TANG KAI MO v. FRED LEE AND ANOTHER

CACV 414/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 414 OF 2007

(ON APPEAL FROM HCB NO. 4166 OF 2003)

----------------------

----------------------

----------------------

J U D G M E N T

----------------------

Hon. Lam J (giving the judgment of the court):

1.  Mr Tang Kai Mo [“Tang”] was made bankrupt on 10 April 2003 on his own petition filed on 5 March 2003.  On 6 March 2007, the trustees in bankruptcy of his estate [“the Trustee”] applied for a suspension of the usual 4 years’ period for the purpose Tang’s discharge from bankruptcy.

2.  The application was heard by Master Yu on 22 November 2007.  By his Decision of 18 December 2007, the Master ordered the period shall cease to run for 15 months from 9 April 2007.  The effect of the order is that Tang was only discharged from bankruptcy on 10 July 2008.  In other words, by the time of the hearing of this appeal, the 15 months’ period have expired.  

3.  Tang appealed against the order of the Master.  Having regard to the Notice of Appeal, the written and oral submissions (including the supplemental submissions) of Tang, his grounds of appeal can broadly be summarized as follows,

(a) the Master erred in finding that Tang’s conduct was unsatisfactory in respect of the transfer of his interest at Flat C, 20 Floor, 31 Broadway, Mei Foo Sun Chuen [“the Property”] to his wife in September 2002 without any consideration;

(b)    the Master erred in finding that Tang’s conduct was unsatisfactory in respect of the disposal of his lump sum pension of $825,000 between 1 September 2002 and 31 March 2003;

(c) the Master failed to apply the two stage test laid down in Re Tong Yuk Kin HCB 22870 of 2002 and Re Liu Man Hoo HCB 11719 of 2002 in that he failed to have regard to all relevant circumstances before deciding that a suspension is called for after finding unsatisfactory conducts.

4.  The Trustees also complained about Tang’s non-disclosure of the lump sum pension of $825,000 in the Statement of Affairs and the Master made some finding of facts related to such complaint at paras. 13 to 15 of his Decision.  However, the Master did not appear to regard this complaint as significant in terms of the outcome of the application, see paras. 37 and 42 of his Decision.

5.  Though Tang did not raise any grounds of appeal in respect of the Master’s finding on non-disclosure in his Notice of Appeal, he claimed the omission was an inadvertent mistake on his part.  We do not see any justification to warrant our interference with the Master’s finding.  It is well established that this court will not disturb any finding of facts at the court below unless we can be satisfied that the finding is manifestly wrong (see Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336).  Tang failed to persuade us that the Master was manifestly wrong in disbelieving Tang that he was innocent in the omission. 

Transfer of interest in the Property

6.  Turning to the transfer of his interest in the Property, Tang’s case was that he believed his interest in the net equity of the Property was not worth anything at the time of the transfer and he did so at the request of his wife.  Thus, Tang is not putting forward a case of no unfair preference regarding this transfer.  Rather he is saying that the transfer, even though it was at nil consideration, did not result in the diminution of his estate to the prejudice of his general creditors. 

7.  Given that line of argument, and given that there is no dispute that the transfer was without any consideration, the evidential burden is on Tang to present credible evidence to substantiate his case as to nil value.  He did not produce any proper valuation report by a qualified surveyor.  Instead he relied on the contents of a letter written by his wife to the Trustees on 26 February 2007 in response to an allegation by the Trustees that the transfer was at an undervalue.  In that letter, two transactions at nearby units at $970,000 and $1 million were referred to.  She said the Property was in a poorer state of repair and smaller in size in comparison with one of those units.  She also referred to adjustment regarding the timing of the transactions.

8.  The Master dealt with this point at para. 33 of his Decision.  He said,

“[Tang] is not an expert.  And the sale price of the properties he referred to in his Defence all exceed $700,000.  From his information, I am not convinced that the Property has a market price less than $700,000.  He had transferred his interest in the Property to his wife without consideration.”

9.  Tang agreed he is not an expert.  However, he submitted that there should be adjustments from the two transactions quoted for various reasons set out in his written submissions and he honestly believed at the time of transfer that the value of the Property was the same as the outstanding mortgage.  He was of the view that the court should not discriminate against him because of his background.  

10.  Though the legal burden of establishing unsatisfactory conduct lies with the Trustees, by reason of the undisputed fact that the transfer was at nil consideration, the evidential burden is shifted to Tang to substantiate his allegation of nil consideration. 

11.  When the Master observed that Tang is not an expert, he was not discriminating against Tang.  Rather, the Master was applying an established rule regarding the admissibility of opinion evidence.  Whilst it is common sense that adjustments have to be made on various factors when reference is made to comparables, the extent of adjustments for the factors are matters that call for expert knowledge.  Valuation of property belongs to the realm of expert opinion evidence.  As such, only qualified expert can give admissible evidence.

12.  Though the Master referred to the fact that the transactions cited all exceeded $700,000 (which is correct), we do not think the Master actually made a finding that the Property had a value equalled to the units in those transactions.

13.  What the Master decided was that Tang failed to discharge the evidential burden in setting up a prima facie case of nil value.  Is he correct? Bearing in mind the rule as to admissibility of expert evidence, there is simply no admissible evidence on the proper value of the Property at the time of the transfer.  Hence, the Master must be right in so holding.

14.  Under such circumstances, the Master was entitled to conclude that the transfer at nil consideration was unsatisfactory conduct by applying the test laid down in Re Tong Yuk Kin HCB 22870 of 2002, recently approved by this court in Fred Lee v Lau Chi Kam CACV 233 of 2007, 2 May 2008.

The disposal of lump sum pension

15.  Regarding the disposal of the lump sum pension, Tang accounted for it in his statutory declaration of 24 June 2005.  He said on 30 August 2002, he received three sums of money (salaries plus lump sum pension) adding up to $1,076,820.  He spent the said sums as follows,

(a)	Repayment to his wife	$255,000
(b)	Household expenses for August	$  25,000
(c)	Repayment of loans from his brother	$  36,000
(d)	KGI Hang Seng Index Commodity trading account loss	$117,263
(e)	Transaction costs	$  21,204
(f)	Emperor Co forex trading loss	$247,875
(g)	Transaction costs	$  20,833
(h)	Setting up Choose Life Investment	$  33,000
(i)	Family and personal expenses	$148,000
(j)	Travelling and holidays	$  30,000
(k)	Legal costs for bankruptcy	$  15,000
(l)	Credit cards and loan repayments	$127,645

16.  The complaints of the Trustees were directed towards the repayments to his wife and his brother as unfair preference.  The Trustees also pinpointed the engagement in speculative activities resulting in a loss of $407,175 as unsatisfactory conduct.

17.  At the time of these transactions, Tang was a retired civil servant with a monthly income by way of pension of $14,938 per month.

18.  These complaints have to be considered against the background that at the presentation of his petition, Tang declared that his total indebtedness was $1,410,416.  The total of debts proved in the bankruptcy was in the total sum of $1,685,663.  The Trustees realized $194,787.11 for the estate and only a dividend of 2% had been declared to the general body of unsecured creditors.

19.  The Master found the complaints well-founded.  Although in para. 37 of his Decision the Master focused on the unfair preference point regarding these payments, he subsequently did refer to the speculative activities at paras. 45 and 46 before he came to his final decision.  Tang criticized the Master as being inconsistent in this respect. 

20.  Reading his Decision as a whole, we think the Master did take into account the speculative activities as unsatisfactory conduct in coming to his final conclusion as to the length of suspension.  Though there is no reference to this aspect in para. 37, the Master referred to this in para. 22 and he said such activity “is to be reprimanded” and went on to say,

“And he lost 10 months’ salary which could be put to much better use, including repayment to his creditors.  He was gambling at the expenses of his creditors.”

21.  However, it is also plain that the Master regarded the unfair preference and transfer of Property aspects as more significant unsatisfactory conducts.

22.  Tang complained that the Master wrongly stated that he was hoping to regain his loss by engaging in the speculative trading.  He said in his written submissions that he was not that optimistic and he realized he was already in deep trouble at the time of such trading.

23.  The transcript of the hearing was not placed before us.  In the absence of the transcript, we are not prepared to say that the Master had misunderstood Tang’s evidence.  In any event, we fail to see how the alleged mistake could have much effect on the outcome, at least not in any way favourable to Tang.

24.  More importantly, the unfair preference is of greater significance.  Tang accepted at the appeal that what he did amount to unfair preference although at the time of repayments he was not aware of the legal consequences.  Given that the wife and the brother come within the definition of “associate” under Section 51B(2) of the Bankruptcy Ordinance, there is a presumption that Tang was influenced by a desire to prefer under Section 50(5) of the Ordinance.  Tang did not produce cogent evidence to rebut the presumption.  Further, the repayments have to be considered against the omission to report the lump sum pension in the Statement of Affairs, the transfer of the Property to the Wife, Tang’s indebtedness to other creditors at that time and the timing of Tang’s presentation of petition for his own bankruptcy.  Although none of these is conclusive, they are circumstantial matters reinforcing the statutory presumption.

25.  In the circumstances, Tang failed to persuade us that the Master’s finding on unfair preference is wrong.

26.  As observed by Cheung JA in Fred Lee v Lau Chi Kam CACV 233 of 2007, 2 May 2008 at para. 10(3), unfair preference must be a specie of unsatisfactory conduct.

The exercise of discretion

27.  Tang submitted that the Master did not exercise his discretion by asking himself whether this is a case for suspension even though there are unsatisfactory conducts.  In Fred Lee v Lau Chi Kam CACV 233 of 2007, 2 May 2008, Cheung JA held that the discretion is to be exercised by considering two main objectives: the rehabilitation of the bankrupt and the public interest in ensuring that the return of the bankrupt would not present an unacceptable risk and that commercial morality is preserved. 

28.  The Master referred to these considerations at paras. 39 to 41 and 47 of his Decision.  Tang complained that the Master had concluded in Para. 38 that a suspension was called for before he alluded to these matters.

29.  We do not think there is any substance in this ground of appeal.  The important question is whether the Master had applied the correct approach in the exercise of his discretion.  Reading his Decision fairly, it is quite plain to us that the Master had adopted the correct approach when he decided that there should be a suspension.  It so happened that the Master stated his concluded view on whether there should be a suspension at para. 38 before he explained his approach later.  We do not read this as indicating that he did not have regard to the correct approach before he came to his conclusion.

30.  Tang prayed in aid of the reference to “conducts of exceptional gravity” in the judgment in Re Liu Man Hoo HCB 11719 of 2002, 14 September 2007 and contended that the Master was wrong to order suspension in the present case.  In Re Liu Man Hoo, the court dealt with a bankrupt who had been very co-operative with the trustee and had contributed substantially to his estate after his bankruptcy.  As regards the exercise of discretion, the court emphasized at paras. 65 to 70 that an overall view of the matter has to be taken and pre-bankruptcy unsatisfactory conducts had to considered together with satisfactory post-bankruptcy conducts.  What the court tried to point out is that given the purpose of the suspension regime, the unsatisfactory misconduct has to be grave before the court can conclude that there has to be a suspension no matter how well behaved the bankrupt has been since his bankruptcy.  Thus, at para. 68, it was said,

“Hence, the unsatisfactory pre-bankruptcy conducts that would warrant a suspension of automatic discharge in any event must be conducts of exceptional gravity.  Based on the materials placed before me … I am of the view that it would not be just and equitable to hold that automatic discharge should be suspended no matter how co-operative he had been since bankruptcy.” (Emphasis added)

31.  It would be quite wrong to read that paragraph as suggesting, as Tang did, that even in a case where there is nothing in the post-bankruptcy conducts of a bankrupt to balance against the unsatisfactory pre-bankruptcy conduct, suspension cannot be ordered unless the unsatisfactory conduct is of exceptional gravity.

32.  To similar effect is the statement of the law at para. 19 of the judgment of Barma J in Re Wong Hing Wah Michael  HCB 26018 of 2002, 12 October 2007.

33.  In the present case, even though Tang had contributed part of his monthly pension to his estate, the total amount realized by the Trustees up to January 2007 was only $190,431.90.  The total debts proved in the bankruptcy was $1,685,665.58.  Such contribution by Tang cannot be compared with the one made by the bankrupt in Re Liu Man Hoo.  Here, the unsatisfactory conducts were more serious than the excessive borrowing established in Re Liu Man Hoo.  The conduct of Tang after his bankruptcy cannot be described as exemplary given his omission in the Statement of Affairs.

34.  Though the Master did not refer to the post bankruptcy conducts of Tang, we do not find any such conduct that would warrant an interference with the order made by the Master.

Result

35.  The appeal is dismissed with an order that Tang shall pay the Trustees’ costs of the appeal, to be taxed if not agreed.