemetery sites was not an express term of the Agreement, procuring its transfer is part of the Bankrupt’s obligation under the Agreement.  Pursuant to the preamble of the Agreement,the Bankrupt procured Bright Success to pass a board resolution on 31 May 2007 to transfer 38 cemetery sites to Tang or her nominee and to enter into the Deed on 7 June 2007 for that purpose.  The 38 cemetery sites were therefore transferred at an undervalue pursuant to the Agreement.

185.  When assessing the consideration moving from the Bankrupt under the Agreement, his loss in value in his shares in Bright Success must be treated as part of his consideration under the Agreement.  It was a hidden loss to the Bankrupt and a hidden gain to Tang. The consideration moving from the Bankrupt, therefore, consisted of the Sale Shares and his loss in value in his 80% shareholding in Bright Success.  The consideration for the Sale Shares was agreed in the sum of $60 million, but the hidden liability to the Bankrupt or hidden benefit to Tang was not paid for.  This consideration should be treated as consideration not received or an undervalue of the Agreement in the amount of $1,595,455.84.  It should be set-off against consideration received.

Conclusion

186.  To determine whether the consideration purportedly provided by Tang is significantly less than the consideration provided by the Bankrupt, it requires a comparison between the value obtained and the value of consideration provided by Tang for the Subject Transactions [34].  This is a question of fact [35].  The lack of precise value of the consideration provided by and received by the Bankrupt should not be a bar to any relief [36].  

187.  As to the value of consideration, if the consideration provided by the Bankrupt is speculative, it is for the defendants who rely on the consideration to establish its value [37].  Lord Scott in Phillips v Brewin Dolphin Bell Lawrie [38] held that “[t]he contemporary view of what a reasonably well- informed potential purchaser was prepared to pay was some evidence in assessing the market value” of the consideration provided by the bankrupt.  The value of such “is, prima facie, not less than the amount a reasonably well informed purchaser is prepared, in arms’ length negotiations, to pay”.

188.  In the absence of expert evidence from the Trustees, I accept that $60 million was the amount which a reasonably well-informed potential purchaser, of which Tang must be one by reason of her knowledge of the company, is prepared, in arms’ length negotiation, to pay.  However, the defendants have not discharged the burden of proving that they in fact paid the Bankrupt the said consideration.  On my finding, the Bankrupt did not receive the full amount under the set-off portion of the consideration in the amount of $6,335,968.89 and did not receive consideration for his loss of $1,595,455.84 as result of the transfer of the 38 cemetery sites.  Putting aside the issue of illusory consideration, what the Bankrupt received was $7,931,424.73 [39] short of the full value.  There was an undervalue of 13.22% [40].

189.  What constitutes ‘significantly less’ is a question of fact ultimately for the court to decide.  There is no clear guidance as to what constitutes “significantly less” as opposed to “less” as each case has to be decided on its own facts and circumstances [41]. In my view, there is no hard and fast formula for determining what is significantly less.  The court shall approach this question on the basis of absolute and relative values and having regard to the nature of the transaction.  At the lower end of the transaction value, absolute value carries more weight; whereas at the higher end of the transaction value, relative value is more important.  In Pagemanor Ltd v Ryan [42], the court considered a 2.6% difference in a property transaction of £69,000 did not constitute a significant undervalue.  A difference of 15.5% has been held to “represent significantly less consideration for the purpose of the Insolvency Act 1986” [43].  The term gives the court leeway to do justice between the transferee and the creditors [44]. 

190.  The present case concerned sale of shares in a successful on-going company and transfer of 38 cemetery sites for a total consideration of $50,000,000.  Having regard to both the undervalue in absolute and relative terms, I consider a difference of $7,931,424.73 representing 13.22%significantly less and constitutes sale at undervalue.  This undervaluation has not taken into account the illusory consideration issue.  Taking into account the issue of illusory consideration, the value of the consideration received by the Bankrupt was only the cash portion of the consideration, ie $13,972,587 less the consideration of $1,595,455.84 not received by him in respect of the transfer of the 38 cemetery sites, ie $12,377,131.16 [45]. The undervalue was as high as 79.37% [46].  I am satisfied that, either way, the transactions under the Agreement and the Deed were at an undervalue of $12,377,131.16. There was a shortfall of $47,622,868.84.

CLAIM UNDER SECTION 60 OF CONVEYANCING AND PROPERTY ORDINANCE

Introduction

191.  The Trustees’ further and alternative case is that the transfer of the Sale Shares under the Agreement and the transfer of the 38 cemetery sites pursuant to the Deed were dispositions with intent to defraud creditors within the meaning of section 60 of the Conveyancing and Property Ordinance and are voidable.  The Trustees raised the issue that the Bankrupt and Tang were associates.  That would be a relevant issue for a claim of unfair preference under section 50 of the Bankruptcy Ordinance.  But no such cause of action has been pleaded.  In any event, they did not succeed on that issue.  However,the evidence is material evidence of the factual background.

192.  The following facts are incontrovertible.  The Bankrupt and Tang had a very close and tight business relationship built over the course of three decades.  Tang had helped the Bankrupt through thick and thin.  She and Cheong Tai had been very supportive of the Bankrupt and lending heavily to Perfecta Group over the years to the tune of $576 million.  In addition to the $46 million loan under the set-off portion of the consideration,through Cheong Wah and Cheong On, Tang lent a total of about $530 million as shown in the proofs of debt those companies filed in the Bankrupt’s subsequent bankruptcy proceedings.  Despite that, the Bankrupt’s group of companies, namely Silver Yield, Perfecta and Panyu were not performing.  By the first half of 2007, the writing was on the wall and both the Bankrupt,Perfecta Group and Silver Yield were living on borrowed time and borrowed money.  They were in effect ‘dead companies walking’.  The auditors of Silver Yield noted in the 2007 financial statement that there was the fundamental uncertainty in the company as a going concern.  The Sale Shares were the Bankrupt’s most valuable assets.

193.  The Trustees suggest that the Bankrupt must know it would only be a matter of time before he and his companies were going to be bankrupted or wound up.  He did not want to drag Tang who had been so loyal and supportive of him into his misfortune and hence entered into the Agreement and the Deed to save Tang from her predicament.  The transactions under the Agreement and the Deed were devised to place the Bankrupt’s Sale Shares out of reach of his creditors.  But for those transactions, the Sale Shares would probably be assets in the Bankrupt’s estate available for distribution to all his creditors.  Cheong Tai’s and Cheong Wah’s loans to Perfecta and Panyu Perfecta would have to be practically written off.  Not only that, the Sale Shares would have to be sold by the Trustees.  Tang would have to live with a non-friendly partner who had equal control over Cheong Tai for just 20% of its equity.  Under the scheme,not only that these loans were recovered, Tang acquired the Bankrupt’s 20% shareholding in Cheong Tai, giving her full control over Cheong Tai after the Bankrupt’s financial demise.  

The law

194.  Section 60 of the Conveyancing and Property Ordinance provides:

“ Voidability of dispositions to defraud creditors

(1) Subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable,at the instance of any person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3)   This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.”

195.  The word “disposition” is even wider than the word “conveyance” [47].  The terms ‘dispose’ and ‘disposition’ have been construed widely in different cases and may cover all kinds of alienation [48]. It therefore includes the disposition by way of transfer of the Sale Shares and the 38 cemetery sites. 

196.  The word “defraud” includes “delay, hinder or defraud” [49].  If the disposition is for consideration, a dishonest intention would be a necessary element [50].  An actual intention has to be proved.  Very seldom will there be direct evidence of such intention.  Proof of dishonest intention is usually by way of inference.  How such inference is to be drawn has been succinctly summarized by Ribeiro PJ in Tradepower (Holdings) Ltd v Tradepower (HK) Ltd [51]as follows:

“ …in cases where the disposition is made for valuable consideration,or where the disponor is not insolvent or where the disposition does not deplete the fund potentially available to the creditors, an actual intent to defraud creditors must be shown as an inference properly to be drawn on the available evidence before s. 60 is engaged.”

If the disposition was made for valuable consideration, the Trustees bear the burden of proving an actual intent to defraud creditors.

Disposition of the Sale Shares — The Bankrupt’s intention and desire to prefer Tang to other creditors

197.  Desire and intention are often incapable of proof by direct evidence, save by admission.  It is usually proved by inference which may properly be drawn on certain basic facts.

198.  The disposition of the Sale Shares was for valuable consideration.  The thrust of the Trustees’ case of defraud on creditors is essentially that the consideration is illusory.  By reason of his design, the Bankrupt exchanged his good assets for bad assets and Tang exchanged her bad assets for good assets.  The good assets were the Bankrupt’s most valuable shareholdings in an on-going profitable business which he and Tang valued was worth $60 million. The bad assets were the debts of Perfecta and Panyu Perfecta with a price label of $46,027,413 which the Bankrupt assumed. 

199.  Tang’s and Wong’s evidence is that the Bankrupt’s intention to dispose of the Sale Shares was to enable him to concentrate or focus on the business of Perfecta Group.  That assertion flies in the face of common sense as it is admitted by Tang that the Bankrupt had minimal involvement in the affairs of Cheong Tai.  The Bankrupt had been Tang’s co-shareholder for three decades.  There was no reason why Tang did not know the Bankrupt’s real reason for selling the Sale Shares was not to enable him to focus on the business of Perfecta.  There was no reason for Tang to put forward this false explanation other than to hide the real reason and her common intention with the Bankrupt behind the Agreement and the Deed.  Her lie is corroborative of the adverse inference which I shall draw.

200.  The Bankrupt had full knowledge of his, Silver Yield’s and Perfecta Group’s dire financial condition.  He must have known that these companies were at the verge of collapse.  They had no means to repay the debts.  The debts were worthless.  He knew it was only a matter of time when he would have to be bankrupted, while Silver Yield and Perfecta Group wound have to be up; and his assets would have to be placed in a pool for distribution among all his creditors.  Through Tang’s companies, this loyal friend had lent him about $46 million [52] without security, but only on the faith of their three decades’ close and tight relations, not to mention the other $530 million debt acquired by Tang through Cheong Tai and Cheong On.  Those debts would be irrecoverable.  The Bankrupt must feel a strong moral urge to reciprocate her loyalty by ensuring that Tang would be able to recover a substantial amount of the debt.  That must be the Bankrupt’s real reason for the making of the Agreement and the Deed.

201.  On the other hand, Tang must also have full knowledge of the Bankrupt’s dire financial conditions.  She had been lending so heavily to the Bankrupt and Perfecta Group and the loans were outstanding.  She must have known that it would be a matter of time when the Bankrupt and the Perfecta Group would be bankrupted or wound up.  The Bankrupt’s Sale Shares would have to be sold by the Trustees.  She would have either to pay a very high price to acquire the Sale Shares from the Trustees or to work with a non-friendly co-shareholder who have equal control over Cheong Tai for just 20% of its equity.  This would be most unpalatable to her. In that eventuality, it would also have been difficult even to contemplate an alternative exit by selling her 80% shares in the company to a third party,given the existence of the Bankrupt’s Class B shares and the 50% control and the fact that Cheong Tai was tied to other companies.  She had great incentive to acquire the Sale Shares.  She must also understand that her loans to the Bankrupt and Perfecta Group would become bad debts and irrecoverable. 

202.  It was under those circumstances that the Bankrupt and Tang entered into the Agreement and the Deed.  The Bankrupt felt morally obliged to ensure that Tang would be able to recover a substantial part of her loans and be left in full control of Cheong Tai upon his demise.  Tang felt she was well entitled to the Bankrupt’s gratitude as what was secured for her was just a fraction of what she had lent.  They must know that as a result of the disposition under the Agreement, the Bankrupt’s good assets which would otherwise be available to the general creditors would be put in the hands of Tang as satisfaction of the worthless debts owed to her by Perfecta and Panyu Perfecta.  Tang was the person to gain from the dispositions.  She was paid a substantial part of the debt and be left in full control of Cheong Tai after the Bankrupt’s financial demise.  The losers were the general creditors.  This is evidence on which the inference of the Bankrupt’s intention to prefer Tang to other creditors by ensuring that she will be paid a substantial part of the debt and be left full control Cheong Tai after the Bankrupt’s financial demise; and the inference that Tang was a knowing party to that fraudulent design may be drawn. 

203.  Tang’s uncooperative attitude towards the Trustees’ investigation lends further weight to the above inference.  For over two years, she refused and resisted the Trustees’ request for information relating to the Subject Transaction.  It was not until after the threat of two section 29 summonses that she began to produce some information.  Her explanation was that she had passed all information to her solicitors and left it to her solicitors to respond to the Trustees’ inquiries.  Her solicitors were not called to testify.  If she had in fact given all information to her solicitors who in the professional discharge of their duty would have answered the Trustees’ inquiries and the Trustees would not have to issue the two section 29 summonses.  I reject her explanation and draw the adverse inference that she was attempting to hide her unwarranted benefits obtained under the Agreement and the Deed which was the product of her conspiracy with the Bankrupt to default creditors.

204.  For the above reasons, the sale of the Sale Shares under the Agreement was a disposition with intent to defraud creditors within the meaning of section 60 of the Conveyancing and Property Ordinance.  The loss suffered by the estate of the Bankrupt includes the illusory consideration under the set-off portion of the consideration and the loss in the value of the Bankrupt’s shares in Bright Success not received by the Bankrupt in the total amount of $47,622,868.84 [53]. I have arrived at the same shortfall in paragraph 190 in respect of the disposition of the Sale Shares under the Agreement under section 49 of the Bankruptcy Ordinance. This shortfall included the loss occasioned by the disposition of the 38 cemetery sites which the Trustees attempt to prove in the subsection below.  Even if the Trustees succeed, they will not be entitled to double recovery.

The disposition of the 38 cemetery sites

205.  The circumstances surrounding the disposition of the 38 cemetery sites have been set out in paragraph 115 above.   The 38 cemetery sites have a market value of between $3,420,000 [54] to $4,180,000 [55]. They were transferred to Wintop at an undervalue of $1,805,680.20 or 47.52%.

206.  The disposition of the 38 cemetery sites under the Deed is part of the composite transactions with the Agreement made under the same circumstances.  The same inferences as in the disposition of the Sale Shares may be drawn.  The Trustees therefore argue that the transfer of the 38 cemetery sites by Bright Success to Wintop at a consideration of $1,805,680.20 was a disposition with intent to defraud creditors.

207.  Mr Smith SC submits that the Trustees’ claim is bad in law for three reasons.  First, the disponor or transferor was Bright Success and not the Bankrupt.  The Bankrupt was the wrong transferor.  Second, the transferee was Wintop and not Tang. Tang was the wrong transferee.  He quoted the case of Dransfield Holdings v Pearl Oriental [56] in which a claim under section 60 of the Conveyancing and Property Ordinance was dismissed on these two grounds.  In that case, the relevant disposition of property was made not to the defendant but to a company owned by the defendant, just as in the present case in that the cemetery sites were transferred to Wintop owned by Tang but not to Tang (the ‘wrong transferee’)and the claim was wrongly brought by the shareholder of the transferor as in the present case that the claim was brought by the estate of the Bankrupt and not Bright Success.  Bright Success and Wintop are not parties to these proceedings.

208.  I have to agree with that submission because of the principle of corporate personality.  The disposition must be one which is entered into by the Bankrupt.  Despite that the Bankrupt procured the disposition, the disposition was entered into by Bright Success.  It was not entered into by the Bankrupt.  The transferee was Wintop and not Tang.  Wintop is not even a party to this action.

209.  In view of the above conclusion, I do not find it necessary to delve into detailed consideration of the third reason advanced by Mr Smith SC that the loss in value of the Bankrupt’s share in Bright Success is reflective loss.  The principle of “no reflective loss” bars any claim by the shareholder, ie the Bankrupt, or his trustees in bankruptcy.  But there are exceptions.  In Johnson v Gore Wood [57], Lord Bingham and Lord Millett held that a shareholder in the company may sue for loss suffered by a company under two situations.  First, where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding.  Secondly, where the company suffers loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages for his own loss, whether of a capital or income nature, measured by the diminution in the value of his shareholding. 

210.  The present case falls within the first situation.  Bright Success suffered loss.  The Bankrupt or the Trustees in his shoes may sue Wintop on behalf of Bright Success to recover the loss even though the loss is a diminution in the value of the shareholding.  However, Wintop is not a party to these proceedings.  Apart from that hurdle, the Trustees would have to seek to lift the corporate veil of Wintop because of the fraud.  No such argument has been advanced.  Furthermore, the Bankrupt was also a party to that fraud. It lies ill in his mouth to seek remedy arising out of his own fraud.

211.  In conclusion, the Trustees’ claim in respect of the transfer of the 38 cemetery sites based on section 60 of the Conveyancing and Property Ordinance fails.  But the Trustees succeeded on the claim of disposition at an undervalue based on section 49 of the Bankruptcy Ordinance.

THE REMEDIES

212.  The Agreement was at an undervalue and a disposition with intent to defraud creditors.  Of the stated consideration of $60 million under the Agreement, the Bankrupt only received $13,972,587 by way of cash and a set-off of $39,711,444.11.  He was not paid his consideration for the transfer the 38 cemetery sites, which was $1,595,455.84.  There was a total shortfall of $7,911.424.73.  On this basis, Tang is obliged to make good the shortfall.

213.  Furthermore, the entire set-off portion of the consideration was illusory in that Perfecta’s and Panyu Perfecta’s debt acquired by the Bankrupt were worthless.  The Bankrupt exchanged his good assets in a profitable company for debts in two insolvent companies.  This is not the case where the assets exchanged turned valueless because of some subsequent events. This is not a case where a peppercorn is good consideration for a Rolls Royce.   By virtue of his position in Perfecta, the Bankrupt knew full well that Perfecta was insolvent and was not in any position to repay the debt assumed by him. Tang knew that as well.  As a result of the Agreement, the pool of assets available for distribution to creditors was significantly reduced.  The dispositions under the Agreement was a defraud on the Bankrupt’s creditors. Tang, who had received the Sale Shares, is required to repay the value represented by the illusory consideration, ie the full value represented by the set-off portion of the consideration, ie $46,027,413 and the consideration not received by the Bankrupt for the transfer of the 38 cemetery sites in the sum of $1,595,455.84.  The total shortfall is $47,622,868.84.  That sum is inclusive of the shortfall of $7,911.424.73 referred to in the above paragraph.

214.  The Trustees seek a declaration that the Agreement constitutes transaction at an undervalue within the meaning of section 49 of the Bankruptcy Ordinance and/or a disposition with intent to defraud creditors within the meaning of section 60 of the Conveyancing and Property Ordinance and is, as such, void as against the Trustees; and a similar declaration in respect of the transfer of the 38 cemetery sites; and other monetary relief.

215.  The Class A and the Class B shares had been consolidated pursuant to the special resolution passed on 13 March 2013.  Though this court is satisfied that the Agreement was entered into at an undervalue and the disposition of the Sale Shares under the Agreement was a disposition with intent to defraud creditors, the Trustees would not be able to recover the Sale Shares in specie.  The declaration sought in respect of the Agreement would be futile.  The only remedy available to the Trustee is an order for damages to make good the shortfall in consideration for the Sale Shares.  Accordingly, I make an order that Tang shall pay damages to the estate of the Bankrupt in the total amount of $47,622,868.84.  This amount is based on my finding that the set-off portion of the consideration, whatever the amount set-off, was illusory and that part of the consideration paid by the Bankrupt which has not been taken into account in the Agreement was the loss in value of his 80% shareholding in Bright Success.  The defendants shall pay interest on the above amount from the date of the writ until judgment at the rate of prime rate plus one percent and thereafter at judgment rate until full payment.

216.  I also make an order nisi that the defendants shall pay the Trustees’ costs on a party and party basis.

217.  I thank counsel and the legal team for their very comprehensive submissions.  I apologise for the time taken in my deliberation.  There were lots of documents to consider and lots of accounts to reconcile.

Annex 1

Appendix C:  Table of the Alleged HK$5.123m Trading Debts

(With entries in bold being the trading debts incurred after the date of the Agreement)

Annex 2 

Appendix D:  P’s Calculation on Vendor Account Entries