PATRICK COWLEY AND ANOTHER (The Joint and Several Trustees in Bankruptcy of the Property of the Bankrupt) v. ALL POWERFUL HOLDING LTD AND ANOTHER

HCB 104/2017

[2021] HKCFI 2132

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 104 OF 2017

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J U D G M E N T

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Introduction

1.  On 1 August 2018, DHCJ Saunders granted an injunction order (“Order”) against the 1st and 2nd Respondents.  The relevant parts of the Order provide that:

“1. The 1^st and 2^nd Respondents, whether by themselves or their officers, directors, employees, servants or agents or otherwise be restrained from withdrawing, transferring, disposing of or otherwise dealing with the funds or assets held in all of the 2^nd Respondent’s bank accounts maintained with HSBC (the ‘HSBC Accounts’), including but not limited to the bank accounts listed in Schedule 2 at the end of this Order until further order is made, or unless the Respondents obtain the prior written consent of the Applicant.

2. The 1^st and 2^nd Respondents, whether by themselves or their officers, directors, employees, servants or agents or otherwise be restrained from withdrawing, transferring, disposing of, diminishing the value of or otherwise dealing with the 2^nd Respondent’s other assets (i.e. other than funds and assets in the HSBC Accounts), including but not limited to the 2^nd Respondent’s shares in its subsidiaries, cash, funds, deposits, shares, listed securities, immovable properties, motor vehicles and all other movable properties situated in Hong Kong and overseas (‘Other Assets’), whether these are in the name of the 2^nd Respondent or not and whether solely or jointly owned or controlled, directly or indirectly, by the 2^nd Respondent, until further order is made, or unless the Respondents obtain the prior written consent of the Applicant.

3. Provided that nothing in the aforementioned Paragraphs 1 and 2 shall prevent the 1^st and 2^nd Respondents from carrying on trading activity (if any) in the ordinary course of business.”

2.  There is before this court the 1st and 2nd Respondents’ application by summons dated 15 December 2020 (“Summons”) to vary the Order by incorporating the following “EXCEPTIONS TO THIS ORDER” in the Order:

“This Order does not prohibit the Respondents from utilising the HSBC Accounts for:

a. spending up to HK$273,000.00 per month towards the trading activity in the ordinary course of business of the 2nd Respondent;

b. paying HK$79,262,648.70 of debts of the 2nd Respondent due to its creditors; and

c. paying HK$5,800,077.10 on legal advice and representation incurred and to be incurred by the 2nd Respondent for the actions HCB 104/2017, HCA 2289/2018 and HCMP 107/2020.”   

Background

3.  The factual background to this application can be gleaned from the Decision of DHCJ Saunders on 1 August 2018 (“Decision”). Suffice it for the present purpose to quote the opening paragraphs from the Decision:

“2. The bankrupt, Mr Jaffe Lau Yu (‘Mr Lau’), was the sole shareholder and director of All Powerful Investment Ltd (‘APIL’) since its incorporation in 2009. APIL is a Hong Kong company. APIL has one issued ordinary share and a total share capital of HK$1.00.

3. On 19 December 2014, Mr Lau executed a Deed of Settlement establishing the JL Family Trust (‘the JL Trust’), a trust governed by the laws of the British Virgin Islands (BVI). The trustee is All Powerful Group (PTC) Ltd (‘APG’), a BVI company. That company was incorporated on that same day as the JL Trust. All Powerful Holdings Limited (‘APHL’), also a BVI company, was also incorporated, on 19 December 2014. The sole shareholder in APHL is the JL Trust.

4. On 20 January 2015, a little over four weeks after the establishment of the entities set out in the previous paragraph, Mr Lau transferred the sole issued share in APIL, held by him, to APHL for the sum of HK$1.00 (‘the share transfer’). Mr Lau remained the sole director of APIL until his resignation on 4 September 2017.

5. On 6 January 2017, a petition in bankruptcy against Mr Lau was presented to the High Court by The Hongkong and Shanghai Banking Corporation (‘HSBC’). Mr Lau was adjudged bankrupt on 5 September 2017. On 4 October 2017, the applicants (‘the Trustees’) were appointed as the joint and several trustees of the property of Mr Lau.

6. The presentation of the bankruptcy petition was within two years of the share transfer.

…

The applications

8. As a result of investigations they have carried out, it is the contention of the Trustees that the share transfer undertaken by Mr Lau on 20 January 2015, to dispose of his shareholding in APIL to APHL for the sum of HK$1.00 is void as it constitutes a transaction at an undervalue and is a disposition of property made with intent to defraud creditors.

9. On 12 February 2018, four months after their appointment, the Trustees made application to the Court for a declaration that the share transfer constitutes a transaction at an undervalue pursuant to section 49, of the Bankruptcy Ordinance (Cap 6) (‘BO’), and, pursuant to sections 51A and 58 BO, an order that the share transfer be set aside, and associated orders.

10. At the same time, the trustees sought Chabra injunctions against APHL and APIL, who are not parties to the substantive BO proceedings, but who hold the assets ultimately reflected by the ownership of the single share in APIL.  The Trustees also seek certain disclosure orders against both APHL and APIL.”

4.  One of the reasons why DHCJ Saunders granted the Order was explained in [53] - [54] of the Decision:

“53. The overwhelming inference to be drawn from the absence of an affirmation from Mr Xie is that there are matters that APIL wishes to conceal from the court. In the whole of the circumstances it seems clear that Mr Lau is taking every step possible, not only to ‘ring fence’ APIL’s assets from his creditors, but also to ensure that the reality of Mr Lau’s control of APIL, and up-to-date information in respect of APIL’s assets, are concealed from the court.

54. Accepting, as I do, that the allegations to which I have referred have not been tested, I am satisfied that the evidence goes well beyond raising a serious matter to be tried. There is a very strong case on the evidence before me that Mr Lau is in reality in control of the JL Trust, APHL, and consequently, ultimately APIL.” (emphasis added)

5.  Regarding the Trustees’ application on 12 February 2018 in the present proceedings, it was subsequently converted into a writ action on 2 October 2018 in HCA 2289 of 2018 in which the Trustees seek inter alia:

(1)  an order to set aside the Share Transfer on the basis of an undervalue transaction; and/or a disposition of property with intent to defraud creditors: and/or

(2)  a declaration that the Bankrupt retains beneficial ownership and control of the 2nd Respondent despite the Share Transfer.

6.  As far as the JL Family Trust is concerned, it is a family trust established by the Bankrupt with the beneficiaries being his wife, Madam Tsang Wai Yee Terri (“Madam Tsang”) and their 3 children.  The 1^st Respondent is held by the JL Family Trust.

Deliberation

Legal principles

7.  The relevant legal principles, set out in Hong Kong Civil Procedure 2021 Vol 1 para 29/1/79, can be summarised as follows.

(1)  Assets are only to be released or excepted from a Mareva injunction for a proper purpose.  Where the defendant seeks the release of funds subject to a Mareva injunction to meet certain expenses, the court should consider whether the defendant has shown by sufficient evidence that (a) he does not have other assets available to meet those expenses; and (b) the purpose of the application is not an attempt to dissipate the assets to frustrate the plaintiff’s enforcement of a judgment: Wharf Ltd v Lau Yuen How [2010] 1 HKLRD 783.

(2)  The defendant must make full and frank disclosure to the court: Cathay Pacific Airways Ltd v Luk Shu Keung unrep, HCA 2895 of 2001, 20 April 2010, DHCJ Carlson. 

(3)  The court is, in an appropriate case, entitled to have a “very healthy skepticism” in respect of assertions made by the defendant.  Where the defendant has previously put forward evidence of questionable credibility, the court should take a “very cautious view” of the defendant’s evidence in support of varying the order: Anokh Singh Pannu v Alantic Ltd unrep, HCA 1696 of 2010, [2012] HKEC 669. 

(4)  Where the defendant wishes to pay a debt falling due, he bears the burden of proving its validity: Kanematsu-Gosho (HK) Ltd v Lee Boon Chean [1986] HKLR 59. 

The 2nd Respondent’s ordinary trading business expenses - HK$273,000 per month

8.  At the hearing, Mr Cheung frankly concedes that the 2nd Respondent has no business operations or trading activities.  Further, the 2nd Respondent’s financial statements^[1] show that it was insolvent with total liabilities of over HK$431 million as at 31 March 2019. 

9.  The evidence in support of the 2nd Respondent’s so-called ordinary trading business expenses is in the 1st affirmation of Chan Chung Yi (“Chan 1”) at para 10 as follows:

“… Since all the 2^nd Respondent’s bank accounts are frozen due to the Order, the 2^nd Respondent can only rely on an affiliate, Sure Vantage Limited (‘Sure Vantage’), to handle the office tenancy and to pay the monthly rental of HK$60,000.00 on the 2^nd Respondent behalf. In addition, under the substantial pressure from various legal proceedings including this action, the 2^nd Respondent has engaged a consultancy firm, Buzzer Beat Company Limited (‘Buzzer Beat’), to provide consultancy services including accounting services, company secretarial services, provision of manpower for daily operation in particular to handle documents in relation to the above-said various legal proceedings such as retrieval and compiling of documents etc. The consultancy fee is HK$200,000.00 per month. …” (emphasis added)

10.  It would therefore appear that what the 2nd Respondent is really seeking is payment for its administrative costs ie monthly rental and consultancy fees.  As far as supporting documents are concerned, Mr Chan has produced an invoice from Buzzer Beat Company Limited (“Buzzer Beat”) for consultancy fee for the month of November 2020 in the sum of HK$200,000, an instruction letter to Sure Vantage Limited (“Sure Vantage”), a BVI company, dated 25 May 2020 to sign a lease at Buzzer Beat’s office address effective from 1 June 2020 and a service agreement signed by Buzzer Beat and Sure Vantage (“Service Agreement”) which appears to be for the rental of a serviced office suite at Buzzer Beat’s office address for the monthly fee of HK$60,000. The Service Agreement however was for a term of 1 year from 1 June 2020 to 31 May 2021. 

11.  Sure Vantage is said to be an affiliate of the 2nd Respondent.  There is however no clarification in Chan 1 as to the relationship between the 2nd Respondent and Buzzer Beat.  It is only in the 2nd affirmation of Chan Chung Yi (“Chan 2”) that he explains that Buzzer Beat’s sole shareholder viz Jason Ling Ko Yin (“Jason Ling”) is a close business associate of the Bankrupt and the 2nd Respondent. 

12.  Nor is there any credible explanation as to why the 2nd Respondent which is clearly insolvent and has no business operations or trading activities would need to incur consultancy fees and rental liability of HK$260,000 a month payable to Buzzer Beat.  The reason put forward in Chan 1 that the 2nd Respondent is “under the substantial pressure from various legal proceedings including this action” can hardly be regarded as a credible explanation.  The various legal proceedings may explain why the 2nd Respondent needs to incur legal costs which will be dealt with below.  But this court is not satisfied that the 2nd Respondent genuinely required and continues to require consultancy services, properly so-called, from Buzzer Beat. 

13.  When one looks at the engagement letter between APIL and Buzzer Beat dated 1 April 2020, the services said to be provided by Buzzer Beat are mainly company secretarial services.  In Mr Cowley’s 10th affidavit (“Cowley 10”), the Trustees express serious doubt as to the genuineness of the engagement, especially in light of the fact that the 2nd Respondent already has its own company secretary and does not have any business operations.  According to APIL’s Annual Return for the year of 2020, APIL’s company secretary is CCA Secretarial Services Company Limited. 

14.  Mr Ho very properly accepts in principle that the 2nd Respondent needs to incur some administrative costs eg accounting and company secretarial services but submits that HK$200,000 per month is wholly excessive.  According to Cowley 10, a monthly fee of HK$200,000 (or HK$2.4 million per year) for such services is completely out of the ordinary.  This court shares the Trustees’ skepticism and agrees that HK$200,000 per month is excessive. 

15.  After taking instructions, Mr Ho informs this court that the Trustees accept a figure of HK$25,000 per month as reasonable future administrative costs and this court will so order.

16.  As far as rent is concerned, the Service Agreement states that the rental arrangement has come to an end on 31 May 2021. In any event, the Service Agreement was signed by Buzzer Beat with Sure Vantage, rather than with the 2nd Respondent.  If the 2nd Respondent wishes to contend that, after 31 May 2021, HK$60,000 will continue to be incurred by it as a result of that Service Agreement or something similar, it bears the burden of proving it has legally incurred such a liability. This the 2nd Respondent has failed to do on the evidence.

17.  Another reason why this court is not prepared to allow the HK$60,000 monthly rental claimed by the 2nd Respondent is that its 2019 management accounts show its rental expenses were only HK$18,000 or HK$22,000.  In view of the conflicting evidence as to the amount of rental liability which the 2nd Respondent claims it has incurred and will purportedly continue to incur, this court is not prepared to allow the HK$60,000 sought by the 2nd Respondent.

Repayment of the 2nd Respondent’s creditors of over HK$79.2 million

18.  For this category of exception, the 2nd Respondent is claiming over HK$79.2 million as the amount due to its creditors.  In support of this, the 2nd Respondent has exhibited in Chan 1 various demand letters and invoices from its alleged creditors viz Madam Tsang for HK$55 million, Greatest Global Holdings Limited for HK$3.477 million, Crystal Delight Investments Limited for HK$5.385 million, Buzzer Beat for HK$1.6 million and Nice Talent Capital Limited for HK$13.8 million.

19.  In Mr Cheung’s written submissions, the explanation for these debts is that since the Order was granted, Madam Tsang through herself and her companies viz Greatest Global Holdings Limited and Crystal Delight Investments Limited have provided financial support for the operations of the 2nd Respondent and repaid its bank loans.  The only bank loan referred to was the Fubon Bank Loan in the sum of over HK$38.2 million which Madam Tsang appeared to have repaid on behalf of the 2nd Respondent with a loan of HK$39 million from Emperor Finance Limited.  The Emperor Finance Loan is now due and Madam Tsang has demanded the 2nd Respondent to repay the same. 

20.  At the direction of this court, Mr Cheung has further given a breakdown (“Breakdown”) of the 2nd Respondent’s alleged debts, the identity of the creditors and the nature of the debts as follows. 

Item No.	Names of creditors	Identity of the creditors	Amount of debts	Nature of Debts
1	Madam Tsang	Spouse of the Bankrupt	55,000,000.00	HK$38,233,750.77 for repayment of Fubon Bank Loan on behalf of the 2nd Respondent.  The remaining balance for the operation of the 2nd Respondent.
2	Greatest Global Holdings Limited	A company owned by Madam Tsang	3,477,048.70	For the operation of the 2nd Respondent.
3	Crystal Delight Investments Limited	A company owned by Madam Tsang	5,385,600.00	For the operation of the 2nd Respondent.
4	Buzzer Beat	A company wholly owned by Mr Jason Ling	1,600,000.00	Outstanding consultancy fee
5	Nice Talent Capital Limited	Under the directorship of Mr Jason Ling between 17 July 2015 and 2 January 2018	13,800,000.00
Total			79,262,648.70

21.  As far as the Fubon Bank Loan is concerned, Mr Cheung submits that it was incurred in the ordinary course of business of the 2nd Respondent without giving any details.  As for the other alleged debts, there is no explanation in the evidence or Mr Cheung’s submissions as to the circumstances under which they were incurred or why they were said to be incurred in the ordinary course of business of the 2nd Respondent.  Take Nice Talent Capital Limited’s claim for HK$13.8 million as an example.  Its invoice dated 30 November 2020 claims the 2nd Respondent owes it (i) consultancy fees in the sum of HK$5 million for the period 1 April 2017 to 30 April 2019 without specifying what consultancy services were provided and (ii) a loan of HK$8.8 million, again without explaining what the loan was about. 

22.  To the credit of Mr Cheung, the Breakdown acknowledges that all the alleged creditors are associated in one way or another with the Bankrupt: Madam Tsang is the Bankrupt’s wife while the corporate creditors are owned by or associated with Madam Tsang or Jason Ling, a close business associate of the Bankrupt and the 2nd Respondent. 

23.  As stated earlier, where a defendant wishes to pay a debt falling due, he bears the burden of proving its validity.  Further, a defendant must show by sufficient evidence that inter alia the purpose of the application is not an attempt to dissipate the assets in order to frustrate the plaintiff’s enforcement of a judgment.  In view of the scanty evidence adduced by the 2nd Respondent, this court is not satisfied with the validity of the alleged debts or that they were incurred in the ordinary course of business of the 2nd Respondent at the material time. 

24.  Importantly, on the undisputed evidence, the balance in the HSBC accounts is in the region of US$2.5 million (approximately HK$19.5 million).  By this part of the application alone, the 2nd Respondent is seeking to settle its indebtedness allegedly due to persons or entities who are closely associated with the Bankrupt, which if granted, will completely wipe out the balance in the HSBC accounts.  In these circumstances and exercising a very healthy skepticism in respect of the assertions made by the 2nd Respondent, as this court is entitled to, this court is not satisfied that the purpose of this part of the application is not an attempt to dissipate the frozen assets in order to frustrate the Trustees’ enforcement of a judgment that they may eventually obtain against the Respondents.

25.  For these reasons, this court is not prepared to grant an exception for the repayment of the debts claimed.

The 2nd Respondent’s past and future legal expenses of HK$5.8 million

26.  The basis of this exception is explained in Mr Cheung’s submissions as thus.

27.  First, there is no provision for legal expenses exception in the Order. 

28.  Second, the 2nd Respondent has faced or is still facing legal actions initiated by the Applicant ie (i) HCB 104 of 2017 in respect of the Trustees’ application for the Order; (ii) HCA 2289 of 2018 in respect of the Trustees’ application to set aside the Share Transfer on 20 January 2015; and (iii) HCMP 1076 of 2020 in respect of the Trustees’ application to declare void a legal mortgage and 5 legal charges created by the Bankrupt in favour of the 2nd Respondent[2].

29.  As of 17 September 2020, the legal costs already incurred by the 2nd Respondent stood at around HK$3.5 million.  They were said to have been paid by Madam Tsang directly to the solicitors as a loan advanced to the 2nd Respondent. Madam Tsang is now demanding the 2nd Respondent to repay. She has also refused to pay any further legal fees on its behalf.  In respect of this Summons to vary the Order, the estimated costs are said to be HK$501,720.  In addition, the estimated further legal expenses to be incurred by the 2nd Respondent in HCA 2289 of 2018 and HCMP 1076 of 2020 are said to be HK$1.8 million.

30.  In principle, a defendant is entitled to defend itself and, if necessary, to spend the frozen funds on legal advice and representation in order to do so.  This is recognised by the standard wording of the usual freezing order or mareva injunction, subject to the defendant demonstrating that he has no other assets with which to fund the litigation.  This ordinary rule is capable of being outweighed in an appropriate case by other considerations.  Ultimately, it is the interests of justice which must be decisive: Tidewater Marine International Inc v Phoenixtide Offshore Nigeria Ltd [2015] EWHC 2748 (Comm) at [36] - [37]; [46].

31.  Regarding past legal costs of around HK$3.5 million, the evidence is that, notwithstanding the absence of legal expenses exception in the Order, the 2nd Respondent had been able to resort to Madam Tsang’s assets to fund the litigation for well over 2 years without bothering to vary the Order.  Given that the 2nd Respondent did have other assets with which to fund those legal expenses, this court does not consider it appropriate to grant an exception, retrospectively so to speak, for those past legal expenses.

32.  As for the 2 sums of HK$501,720 and HK$1.8 million, while there is some sort of breakdown for the former sum in Messrs SK Wong & Co’s statement of 1 December 2020, there is no breakdown as to how the HK$1.8 million were arrived at in the 2 letters dated 9 December 2020 from Messrs KY Woo & Co and exhibited to Chan 1 - instead, there was a bare assertion and a demand for costs on account.

33.  This court is persuaded on the evidence that, owing to Madam Tsang’s refusal to continue funding its litigation, the 2nd Respondent has demonstrated that it has no other assets with which to fund the future costs of its litigation with the Trustees.  This court is also satisfied that it is in the interest of justice that a legal expenses exception be added to the Order.  However, on the rather unsatisfactory state of the evidence as to quantum, this court is not prepared to accept at face value the claim to the tune of HK$2.3 million. 

34.  Given the Trustees’ very proper acceptance that some future legal costs should be allowed, and doing the best this court can with the evidence available, this court is prepared to allow a lump sum of HK$750,000 as future legal expenses and shall so order.  Any further increase in future legal expenses will have to be made by consent or the subject of a further application by the 2nd Respondent.

Disposition and costs order nisi

35.  In the premises, this court hereby orders that the terms of the Order be varied so that as from the date hereof:

The Order does not prohibit the Respondents from utilising the HSBC Accounts for spending up to

i. HK$25,000 per month towards the administrative costs of the 2nd Respondent; and

ii. HK$750,000 as expenses on legal advice and representation to be incurred by the 2nd Respondent in the actions HCB104/2017, HCA 2289/2018 and HCMP 107/2020.

36.  Since the Trustees are substantially successful in resisting the Summons, there shall be a costs order nisi that costs of and occasioned by the Summons be to the Trustees, to be taxed if not agreed, and paid by the Respondents forthwith, certificate for counsel.