HO MAN KIT and Kong Sze Man Simone the Joint and Several Liquidators of Auragem Company Limited (in creditors’ voluntary liquidation) v. SURE LEAD LTD

HCMP 2019/2018 and
HCMP 2021/2018
(Heard Together)

[2019] HKCFI 2914

HCMP 2019/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2019 OF 2018

_______________

_______________

_______________

MISCELLANEOUS PROCEEDINGS NO 2021 OF 2018

_______________

_______________

_______________

(Heard Together)

____________________

JUDGMENT

____________________

APPLICATIONS

1.  There are two applications before this Court. The first is the application of Ho Man Kit and Kong Sze Man Simone Joint and Several Liquidators (“the Plaintiffs”) of Auragem Company Limited (In Creditors’Voluntary Liquidation) (“Auragem”), by originating summons dated 15 November 2018, for the following orders against Sure Lead Limited (“the Defendant”):

“ 1. A Declaration that the two bank transfers from Auragem Company Limited (In Creditors’ Voluntary Liquidation) to the Defendant on 8^th May 2018 in the total sum of USD180,400 (or such amount as determined by this Honourable Court) were gifts from Auragem Company Limited (In Creditors’ Voluntary Liquidation) to the Defendant constituting transactions at an undervalue within the meaning of Section 265D and 266B of the Ordinance and are void as against the Plaintiff; or alternatively,

2.  A Declaration that the two bank transfers from Auragem Company Limited (In Creditors’ Voluntary Liquidation) to the Defendant on 8^th May 2018 in the total sum of USD180,400 (or such amount as determined by this Honourable Court) were unfair preference given by Auragem Company Limited (In Creditors’ Voluntary Liquidation) to the Defendant within the meaning of Section 266 and 266B of the Ordinance;

3.  An Order that the Defendant do repay the said sum of USD180,400 (or such amount as determined by this Honourable Court) to the Plaintiffs.”

2.  In the second application, namely, HCMP 2021/2018, the Plaintiff took out a similar originating summons in relation to Eternal Diamonds Corporation Limited (In Creditors’ Voluntary Liquidation) (“Eternal”), also on 15 November 2018, seeking similar orders against the same Defendant, except the relevant sum is HK$1,500,000.

MATERIAL FACTS

Auragem

3.  The facts of the two cases are strikingly similar, if not outright identical.  Auragem is a Hong Kong company incorporated on 4 June 2010.  Its sole shareholder and director is Mr Sonu Shailesh Mehta (“Mr Sonu”). In April 2018, Mr Sonu, through a Mr Bagaria Ashish Bajranglal contacted the Plaintiffs and discussed the proposed liquidation of Auragem.

4.  On 3 May 2018, Mr Sonu executed a “written record of the decision of the sole director of the Company passed pursuant to the Company’s Articles of Association” (the “Written Record of the Sole Director”) to call an extraordinary general meeting to have Auragem wound up voluntarily.

5.  From the bank statements and transfer advices of Auragem,the Plaintiffs found out that there were two transfers in the total sum of US$180,400 which were paid to the Defendant from Auragem’s bank account on 8 May 2018 (the “Auragem Money Transfers”).

6.  It is important to note that the Auragem Money Transfers were made five days after the Written Record of the Sole Director of the Company was executed.   

7.  On 24 May 2018, Auragem was voluntarily wound-up pursuant to a special resolution passed by Mr Sonu and the First Creditors’ Meeting held on 24 May 2018.  The Plaintiffs were appointed as the joint and several liquidators of Auragem.

8.  The Plaintiffs submitted that according to the ledger account provided by Mr Sonu for the period from 1 April 2017 to 19 April 2018, the Plaintiffs were not able to find any record of Auragem that it was indebted to the Defendant at any material time.

9.  On 24 July 2018, the Plaintiff issued a letter to the Defendant requesting details and information regarding the Auragem Money Transfers.  

10.  On 27 August 2018, Mr Tamer of the Defendant replied by email and stated that the Auragem Money Transfers were made to settle payments due to the Defendant for the liquidation consulting services that it had provided to Auragem and provided an invoice (No. A0018).

11.  On 7 September 2018, the Plaintiffs by email requested the Defendant to provide supporting information and documents.  In the said email, it is stated that:

“ Due to the substantial amount transferred to Sure Lead Limited,further documents are needed. We shall be grateful if you could provide us with the following information and documents:-

1. Engagement letter for the alleged services provided (if any);

2. The related charging scales;

3. Details and all records of the alleged consulting services provided; and

4. Detailed breakdown of the bill of costs/time sheet.”

12.  On 4 October 2018, Mr Tamer of the Defendant replied and confirmed that:

(1)  There was no engagement letter;

(2)  The Defendant “had in person meetings in March and April to discuss the scope” and “simply discussed different briefs for Sure Lead to execute.”

(3)  That charges were calculated on project basis and they “spent a lot of timed resources preparing and working on scenarios that the companies did not end up taking”, “due to the companies entering liquidation and not pursuing our options (they) were unable to finalise”.

(4)  There was no charging scale, breakdown of the bill of costs or time sheet.

13.  The Plaintiffs referred to a balance sheet provided by Mr Sonu which covers the period of 1 April 2017 to 18 April 2018 for the purpose of discussion and preparation of the statement of the financial position of Auragem before its first creditors’ meeting (“the April Balance Sheet”).The Plaintiffs pointed out that the Defendant is not on the list of sundry creditors in the April Balance Sheet.  Further, according to the ledger for the period of 1 April 2017 to 19 April 2018 provided by Mr Sonu, there is no record of the Defendant or any unsettled service provided by any third party.

14.  Accordingly, the Plaintiffs consider that the alleged services provided by the Defendant did not exist and the Auragem Money Transfers should be considered as gifts from Auragem to the Defendant constituting transactions at an undervalue within the meaning of sections 265D and 266B of the Ordinance.  Alternatively, as Auragem was insolvent at the material time, the said Auragem Money Transfers were transactions which constitute unfair preference within the meaning of sections 266 and 266B of the Ordinance.

Eternal

15.  Eternal is a Hong Kong Company incorporated on 18 December 2002.  Its sole director is Mr Ashish Bajranglal Bagaria (“Mr Ashish”).

16.  Similarly, in April 2018, Mr Ashish contacted the Plaintiffs and discussed the proposed liquidation of Eternal.

17.  Similarly, on 3 May 2018, Mr Ashish executed a “written record of the decision of the sole director of the Company passed pursuant to the Company’s Articles of Association” (the “Written Record of the Sole Director”) to call an extraordinary general meeting to have Eternal wound up voluntarily.

18.  From the bank statements and transfer advices of Eternal,the Plaintiffs found out that a transfer in the sum of HK$1,500,000 was paid to the Defendant from Eternal’s bank account also on 8 May 2018 (the “Eternal Money Transfer”).

19.  It is important to note that the Eternal Money Transfer was also made five days after the Written Record of the Sole Director of the Company was executed.

20.  On 24 May 2018, Eternal was voluntarily wound-up pursuant to a special resolution passed by Mr Ashish and the First Creditors’ Meeting held on 24 May 2018.  The Plaintiffs were appointed as the joint and several liquidators of Auragem.

21.  The Plaintiffs submitted that according to the ledger account provided by Mr Ashish for the period from 1 April 2017 to 19 April 2018,the Plaintiffs were not able to find any record of Eternal that it was indebted to the Defendant at any material time.

22.  On 23 August 2018, the Plaintiff issued a letter to the Defendant requesting details and information regarding the Eternal Money Transfer.

23.  On 7 September 2018, the Plaintiffs by email requested the Defendant to provide supporting information and documents.  In the said email, it is stated that:

“ Due to the substantial amount transferred to Sure Lead Limited,further documents are needed. We shall be grateful if you could provide us with the following information and documents:-

1. Engagement letter for the alleged services provided (if any);

2. The related charging scales;

3. Details and all records of the alleged consulting services provided; and

4. Detailed breakdown of the bill of costs/time sheet.”

24.  On 4 October 2018, Mr Tamer of the Defendant replied and confirmed that:

(1)  There was no engagement letter;

(2)  The Defendant “had in person meetings in March and April to discuss the scope” and “simply discussed different briefs for Sure Lead to execute.”

(3)  That charges were calculated on project basis and they “spent a lot of timed resources preparing and working on scenarios that the companies did not end up taking”, “due to the companies entering liquidation and not pursuing our options (they) were unable to finalise”.

(4)  There was no charging scale, breakdown of the bill of costs or time sheet.

25.  Mr Tamer of the Defendant also attached in the email an invoice (No. A0024) dated 11 April 2018 in the sum of HK$1,500,000 being “consulting fees” payable by Eternal.

26.  The Plaintiffs also referred to a balance sheet provided by Mr Ashish which covers the period of 1 April 2017 to 25 April 2018 for the purpose of discussion and preparation of the statement of the financial position of Eternal before its first creditors’ meeting (“the Eternal April Balance Sheet”).  The Plaintiffs pointed out that the Defendant is not on the list of sundry creditors in the Eternal April Balance Sheet.  Further, according to the ledger for the period of 1 April 2017 to 25 April 2018 provided by Mr Ashish, there is no record of the Defendant or any unsettled service provided by any third party.

27.  Accordingly, the Plaintiffs consider that the alleged services provided by the Defendant did not exist and the Eternal Money Transfer should be considered as gifts from Eternal to the Defendant constituting transactions at an undervalue within the meaning of sections 265D and 266B of the Ordinance.  Alternatively, as Eternal was insolvent at the material time, the said Eternal Money Transfer was a transaction which constitutes an unfair preference within the meaning of sections 266 and 266B of the Ordinance.

28.  It has not escaped this Court’s attention that there are striking similarities between the two cases, in particular, in terms of timing.

Preliminary objection by the Plaintiffs

29.  The Plaintiffs first raised a preliminary objection that the Affirmation of Jeffrey Paragas filed in the Auragam and Eternal proceedings are defective and cannot be relied on by the Defendant (the “Paragas Affirmations”).  It was submitted that the jurat of the Paragas Affirmations does not state where those affirmations have been affirmed and hence falls foul of Order 41, rule 1(8) of the Rules of the High Court, Cap 4A.

30.  I am of the view that this is not a meritorious argument.  Mr Ho for the Defendant rightly pointed out that the Plaintiffs had already confirmed in March 2019 that they would not object to the Defendant’s reliance on the Paragas Affirmations:

(1)  In the Defendant’s solicitors’ letter dated 6 March 2019, it is stated that:

“ If you maintain that our client may not rely on the Paragas affirmations, please say so now and we will make the necessary application. It would be unsatisfactory for such issue to remain undetermined as any substantive hearing approaches.”

(2)  The Plaintiffs’ solicitors replied on 8 March 2019 and stated that:

“ our client will not take issue on your clients’ late filing of the Affirmations of Mr Paragas.”

31.  I agree with Mr Ho’s submission that it is reasonable for the parties to expect that had it been intended for any procedural objections to be taken in respect of the Paragas Affirmations, they ought to have been taken at an early stage so that the same could be dealt with and/or rectified. The Plaintiffs’ approach of keeping cards up their sleeve in relation to procedural irregularities which could be easily rectified is not to be endorsed. The Court is interested in resolving the real issues.  Litigation should not be viewed as a game.

32.  Mr Ho for the Defendant also submitted that in any event the Paragas Affirmations are not defective.  I do not see the need to deal with the arguments in detail save to say that I am inclined to agree with Mr Ho’s submissions.  In any event, even if Mr Ho’s submissions are wrong, I accede to his request to exercise this Court’s discretion under Order 41, rule 4 of the Rules of the High Court, Cap 4A to grant leave for the Defendant to rely on the Paragas Affirmations.

TRANSACTIONS AT UNDERVALUE

Applicable legal principles

33.  Sections 265D and 265E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (the “Ordinance”) provide:

“ 265D. Transactions at an undervalue voidable in certain circumstances

(1) This section applies in relation to a company if the company goes into liquidation.

(2) If the company has at a relevant time (within the meaning of section 266B) entered into a transaction with a person at an undervalue, the liquidator may apply to the court for an order under subsection (3).

(3) Subject to section 266C, on an application under subsection(2), the court may make an order that it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.

(4) The court must not make an order under subsection (3) if it is satisfied that—

(a) the Company entered into the transaction in good faith and for the purpose of carrying on its business; and

(b) at the time the company did so, there were reasonable grounds for believing that the transaction would benefit the company.

265E.  Meaning of transaction at an undervalue

A company enters into a transaction with a person at an undervalue if—

(a)   the company makes a gift to that person, or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration; or

(b)   the company enters into a transaction with that person 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 company.”

(emphasis added)

34.  The burden rests on the Plaintiffs to establish:

(1)  There is a “transaction at an undervalue” in that it falls within one of the categories under section 265E of the Ordinance.

(2)  The transaction was entered into at any time not more than five years prior to the commencement of the Companies’ winding-up.

(3)  The company was insolvent at the time the transaction was entered into; or the company became insolvent in consequence of the transaction itself.

35.  I agree with Mr Ho for the Defendant that it is important to note that the only basis on which the Plaintiffs assert that the Auragem Money Transfers and the Eternal Money Transfer were transactions at an undervalue is that the said transfers were gifts from Auragem and Eternal (the “Companies”) to the Defendant.  The Plaintiffs have not relied on any other grounds.

36.  Mr Ho for the Defendant submitted that insofar as the Plaintiffs solely relied on the gift limb of section 265E of the Ordinance,the Plaintiffs’ case on transaction at an undervalue must fail. I agree. Where it is asserted that the transaction in question is a gift, it must be shown that the debtor intended to make a gift and, in the absence of such intention, it does not suffice that no consideration was received such that the transaction was effectively a gift.  (See Re Hampton Capital Ltd[2016] 1 BCLC 374 at §36 per Deputy High Court Judge George Bompas QC) and Transaction Avoidance in Insolvencies (3^rd ed) at §4.15.)

37.  In order to constitute a gift:

(1) There must have been an intention by the donor to make an immediate present gift; and the gift must be perfected either by delivery of possession or by deed. (See The Law of Personal Property (2^nd ed) at §17-001.)

(2)  In other words, there must be a voluntary transfer from the donor to the donee with the full intention that the property would not return to the donor.  The key element is the intention to gift.  It must be shown that the donor intends there and then to give the property to the donee.  (See Young Tin Kin Kenneth v Lau Lan Fong Nancy HCA 1545/2004, unreported, 6 September 2006 at §§52 – 54, per Deputy High Court Judge Muttrie and Wu Wing Ching v Ding Yufang HCMP 2471/2012, unreported, 16 July 2014 at §24 per Recorder Pow SC.)

38.  In Re Hampton Capital Ltd[2016] 1 BCLC 374, Deputy High Court Judge George Bompas QC at §36 said:

“ The difficulty I have with the Administrators’ s 238 claim is that on the evidence Mr Commerford did not intend to make a gift to Elite when he instructed any of the payments;and I have no ground for thinking that Mr Kusimo did so either. Mr Commerford’s evidence, indeed, is that his intention was positively not to have the Company make a gift.  If it is Mr Mayweather’s intention which is in point, the likely inference to be drawn is that he intended to misappropriate the money and had some arrangement with Elite which might help him in that regard.  I reach this conclusion because Mr Commerford told me, and it is therefore the Claimant’s case, that there had been payments which, on Mr Mayweather’s instruction, he (Mr Commerford) made to himself so that payments could be made to Mr Mayweather through a casino.  Also the payments to Mr Kanzira, which I will discuss later, were made for the personal benefit of Mr Mayweather,including to enable him to gamble, and not as gifts to Mr Kanzira.”

(emphasis added)

Analysis

39  Ms Fong for the Plaintiffs did not seek to prove the requisite intention to gift.  Instead her main submission was:

“ The key issue to be determined is whether D has provided the Alleged Services to the Companies, which in turn resolves the issue of whether the Companies received any consideration for the Money Transfers.” 

40.  Properly analysed, the Plaintiffs’ case is that there was no services provided.  First, it is not a case that the money transfers were gifts. It is not even a case that there was a transaction “on terms that provide for the company to receive no consideration.”

41.Given that gifts was the only ground relied upon by the Plaintiffs in both originating summonses, I cannot see how the Plaintiffs’case can even get off the ground given that they did not seek to prove the requisite intention to gift.  On this ground alone, the Plaintiffs’ claim on transactions at an undervalue should be dismissed.

42.  As to the limb of a transaction on terms that provide for the company to receive on consideration, the Plaintiffs’ case is that there were no transactions at all.  Hence, I cannot see how the Plaintiffs can rely on this limb.  Mr Ho for the Defendant submitted that a transaction other than a gift “involves at least some element of dealing between the parties to the transaction”.  (See Transaction Avoidance in Insolvencies (supra) at §§4.08 – 4.09.)

43.  In Re Hampton Capital Ltd (supra) at §38, Deputy High Court Judge George Bompas QC said:

“ I am aware that s 436 of the 1986 Act contains a definition of ‘transaction’ as including a ‘gift, agreement or arrangement’ and references to ‘entering into a transaction’ are to be construed ‘accordingly’.  Nevertheless, I cannot accept that the mere transmission of money, the mere making of a payment, without any form of dealing between the paying company and the payee,can constitute the entering into of a transaction by the company with the payee (at any rate where the transaction is not a ‘gift’). What is required, on the language of s 238(4), is the entering of a transaction between two parties.  Without straining the language of the section, this must require some engagement, or at least communication, between the two parties and not merely a disposition of money which results in one party’s money landing up in the bank account of the other without anything said or done by that other.”    (emphasis added)

44.  Ms Fong for the Defendant did not make submissions on what constitutes ‘transaction’ in the present cases.  That should really be the end of analysis on this issue.

45.  The Plaintiffs’ case is that the alleged services were never provided by the Defendant.

46.  The Defendant’s case in respect of the Auragem Money Transfers is that:

(1)  In February 2018, Mr Tamer of the Defendant was contacted by one of his business contacts in New York, a Mr Jeffrey Paragas and said that there were two potential situations in Hong Kong where the Defendant’s services would be of use.  Mr Tamer was told that there were two diamond traders based in Hong Kong which may wish to liquidate its stock.

(2)  In mid-February 2018, Mr Tamer of the Defendant had a telephone call with Mr Sonu during which Mr Tamer was told that Mr Sonu wanted to dispose of the stock outside Hong Kong. Mr Sonu made it clear that he wanted that to be carried out discretely without notifying any of the major diamonds traders in Hong Kong.

(3)  After the initial call, on or around 18 February 2018, Mr Sonu and Mr Tamer met at the office of Auragem in Hung Hom,Kowloon, Hong Kong.  Mr Tamer was asked to provide his advice on how Auragem could receive the best price for its stock.  Mr Tamer outlined the ways the Defendant could help Auragem to identify buyers on an “anonymous” basis. Mr Sonu told Mr Tamer that he wished the Defendant could sell Auragem’s stock at about US$3,000,000.

(4)  At the end of the first meeting, Mr Tamer indicated to Mr Sonu that the Defendant would charge on a per-project basis and the fees are payable regardless of whether the client adopts the Defendant’s advice.  Mr Tamer also gave Mr Sonu an estimate of the Defendant’s fees to work on the project at about US$150,000 to US$200,000.

(5)  Shortly after the first meeting, Mr Sonu contacted Mr Tamer by phone and confirmed the engagement of the Defendant. It is Mr Tamer’s evidence that “the Defendant was specifically told by Mr Sonu to refrain from producing any documents regarding the potential sale”.

(6)  After the Defendant’s engagement was confirmed, Mr Tamer attended Auragem’s office again to discuss strategy and discuss how his plan should be implemented.  It was then agreed a ‘private’ approach should be taken and Mr Tamer would identify the most appropriate buyer outside of Hong Kong who would buy the stock based on Mr Tamer’s recommendation and appraisal.

(7)  Mr Tamer then analysed the stock in detail in early March 2018.  He attended Auragem’s office personally for approximately three days to conduct an in-depth analysis of the stock.

(8)  He inspected Auragem’s stock at around the same time he reviewed Eternal’s stock.  This is because the Defendant’s engagements were confirmed during the same period.  The engagement of Eternal was confirmed before Auragem’s and he therefore started the inspection of Eternal’s stock first. The whole inspection process for both companies lasted for approximately seven to eight days.

(9)  After his in-depth analysis of the stock, Mr Tamer conducted market research in mid-March 2018 on the market value of the stock he reviewed.  He conducted market research for both companies at the same time.  He conducted online research,visited retail shops, visited or contacted his contacts who are in the wholesale business and his contacts generally.  It took approximately 10 days for him to complete the market research and from the research, his then estimate of the value of Auragem’s stock was about US$2,000,000.

(10)  After he finished conducting the market research, without disclosing who the potential seller was, he called a few of his business contacts to see if they were interested in purchasing the stock.

(11)  Ultimately, he identified Saumil Diam LLC by the end of March 2018 which made an initial offer of US$1,700,000 to purchase Auragem’s stock.

(12)  Mr Tamer called Mr Sonu in late-March 2018 to inform him of Saumil Diam LLC’s offer.

(13)  In around early April 2018, Mr Sonu called Mr Tamer to inform him that Auragem is “going into a different direction”and asked him not to divulge any information he obtained through the engagement of the Defendant.  He also asked Mr Tamer to present him with an invoice for the services rendered by the Defendant.

(14)  Mr Sonu specially asked Mr Tamer to record the services provided simply as “consultancy fee” and not to provide any details.

(15)  Thereafter, Mr Tamer sent out invoice No. A0018.

(16)  Mr Tamer confirmed that after the Defendant presented the invoice, prior to its settlement, he did not put any pressure on Mr Sonu to make payment because it was settled within one month which is quick based on his experience working in the industry for almost 20 years.

47.  The Defendant’s case in respect of the Eternal Money Transfer is broadly similar:

(1)  Eternal was also referred to the Defendant by Mr Jeffrey Paragas.

(2)  In mid-February 2018, Mr Tamer had a telephone call with Mr Ashish.  Again, Mr Ashish made it clear that he wanted to sell his stock discretely.

(3)  Also on or around 18 February, Mr Tamer met Mr Ashish at the office of Eternal in Hung Hom, Kowloon, Hong Kong.

(4)  Mr Ashish also wanted the Defendant to help Eternal to sell its stock at the best price.  Mr Ashish wanted Mr Tamer to assist him in total secrecy and even wanted the Defendant to represent to potential buyers that the Defendant was the seller of the stock.

(5)  Mr Ashish also gave Mr Tamer his estimate that the stock he wished the Defendant to sell on its behalf had a value of about US$2,200,000.

(6)  Similarly, they discussed about how the Defendant would approach the project and how long the entire process would be. In the end, they agreed to take a “private” approach where Mr Tamer would identify the most appropriate buyer outside of Hong Kong that would buy the stock, again, based on Mr Tamer’s recommendation and appraisal.

(7)  Mr Tamer explained to Mr Ashish that the Defendant would charge on a per-project basis and the fees are payable regardless of whether the client adopts the Defendant’s advice. Mr Tamer gave Mr Ashish an estimate that the Defendant’s fees to work on the project would be in the region of US$200,000 to US$250,000 based on his estimated value of Eternal’s stock.  

(8)  Then Mr Tamer similarly carried out his in-depth inspection and marketing research.  He said that it took him approximately 10 days to complete the market research and from his research, his then estimate of the value of Eternal’s stock was about US$1,900,000 to US$2,000,000.

(9)  Again, ultimately, Mr Tamer identified Saumil Diam LLC by the end of March 2018 which made an initial offer of US$2,000,000.

(10)  Mr Tamer called Mr Ashish in late March 2018 to inform him of Saumil Diam LLC’s offer but Mr Ashish then informed him that Eternal is not interested in the private sale.

(11)  Mr Tamer then presented the Defendant’s invoice, No. A0024.

(12)  Mr Tamer also confirmed that he did not put any pressure on Mr Ashish to make payment because it was settled within one month which is quick based on his experience working in the industry for almost 20 years.

48.  Ms Fong for the Plaintiffs submitted that the Defendant’s case in relation to both the Auragem Money Transfers and the Eternal Money Transfer is totally incredible for a number of reasons:

(1)  Mr Tamer did not have the expertise and connection to provide the alleged consulting services.

(2)  There are inconsistencies on the scope of the Defendant’s services as set out in Mr Tamer’s email dated 4 October 2018 and his affirmations.

(3)  The money transfers and the purported invoices were a scam.

49.  I do not propose to go into every single detail of the Plaintiffs’ forensic analysis which is fully set out  in Ms Fong’s two skeleton submissions save that I agree that there are sufficient materials for this Court to cast doubt on the genuineness of the services allegedly provided by the Defendant to Auragem and Eternal.

50.  I am also prepared to accept that the following facts are undisputed:

(1)  There was no formal engagement letter;

(2)  There is a total absence of documentary evidence in relation to the alleged services provided (save for the invoices No. 0018 and No. 0024);

(3)  There was no breakdown, charging scale or time sheet to calculate the consultancy fees;

(4)  The Defendant has no physical address in Hong Kong;

(5)  No pressure was being put on Auragem and Eternal to settle the same invoices;

(6)  There are four more unrelated companies in liquidation which requested for the same service from the same entity,the Defendant, around practically the same time and all four companies abruptly ended the engagement without receiving any practical benefit for the alleged services.  Nonetheless,these companies paid the Defendant in full;

(7)  There was no record of the alleged services in the Companies’ ledger accounts;

(8)  The Defendant does not appear on the Companies’ list of sundry creditors as at 25 April 2018; and

(9)  The Companies were insolvent at the material time when the Auragem Money Transfers and the Eternal Money Transfer were made.

51.  Mr Ho Man Kit, one of the Plaintiffs, on oath, deposed that:

“ 27.   ... From my auditing experience, this is not uncommon for the profit margin for whole-selling such types of low-end diamonds. It is unbelievable that the Company would have agreed to pay 5% of the total value to the Defendant as a consulting fee, notwithstanding that the fact the service was not needed at the end.”

52.  Ms Fong for the Plaintiffs further submitted that according to Mr Ho Man Kit, the Plaintiffs have conducted background investigation and obtained evidence showing that the Companies are scam vehicles set up in a money laundering scheme.

53.  There are suspicious and disquieting circumstances in the present cases which merit investigation, but I do not see how this Court can determine the issue of fraud and/or sham transactions made for no consideration on paper without proper pleadings and cross-examination. I cannot see how Mr Ho’s submission that the Plaintiffs are, in effect,advancing a case of fraud against the Defendant can be faulted.  The Plaintiffs are in effect saying that (1) the Defendant has dishonestly fabricated a story that it provided the alleged services in consideration of the Auragem Money Transfers and the Eternal Money Transfer; and that (2) the invoices produced were fake in that they were a sham which did not reflect the true intentions of the parties to the alleged transactions.

54.  We have to call a spade a spade.  The Plaintiffs are not saying that there existed any intention to make a gift to the Defendant.  They are saying that there were no alleged services provided by the Defendant and hence there was no consideration received by Auragem and Eternal.  In order for the Court to arrive at that conclusion, the Court must be satisfied at this stage that no such services were provided and Mr Tamer lied to this Court. It will be incorrect for this Court to make a summary determination of such serious issues on paper.  Ms Fong for the Plaintiffs submitted that this Court can make such determination according to the list of inconsistencies that she identified in her two skeleton submissions.  I do not think that is correct and allowable.

55.  The following propositions of law are well established:

(1)  Allegations of fraud must only be pleaded when there is sufficient evidence.  They must then be specifically pleaded distinctly and with the utmost particularity.  (See ADS v Wheelock Marden & Co Ltd[1994] 2 HKC 264, 270B–C per Bokhary JA (as he then was)).

(2)  The Court will not allow allegations of fraud or contempt to be made without proper evidence and if they are made irresponsibly, the Court will exercise its inherent jurisdiction to strike out the same.  (See Choy Bing Wing v Chief Executive of HKSAR[2006] 1 HKLRD 666 at §9 per Lam J (as he then was).)

(3)  The more serious the act or omission alleged, the more inherently improbable must it be regarded.  The more inherently improbable it is regarded, the more compelling will be the evidence needed to prove it on a preponderance of probability.  (See Solicitor (24/07) v Law Society of Hong Kong (2008) 11 HKCFAR 117 at §116 per Bokhary PJ.)

(4)  Where the Court is invited to reach a conclusion of fraud as an inference to be drawn on the basis of circumstantial evidence,any such inference must be properly grounded in the primary facts found.  In Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387, Ribeiro PJ at §185 said:

“ ... Where, as in the present case, the court is invited to reach a conclusion of forgery as an inference to be drawn on the basis of circumstantial evidence, any such inference must be properly grounded in the primary facts found.  The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question. ...”

56.  Given the allegation of fraud, the Plaintiffs have never applied:

(1)  to continue the present proceedings as if begun by writ pursuant to Order 28, rule 8 of the Rules of the High Court,Cap 4A and to serve pleadings in order to address the serious factual disputes between the parties; and

(2)  for cross-examination for witnesses, pursuant to Order 28, rule 4 of the Rules of High Court, Cap.4A.

57.  The substantial hearing of these proceedings was adjourned on 30 August 2019 and resumed on 11 September 2019.  The Plaintiffs decided not to take out proper applications so that the issues of fraud and/or sham transactions could be properly investigated and determined.

58.  Mr Ho for the Defendant submitted that the Court cannot and should not be expected to resolve serious factual disputes under the originating summons procedure.  Such procedure is not and has never been intended to be a shortcut to resolve disputes which can only be properly dealt with in a writ action and/or with proper cross-examination of witnesses at a trial.  (See Ip Kam Wah v Fair City Group Ltd[2005] 4 HKLRD 168 at §8 per Deputy High Court Judge To (as he then was).)  I agree.

59.  Mr Ho for the Defendant also persuasively submitted that by way of analogy, had the Plaintiffs commenced the present proceedings by way of a writ action, they would have been prevented from obtaining summary judgment under Order 14 of the Rules of the High Court, Cap 4A given the existence of the fraud allegations.  On that basis, it would be remarkable if indeed they could achieve the same result, namely, a final determination based upon fraud allegations without a full trial attendant with cross-examination, by using and pursuing the presenting proceedings. I also agree.

60.  Additionally, Mr Ho for the Defendant also submitted that the Plaintiffs have not adduced any direct evidence in response to the Defendant’s evidence.  In particular, there is no evidence before the Court from any person associated with the Companies that the services did not exist or were not provided in the manner as Mr Tamer deposed. Notwithstanding the absence of such direct evidence, the Plaintiffs are inviting this Court to find that the Defendant engaged in fraudulent conduct and fabricated the services.  This is unsatisfactory because the Plaintiffs carry the burden of proof to make good their claims under sections 265D and 265E of the Ordinance and they are advancing a case of fraud.

61.  Further, Mr Ho for the Defendant submitted that the Plaintiffs have conspicuously failed to obtain any evidence from the sole director of each of Auragem and Eternal.  This is surprising, given that each of these individuals is likely to have personal knowledge of the Auragem Money Transfers and the Eternal Money Transfer.  This is no suggestion that both Mr Soun and Mr Ashish were not cooperating with the Plaintiffs.  Even if they are not cooperating, the Plaintiffs should explain the same to the Court.

62.  Finally, Mr Ho for the Defendant submitted and I agree that the Plaintiffs have ample opportunities to apply to continue these proceedings as if began by writ and for cross-examination.

63.  Mr Ho for the Defendant has set out in his very helpful written submissions on why the Defendant’s evidence is consistent with bona fide commercial transactions and valuable considerations were provided.  Again, for the same reasons as set out above, I do not find it necessary to deal with each and every of Mr Ho’s submissions on this issue save to say that I do not find it possible and proper to determine whether valuation considerations were provided on the existing evidence without the benefit of pleadings and cross-examination.  Mr Ho for the Defendant has offered plausible explanations in response to Ms Fong’s suggested inconsistencies.  These are matters that this Court cannot not resolve summarily given the seriousness of the allegation.

64.  In reply, Ms Fong for the Plaintiffs submitted that there is no allegation of fraud.  The Plaintiffs’ case is simply that the money transfers were a sham, ie, did not truly reflect the nature of the transaction between the Companies and the Defendant.  I reject this submission.

65.  First, the Plaintiffs’ case inherently carries with it an element of dishonesty on the part of the Defendant.  Secondly, a sham exists where:

(1)  the parties intended that the documents or acts they have done would not create the legal rights or obligations they appear to create; and

(2)  it was intended that the documents or acts would mislead a third party into believing the parties had created those rights and obligations.

66.  Again, I do not see how this Court can determine the above issues without pleadings and cross-examination.  It is simply wrong for the Court to embark on a determination on such issues on a summary basis.

67.  For all the above reasons, the Plaintiffs’ claims on transactions at an undervalue are dismissed.

UNFAIR PREFERENCES

Applicable legal principles

68.  Sections 266 and 266A of the Ordinance provide:

“ 266.     Unfair preferences voidable in certain circumstances

(1)   This section applies in relation to a company if the company goes into liquidation.

(2)   If the company has at a relevant time (within the meaning of section 266B) given an unfair preference to a person,the liquidator may apply to the court for an order under subsection (3).

(3)   Subject to section 266C, on an application under subsection (2), the court may make an order that it thinks fit for restoring the position to what it would have been if the company had not given that unfair preference.

(4)   The court must not make an order under subsection (3) unless the company was influenced, in deciding to give that unfair preference, by a desire to produce in relation to that person the effect mentioned in section 266A(1)(b).

(5)   A company which has given an unfair preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the unfair preference was given is presumed, unless the contrary is shown, to have been influenced, in deciding to give it, by the desire mentioned in subsection (4).

266A.  Meaning of unfair preference

(1)   A company gives an unfair preference to a person if—

(a)   that person is –

(i)   one of the company’s creditors; or

(ii)  a surety or guarantor for any of the company’s debt or other liabilities; and

(b)   the company does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position that person would have been in if that thing had not been done.

(2)   For the purposes of subsection (1)(b), a company goes into insolvent liquidation if it goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

(3)   The fact that something has been done pursuant to the order of any court does not, without more, prevent the doing or suffering of that thing from constituting the giving of an unfair preference.”.

(emphasis added)

69.  As a matter of law, the Plaintiffs must establish:

(1)  An “unfair preference” was given to the Defendant within the meaning of section 266A of the Ordinance, in that:

(a)  the Defendant was one of the Companies’ creditors; and

(b)  the Companies did anything or suffer anything to be done which “has the effecting of putting the Defendant into a position which, in the event of the Companies going into insolvent liquidation, will be better than the position the position that the Defendant would have been in if that thing had not been done.”

(2)  At the time of the giving of the unfair preference, the Companies, acting by its directors, were influenced in deciding to make the Auragem Money Transfers and the Eternal Money Transfer by a desire to produce the effect of putting the Defendant into a better position than it would have been in had the unfair preference not been given.

(3)  The unfair preference was given at any time not more than six months prior to the commencement of the Companies’ winding-up.

(4)  The Companies were insolvent at the time the unfair preference was given or the Companies became insolvent in consequences of the giving of the unfair preference.

70.  I accept that as a matter of fact the settlement of the invoices through the Auragem Money Transfers and the Eternal Money Transfer to the Defendant when the Companies were in fact insolvent means that assets of the Companies have been distributed to the Defendant prior to the Companies’ secured and other unsecured creditors, not in pari passu as would have been the case in the usual liquidation process.

71.  Hence, the said money transfers have the effect of putting the Defendant in a better position than it would have been in, had the said money transfers not been made and the Defendant had paid in accordance with the statutory fixed priority during the liquidation process.

72.  Ms Fong for the Plaintiffs submitted that other than paying office rent, the Plaintiffs cannot identify any major payment made by the Companies to any other creditors since March 2018.

73.  As to the requisite mental elements, Kwan J (as she then was)in Re Phantom Records Ltd HCMP 2770/2003, unreported, 7 December 2006 at §§86 – 88 said:

“ 86.       In relation to (3), two elements are required to be established: a desire to produce the effect of improving the creditor’s position in an insolvent liquidation, and such desire had influenced the decision to enter into the transaction.

87.       A desire of improving the creditor’s position in an insolvent liquidation is a subjective state of mind. Desire is different from intention.  Whereas intention is objective in that a person is taken to intend the necessary consequences of his actions, a person is not to be taken as desiring all the necessary consequences of his actions and one can choose the lesser of two evils without desiring either (Re MC Bacon Ltd [1990] BCLC 324 at 335f to 336a; Re Hau Po Man Stanley, [2005] 2 HKC 227 at 233C).  There is often no direct evidence of the requisite desire and the existence of this state of mind may be inferred from all the relevant circumstances, even ‘contrary to the denials of those whose state of mind is inquired into to determine what state of mind is attributed to the company making the decision” (Re Fairway Magazines Ltd [1993] BCLC 643 at 649f).

88.       As for influence, this requirement is satisfied if it was one of the factors which operated on the minds of those made the decision.  It need not have been the only factor or even the decisive one.  It is not necessary to prove that if the requisite desire had not been present, the company would not have entered into the transaction (Re MC Bacon Ltd, supra at 336c to d).”

(emphasis added)

74.  Mr Ho for the Defendant submitted that the issuance of the invoices amounted to genuine pressure.  I do not agree.  The issuance of an invoice is just a normal step in a commercial transaction.  It evidences that an amount either would be due from the date of the issuance of the relevant invoice or within a certain period as stated in the invoice.

75.  On the facts of the present case, on balance, I am of the view that the Plaintiffs have established that the Auragem Money Transfers and the Eternal Money Transfer were unfair preference and as such should be paid back to the Companies.

76.  First and foremost, the timing of the Auragem Money Transfers and the Eternal Money Transfer is peculiar.  They were made after the sole directors of the Companies had determined to wind up the Companies on a voluntarily basis on 3 May 2018.  Payments were made on 8 May 2018 albeit that the winding-up resolutions, as a matter of formality, were only formally passed on 24 May 2018.  One would have expected that once decisions were made to wind up a company on a voluntarily basis, all the creditors should be paid on an equal basis unless there were genuine pressure from any particular creditor.

77.  Secondly, other than paying for office rental expenses, the Plaintiff cannot identify any major payments made by the Companies to any creditors other than the Defendant since March 2018.  That begs the question of why only the Defendant’s debts were paid in full at a time when the Companies were insolvent and there were many other creditors.

78.  Thirdly, Mr Tamer of the Defendant positively confirmed that other than the invoices, the Defendant did not apply any pressure to secure a payment which he considered to be quick according to his 20 years of experience in the industry.

79.  Fourthly, the Companies were then insolvent and had decided to be wound up on a voluntarily basis.  In the absence of any other credible explanations, I agree that other than a desire to prefer, there is no other plausible explanation as to why only the Defendant was paid in full and not any other creditors. (See Re Cosy Seal Insulation Ltd (in administration) [2016] 2 BCLC 319 at §149 per Judge Behrens)

80.  Accordingly, I am of the view that the relevant desire to prefer is established and the Companies were influenced by such desire to prefer to make the Auragem Money Transfers and the Eternal Money Transfer to the Defendant.  Such desire to prefer was at least one of the factors which operated in the minds of those making the decision to arrange the Auragem Money Transfers and the Eternal Money Transfer.

DISPOSITION

81.  For all of the reasons stated above, I make the following orders:

(1)  Paragraph 1 of both Originating Summonses in HCMP 2019 and HCMP 2021 of 2018 be dismissed;

(2)  Declaration in terms of paragraph 2 of both Originating Summonses in HCMP 2019 and HCMP 2021 of 2018 is granted;

(3)  An order that the Defendant do repay the sum of US$180,400 and HK$1,500,000 to the Plaintiffs.

(4)  The Plaintiffs is entitled to interest at the rate of HSBC’s prime rate plus one percentage from 8 May 2018 until the date of this judgment and thereafter at the judgment rate.

82.  As far as costs is concerned, as the Plaintiffs’ claims under sections 265D and 266B of the Ordinance are dismissed, I make a costs order nisi that there be no order as to costs.  The costs order nisi will be made absolute within 14 days from the date of this judgment unless the parties take out applications to vary the same within the 14-day period.

83.  Finally, it remains for me to thank counsel, in particular, Mr Ho for the Defendant for his very able and helpful assistance to this Court.