WONG TAK MAN, STEPHEN AND ANOTHER v. CHEUNG SIU FAI also known as DICKSON CHEUNG AND ANOTHER

HCMP 1431/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1431 OF 2012

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J U D G M E N T

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I. INTRODUCTION

1.  By the originating summons herein, the applicants, who are the trustees in bankruptcy of Cheung Siu Kin Alex (“the trustees”), seek (i) an order under s. 49 of the Bankruptcy Ordinance (“the Ordinance”) to set aside certain transfers of funds made by the bankrupt to each of the 1^st and 2^nd respondents during the 5 years prior to bankruptcy as transactions at an undervalue; (ii) alternatively, an order under s. 50 of the Ordinance to set aside certain transfers of funds made by the bankrupt to each of the 1^st and 2^nd respondents during the 2 years prior to bankruptcy as unfair preferences.

2.  The fact, date and amount of the payments in question are not in dispute.  It should be noted at the outset, however, that during the relevant 5-year or 2-year period (as the case may be), there were also payments made the other way, i.e. by each of the 1^st and 2^nd respondents to the bankrupt.  The central issue that arises concerns the nature of the payments made by the bankrupt to the respondents, but this question cannot properly be answered without also making an assessment of the nature of the payments in the reverse direction and looking at their relationship as a whole.

3.  The trustees contend, as their primary case, that the payments made both ways were gifts, and the payments made by the bankrupt to the respondents were therefore transactions at undervalue to which s. 49 applies.  Alternatively, as their secondary case, the trustees contend that the payments made by the respondents to the bankrupt were loans and the payments made by the bankrupt to them were repayments of loans, which are caught by s. 50 as unfair preferences.  If the payments by the bankrupt were either gifts or repayments of loan, issues relating to the solvency of the bankrupt would arise, having regard to the provisions of s. 51(2) of the Ordinance.

4.  The respondents deny that the bankrupt’s payments to them were either gifts or repayments of loans.  They contend that the bankrupt was effectively running a private investment fund at the time, that they paid money to the bankrupt for making investment and that when the bankrupt paid money to them he was giving them a return on the money they invested.  On this footing they contend that as a matter of law the money paid by the bankrupt to them was money belonging beneficially to them and was returned to them by the bankrupt as trustee.  As such the payments fall outside the bankruptcy regime altogether and do not constitute either transactions at undervalue or unfair preferences.  On this analysis the question of the solvency of the bankrupt at the time is irrelevant.

II.  FACTUAL BACKGROUND

The persons involved

5.  The bankrupt is the elder brother of the 1^st respondent.  Without meaning any disrespect, I shall call the bankrupt “Alex” or “the bankrupt” and the 1^st respondent “Dickson” in this judgment.  They grew up together in a family of modest means living in public housing and have maintained a close relationship.

6.  Alex became a quantity surveyor practising in Hong Kong, having obtained his Bachelor degree in England in 1994 and qualified as a Chartered quantity surveyor in around 1998.  Soon after he started working he traded securities and before long he began to do so with great zeal and frequency.  Between September 2003 and May 2006 he had worked at one surveyors firm with a monthly salary of about $31,500.  He then worked at another firm with a monthly salary of about $33,000 until he was dismissed in mid 2009.

7.  Dickson, after his graduation in 1995, has worked in the finance industry and has acquired substantial knowledge in the trading of stocks and securities.  He has worked in several investment banks, including Jardine Fleming (1999-2000), Crédit Agricole (2000-2007) and his present employer Bank of America Merrill Lynch (since 2011) and has also become a licensed person under the Securities and Futures Ordinance since April 2003. He has apparently been earning around $10-20 million a year since 2003.

8.  The 2^nd respondent was married to Dickson in 2000.  She was and is a civil servant in Hong Kong Post.  Again without any disrespect, I shall refer to her as “Winnie” in this judgment.

Trading activities of the bankrupt

9.  Since he started work in 1994, Alex had been trading in the stock market.  Dickson had also traded in securities since 1995.

10.  From late 2001 to early 2005, Alex had a securities trading account with a brokerage house called Kim Eng Securities (Hong Kong) Limited (“Kim Eng”).  The account executive there was a lady called Florence Fung (“Florence”).  According to Alex and Dickson, she was Alex’s former girlfriend.

11.  In around May 2005, Florence moved to work in a different securities brokerage firm, namely, Quam Securities Company Limited (“Quam”).  Earlier that year, in around February, she had procured Alex to open an account at Quam and to move his “trades” to Quam.  It appears that Alex was a coveted client at that time, which was not surprising given his heavy trading which would generate substantial commission income for the broker.  While she worked in Quam, Florence was the account executive of Alex’s accounts there.

12.  Alex’s securities trading account at Quam included a margin account and a futures account (collectively, the “Quam accounts”) which he had used to trade (i) stocks, stock options and other derivatives, and (ii) index options and futures, respectively.  It is clear that there was heavy trading through the Quam accounts.

13.  Over the period of 2003–2008 Alex had dealings with various securities companies including Quam, Kim Eng, Everbright, Kingston, Sun Hung Kai, Core Pacific and VC Brokerage.

14.  At the material times, Alex also had a bank account with Standard Chartered Bank (“the SCB account”) through which he received and paid out substantial sums. 

The bankruptcy

15.  In around July 2007, the bankrupt suffered a substantial loss of over $13 million through securities and futures trading and over the next couple of months, he suffered a further loss of $6 million.  As of August 2008, he owed around $17 million to Quam.

16.  On 25 August 2008, Quam petitioned for Alex’s bankruptcy and a bankruptcy order was made on 26 November 2008.  The Official Receiver initially became the trustee in bankruptcy but was replaced in March 2010 by private insolvency practitioners.  Quam is the only significant proving creditor in the bankruptcy.

The transfers of funds between the parties

17.  In the course of their investigation the trustees noticed that between 2003 and 2008, there had been mutual payments of money between Alex on the one hand and Dickson, Winnie, and other third parties including Florence and some unidentified parties on the other. (There might have been such payments before 2003 but the trustees have limited their inquiry to the period of time relevant under the statutory provisions.)

18.  Various sums of money were paid by Dickson, Winnie and other third parties, either into Alex’s securities accounts or the SCB account.  Conversely, there were also various sums of money paid out of the SCB Account to these parties.

19.  Details of the transfers of funds between Alex, Dickson, Winnie and Florence have been conveniently set out in a schedule attached to the skeleton argument of counsel for the respondents, which I attach after some modifications as the “Appendix” to this judgment.[1]

The payments sought to be impugned in the present proceedings

20.  Of these transfers of funds, the trustees seek by these proceedings to impugn 46 transfers by Alex to either Dickson or Winnie, in the total sum of $38,674,245, made in the 5-year period prior to the bankruptcy i.e. from 26 August 2003 to 25 August 2008.[2]

21.  A few observations may be made at this stage based on the Appendix:

(1) During the same period, there were also transfers of funds by the two respondents to Alex amounting to a total sum of $29,694,000. 

(2) The payments in both directions occurred from time to time.  However, after June 2007, Alex had not transferred any money to Dickson or Winnie.  Instead, from then on, the transfers were all made to Alex.  The payments from the respondents to Alex after June 2007 came to total of $5,384,000.

(3) There were 8 payments by Florence to Alex during the 5‑year period.  Florence deposited a total sum of $12,940,000 into Alex’s accounts whereas a sum of $1,800,000 was paid out to Florence.  The respondents contend that Florence paid those sums to Alex because she owed them to Dickson and Dickson told her to pay Alex.  This is a discrete factual issue which I shall deal with below.

III.  THE STATUTORY FRAMEWORK

22.  S. 49 of the Ordinance governs transactions at undervalue.  It provides:

“(1) Subject to this section and sections 51 and 51A, where a debtor is adjudged 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.”

23.  S. 50 of the Ordinance governs unfair preference and provides:

“(1) Subject to this section and sections 51 and 51A, where a debtor is adjudged bankrupt and he has at a relevant time (defined in section 51) given an unfair preference to any person, 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 given that unfair preference.

(3) For the purposes of this section and sections 51 and 51A, a debtor gives an unfair preference to a person if-

(a) that person is one of the debtor’s creditors or a surety or guarantor for any of his debts or other liabilities; and

(b) the debtor does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the debtor’s bankruptcy, will be better than the position he would have been in if that thing had not been done.

(4) The court shall not make an order under this section in respect of an unfair preference given to any person unless the debtor who gave the unfair preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (3)(b).

(5) A debtor who has given an unfair preference to a person who, at the time the unfair preference was given, was an associate of his (otherwise than by reason only of being his employee) is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (4).

…”

24.  S. 51 of the Ordinance contains provisions on the relevant periods of time during which transactions may be impugned as transactions at undervalue and unfair preferences:

“(1) Subject to subsections (2) and (3), the time at which a debtor enters into a transaction at an undervalue or gives an unfair preference is a relevant time if the transaction is entered into or the unfair preference given-

(a) in the case of a transaction at an undervalue, at a time in the period of 5 years ending with the day of the presentation of the bankruptcy petition on which the debtor is adjudged bankrupt;

(b) in the case of an unfair preference which is not a transaction at an undervalue and is given to a person who is an associate of the debtor (otherwise than by reason only of being his employee), at a time in the period of 2 years ending with that day; and

(c) in any other case of an unfair preference which is not a transaction at an undervalue, at a time in the period of 6 months ending with that day.

(2) Where a debtor enters into a transaction at an undervalue or gives an unfair preference at a time mentioned in subsection (1)(a), (b) or (c) (not being, in the case of a transaction at an undervalue, a time less than 2 years before the end of the period mentioned in subsection (1)(a)), that time is not a relevant time for the purposes of sections 49 and 50 unless the debtor-

(a) is insolvent at that time; or

(b) becomes insolvent in consequence of the transaction or preference,

but the requirements of this subsection are presumed to be satisfied, unless the contrary is shown, in relation to any transaction at an undervalue which is entered into by a debtor with a person who is an associate of his (otherwise than by reason only of being his employee).

(3) For the purposes of subsection (2), a debtor is insolvent if-

(a) he is unable to pay his debts as they fall due; or

(b) the value of his assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities.”

25.  In the case of transaction at an undervalue, s. 51(1)(a) of the Ordinance provides that, subject to s. 51(2) and (3), “relevant time” means a time within “the period of 5 years ending with the day of the presentation of the bankruptcy petition on which the debtor is adjudged bankrupt”.

26.  The effect of s. 51(2) is that, in the case of a transaction at an undervalue, the 5-year period is sub-divided into two periods:

(1) Any time during the period which is less than 2 years before the end of the period mentioned in s. 51(1)(a) (i.e. the period ending with the day of the presentation of the bankruptcy petition) (i.e. the period between 26 August 2006 and 25 August 2008) will be a “relevant time”. 

(2) Any time during the rest of that 5-year period (i.e. the period between 26 August 2003 and 25 August 2006) is not a relevant time unless the debtor-

“(a) is insolvent at that time; or

(b) becomes insolvent in consequence of the transaction or preference”.

27.  There is no dispute that Dickson and Winnie are “associates” of Alex within the meaning of s. 51(2) as defined in s. 51B(2) & (7), being his relative (i.e. brother) and the spouse of his relative respectively.  From this three consequences follow:

(1) By virtue of s. 51(1)(b), the relevant period in which payments may be impugned as unfair preferences is 2 years instead of 6 months.

(2) As far as transactions at undervalue are concerned, by virtue of the provision in the final part of s. 51(2), in respect of the period between 5 and 2 years prior to the bankruptcy, the burden would lie on the respondents to show that Alex was not and did not become insolvent.  This stands in contrast to the position in unfair preference where the burden is on the trustees to prove insolvency, though the relevant period for unfair preference was within 2 years prior to bankruptcy.

(3) By virtue of s. 50(5), where it is found that there was an unfair preference of the respondents, Alex would be rebuttably presumed to have been influenced by the requisite desire.

IV.  THE ISSUES

28.  The following issues arise for determination in these proceedings:

(1) What is the nature of the bankrupt’s payments to the respondents?  In particular, were they gifts or payments for no consideration as the trustees suggest, or were they loan repayments, or returns under an investment agreement as the respondents argue?  This issue requires a consideration also of the nature of the payments by the respondents to the bankrupt.

(2) If the payments to the respondents were gifts or payments for no consideration, so far as the payments between 26 August 2003 and 25 August 2006 are concerned, have the respondents shown that the bankrupt was not insolvent at the time and did not become insolvent as a result of the payments?

(3) On the basis of the respondents’ case of payments under an investment agreement, were the payments to the respondents made by the bankrupt pursuant to a personal obligation to give a return on the money invested, or were they returns of the investments (converted into money) in which the respondents had a proprietary interest?

(4) If the payments to the respondents were either loan repayments or payments pursuant to a personal obligation under the investment agreement:

(A) have the trustees shown that the bankrupt was insolvent at the time or became insolvent as a result of the payments?

(B) was the bankrupt influenced by a desire to put the respondents into a better position in the event of his bankruptcy?

(5) Were the payments made by Florence Fung to the bankrupt payments made on behalf of Dickson?  If not, what are the implications on the nature of the bankrupt’s payments to the respondents?

(6) If the trustees’ case under ss. 49 or 50 is established in any respect, what is the appropriate relief?

29.  I shall deal with these issues in turn below.

V.  ISSUE 1 – NATURE OF THE PAYMENTS

The trustees’ case

30.  S. 49(3) of the Ordinance refers to 3 types of transactions that amount to transactions at an undervalue.  The first type (s. 49(3)(a)) is “gift” or “transaction … on terms that provide for [the debtor] to receive no consideration”.  As explained in Parry, Transaction Avoidance in Insolvencies at §4.12, while a gift by definition involves the transfer of an asset for which no consideration is received, not all “transactions … on terms that provide for [the debtor] to receive no consideration” are gifts, as they do not necessarily entail the transfer of an asset, e.g. voluntary waiver of a debt for no consideration.

31.  The trustees have, since at least the issuance of the originating summons up to the commencement of trial, run a case that the bankrupt’s payments to the respondents were “gifts”.  That was a technical way of putting it because, in common parlance, a gift means a present, the bestowal of a bounty or largesse.  In opening, however, Mr Whitehead SC, who appeared for the trustees, made it clear that what the trustees are alleging is not that the bankrupt was giving “presents” to the respondents in the ordinary sense of the word, but that he was repaying the respondents, out of a purely moral obligation, money that the respondents had previously made available to him. 

32.  In other words, their case is not that the bankrupt’s payments to the respondents were presents or payments out of benevolence.  It is the other way round.  The trustees submit that the respondents’ payments to the bankrupt were gifts of money to help him out, without any obligation of repayment on the part of the bankrupt.  The bankrupt’s payments to them were repayments referable to such assistance but made without any legal obligation to repay.  Because the bankrupt was not legally obliged to repay the respondents and voluntarily chose to do, the payments were “gifts” or transactions entered into “on terms that provide for the [bankrupt] to receive no consideration” within the meaning of s. 49(3)(a).

33.  The trustees’ position – to my mind an unattractive one – is that the estate, whilst keeping the benefit of the payments made by the respondents to the bankrupt, should be able to claw back the payments made by the bankrupt to the respondents pursuant to his moral obligation to repay.  In the way it is put, the trustees’ case depends, therefore, on showing that the respondents’ payments to the bankrupt were gifts, resulting in no legal obligation whatsoever for the bankrupt to make repayment. 

The respondents’ case

34.  The respondents contend that Alex was running an investment fund.  He was not licensed to do so, but he was taking money from other people and investing it on their behalf, including his mutual friends with Dickson.

35.  Dickson also used to trade securities himself. In around 2000, his career took off.  He became an assistant director at Crèdit Agricole Bank and had the increased opportunity of coming across price-sensitive information.  In around 2002, to avoid direct involvement in the trading of securities, Dickson liquidated his own investments and transferred his money to his brother Alex to trade for him. 

36.  At about the end of 2002, Dickson had placed around $7 million with Alex for investment, when the total value of Alex’s portfolio was around $20-30 million.  Dickson trusted Alex and did not inspect the investment portfolio.  Nor did he keep a detailed record of his share in Alex’s portfolio.

37.  In September 2006, Alex told Dickson that his investment portfolio was not doing well and had suffered considerable loss. Dickson requested to reduce his share in the “fund” and asked for the return of some of his money.

38.  Since about July 2007, Alex had asked Dickson to help him with his financial difficulties and to deposit money into the investment portfolio.  As a result, from July 2007 to July 2008, Dickson caused various sums to be transferred to Alex.

39.  The respondents say that Winnie did not give any money of her own to Alex.  Dickson handed to her most of his income and she oversaw the family’s finance.  When she had monetary dealings with Alex they were done by her on Dickson’s account.

40.  On the above factual basis, the respondents contend that the legal consequence was that the money given to Alex and the money he returned to Dickson was trust money belonging throughout beneficially to Dickson.

Discussion of the evidence

41.  The issue is the nature of the payments by Alex to Dickson.  But this question has to be seen in the context of other questions.  Was Alex running an investment fund?  What is the nature of the payments by Dickson to Alex?  (I accept Winnie’s case that her involvement in this matter was in essence for Dickson’s account.  The payments to and from her therefore require no separate discussion or treatment.)

Was Alex running an investment fund?

42.  The first question is relatively uncontroversial.  Alex held 5 bank accounts with SCB and HSBC and 13 securities accounts with 7 brokerage houses.  The aggregate fund inflows and outflows during the 5-year period in question exceeded $100 million each way; the churn through the fund was over a billion dollars in this period.  It is plain from the pattern and volume of trading and the substantial payments and fund flows between Alex and various parties that he was operating some kind of investment arrangement in which other parties took part.  The respondents’ expert Mr Haughey opined that Alex was running an “informal investment club”.  The trustees’ expert Mr Poole did not dissent from it although he said he would expect to see some documentary records – a matter that I shall come back to.

43.  There is also the unchallenged evidence of Mr Cheung Hung, who was in 1999/2000 a broker with various disclosure obligations and subject to restrictions on securities trading.  He said that since he knew Alex was doing well with his investments and he trusted him, he gave Alex about $2-3 million to invest for him.  In 2002 his investment with Alex grew to $4-5 million.  In 2006 when he noticed that Alex’s trades were not doing well, he asked him to return his funds and received a sum below $2 million in around 2006.  He was an independent witness with no interest in the outcome of this litigation.  I accept his evidence.  I find that Alex was operating an informal “investment fund” at the material times.

What is the nature of the payments between Dickson and Alex?

44.  The trustees contend that the payments made by Dickson to Alex were all gifts.  The question has to be determined with reference to the intention of the payer, i.e. Dickson: see Dewar v Dewar [1975] 2 All ER 728, 732-733; Meisels v Lichtman [2008] EWHC 661 (QB) at §§71‑75. 

45.  There is no direct evidence for the trustees’ contention of gifts.  Mr Whitehead SC sought, with characteristic skill, to attack the explanations given by Alex and Dickson in their testimony, but even if they are discredited that does not prove the payments were gifts: Hobbs v Tinling (C T) and Co Ltd [1929] 2 KB 1 at 21.  The trustees would still have to prove by evidence, including inference from facts established by evidence, that the payments to Alex were gifts.

46.  Mr Whitehead SC submitted that while the notion of two persons passing financial gifts of millions of dollars backward and forward to each other is prima facie implausible, the blood ties between the brothers in this case makes it not improbable.  I accept that what may appear to be strange things in a commercial context can well happen within a family.  That means I have to evaluate the evidence, having regard to the inherent probabilities, not as observed in the commercial world, but as might be found in the context of a local Chinese family such as the Cheung’s.

47.  The trustees placed considerable reliance on the contents of their interview of Dickson which took place in January 2012, the transcript of which was placed in the documents for the trial.  The transcript, which I have read, is not a statute and one cannot take one or two answers in isolation as a comprehensive legal statement.  Although there was prior correspondence from the trustees informing Dickson of their investigation, at that time the trustees viewed the dealings between the brothers as a running account and stated that there was a credit balance in favour of the bankrupt, which is quite different from the case being run now.  Dickson did not bring a lawyer with him to the interview.

48.  The thrust of the answers given by Dickson at the interview is that he had been quite ready to help family and friends with his money.  He would lend money to them and when it was not returned, instead of pursuing the borrower he would write it off (this was perhaps due to Dickson’s reaction to an incident in his university days when a classmate who had borrowed money from him committed suicide).  From around the late 1990s or 2000 Alex had requested funds from Dickson, and Dickson had from time to time paid various sums to him.  Alex sometimes told Dickson that he needed money to pay margin calls and sometimes asked Dickson to “invest” in his trades.  Dickson would not care too much about the reasons given by Alex for asking for money; much less would he seek to verify them.  The dealings were entirely informal and Dickson, who kept no records of them, did not pay attention to whether a particular sum was paid to Alex as a loan to help him out or as participation in his trades.

49.  The precise meaning of the reference to “margin” in the interview was unclear.  Mr Manzoni SC, who appeared for the respondents, demonstrated through an analysis based on a schedule of the margin position of Alex’s securities accounts that there was no correlation between payment being made by Dickson to Alex and the margin call being made by the brokerage firms. It seems to me the proper reading of the evidence given in the interview was that Dickson was sometimes asked by Alex for money to help with acquisitions of investments while maintaining the margin requirement laid down by the securities firms.

50.  Dickson was quite adamant, however, even at the time of the interview when he did not know the nature of the case of the trustees now advanced against him, that the money he paid to Alex was not gifts.  If Alex was able to repay, he expected him to repay it, without paying attention to whether it was a return of investment or repayment of a loan.  If Alex was unable to repay, Dickson would not pursue him and “would not reckon with him”.

51.  I accept Dickson’s evidence on this point.  He was no doubt generous with Alex.  He was brought up in a family that emphasised helping each other out.  He gave his sister a flat in Laguna City to live in. He was very close to Alex.  But I accept that in paying large sums of money to Alex at his request he was not giving him “cash presents”.  There was no intention that such money should never be recoverable by Dickson, even if, for example, the brothers fell out with each other or if Alex for whatever reason left behind a sizeable estate.  This is consistent with Dickson’s attitude towards advances made to his friends.  He expected repayment if they could repay, but if they could not, he would treat the loans as written off rather than pursue them.  Although Dickson was a high-earner, he was not a tycoon with billions of dollars worth of assets.  He was also a married man who shared his finances with his wife.

52.  The important objective fact is that there were indeed payments back by Alex to Dickson from time to time.  This is not a case where Dickson had been paying money to Alex for years without repayment until insolvency.  The incontrovertible fact is that Alex paid back Dickson regularly.  There were payments both ways at various points during the 5 years.  Alex’s payments were, on the evidence, and in the way the witnesses were cross-examined, clearly referable to Dickson’s prior payments to him. They were made in recognition of his obligation to pay Dickson back.  To say that Alex’s payments to Dickson were “gifts” in the commonly used sense of the word would be absurd.  To say that he was unnecessarily repaying Dickson because Dickson had been making gifts of money to him without expecting to be repaid ignored the reality.  Had Alex not been repaying Dickson at all, it would in my view be highly doubtful that Dickson, even with his generosity, would simply have given Alex money year after year to the tune of some $30 million.  In fact Dickson said in his interview, which I accept, that he would not have let large sums remain outstanding from Alex for a long time.

53.  There is no evidence that Alex was experiencing financial hardship between the early 2000s and the first half of 2006, such that Dickson would want to gift substantial sums of money to Alex.  Alex’s need for funds appears to have been driven by liquidity needs, as he was able regularly to repay Dickson. 

54.  The fact that Dickson himself kept no record of the financial dealings with Alex, and that by 2012 he could not remember very clearly the details of the dealings, is in my view entirely consistent with the close relationship of the brothers and with the casual way in which Dickson handled his financial dealings with friends and relatives.  It must also be remembered that most of the money had been repaid by Alex.  In my view the absence of documentation is not a basis for inferring that the payments between the brothers were mutual gifts.

55.  Admittedly there was no discussion between the brothers of any rate of interest or return or time for repayment.  This is however not uncommon for financial dealings between friends and family members. I do not infer from it that Dickson’s payments to Alex were gifts.

56.  In his 2^nd and later affirmations and his oral evidence, Dickson took the position that the money he paid to Alex prior to mid 2007 was money he invested in the private “investment fund” run by Alex, and that the money he and Winnie paid to Alex between mid 2007 and 2008 was loans.

57.  It seems to me there has been a degree of ex post facto reconstruction and rationalisation here.  Dickson was unable at the interview with the trustees in January 2012 to give any details.  He told the interviewer that, of the payments he made to Alex, he would not be able to tell which one was made as a loan and which one was made as an investment in the fund.  In his first affirmation in these proceedings made in September 2012, he was still unable to state the true nature of each of the payments without the assistance of the bankrupt. 

58.  Likewise, in his interview by the trustees in April 2013, the bankrupt was unable to give details or to point to any pattern with regard to the nature of the payments from Dickson, although he said that Dickson had placed some money with him for investment.

59.  I am unable to accept entirely the “reconstructed” position advanced by Dickson.  It seems to me the true position was probably closer to what he said in his interview, namely, that some of the money he paid Alex was meant as loans to him and some was meant for participation in the investment fund run by Alex.  It may be that it did not matter very much to Alex which was which.  He regarded the money placed with him as money he was free to deploy, with an obligation to pay back with a return if possible.  He would try to make a profit in his trading and give a return to the people who had given him money – whatever the payment was called.  Accordingly, when Alex paid back Dickson, it was pursuant to that obligation arising from the prior payments by Dickson to him.

Conclusion on nature of payments

60.  Accordingly, I reject the trustees’ case that the payments made by Alex to Dickson were gifts or otherwise transactions at undervalue.  I find that they were payments made in consideration of Alex’s legal obligation to repay Dickson either in consequence of the loans from Dickson or the sums injected by Dickson into the investment fund operated by Alex.

VI.  ISSUE 2 – INSOLVENCY FOR THE PURPOSES OF TRANSACTIONS AT UNDERVALUE

61.  In the light of my conclusion on Issue 1 above, this issue does not arise.  In case I am wrong, I should say that for the reasons set out under Issue 4(A) below, I find that the solvency position of the bankrupt between 5 and 2 years prior to bankruptcy was as set out in Appendix 6 to the joint report of the experts on the basis of 50% of the margin requirement.  That appendix shows the bankrupt to be mostly solvent on the relevant payment dates.

VII.  ISSUE 3 – PERSONAL OBLIGATION OR PROPRIETARY INTEREST

62.  In so far as the payments from Alex to Dickson within the 2 years ending on 25 August 2008 (there were 10 such payments: see the Appendix) were repayments of loans, there is no dispute that they were repayments made by Alex pursuant to a personal obligation and as such potentially caught by the provisions on unfair preference.

63.  On my finding under Issue 1, in the absence of proper records it cannot be concluded that any particular one of those payments was attributable to monies that Dickson provided to Alex by way of investment.

64.  Even if some payments are on the evidence shown to have been made by Alex by way of giving a return to Dickson for his investment in the fund, it does not necessarily follow that the money repaid was trust money.  Mr Manzoni SC argued that the money paid by co-investors to Alex was paid for the specific purpose of investing in the fund and as such held on a Quistclose[3] trust.  But even if that was the case it does not mean that when the money was applied for the purpose for which it was paid a trust would necessarily arise.  In the case of Barclays Bank Ltd v Quistclose Investments Ltd itself, the money was given for the purpose of making a loan.  If the purpose had not failed, and the money given had in fact been applied as intended, there would simply have been a loan.  The nature of the legal relationship arising from the application of the money for the purpose for which it was given depends on the objective intention of the parties with respect to that transaction. 

65.  Thus the nature of the relationship between Alex and the co-investors after he received funds from them and applied them for the purpose intended depended on the objective intention of the parties.  Likewise the nature of any repayment made by Alex to the co-investors depended on the legal consequences of the arrangements pertaining to the investment fund operated by Alex.

66.  The fact that Alex was operating an informal investment fund and had invited various persons to take part in it by providing money to invest in trades does not in itself lead to the conclusion that the “clients” acquired a proprietary interest in the securities purchased in Alex’s name.  Alex was not acting in the capacity of a securities broker purchasing specific securities for and on behalf of particular clients, in contrast with cases such as Re CA Pacific Finance Ltd [1999] 2 HKLRD 1; Re Peregrine Brokerage Ltd [2004] 1 HKLRD 856.  Even in the case of Lily Cheung v Standard Chartered Bank Hong Kong Trustee Ltd (unreported, HCA 5464/1987, 28 February 1990), which concerned a discretionary portfolio, it appears that the manager was buying specific shares for specific clients with the shares allocated to their accounts, albeit using the manager’s own discretion in the selection of securities.  In the present case, it is not suggested that any particular part of the securities held by Alex could be attributed to any particular client. 

67.  The evidence does not leave one with a very clear idea of how the fund worked.  No contemporaneous document at all regarding its operation was adduced in evidence, such as the documents Alex produced to account to the co-investors.  The oral evidence was not entirely clear on the detailed operation of the fund. 

68.  As submitted by counsel on behalf of the trustees, an intention to create a trust normally requires indicators that the trustee must keep the specific trust property separate from property available for his own use.  The fact that a transaction contemplates the mingling of funds is not necessarily fatal to a trust but if there are no other indicators of a trust, the absence of segregation of funds is a good indicator that they were to be used absolutely by the recipient: Lewin on Trusts (19^th ed) at §§8-061 – 8-065.  And if it is intended that the money is to be at the free disposal of the recipient, then a trust does not arise over the money: In re Goldcorp Exchange Ltd [1995] 1 AC 74, 100; Twinsectra Ltd v Yardley [2002] 2 AC 164 at §74; Paragon Finance plc v D B Thakerar & Co [1999] 1 All ER 400 at 416.

69.  In the present case it is clear that the money contributed by a co-investor would be mingled with the bankrupt’s own money. There was no agreement for him to keep the money and securities separate from his personal assets.  He did not in fact keep separate accounts for his own money and the fund’s money.  He said at his interview and in his oral testimony in court that he could use the money provided by the co-investors, after booking into the fund, for his personal daily expenses.  Mr Manzoni SC tried to explain that answer by suggesting that when a co-investor injected funds, the bankrupt would augment the fund with his own money and then use the cash provided by the co-investor as the bankrupt wished.  There is however no evidence to that effect.  My understanding of the evidence that the bankrupt did give is that after receiving money from his co-investors, he considered himself at liberty to use the money as he pleased, provided that he somehow accounted to the co-investors for it.  On that basis it is difficult to find the requisite intention to create a trust: see also Sacmi Cooperative Meccanici Imola v Gabriel Chi Kok Tam and Jacky Chung Wing Muk (unreported, HCMP 1942/2002, 24 March 2005).

70.  Further, the evidence is not wholly clear as to what actually constituted the boundaries of the “pool” of securities and money that formed the fund.  As Briggs J stated in Re Lehman Brothers International (Europe) (in administration) [2010] EWHC 2914 (Ch) at §225(iii):

“A trust of part of a fungible mass without the appropriation of any specific part of it for the beneficiary does not fail for uncertainty of subject matter, provided that the mass itself is sufficiently identified and provided also that the beneficiary’s proportionate share of it is not itself uncertain.”

71.  If a co-investor upon investing money, acquired a direct aliquot share in the various securities held by Alex for the fund, then the co-investor ought to be able to call for delivery of those securities to himself.  That would be a surprising result in the context of the kind of fund that Alex was operating.  There is in fact no suggestion that any co-investor had a right to ask for the return in specie of any specific securities or a pro-rata portion of the basket of securities that Alex had acquired for the fund. 

72.  While the co-investors had an entitlement to get an investment return, if there was a profit in the trades, and they would be entitled to an account from Alex, it seems to me that their recourse is against Alex.  The co-investors’ intention seems to have been, not to acquire securities beneficially through Alex, but to obtain an exposure to the market and benefit from any upside risks through the trades that Alex was undertaking.

73.  Accordingly, even if the payments by Alex to Dickson were made on account of the “investment fund”, I would not accept that they were a return of trust monies.  I conclude therefore that the payments made by the bankrupt to the respondents were repayments pursuant to a personal obligation rather than the return of money already beneficially owned by the respondents.

VIII.  ISSUE 4(A) – INSOLVENCY FOR THE PURPOSES OF UNFAIR PREFERENCE

74.  As stated above, by virtue of s. 51(2) of the Ordinance, a transaction cannot be impugned as an unfair preference unless the debtor was insolvent at the time of the preference or became insolvent in consequence of the preference.  The burden of proving insolvency lies on the person who seeks to invalidate the preference.

75.  Both sides adduced expert opinion evidence on this issue.  The trustees’ expert was Mr Neill Poole and the respondents’ expert was Mr Darach Haughey.  Each of them has produced his own report and together they have subsequently authored a joint report setting out their agreements and differences.

76.  Both experts have noted that crucial information was missing from the materials available:

(1) Only documents from 2002/3 onwards were available.  The experts did not have access to earlier documentation relating to the bankrupt’s bank accounts and securities trading accounts.

(2) The experts did not have information regarding the opening position of the bankrupt’s finances existing before the period of enquiry.  This could be quite significant.  For example, after the oral evidence had closed, it transpired that Alex had provided $37.7 million worth of collaterals to trade at Kim Eng.

(3) The statements of accounts at the securities houses were incomplete.

(4) The nature of certain payments and receipts by the bankrupt was unknown, even where the identity of the payer and payee in question was known. 

(5) So far as the payments to co-investors were concerned, there was no information as to how profits made and losses suffered were reflected in the payments.

77.  Because of the serious deficiency of available information, both experts took the view that there was insufficient information to assess the bankrupt’s solvency based on a cash flow test.  Both of them therefore concentrated on the balance sheet test, which by virtue of s. 51 of the Ordinance means that one has to ask whether “the value of [the bankrupt’s] assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities”.  The experts still have misgivings about the amount of information available for the purpose of this test. 

78.  Mr Poole took the view that there was insufficient information to make a full and proper determination of the bankrupt’s solvency during the relevant period under a balance sheet test.  In the joint report he said there is insufficient evidence for him to form an opinion on whether the bankrupt was solvent or otherwise.  On the basis of certain assumptions he had made, however, he considered that it was possible, and indeed probable, that the bankrupt was insolvent on the balance sheet test throughout the period from August 2006 to August 2008.

79.  Mr Haughey agreed that there was insufficient information to form a conclusive opinion but proceeded to form a view based on the information available and certain assumptions that he made.  On that basis he came to the opinion that the bankrupt was solvent up to and including June 2007 and was insolvent from July 2007 onwards.

80.  The difference between the experts primarily stems from the different assumptions they made.  There are in essence three main disputed assumptions made by the experts, which are, using the terminology adopted by the experts, as follows:

(1) the third party liabilities / asset share assumption;

(2) the opening third party liabilities / asset share assumption; and

(3) the contingent liabilities assumption.

81.  The primary task of the court is therefore to assess what assumptions, if any, are reasonable and logical and should be made in the exercise.  Each expert had elaborated on his reasons for making his assumption rather than his counterpart’s and, as one might expect, something could be said for each of these positions.  In these circumstances, the task for this court, as I see it, is to assess which assumption in each case is likely to approximate more closely to reality or has a higher probability of best reflecting the true position, having regard to all the facts and circumstances known from the available evidence.  I must also test an assumption and its logical conclusions against the inherent probabilities in the circumstances of this case.  The exercise has to be grounded in reality.  In the discussion below some of the data relate to the 5-year period from August 2003 to August 2008 (rather than just the 2-year period up to August 2008) for that was the way in which the matter was presented in the joint report.  I have kept in mind however that the purpose of the exercise under this Issue is to determine the solvency of the bankrupt at various points during the 2-year period up to August 2008.

The third party liabilities / asset share assumption

82.  The experts observed that during the 5 years between August 2003 and August 2008, $147.8 million was received into the bankrupt’s bank and securities accounts from third parties and $117.2 million was paid out to those third parties.  Both experts have had to make assumptions to account for this objective fact. 

83.  Mr Poole has assumed that the cumulated balances of payments received by the bankrupt from third parties, less payments made by the bankrupt to third parties, represent liabilities of the bankrupt or the share of the assets included in the bankrupt’s accounts attributable to third parties.

84.  Mr Haughey divided the fund inflows and outflows into 5 categories, namely, (i) identified third parties; (ii) unidentified payers/payees; (iii) securities companies and bank; (iv) co-investors; and (v) the respondents.  He has assumed that the net fund inflows from categories (iv) and (v), but not the others, represented liabilities of the bankrupt.

85.  I prefer the approach of Mr Haughey on this point.  The first category of entities includes third parties with whom the bankrupt had financial dealings and among them are a firm of certified public accountants, a solicitors firm and several corporate entities including Financial Products Group Limited and Gorient (Hong Kong) Limited.  According to the trustees, Financial Products Group Limited was incorporated in 2004 and the bankrupt was one of its two directors.  The bankrupt had stated in an email that he had lent money to Gorient (Hong Kong) Limited.  As for the solicitors firm (Messrs Gary Mak, Dennis Wong & Chang) see paragraph 96 below.  There is nothing to suggest that the monies received from all these persons represented liabilities of the bankrupt, rather than, for example, repayment of a prior liability to the bankrupt.  None of them has proved in the bankruptcy.  It is somewhat surprising that no information has been obtained by the trustees from these identified third parties as to the nature of the payments. 

86.  For the same reason, I do not think one can readily assume that category (ii) payments created liabilities on the part of the bankrupt. 

87.  As for category (iii) payments, insofar as they reflect the actual asset and liability of the bankrupt vis-à-vis the banks and securities companies, the position is reflected in the monthly statements issued by these institutions.  Insofar as they were in fact payments from or to third parties, again I do not think it can be readily assumed, without knowing who those third parties were, that the amounts represented liabilities of the bankrupt.

88.  Mr Poole’s assumption would result in the conclusion that there were creditors (apart from Quam) owed some $41.2 million by the bankrupt as at August 2008.  But there were only two known proving creditors in the bankruptcy, Quam, and HSBC (whose debt was negligible in the scheme of things).  Nor was it suggested to the bankrupt that he should have included additional creditors owed $41 million in his statement of affairs.  Mr Manzoni SC submitted with some force that it is unlikely that creditors who were in aggregate owed over $41 million just did not bother to do anything in the bankruptcy.  Mr Whitehead SC submitted that creditors might have refrained from coming forward because they thought there was no point or because they did not want to make public that they had dealings with the bankrupt.  These explanations seem to me to be speculative.  Further, even if these reasons were valid in relation to some of the creditors, it is striking that not a single creditor from a presumed group owed more than $41 million had made any claim in the bankruptcy. 

89.  In contrast, Mr Haughey’s assumption led to the conclusion that at the end of August 2008 the bankrupt had paid the co-investors $8.8 million more than they had paid him.  It is not disputed that if over the years profit from the trading had been paid by the bankrupt to the co-investors in that amount then the difference would be accounted for and there would be nothing owing from them to the bankrupt.  The precise figure is unknown but the witnesses’ evidence does suggest, which I accept, that the bankrupt did manage to make profit and give positive returns to the co-investors at least in the earlier years.

90.  Mr Poole’s assumption would also lead to the conclusion, in the earlier period, that as at 2005 – when the bankrupt moved this trades to Quam, he had around $10-12 million assets and yet owed liabilities of around $17 million to various third parties.  There is little support for this conclusion in the factual evidence. In fact the conclusion is inconsistent with the case put to the bankrupt that at that time his net worth was around $1 million to $1.5 million.

The opening third party liabilities / asset share assumption

91.  The experts have identified 11 payments totalling $15.655 million by the bankrupt to third parties from whom no payments appear to have been received by the bankrupt during the 5-year period.  Each expert has given his opinion on the impact of these payments on the asset position of the bankrupt.

92.  Mr Poole has assumed that the payments represented repayments of opening liabilities of the bankrupt or distributions of the share of assets held by the bankrupt for such third parties at the beginning of the 5-year period.  Mr Poole’s third party liabilities / asset share assumption and opening liabilities assumption are based on the same logic and “go hand in hand”.  In the appendices to the joint report their results are presented as composite figures. 

93.  Mr Haughey disagreed with the opening liabilities assumption and considered that no such assumption should be made. 

94.  Here, again, the evidence contains much uncertainty.  Based on information obtained from the bankrupt, of the 11 payees, 8 were likely to have been co-investors in the bankrupt’s investment fund.  One of those payees was Lee Kin Chung Alex, a former colleague of Dickson at a company called Calyon.  At the interview with the trustees, Dickson said that the bankrupt was instructed by him to make payment to Lee for his (Dickson’s) joint investment with Lee.  None of these payees appears to have been interviewed by the trustees with regard to the nature of the payments or at all.

95.  The other 3 (out of 11) payees included a solicitors firm (which was paid $2.3 million), a corporate entity ($1 million) and an employee of Quam ($1 million). 

96.  The sum of $2.3 million paid to a solicitors firm (Messrs Gary Mak, Dennis Wong & Chang) appears on the evidence to be a payment made by the bankrupt applied for the purchase of landed property in the name of one Lisa Leung (also a former colleague of Dickson at Calyon) in 2006.  In August 2011 the trustees wrote letters to the solicitors firm and Lisa Leung to make enquiries.  The trustees have stated that Dickson, Lee Kin Chung Alex and Lisa Leung all worked at Calyon and the transactions among them needed to be further investigated. 

97.  The investigation however did not appear to have made further progress.  Nor were these matters investigated at trial.  In this state of the evidence, it seems to me that a blanket assumption that all 11 payments represented opening liabilities of the bankrupt as at August 2003 could be wide of the mark.

98.  Further, Mr Haughey made the point that if one were to assume that such payments out by the bankrupt were made to discharge, and therefore implied the existence of, opening liabilities, then one should equally assume that payments in to the bankrupt over the 5-year period from third parties who did not appear to have received any payment from the bankrupt during the same period, represented opening assets (ie receivables) of the bankrupt.  Such payments totalled $14.7 million.  The breakdown shows payments in from Financial Products Group Ltd of over $10.2 million and from Gorient (Hong Kong) Ltd or Gorient (Holdings) Ltd of $2.3 million.  If this was offset against the assumed opening liabilities, then less than $1 million of net opening liabilities would remain.

99.  Mr Whitehead SC argued that this corresponding assumption was not appropriate because there was no evidence that the bankrupt lent any money to anyone.  However, as can be seen above, one hardly has a comprehensive picture of the bankrupt’s financial affairs in the evidence.  By not making this corresponding assumption, Mr Poole would be treating those payments-in as loans or co-investment, which as such would not affect the net assets position of the bankrupt.  But in light of the fact that there was no payment back to these parties over the 5 years from 2003 to 2008, such treatment does not seem to me to be entirely realistic.

100.  Further, as Mr Poole acknowledged, where the payments were made to co-investors, they could represent shares of profits made during the 5 years attributable to them.  On this basis, the payments would have arisen because of profits made during the 5 years, and would not imply the existence of liabilities on the part of the bankrupt in the amount of the payments as at the opening date.

101.  All of this shows the enormous uncertainties involved in the exercise, due to the lack of information as to the basis on which monies were paid to the bankrupt by third parties and the reasons for payments to third parties by the bankrupt.  In an ideal world these reasons would have been investigated, if necessary through the use of the trustees’ statutory powers such as the power to examine under s. 29 of the Ordinance. But the trustees no doubt had their own constraints.  The fact is that this court has to deal with the issue based on what is available.

102.  In the ultimate analysis, it may be that some of the payments out of $15.655 million represented opening liabilities and some of the payments in of $14.7 million represented opening assets of the bankrupt. In my view however we are in the realm of mere possibilities and the likelihood does not justify an assumption that the bankrupt had net opening liabilities in the sum of $15.655 million.

The contingent liabilities assumption

103.  The bankrupt traded index futures.  For that he needed to provide an “initial margin” when the position was first taken and to keep a “maintenance margin” (typically lower than the initial margin) as the position was maintained. 

104.  Margin requirements are used to determine the amount of collateral required by the broker or the clearing house.  The clearing house in turn guarantees the futures.  The margin requirement varies according to the type of futures contract involved and a minimum requirement is set by the Hong Kong Exchanges and Clearing Limited from time to time based typically on the maximum likely loss that may occur over one trading day. 

105.  For the purpose of identifying and quantifying the bankrupt’s contingent liabilities on futures contracts, Mr Poole has taken the margin requirement (as stated in the brokers’ statements) as a proxy for the bankrupt’s potential liability on his positions.  He has done two sets of calculations based on treating 100% and 50% of the margin requirement as contingent liabilities respectively. 

106.  Mr Haughey disagreed with this approach.  He considered that the fair value of the relevant financial instruments which would have been valued on a mark-to-market basis at a particular point in time would already reflect the factors (including the possibility of movements in price) that would affect their value at that point in time, and that there was therefore no need to make another separate calculation for a potential future loss.

107.  I start with s. 51(3)(b) of the Ordinance which provides that a debtor is insolvent on the balance sheet test if

“the value of his assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities”.

A contingent liability may for present purposes simply be said to be a potential liability which depends upon an event which may or may not happen.  In the present case since futures contracts imported a legal obligation to pay it is unnecessary to consider whether contingent liability must be based on an existing legal obligation: cf In re Nortel GmbH (in administration) [2014] AC 209; In re Sutherland, decd [1963] AC 235.

108.  It is well known that futures are risky investments.  They involve trading on margin and each contract has an expiry date.  Hang Seng Index futures have a multiplier of $50 per index point. Whenever the market moves there is a potential gain or loss for the investor. Thus, for example, if the Hang Seng Index moves against the investor by 500 points, he incurs, at least notionally, a loss of $25,000 on each contract.  If the investor tops up the margin, he need not realise a loss and can potentially hold out for a favourable turn of the market until the expiry of the contract.  I think therefore that in principle index futures do give rise to a contingent liability; they represent a right to receive, but also an existing contractual obligation to pay, a quantifiable amount depending on the movement of the index.  I do not accept that any potential liability is for present purposes sufficiently reflected in the market value of the instrument.

109.  Mr Haughey referred to the valuation of financial instruments under generally accepted accounting principles and in particular Hong Kong Accounting Standard 39 – Financial Instruments: Recognition and Measurement, which concerns the valuation of financial instruments.  In addition he referred to Hong Kong Accounting Standard 37 which provides generally that contingent liabilities under an existing obligation are not recognised as liabilities where it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or where a sufficiently reliable estimate of the amount of the obligation cannot be made.

110.  Mr Poole acknowledged that Mr Haughey’s view was the correct and generally accepted approach in the context of reporting on the financial affairs of a company on a going concern basis.  Mr Poole considered however that contingent liabilities on futures contracts should be separately recognised in this case because (i) the Ordinance specifically provides for contingent liabilities to be taken into account; and (ii) in the case of an individual such as the bankrupt with a relatively small income any losses incurred as a result of adverse market movements might have to be realised and settled.

111.  There is in my view considerable force in Mr Poole’s views.  While as Mr Manzoni SC pointed out there was no incident before July 2007 where the bankrupt was not able to satisfy any margin call in one form or another, that is not a reason for ignoring the potential liability on a futures contract to pay in accordance with the movement of the index.

112.  The quantification of such contingent liability is not however straightforward.  The minimum margin requirement is the amount of security required by the clearing house and/or the broker for futures trading.  It is not an estimate of the probable liability of an investor. Rather, it is calculated by the Exchange using a statistical model with reference to the maximum likely loss that may occur over one trading day.  The current minimum margin requirement for a Hang Seng Index future contract is $86,600, which covers an adverse movement of 1,732 points in the index.  The margin amount applicable at the material time is not clear from the materials.

113.  If an investor were to liquidate the position on the date of the statement, the liquidation price would be determined based on the actual market price rather than the margin requirement.  However, in my view, the margin requirement can properly be used as a reasonable proxy for estimating the contingent or potential liability of an investor.  On the evidence in this case I accept Mr Poole’s methodology using 50% of the margin requirement shown in the available statements as an indicator of the relevant contingent liabilities.

Conclusion on insolvency

114.  It follows from the above that, in my view, the scenario based on (i) rejecting Mr Poole’s third party liabilities / asset share assumption; (ii) adopting Mr Haughey’s approach on the opening third party liabilities / asset share assumption; and (iii) adopting Mr Poole’s contingent liabilities assumption based on 50% of the margin requirement, is likely to approximate more closely to the true financial position of the bankrupt within the meaning of s. 51 of the Ordinance.  I think it is justifiable to come to this conclusion, though the result is not one for which anyone can vouch with much confidence given all the uncertainties and constraints that I have mentioned above.

115.  That scenario is documented in Appendix 14 to the joint report of the experts, according to which the bankrupt was (during the 2 years ending in August 2008) solvent up to 11 October 2006 and was insolvent thereafter.  It follows that, as can be seen from the Appendix to this judgment, the first three payments by the bankrupt to Dickson during the 2-year period did not, but the subsequent payments did, potentially fall within the purview of unfair preference.

IX.  ISSUE 4(B) – WHETHER THE BANKRUPT WAS INFLUENCED BY A DESIRE TO PREFER

116.  This issue raises two separate questions: (i) whether Alex had a desire to prefer Dickson and, if so, (ii) whether he was influenced by it.  S. 50(5) creates a statutory rebuttable presumption that a debtor who has given an unfair preference to an associate has been influenced by a desire to prefer him.  This subsection is not entirely easy to construe, for it is not clear from the language itself whether the debtor is presumed both to have had the desire and to have been influenced by it, or is only presumed to have been influenced by the desire which is not presumed.

117.  The Court of Appeal has held that the rebuttable presumption in s. 50(5) of the Ordinance applies to influence by the desire but not the existence of the desire: Trustees of the Property of Hau Po Man Stanley (in bankruptcy) v Hau Po Fun Ivy [2005] 2 HKC 227 at §16 per Le Pichon JA.  The question of presumption was of some importance in that case since there was no oral evidence.  In the present case I have heard live evidence from the bankrupt and other witnesses.  While I proceed on the basis of the interpretation of s. 50(5) adopted in Hau Po Man Stanley, I do not think the present issue actually turns on presumptions or the burden of proof.

118.  On the basis of Hau Po Man Stanley:

(1) It is for the trustees to prove that in making the relevant payments to Dickson, Alex had a desire to produce in relation to Dickson the effect of putting him into a position which, in the event of Alex’s bankruptcy, would be better than the position he would have been in if those payments had not been made.

(2) If there was such a desire, it is presumed by virtue of s. 50(5) that Alex was influenced by such desire in deciding to give the unfair preference.  The presumption is rebuttable, and it would be for the respondents to prove that Alex was in fact not so influenced.

119.  Both counsel referred me, with different emphases, to the following passages in the judgment of Mummery Jin Re Fairway Magazine Ltd [1993] BCLC 643 at 649f-g:

“Secondly, a desire to produce that effect is a subject state of mind. As it is subjective, there may often be no direct evidence of that state of mind. The existence of the state of mind may, however, be inferred from all the relevant circumstances, and 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.

Thirdly, it does not follow that, because there was a desire to grant the debenture or to make the payment, there was a desire to prefer the creditor in the event of insolvency.  If the company is influenced by ‘proper commercial considerations’ and not by a ‘positive wish to improve the creditor’s position in the event of its insolvent liquidation’, then the debenture will be valid.  If a desire to prefer is present, however, it is sufficient that it influences the decision.  It does not have to be the sole or decisive influence on the decision.”

120.  In this context, the effect or result of one’s actions is to be distinguished from desire motivating such actions.  As Le Pichon JA said in Hau Po Man Stanley, supra, at §15:

“What is important is to consider what influenced a person to take a particular course.  In other words, why did that person do what he did?  If a person appreciates that his act may have a particular result, he may allow that result to occur even though his reason for so doing may be to achieve some other objective.  Hence what would have influenced him to do the act was the cause rather than one of the results of the act. “

121.  As Millett J said in Re M C Bacon Ltd [1990] BCC 78, 87:

“There must have been a desire to produce the effect mentioned in the subsection, that is to say, to improve the creditor’s position in the event of an insolvent liquidation. A man is not to be taken as desiring all the necessary consequences of his actions. Some consequences may be of advantage to him and be desired by him; others may not affect him and be matters of indifference to him; while still others may be positively disadvantageous to him and not be desired by him, but be regarded by him as the unavoidable price of obtaining the desired advantages. It will still be possible to provide assistance to a company in financial difficulties provided that the company is actuated only by proper commercial considerations. Under the new regime a transaction will not be set aside as a voidable preference unless the company positively wished to improve the creditor’s position in the event of its own insolvent liquidation.”

122.  The bankrupt denied that he had any desire to prefer Dickson.  This must of course be tested against other evidence.  Mr Whitehead SC relied on Dickson’s evidence that in September 2006, when Alex’s trades were not doing too well, Dickson asked Alex to reduce his share and return money to him.  This was also the bankrupt’s explanation: he said he paid Dickson because he asked for his share in the fund to be reduced.  If other co-investors asked for a return of their investment, he would also oblige. 

123.  This evidence is in itself insufficient to justify an inference of a desire to prefer Dickson.  The evidence was simply that Dickson considered the investments were not doing as well as before.  The reason why Dickson was paid was that he asked for it.

124.  Mr Whitehead SC drew my attention to Re Exchange Travel (Holdings) Ltd (in liquidation) [1996] BCC 933 and made the point, which I accept, that a belief on the part of the debtor that he was not already insolvent does not preclude a finding of a desire to prefer, at any rate where he was aware that insolvency was a distinct possibility. 

125.  As far as the bankrupt’s own perception of his financial condition is concerned, Mr Whitehead SC relied on the forms for opening securities trading accounts in 2003 and 2005 where certain boxes were ticked indicating the bankrupt had a net worth of around $1 million or $1.5 million.  I accept however the bankrupt’s evidence that he took a cavalier approach to the ticking of the boxes in those forms, and that he regarded his investment portfolio, at any rate a very substantial portion of it, as his own assets.  Trading his portfolio was his passion, his life.  The evidence suggests that he was overall a successful trader or (some might say) speculator in securities and futures at least up to and including 2005. 

126.  Documentary evidence shows that there was a substantial positive balance taking into consideration the securities in Alex’s accounts up to June 2007, leaving aside (i) the unquoted financial liabilities arising from Alex’s short position on certain call options, and (ii) the contingent liabilities arising from futures contracts referred to above.  That balance only became negative in July 2007.

127.  The net assets position of Alex’s accounts would only become negative before July 2007 if one took into consideration the unquoted financial liabilities and contingent liabilities.  The computation of the unquoted financial liabilities relating to call options was however complex and the result was by no means obvious.  Nor is there sufficient evidence that the bankrupt appreciated the extent of his liability under them.  The same may be said with his contingent liabilities.  As explained under Issue 4(A) above, the contingent liabilities as computed by Mr Poole represented 50% of the margin requirement.  If, as is currently the position, the full margin requirement provided buffer for an adverse movement of over 1,700 points in the Hang Seng Index, then the contingent liabilities calculated by Mr Poole would represent an adverse movement of over 800 points.  While I have accepted Mr Poole’s opinion having regard to the provision of s. 51(3)(b) of the Ordinance, I do not think the bankrupt had in mind that he had contingent liabilities representing that kind of risk.  I think that from the point of view of the bankrupt, real trouble only hit him from July 2007 onwards.  In that month alone he lost $13 million in the trades through Quam, and another $6 million in August to October 2007.  In my view, on the evidence, Alex had not subjectively contemplated the possibility of insolvency until the latter part of 2007.  In fact perhaps his subsequent financial problems stemmed in part from his overly optimistic approach. 

128.  Mr Whitehead SC relied on the blood relationship between Alex and Dickson to suggest that Dickson was preferred.  But he has not disputed the legal proposition that the statute only presumes influence by the desire, and not existence of the desire, in the case of preference given to associates.

129.  In any event, Mr Manzoni SC relied on three matters as negativing any desire to prefer or influence by such desire.  First, he submitted that the payments to Dickson were nothing out of the ordinary when seen in the context of the entire history of the financial dealings between the brothers.  There was a continuous pattern of dealing involving payments both ways from time to time.  The payments now under attack form part of that overall picture which is simply a continuation of the pattern.  This observation is in my view borne out by the pattern of the payments as can be seen from the Appendix to this judgment.

130.  Secondly, immediately following the payments under attack was not the bankruptcy of Alex, but payments made the other way round, ie by the respondents to Alex, totalling $5,384,000 (excluding $1 million transferred to Alex from Florence’s account).  There is, in my view, something inherently odd about the proposition that between September 2006 and June 2007, Alex desired to put Dickson in a better position in the event of Alex’s bankruptcy and therefore repaid money to him, and yet, after July 2007, when Alex’s financial position had worsened, he actually asked Dickson to lend him money to deal with his financial difficulties.  I do not say that the earlier payments in such a situation could never be preferences, but I think that the overall conduct including the subsequent payments to the bankrupt may be taken into account in testing the suggested inference that the earlier payments were preferences.

131.  Thirdly, during same period of time as that spanned by the payments to the respondents in question, namely, 18 September 2006 to 21 June 2007, the bankrupt not only made payments to the respondents but also payments to other third parties including known co-investors.  The total payments out during that period amounted to $14,832,815 (including $6,390,000 to the respondents).  If one examines the entire 2‑year period ending on the date of the bankruptcy petition, the total payments out to co-investors and third parties amount to $16,822,850.  This includes, for example, $1.3 million paid out to Mr Cheung Hung in October 2006, which was consistent with his unchallenged evidence that when he noticed Alex was not doing well with his trades in 2006, he asked him to return his funds.  I accept that likewise the bankrupt paid sums to Dickson because Dickson asked for the return of his money and that Alex did and would do the same with respect to other co-investors if and when asked.

132.  There is in my view considerable force in Mr Manzoni SC’s submissions, which I accept.  There is nothing to show that Alex was at the material times aware of the possibility of bankruptcy.  As far as he was concerned, his securities balance was in the black up until June 2007.  He repaid Dickson because he was asked for the return of the funds provided to him.  He also repaid at least another co-investor and paid some third parties at around the same time – in fact in greater amount in total than he paid Dickson.  It was in July 2007 that Alex suffered big losses in his trades, and he turned to Dickson for help, and got help in the form of substantial sums advanced.  This, in my view, is not the conduct of a consciously insolvent or near-insolvent person who wished to prefer his brother to other creditors by repaying all debts to him in case he himself became bankrupt.  I find that there was no requisite desire to prefer on the evidence as a whole.  It follows that I also take the view that in making the payments in question the bankrupt was not influenced by a desire to prefer Dickson in the event of bankruptcy.

X.  ISSUE 5 – PAYMENTS MADE BY FLORENCE FUNG

133.  Florence was a bone of contention between Dickson and Quam.  Quam had alleged that Florence was in fact Dickson’s girlfriend and said so to the trustees.  Quam also brought an action in 2009 against Dickson and Florence and Financial Products Group Limited (HCA 282 of 2009) alleging that Dickson and Florence had an intimate relationship as boyfriend and girlfriend and making various claims including a claim for conspiracy to defraud.  The action was dismissed by consent as against Dickson and Florence in 2010.

134.  There is little contemporaneous documentary evidence about the transactions involving Florence.  The objective, undisputed fact is that during the 5-year period ending on the date of the bankruptcy petition, Florence had paid 7 sums totalling $12.94 million to Alex, whereas Alex had paid her one sum of $1.8 million on 15 November 2004 (see the Appendix).  In other words, she made a net deposit over the 5-year period of $11.14 million to Alex. 

135.  According to Dickson, he knew Florence from work in 1997 when she worked as a secretary in Jardine Fleming and Alex met her in 1998.  Florence became Alex’s girlfriend in 2000.  She borrowed money from Dickson to invest in Alex’s fund.  She broke up with Alex but remained on good terms with him until 2005.  In 2005 Dickson started asking Florence to repay her loans, and also told Florence to transfer funds to Alex which were to be treated as repayment of loans by Florence and as investment by Dickson in Alex’s fund.  Dickson’s case therefore is that the payments from Florence to Alex should also be treated as his (Dickson’s) payments to Alex.

136.  The trustees’ position is that Dickson’s evidence on Florence should be disbelieved, and that the payment from Florence should not be treated as having been made on behalf of Dickson, but should be treated as her own money. 

137.  On the thin evidence available, I am unable to accept the respondents’ factual allegations about Florence. In his email of August 2011 to the trustees the bankrupt did not state that substantial sums of money coming from Florence were in fact Dickson’s money.  Nor did Dickson say so in his own interview in January 2012 even though Florence was mentioned.  The first time that claim was made was in Dickson’s first affirmation in these proceedings dated 14 September 2012.  A letter from Florence dated 13 January 2013 has been adduced by the respondents in evidence, but the letter did not mention any loan from Dickson or any payment she made to Alex on behalf of Dickson.  No record of any contemporaneous communication such as emails between Dickson and Florence has been disclosed.  No documentary evidence of any loan or transfer of money from Dickson to Florence has been produced.  Nor have the respondents called Florence to give evidence, even though she remained contactable despite frequent travels.  It may be, and indeed it seems likely, that there were financial dealings between Dickson and Florence, but on the evidence available I am not prepared to find that they were as described by Dickson and Alex.

138.  Mr Whitehead SC submitted that because Dickson claims that Alex’s payments to him were repayments of the money he had paid Alex including the money he had caused Florence to pay Alex, if I reject Dickson’s explanation, then the amount of $11.14 million should be singled out from the impugned payments as over-payments or as gifts by Alex to Dickson.

139.  I am unable to accept this submission.  If Dickson’s evidence on Florence is not accepted, this net figure of $11.14 million is to be deducted from the money he claims he had paid Alex.  But it does not follow that Alex made gifts to Dickson.  For one thing, the opening balance between the two brothers and in particular how much Dickson had already paid Alex prior to the 5-year period on which this trial has focussed is unknown (although Alex claimed it was around $7 million).  So one cannot say Alex paid Dickson more than he received from Dickson.  Nor is it known what returns or profits Alex attributed to Dickson and paid him.  Moreover, the trustees are unable to point to any specific part of the 46 payments under challenge as being attributable to the net deposit from Florence. 

140.  It is for the trustees to prove there were gifts.  As I have said above, this was not done by merely discrediting the respondents’ explanation.  The only case of “gift” run by the trustees and put to the witnesses was that Dickson had given money to Alex which he was not legally required to repay and that in actually making repayment out of a moral obligation, he was making “gifts” to Dickson.  It was never put to the witnesses that Alex out of benevolence made gifts of money to Dickson.  There was no suggestion of any “gift” by Alex to Dickson in the everyday sense of that word.  Nor was it put to any witness that there was an “over-repayment” by Alex to Dickson by mistake in that $11.14 million should have been repaid to Florence and not Dickson, and Mr Whitehead SC quite properly disclaimed such an allegation.  Anyhow even if there were such mistake the proper plaintiff would have been Florence, not the trustees.  In these circumstances while I do not entirely accept the respondents’ evidence about Florence this does not affect my conclusion on the above issues.

XI.  ISSUE 6 – RELIEF

141.  It follows from my conclusions above that the trustees’ claim fails.  The question of relief does not arise for decision.  I should record that Mr Manzoni SC made a point on relief based on s. 50(2) of the Ordinance which provides:

“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 given that unfair preference.”

142.  He submitted that, if the payments to the respondents in the 2-year period totalling $6,390,000 were impugned as unfair preferences, then because the respondents had in fact advanced $5,384,000 to the bankrupt between July 2007 and his bankruptcy, the position had to that extent been restored.

143.  The same point, in fact, could be made in relation to transactions at undervalue based on s. 49(2) which is in materially the same terms as s. 50(2) to the extent that the respondents had also made payments to the bankrupt in the wider period relevant under s. 49.

144.  On the evidence there is basis for saying that had the payments from the bankrupt to the respondents not been made, many of the payments from the respondents to the bankrupt would also not have been made.

XII.  CONCLUSION

145.  In summary, I find that the payments by the respondents to the bankrupt were not gifts but carried with them a personal legal obligation to repay.  The payments by bankrupt to the respondents were payments made pursuant to such obligation and hence not gifts or payments made for no consideration.  The claim to impugn the payments as transactions at undervalue pursuant to s. 49 of the Ordinance therefore fails.

146.  The payments to the respondents were made from money belonging to the bankrupt beneficially and were not trust property that had always belonged to the respondents.  The payments that were made during the 2 years prior to the bankruptcy petition could therefore potentially be attacked as unfair preferences.  Taking into account his contingent liabilities arising from his trading in futures, the bankrupt was insolvent after 11 October 2006.  On the evidence however the bankrupt did not have a desire to prefer the respondents at the material times and was not influenced by such desire in making the payments in question.

147.  For the foregoing reasons, the originating summons is dismissed. 

148.  I make an order nisi that the trustees do pay the respondents the costs of these proceedings.

Appendix

HCMP 1431/2012

List of Relevant Payments