MICHAEL JOHN SHORT AND ANOTHER v. CHAN FEI YIN

DCCJ 5023/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5023 OF 2007

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DECISION

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1.  The Plaintiffs applied for summary judgment under O. 86 of the Rules of the District Court, Cap. 336 against the Defendant for the return of deposit in the sum of $350,000.  For such application, Registrar Poon granted the Defendant unconditional leave to defend the Plaintiffs’ claim.  This is the appeal against the Registrar’s order.

2.  This case is about an aborted property transaction.  By a preliminary agreement dated 9 October 2007 (“the Subject Agreement”), the Plaintiffs agreed to purchase from the Defendant the property known as House G18, Stage IV, Marina Cove, 380 Hiram’s Highway, Sai King (“the Property”) at a price of $11,600,000.  An initial deposit of $350,000 was paid by the Plaintiffs upon the signing of the Subject Agreement.

3.  Before the execution of the formal agreement, the Plaintiffs discovered that the Property had previously been owned by the Defendant and his ex-wife, Madam Chow Yik Fun Fanny (“Madam Chow”), as joint tenants.  By an assignment dated 25 June 2005 (“the Assignment”), Madam Chow transferred her entire interest in the Property to the Defendant.

4.  The complication of this case arises out of a term in the Assignment which provided that Madam Chow was to receive no consideration for the transfer.  According to the Plaintiffs, transfer made in return for no consideration constitutes a defect in the Defendant’s title because it is liable to be set aside as a transaction at an undervalue pursuant to s. 49 of the Bankruptcy Ordinance, Cap. 6, if Madam Chow is adjudicated bankrupt upon the presentation of a bankruptcy petition on or before 24 June 2010. This defect, claims the Plaintiffs, was incapable of being cured before completion.

5.  After adopting such stance, the Plaintiffs, by a letter dated 30 October 2007, rescinded the Subject Agreement and demanded the return of the initial deposit of $350,000.  This was done without making any attempt to raise requisition against the title of the Property.  By a letter dated the following day, the Defendant’s solicitors accepted the Plaintiffs’ purported repudiation of the Subject Agreement and forfeited the deposit.  The Plaintiffs thereafter brought the present action against the Defendant to claim for various relief including the recovery of the deposit.

6.  In reply to the Plaintiffs’ claim, the Defendant contends that the Assignment should be regarded as having been made in consideration of a compromise made in the matrimonial proceedings, FCMC No. 8078 of 2004, involving the Defendant and Madam Chow (“the Matrimonial Proceedings”).  In fact, the Assignment was made pursuant to a consent order made by HH Judge Geiser in the Matrimonial Proceedings (“the Consent Order”), which provided that the Defendant had to make a lump-sum payment to Madam Chow.  Further under the Consent Order, Madam Chow would be released from all the obligations and liabilities under the guarantees given to a bank in respect of the Property and two limited companies.  As the transfer was made in consideration of these terms, the trustee in bankruptcy, says the Defendant, has no chance of setting aside the transfer as an undervalued transaction in the case that Madam Chow is adjudicated bankrupt upon the presentation of a bankruptcy petition within 5 years of the making of such transfer.

The Assignment and the Consent Order

7.  The two key documents in the present case are therefore the Assignment and the Consent Order.  For the purpose of this application, I need to set out the contents of these two documents in some details.

8.  The relevant part of the Assignment is listed out as follows:

“WHEREAS:-

1.  The Assignor [Madam Chow] and the Assignee [the Defendant] were prior to the Order hereinafter recited husband and wife.

2.  On the 28^th day of July 2004 the Assignor presented a Petition in Divorce being Matrimonial Cause No. 8078 of 2004 (hereinafter called “the said Divorce Action”) in the District Court of the Hong Kong Special Administrative Region against the Assignee praying (inter alia) for the dissolution of the marriage between the Assignor and the Assignee.

3.  By a Consent Summons dated the 17the day of August 2004 and made between the Assignor of the one part and the Assignee of the other part the Assignor and the Assignee agreed to an Order being made by the Court for the dissolution of the said marriage on the terms and conditions therein mentioned subject to the approval thereof by the said court.

4.  It is a term of the said Agreement that the Assignor shall assign to the Assignee the Property hereinafter more particularly described without consideration.

5.  On the 8^th day of December 2004 the said Court in the said Divorce Action ordered (inter alia) that said Consent Summons be made an Order of the said Court.

NOW THIS INDENTURE WITNESSETH that it pursuant of the said Order and in consideration of the premises the ASSIGNOR as BENEFICIAL OWNER ASSIGNS to the Assignee the land described in the SCHEDULE ………”

9.  On the other hand, the relevant part of the Consent Order is as follows:

“UPON the acknowledgement of the parties that the Petitioner [Madam Chow] shall be forthwith released from all obligations and liabilities under the Guarantees given to the Bank of China (Hong Kong) Limited in respect of the Property, Sunnyart Packaging Material Limited and Sunny Art Products Limited on or before the said transfer of the Property hereinafter mentioned in paragraph 4.

The Judge upon the making of the Decree Nisi herein ordered by consent that there be no order as to costs.

IT IS BY CONSENT ORDERED that:-

1.  the Petitioner and the Respondent [the Defendant] do have joint custody of the children ……… with care and control be granted to the Respondent.

2.  the Petitioner do have reasonable access to the said children ………

3.  the Respondent shall pay a lump sum of $700,000 to the Petitioner in the following manner:-

(a)   a sum of HK$200,000.00 shall be paid by the Respondent to the Petitioner upon the making of Decree Absolute;

(b)   the balance of HK$500,000.00 shall be paid by the Respondent to the Petitioner by 36 equal monthly instalments of HK$13,888.89 each, the 1^st instalment of which shall be paid on the date of pronouncement of decree absolute and the subsequent instalments shall be paid on the 1^st day of each and every month until full payment.

4.  the property now in the joint names of the Petitioner and the Respondent situate at [address of the Property] shall be transferred to the sole name of the Respondent on the date of the making of decree absolute.”

The Plaintiffs’ arguments and the provisions in the Bankruptcy Ordinance

10.  It is the Plaintiffs’ case that the title of the Property was defective as the trustee in bankruptcy can rely on s. 49 of the Bankruptcy Ordinance to set aside the Assignment.  The said section provides:

“(1) Subject to this section and sections 51 and 51A, where a debtor is adjudicated bankrupt and he has at a relevant time (defined in section 51) entered into a transaction with any person at an undervalue, the trustee may apply to the court for an order under this section.

(2)    The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that debtor had not entered into that transaction.

(3)    For the purposes of this section and sections 51 and 51A, a debtor enters into a transaction with a person at an undervalue if-

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

(b)   he enters into a transaction with that person in consideration of marriage; or

(c)    he 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 debtor.”

The “relevant time” referred to in s. 49 is defined in s. 51 to mean, in the case of a transaction at an undervalue, 5 years prior to the presentation of the bankruptcy petition.  Upon an application by the trustee in bankruptcy, the court can then rescind the transfer pursuant to ss. 49(2) and 51A(1).

11.  Mr. Man, counsel for the Plaintiffs, submits that s. 49 does not only impact upon a gift, but also a transaction “on terms that provide for the [bankrupt] to receive no consideration” (see: s. 49(3)(a)).  As clause 4 of the Preamble of the Assignment expressly provided that it was a term of the agreement between Madam Chow and the Defendant that the transfer was “without consideration”, this fact alone would trigger the application of s. 49.

12.  Further, Mr. Man submits that transfer made pursuant to a consent order made in matrimonial proceedings does not prevent it from being set aside as a transaction at undervalue, as s. 24 of the Matrimonial Proceedings and Property Ordinance, Cap. 192 provides:

“The fact that a settlement or transfer of property had to be made in order to comply with an order of the court under section 6 shall not prevent that settlement or transfer from being a settlement of property to which section 49 of the Bankruptcy Ordinance (Cap. 6) applies.”

Hence, transfer of a property made pursuant to a consent order in ancillary proceedings, says Mr. Man, does not necessarily preclude the same from being a transfer at undervalue for the purposes of the Bankruptcy Ordinance (see: Haines v Hill [2007] EWCA Civ 1284, at para. 67, per Rix LJ).  An example for setting aside such kind of transaction can be found in Re Kumar [1993] 1 WLR 224, where the consent order in fact stated that the property transfer was made in consideration of the settlement of the claim, yet in those circumstances, Ferris J, upon evaluation of all the evidence, concluded that the transfer was at an undervalue.

13.  According to Mr. Man, the evidence is clear in the present case.  The Assignment stated that the transfer was for no consideration, and there is no evidence adduced by the Defendant to contradict it or as to why the Assignment contained such a statement.  Further, even if there is any parol evidence to contradict the Assignment, the Defendant is estopped by deed from asserting that consideration had indeed been given for the transfer of Madam Chow’s interest to him.  Hence, if the sale of the Property had gone through and the trustee in bankruptcy is to apply for an order under s. 49, the Plaintiffs would similarly be estopped from making an assertion contrary to the Assignment.  In addition, after the completion of the sale, there is no incentive for the Defendant to offer any assistance to the Plaintiffs to defend a claim by the trustee in bankruptcy.  This means that such transfer would be set aside and the Plaintiffs would be stripped of their interest in the Property.  The law should not, therefore, require the Plaintiffs to accept this title which involves a manifest possibility of litigation which cannot be excluded on the “very high standard of beyond reasonable doubt”.

Duty to show good title

14.  It is trite law that vendor in a property transaction must prove a good title to the property in question.  As to what constitutes a good title, a useful summary of the law can be found in paragraph 13.08 of The Annotated Ordinances of Hong Kong, Conveyancing and Property Ordinance (Cap 219):

“A ‘good title’ is one which can, at all times and in all circumstances, be forced upon an unwilling purchaser in an action for specific performance (Pyrke v Waddingham (1852) 10 Hare 1, Kan Wing Yau v Hong Kong Housing Society [1988] 2 HKLR 187).  A good title does not mean a perfect title, free from every possible blemish.  Whenever a dispute as to whether a title is defective arises, ‘it must be approached from the standpoint of a willing purchaser and a willing vendor, both possessed of reasonably robust common sense, both intending to see the transaction through to completion in terms of their bargain.’ (per Litton PJ in Mexon Holdings Ltd v Silver Bay International Ltd. [2000] 2 HKC 1 at 942, CFA).  The test of whether the vendor has discharged his obligation to prove good title is whether there is any risk of a successful challenge to his title, whether as result of a defect in title (for instance an undisclosed encumbrances) or because the title is defeasible (for instance by the exercise of a right of re-entry) see Re Heaysman’s and Tweedy’s Contract (1893) 69 LT 889, MEPC Ltd v Christian-Edwards [1981] AC 205, Chung Kwok Yiu Ringo v Leung Chi Shing [1996] HKLY 921, Kan Wing Yau v Hong Kong Housing Society above and Chi Kit Co Ltd v Lucky Health International Entreprises Ltd [2000] 3 HKC 143, [2000] 2 HKLRD 503, CFA.  The risk of a successful challenge must be real and not merely fanciful (Goodtex Land Co Ltd v Lung Kwong Emporium Co Ltd [1993] 1 HKC 645, Active Keen Industries Ltd v [1994] 2 HKC 67, [1994] 1 HKLR 396, CA, Chung Kwok Yiu Ringo v Leung Chi Shing above, Mariner International Hotels v Atlas Ltd [2007] HKCU 209).  The court should uphold a vendor’s assertion of good title if it is satisfied beyond reasonable doubt that a purchaser would not be at risk of a successful challenge to that title (Lam Suk Fan v Choy Ying Keung Kenny [2001] 3 HKC 428 at 437).  Where the court is satisfied beyond reasonable doubt that a blot on the title of the vendor would not give rise to litigation by interested persons, the court will hold that good title is shown and can be forced on a purchaser (Yook Lu Fong & Anor v Lau Po Ching [2002] 2 HKC 657 at 664).”

15.  I therefore proceed to determine whether the title of the Property was defective in the light of these principles.

Was the title defective?

16.  In this regard, I am able to agree with most of Mr. Man’s submissions save as one critical issue.  According to Mr. Man, the Assignment clearly provided that the transfer was made with no consideration, and therefore the trustee in bankruptcy has a good case of setting aside the transfer if Madam Chow is adjudicated bankrupt upon the presentation of a petition before 24 June 2010.  However, in deciding whether the transfer was indeed a transaction at undervalue, should the court just focus on the literal meaning of one sentence in the Assignment?  In my judgment, the answer must be no.

17.  The Preamble and the main body of the Assignment clearly stated that the transfer was made pursuant to the Consent Order made in the Matrimonial Proceedings.  Hence, the court needs to look at the terms of the Consent Order for the complete background of the transfer.  The Consent Order provided that the Defendant had to make a lump-sum payment of $700,000 to Madam Chow, of which a sum of $200,000 was paid forthwith and the balance of $500,000 to be paid by 36 equal monthly instalments.  Further, Madam Chow would be released from all the obligations and liabilities under the guarantees given to a bank in respect of the Property and two limited companies.  It is common ground that ancillary relief paid by a party in matrimonial proceedings can constitute consideration for the purpose of s. 49(3)(a) of the Bankruptcy Ordinance (see: Haines v Hill, ibid).  To me, the ancillary relief provided by the Defendant under the Consent Order in the present case was significant consideration, and there is nothing to suggest any fraud or attempt to evade possible creditors in the making of the compromise agreement.  Hence, on the face of these documents and reading them together, the most likely conclusion that the court would make is that the transfer was made in consideration of the terms provided for in the Consent Order.  It is, therefore, extremely unlikely that the trustee in bankruptcy will make any attempt to set aside the transfer in the case that Madam Chow is adjudicated bankrupt, and even if he decides to do so, there is no real prospect of any chance of success.

18.  It is true that the trustee in bankruptcy can rely on the doctrine of estoppel by deed.  However, a party is only estopped from making an assertion contrary to a statement in a deed if the meaning of the latter statement is clear.  In construing the meaning, the court should not just look at one single statement in isolation.  Instead, the deed should be construed as a whole, and if reference was made to another document, both documents should be construed together in order to give true effect to the meanings of the documents.  As I have mentioned above, the Preamble of the Assignment, reading it together with the terms of the Consent Order, can only mean that the transfer was made in consideration of the terms provided for in the Consent Order, and so in my judgment, there is no chance that the transfer will be set aside in the future.

19.  Mr. Man, in his able submissions, lays great emphasis on the term “Agreement” in clause 4 of the Preamble.  As reference was made to an “Agreement” rather the “Consent Order” in the said clause, there was a possibility that, outside the scope of the Consent Order, Madam Chow and the Defendant had agreed that there was no consideration for the transfer.  In such case, the transfer would still be set aside.  However, I cannot accept such argument.  The actual term used in clause 4 was “the said Agreement”, and so it referred to the agreement mentioned in the preceding clauses.  If one then look at the preceding clauses, “the said Agreement” must mean the settlement agreement embodied in the Consent Order.  Hence, it is simply impossible for the trustee in bankruptcy to say that the transfer was in fact made with no consideration.

20.  I am not here to speculate the reason as to why clause 4 of the Preamble had been drafted in such manner.  It may mean that the transfer was made with no additional payment or consideration apart from those already included in the Consent Order.  In any event, the court has to look at all the documents to decide whether the transfer was in fact made with no consideration, and for this, I hold that the trustee in bankruptcy has no real chance in persuading the court to accept that the transfer was made with no consideration.

21.  Mr. Man does not seek to rely on s. 49(3)(c) of the Bankruptcy Ordinance and argues that the transfer would be set aside because the consideration provided by the Defendant for such transfer was substantial less in value than that provided by Madam Chow.  Obviously, if the Plaintiffs had any queries about the sufficiency of the consideration provided by the Defendant, the proper course for them to take should have been to raise the relevant requisition of title for the Defendant to answer.  As the Plaintiffs had not made any attempt in this regard, they were the parties in breach of the Subject Agreement.

22.  I agree with Mr. Man about the high standard that a vendor has to meet about the proving of title.  However as laid in the said passage in The Annotated Ordinances of Hong Kong, Conveyancing and Property Ordinance (Cap 219), ibid,  a good title does not mean a perfect title free from every blemish, and the ultimate test is whether there is any risk of a successful challenge to the title.  Based on my aforesaid analysis, I do not find there was any such real risk.

23.  The appeal is therefore dismissed.  Save that the time provided for in the order about the filing of pleadings shall run from the date of the handing down of this decision, the order of Registrar Poon is affirmed.  I also make an order nisi that the costs of the appeal be to the Defendant with certificate for counsel, which shall be made absolute 14 days after the handing down of this decision.