LAU SIU HUNG AND ANOTHER v. CHOW SAI YIP AND ANOTHER

HCB 3640/2015

[2018] HKCFI 249

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 3640 OF 2015

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Re: Chow Sai Cheong (“the Bankrupt”)

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D E C I S I O N

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1.  This is an application under ss.49, 50, 51 and 51A of Bankruptcy Ordinance, Cap 6 (Ordinance) by the Applicants (Trustees) pursuant to an Amended Summons filed on 26 October 2016 (Summons) for an order that the Respondents do pay to them HK$400,000 which represents 1/3 of the value of a property known as Main Roof, Yuet Yuen Mansion, No 19 Mong Kok Road, Kowloon (Property).

2.  The Bankrupt and the Respondents are brothers. The Property was inherited by them from their father in December 2008 when they became tenants in common, each owning 1/3 of the interest in the Property.  By an assignment dated 30 July 2013 (Assignment), the Property was assigned to the Respondents (as tenants in common each owning 1/2 of the interest therein) at a stated consideration of HK$1,000,000 (Transaction). 

3.  The Trustees challenge the Transaction as one at an undervalue.  Such challenge is based on their case that no or no sufficient payment was made to the Bankrupt for his 1/3 interest in the Property. Alternatively, the payment(s) made to the Bankrupt constituted unfair preference.

Issues

4.  Although the law in respect of the relevant sections of the Ordinance is complex, the issues in this case turn very much on the credibility of the factual case of the Respondents.  For that purpose, the court has the benefit of their evidence tested in cross-examination. 

Background

5.  Pursuant to a Petition of the Bankrupt himself filed on 12 May 2015 (Petition), a bankruptcy order was made on 30 June 2015. 

6.  Enquiries were made by the Trustees regarding the Assignment.  Letters were sent by them on 10 November 2015, 3 December 2015 and 15 December 2015 to the Respondents requesting information and documents on the payment of the consideration of HK$1,000,000.

7.  An email dated 21 December 2015 was received by the Trustees from the 1st Respondent (SY) (writing on behalf of also the 2^nd Respondent (SL)).  It was stated that: “... sums of money in numerous bank cash withdrawals in advance were made for the [Assignment] to the bankrupt.  There was no bank drafts or invoices made out directly to the bankrupt in question”.

8.  The Trustees responded by a letter dated 22 December 2015 to the Respondents and requested them to provide: (i) the date and amount of each “sums of money in numerous bank cash withdrawals in advance” to the Bankrupt; and (ii) copies of the documents to support the same.

9.  By an email dated 31 December 2015 from the Respondents to the Trustees, it was stated as follows :

“Regarding your email request to provide supporting documents for the said payments to the bankrupt. We reiterate that the said payments were made in the form cash withdrawls from our savings bank accounts over a long period of time up until July 30, 2013 of which no bank statements exist for such withdrawals.

  In addition, we could not pinpoint the exact dates of such withdrawals as they were made over 3 years ago.  ...”

10.  The Trustees wrote to the Respondents again on 30 January 2016, drawing their attention to the relevant provisions of the Ordinance.  Despite a number of reminders from the Trustees and their solicitors, no reply had been received from the Respondents.

The Respondents’ evidence

11.  Two affidavits had been filed by SY.  According to the 1^st affidavit, there was an Agreement for Sale and Purchase (Exhibit “A”) of the Property between the 3 brothers as vendor and the Respondents as purchaser dated 30 August 2012 and signed on 11 September 2012 (SPA).  At that time, the Respondents had no knowledge that the Bankrupt would subsequently file a bankruptcy petition.

12.  The proceeds from the sale of the Property were used for payments made on behalf of the Bankrupt by the Respondents to settle all the Bankrupt’s debts as evidenced by bank withdrawals, official payment receipts and bank-in slips.  To the best of the Respondents’ knowledge and in good faith, they helped the Bankrupt to settle all his debts and as a result of which they believed that the Bankrupt was “debt-free” as of July 2012.  Any subsequent loans taken out by the Bankrupt were outside the Respondents’ knowledge.

13.  An exhibit “B” in 4 pages was produced in support.  The first 2 pages showed the bank book of SY.  There was a withdrawal of HK$150,000 on 25 May 2012.  The other 2 pages showed 4 receipts.  Two of the receipts were issued by United Asia Finance Ltd in the name of the Bankrupt and both dated 9 June 2012.  One of these receipts referred to a “Repayment” of HK$14,796 and the other referred to “Early Settlement” in the sum of HK$1,583. Both payments were in cash.  The account number on these documents were different, which suggest that 2 loan accounts with United Asia Finance Ltd were involved.

14.  One of the other 2 receipts was issued by Public Finance Ltd in the name of the Bankrupt dated 9 June 2012.  It recorded a cash payment of HK$60,502 for “full settlement of Personal Loan ...”.  The final receipt was dated 7 July 2012 in the name of the Bankrupt and issued by PrimeCredit Ltd.  It recorded a payment of HK$38,172 for “Early Settle”.  The payments evidenced by the 4 receipts amounted to HK$115,053[1].

15.  Further, a Declaration from SL (Declaration) was exhibited to the affidavit (Exhibit “C”).  It was stated that the Bankrupt had not paid any compensation to the Respondents as he promised (HK$6,000 per month) for his exclusive use and occupation of the Property from 2008 to 2013.

16.  In the Declaration, SL also stated that the Bankrupt was indebted to the tune of HK$140,000 and asked for his help to discharge the debts.  SL refused the request because he had already repaid HK$150,000 of his brother’s debts some years ago.  However, the Bankrupt offered his share of the Property in exchange for the help, and the Respondents agreed to do so because they did not want to have their interest in the Property affected in the event that the Bankrupt had to sell his share to pay his debts. 

17.  The last exhibit (Exhibit “D”) consisted of a Schedule and more receipts.  The former set out (a) the payments made for the Bankrupt totalling HK$300,442.19 and (b) the unpaid compensation at HK$360,000 (HK$6,000 x 60 months).  In addition to the information from Exhibit “B”, the Schedule and the additional receipts showed 4 payments made in August 2009 in the total sum of HK$150,442.19.  Those payments were made to 3 finance companies, namely, Promise (Hong Kong) Co Ltd, United Asia Finance Ltd and PrimeCredit Ltd.  Two of the receipts referred to early settlement. 

18.  Finally, in the affidavit the Respondents challenged the reliability of the valuation report of the Property adduced by the Trustees because (a) it was a “desktop valuation without site inspection” and (b) according to the Occupation Permit (Exhibit “E”), the Property consists of a “drying area and motor room for non-domestic use”.

19.  The only additional information contained in SY’s 2^nd affidavit is a “Third Party’s Payment and Request for Loan Termination Form” dated 10 August 2009.  It recorded a request made by SL to Promise (Hong Kong) Co Ltd to settle the outstanding debt of the Bankrupt and that the latter would not to lend to the Bankrupt in the future.

20.  For completness, it should be mentioned that 1 of the exhibits produced by the Trustees was a Deed Poll dated 17 March 2006, which evidenced the fact that the Bankrupt was residing at the Property with his family. 

Analysis

21.  The relevant sections of the Ordinance are concerned with the retrospective avoidance of (a) transactions at an undervalue entered into by a person who was subsequently adjudged bankrupt[2] and (b) unfairness preference by a debtor (who was subsequently made bankrupt) of one of his creditors over the others. 

22.  However, the key issue in this application is the credibility of the Respondents’ factual case.  If it is accepted by the court, this application must be declined.

23.  First and foremost, the evidence that the Bankrupt was in financial trouble well before the Petition is clear.  Secondly, in light of the relationship between the Bankrupt and the Respondents, the evidence that the latter were trying to help their brother financially is inherently credible, as well as supported by documentary evidence.  In particular, SL did in fact tried to clear the Bankrupt’s debts in 2009 and prevent further borrowing by him (see the document referred to in para 19 above).

24.  Much of the criticisms of the Respondents’ evidence made by Mr Liu, who appeared for the Trustees, were based on the inconsistencies in the Respondents’ explanations and variance between their case and the terms of the SPA. 

25.  Before I deal with these criticisms, in particular those in relation to the SPA, it should be said that both Respondents had impressed the court as reliable witnesses.  They were straight forward and forthcoming in their evidence, doing their best to relate to the court matters which took place some years ago in the absence of a perfect documentary record.  I note in particular that that SL is not a sophisticated person. 

26.  Given the inevitable faded recollection and the limited availability of record, I do not believe that any one of the Respondents was shown to have given a previous inconsistent statement to hide or obscure the facts.

27.  There is no reason to doubt the evidence that it was the Bankrupt’s request for help to clear his debts which led to the agreement between the brothers on the sale of the Bankrupt’s interest in the Property.  The withdrawal of the HK$150,000 in May 2012 provides a good indication of the timing of the agreement.  It must be borne in mind that it was not a typical commercial transaction, and I do not believe the date of the SPA (3 months later) is a real indication of fragility in the Respondents’ case. 

28.  The available receipts support SL’s viva voce evidence that he took the HK$150,000 from SY and went to various finance companies to settle the Bankrupt’s debts.  The Respondents’ evidence that they believed that they had paid off all the Bankrupt’s debts is entirely credible.

29.  The evidence of an agreed monthly “compensation” of HK$6,000 for the exclusive use of the Property by the Bankrupt and his family is supported to some extent by the Deed Poll.  This evidence is again inherently credible.

30.  There is no reason to ignore what the Bankrupt owed to his brothers when they paid off his debts previously (at least in 2009 as shown by some receipts).  Naturally, those obligations would have featured in their discussions over the sale of the Bankrupt’s interest in the Property.

31.  In the premises, I find that the Respondents had provided no less than HK$300,000[3] (HK$150,000 plus HK$150,442.19 (paras 13 and 17 above)) and had agreed to setting off the unpaid compensation in return for the Bankrupt’s interest in the Property. 

32.  The consideration stated in the SPA was different: purchase price of HK$1 million and deposit of HK$150,000 upon signing of the agreement.  In light of the way in which the terms of the SPA were formulated, there is no reason to doubt the Respondents’ evidence that it was prepared by a firm of solicitors.  The evidence is that it was the same firm which prepared the Assignment.  However, it appears from the evidence that the matter was handled largely by a clerk in the firm. 

33.  Both Respondents had difficulty recalling the details surrounding the creation of the SPA, which was not registered with the Land Registry.  SY’s evidence is that the payment of the HK$150,000 in May 2012 represented the deposit.  Both Respondents said that there was considerable delay on the part of the solicitors in preparing the documentation.  SL explained that he had told the solicitor that a lot of money was owed to him by the Bankrupt over the years and the Bankrupt also owed him much rent.  It was the solicitor who suggested the purchase price of HK$1 million because HK$150,000 was an “impossibly low price”.  The references to “solicitor” were probably meant to refer to the clerk who handled the matter.

34.  There is a ring of truth in the evidence concerning the SPA.  It was a small conveyancing transaction handled mainly by a clerk.  Given what he or she was told concerning the consideration for the sale, it is not inconceivable that the clerk then suggested a convenient price of HK$1 million. 

35.  In these premises, I find the Respondents to be reliable witnesses and I accept their evidence despite the wrinkles. 

36.  Mr Liu did not quarrel with the proposition that if the court accepts the evidence of the Respondents, the Transaction was not at an undervalue.  Indeed, the consideration provided by the Respondents exceeded the value of the Bankrupt’s interest in the Property, which was assessed at HK$400,000 by the Trustees. 

37.  Further, in light of the evidence of the Respondents, I cannot agree that the Transaction constituted an unfair preference by the Bankrupt of his brothers.  The Transaction was not influenced by the Bankrupt’s desire to favour his brothers in the event of his bankruptcy, but by the Bankrupt’s desire to get out of the financial hole in which he found himself.  I find the presumption under s.50(5) of the Ordinance, which is relied upon by the Trustees, rebutted. 

Conclusions

38.  For these reasons, the Summons is dismissed, and I make an order nisi that the costs of and occasioned by the Summons, including the Respondents’ costs, be paid out of the estate of the Bankrupt.