RE FORTUNE KING TRADING LTD (In Liquidation)

HCCW 432/2012

[2020] HKCFI 353

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 432 OF 2012

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J U D G M E N T

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Introduction

1.  This application arises in the context of (1) the compulsory winding up of Fortune King Trading Limited (“Company”), which was wound up on 30 January 2013, and (2) the bankruptcy of Luu Hung Viet Derrick (“Luu”), who was made bankrupt on 8 February 2012.

2.  The application is made pursuant to Rule 95 of the Companies (Winding-Up) Rules Cap 32H (“Rule 95”), by the trustees-in-bankruptcy (“Trustees”) of Luu.  By summons dated 22 February 2019, the Trustees seek an order that the decision of the joint and several liquidators (“Liquidators”) of the Company, in rejecting the proof of debt of the Trustees for the sum of $44,831,070.97 (“Trustees’ Proof”), be reversed and that the Trustees’ Proof be admitted in full.

3.  The contest between the parties is perhaps unusual in that it is between Trustees and Liquidators, neither of whom has a personal interest in the outcome because both are acting in accordance, no doubt, with what they see is their statutory duty on behalf of the creditors of the bankruptcy and liquidation estates.  At the hearing, the Trustees were represented by Mr Sebastian Hughes of Counsel and the Liquidators by Mr Jason Yu of Counsel.

4.  Unless the context otherwise makes clear, all references to dollar sums in this Judgment are denominated in Hong Kong Dollars.

Background

5.  The Company was incorporated in Hong Kong on 26 April 2007.  Until March 2012, its sole shareholder and director was Alphred Group Limited (“Alphred”).

6.  Alphred was itself incorporated in the BVI on 28 March 2007.  On 4 May 2007, Luu became its sole shareholder and held one share. Luu’s wife, Liu Ke Mian (“Lorraine Liu”) was allotted one share on 26 September 2008.  Luu remained sole director of Alphred until Lorraine Liu was appointed as a director on 20 January 2012, after the bankruptcy petition had been presented against Luu and only shortly before the Bankruptcy Order was made against him.

7.  On 23 July 2007, the Company purchased a property, being House 18, Severn 8, 8 Severn Road, Hong Kong (“Property”) for $109 million.  The Company had no business or operation other than holding the Property.

8.  The Purchase price of $109 million was paid in four instalments: an initial deposit of $5 million, further deposits of $5.9 million and $10.9 million, and the balance of $87.2 million. The last payment for the Property was made on 30 November 2007, the date of completion.

9.  The Property was made subject to a number of mortgages: (a) a mortgage dated 4 December 2007 in favour of Standard Chartered Bank; (b) a legal charge dated 18 July 2008 in favour of Goldbest International Investment Limited (“Goldbest”) to secure a loan agreement of the same date for a $15 million loan facility; (c) three legal charges dated 4 December 2007, 23 June 2009 and 4 September 2009 in favour of Freeway Finance Co Ltd (“Freeway”); (d) a second legal charge dated 27 October 2009 and a third mortgage dated 16 August 2010 in favour of Hong Kong Finance Co Ltd (“HKF”); and (e) a second legal charge dated 21 January 2010 in favour of Sparkle Well Finance Co Ltd (“Sparkle”).

10.  On 1 August 2011, the bankruptcy petition was presented against Luu in HCB 4776/2011, and the Bankruptcy Order was made on 8 February 2012.

11.  On 30 March 2012, and without the consent of the Official Receiver or Trustees, Alphred passed a resolution approving the transfer of the one share held by Alphred in the Company to Satisfactory Kingdom Holdings Ltd (“Satisfactory Kingdom”).  The special resolution was signed by Lorraine Liu as authorised signatory of Alphred.  The transfer was made for no apparent consideration.

12.  Satisfactory Kingdom as a company incorporated in the BVI.  Its sole director and shareholder is a Madam Wang Ying, a resident of Beijing who has ignored all communications from the Liquidators.

13.  On 30 April 2012, the Property was sold for $168 million.  The net proceeds of sale of $14,835,000 were ultimately later paid into court in HCA 1055/2012, in proceedings commenced by the Trustees against the Company.

14.  On 3 July 2012, Construction Ltd (“Construction”) issued HCA 1140/2012 against the Company in respect of an alleged debt of $16.8 million.  Only two days later, on 5 July 2012, the Company filed an acknowledgement of service admitting Construction’s claim and just seven days later, on 12 July 2012, Construction obtained judgment against the Company for the full amount of its claim, plus interest and costs. The acknowledgement of service was executed by Satisfactory Kingdom.

15.  On 23 November 2012, Construction presented a winding up petition against the Company.  On 30 January 2013, the Company was wound up.  It seems that the only parties to file proofs of debt in the liquidation of the Company are (i) Construction and (ii) the Trustees.  Tso Yin Yee and Pang Yiu Kwong of Advantage Advisory Ltd were appointed as liquidators (“Former Liquidators”).

16.  The Trustees’ application to continue HCA 1055/2012 was refused by the Master, and by a Judge on appeal in May 2014.

17.  On 14 October 2015, the Former Liquidators applied for a determination whether the net balance from the sale of the Property was legally and beneficially owned by the Company or held by the Company for and on behalf of the bankruptcy estate of Luu.  In her Decision of 19 May 2017 (“2017 Decision”), Recorder Linda Chan SC (as she then was) held that the Property and net sale proceeds belonged to the Company.  The Former Liquidators were criticised by the Recorder for failing to discharge their duties, and she made adverse costs orders against them.

18.  By a Decision dated 27 July 2016, the Trustees application for suspension of the automatic discharge of bankruptcy was granted by Master J Wong, the period of suspension being for four years.  It may be relevant to the considerations below that the Master took into account, amongst other things, that (a) Luu’s Statement of Affairs affirmed on 17 April 2012 (“SOA”) did not reflect the true position, as there was a lot of concealment and he was far from full and frank in his disclosure, (b) Luu had not been cooperative with the Trustees, but rather was passive and reactive, (c) on occasions Luu had adopted the “catch me if you can” approach and occasional positive obstruction, and (d) Luu had been hiding his assets from disclosure and collection by the Trustees for distribution among the creditors.

19.  By order of Harris J dated 6 October 2017, the Former Liquidators were removed, and the Liquidators were appointed in their stead.  Shortly before that, the Trustees had submitted the Trustees’ Proof.  The Trustees’ Proof was rejected on 1 February 2019, leading to the current application.

Applicable Legal Principles

20.  The relevant applicable principles as to appeals against rejection of proofs are not significantly in dispute, and can be distilled from various cases including Re Global March Ltd [2005] 4 HKC 51, at §§10-13, 21, 24, 28, 33-36; Active Base Ltd v Roderick Sutton & Desmond Chung (unreported, HCCW 470/2005, 4 June 2008, Kwan J) at §§50-54; and Re Adam Holdings Ltd [1985] 2 HKC 608, at 610-611, 614-615.  The principles might be summarised as follows:

(1)     An appeal under Rule 95 against a liquidator’s adjudication is a hearing de novo, at which the Court may confirm, reverse or vary the liquidator’s decision.

(2)     The purpose of the hearing is for the Court to determine to what extent the applicant should be allowed to rank as a proving creditor.  Therefore, the Court is bound to decide the rights of the applicant in the light of all of the evidence which is before the Court, and not merely to express a view as to whether the liquidator was right or wrong in rejecting the proof on the evidence then available to the liquidator at the time he rejected it.

(3)     A liquidator who defends his decision to reject a proof is no longer acting in a quasi-judicial capacity, but is cast in the role of an adversary.

(4)     The onus of proof is on the applicant to show on a balance of probabilities that a real debt is due to him.

(5)     The requirement for a liquidator or trustee in bankruptcy in admitting or rejecting a proof is to require some satisfactory evidence that the debt on which the proof is founded is a real debt, and this is a relatively low threshold.  Nevertheless, the liquidator or trustee is entitled to go behind mere form so as to get at the truth.

(6)     On an appeal against the rejection of a proof, the applicant’s burden is to prove a real debt, to be established by credible evidence.

(7)     Hence, there may be cases, for example where probative evidence is scarce, where the incidence and standard of proof has some significance.  The burden remains with the applicant to establish proof of the claim on the balance of probabilities on whatever evidence is produced.

(8)     The applicant is not entitled to say that his claim should be admitted because this is all the evidence that he has and because the best evidence has been lost or destroyed.  Even in such a situation, the burden remains with the applicant to prove his claim on the balance of probabilities on the evidence as is produced.

(9)     But the Court is not bound to accept at face value any accounts of a company previously prepared, and is entitled to go behind them to form its own conclusion as to the truth.  Even if the accounts in question have been audited, where there is evidence to show that the accounts are or may be inaccurate, or to cast doubt on the way in which the auditor carried out his duties, this will be a factor to take into account.

21.  Section 35 of the Bankruptcy Ordinance Cap 6 (“BO”) provides for the possibility of set-off where a company’s creditor is also a debtor of the company, provided that there has been “mutual credit, mutual debts, or other mutual dealings”.  Where the creditor is a bankrupt, the remedy of the company against the bankrupt is the right to prove in his bankruptcy: see section 34(3) of the BO.  But in the absence of “mutuality”, including where an individual has been acting in different capacities, set-off will not apply.  Nor will it apply if the money taken from the company amounts to a voidable preference, misfeasance or misappropriation of assets.

22.  As to secondary liability, for a person to make out a claim for contribution or reimbursement, the claimant must show that he discharged the defendant’s liability to a third party and that (1) the claimant and the defendant were both liable to the third party, (2) who was forbidden to accumulate full recoveries from both of them, but (3) who could choose to recover in full from either of them, and that (4) some or all of the burden of paying the third party should ultimately be borne by the defendant.  The basic rule is that the claimant must prove that he paid the third party pursuant to an existing legal liability: see Goff & Jones ‘The Law of Unjust Enrichment’ 9^th Ed §§20-01 to 20-02.

23.  In the Global March case at §35, the following points were accepted, that as a matter of law: (1) for the purpose of mandatory set-off under section 35, any payment effected by a guarantor pro tanto extinguishes the principal debt; (2) a right to prove may arise where the creditor has discharged the company’s own debt and becomes entitled in law or equity to recoup his payment, for example by subrogation or because the payment was made under compulsion of law; and (3) further, a surety for part of the debt is entitled to prove in the winding up of the debtor company once a payment has been made to the creditor in relation to that part of the debt for which he or she is liable.

24.  In this context, Mr Hughes also referred me to Goff & Jones at §§5-54 and 5-63, which identify that a defendant can be enriched by the discharge of his obligation to a creditor, whether the obligation arose in contract, tort or unjust enrichment, under a statute or for some other reason, and that the law deals with sharing of burden between persons “primarily” and “secondarily” liable.  I agree with Mr Yu that this goes to the first question of the four identified by the Shanghai Tongji case (see below), namely whether there was enrichment; it does not of itself answer the other questions, such as whether any enrichment was unjust.

25.  But in addition to guarantees, the statute which Mr Hughes relies upon is section 15 of the Law Amendment and Reform (Consolidation) Ordinance Cap 23 (“LARCO”), which is headed “Right of surety who discharges liability to assignment of all securities held by creditor”, and provides that:

“(1) Every person who, being surety for the debt or duty of another or being liable with another for any debt or duty, pays such debt or performs such duty, shall be entitled to have assigned to him, or to a trustee for him, every judgment, specialty, or other security which is held by the creditor in respect of such debt or duty whether such judgment, specialty, or other security is or is not deemed that law to have been satisfied by the payment of the debt or performance of the duty.

(2) Such person shall be entitled to stand in place of the creditor, to use all the remedies, and, if need be and upon a proper indemnity, to use the name of the creditor, in any action or other proceeding at law or in equity, in order to obtain from the principal debtor or any co-surety, co-contractor or co-debtor, as the case may be, indemnification for the advances made and loss sustained by the person who has so paid such debt or performed such duty, and such payment or performance so made by such surety shall not be a bar to any such action or other proceeding by him.

(3) No co-surety, co-contractor, or co-debtor, shall be entitled to recover from the other co-surety, co-contractor, or co-debtor, by the means aforesaid, more than the just proportion to which, as between those parties themselves, such last mentioned person is justly liable.”

26.  On the other hand, mere proof of payment by one person to another does not of itself establish a loan.  In Big Island v Wu Yi Development Limited (2015) 18 HKCFAR 364 at §§99-109, it was held that Hong Kong should not follow previous authorities standing for the proposition that the mere fact of payment by one to another gave rise to a presumption of an obligation to repay it.  This is because the making of a bear payment to another may in the nature of things be explicable by reference to a wide variety of possibilities.  It is the making of the payment in the circumstances which surround it that will enable appropriate inferences to be drawn, in the light of any relevant traditional presumption.  But generally, it is preferable to avoid making any presumption; presumptions lend themselves to tactical ploys in litigation, and it is better that parties are encouraged to present the totality of their case, particularly in cases arising out of commercial transactions.  Therefore, it is better to leave the Court to draw inferences as to the “character and effect” of the payment.  Where an applicant says there was a loan (and not, say, a gift), he will bear the burden of showing against the circumstances that the relevant payment had the character and effect of a loan.

27.  But it can be pointed out that, on the facts of many previous authorities, there may have been a real lack of evidence as to the payer and, sometimes, the payee of the monies alleged to have been provided by way of a loan.  It will be necessary, therefore, to look at the particular facts of this case in order to assess the character and effect of each of the relevant payments.

28.  Also in the Big Island case, at §§67-68 referring to the CFA’s previous decision in Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79, stress was put on the relevant questions to be asked when considering matters of unjust enrichment.  The four questions are: (a) was the defendant enriched? (b) was the enrichment at the plaintiff’s expense? (c) was the enrichment unjust? (d) are any of the defences applicable?  Mr Yu emphasised the importance of the third question, and the approach of the common law to look for an unjust factor, something which makes it unjust to allow the payee to retain the benefit.  The common law accepts that the payee is enriched when the sum was not due to be paid to him, but it requires the payer to show that this was unjust.

29.  In the context of an argument as to the existence of an issue estoppel or res judicata, reference might be made to the summary of applicable principles adopted by Anthony Chan J in Capital Wealth Finance Co Ltd v Lai Yueh-Hsing (unreported, HCA 686/2012, 31 July 2015) at §§20-26.  To give rise to an estoppel, the earlier decision relied upon must satisfy the following requirements: (1) it must be judicial in the relevant sense; (2) it was in fact pronounced; (3) the tribunal had jurisdiction over the parties and the subject matter; (4) the decision was (a) final and (b) on the merits; (5) it determined a question raised in the later litigation; and (6) the parties are the same or their privies or the earlier decision is in rem.

30.  A decision will create an issue estoppel if it determined an issue in a cause of action as an essential step in its reasoning.  Issue estoppel applies to fundamental issues determined in an earlier proceeding which formed the basis of the judgment.  Therefore, an express decision will not necessarily create an issue estoppel.  Only determinations which are necessary for the decision, and fundamental to it, will do so.  The question is whether the determination was so fundamental that the decision cannot stand without it.  As it is sometimes put, it can be asked whether the determination is the immediate foundation of the decision or no more than part of the reasoning supporting the conclusion.

31.  There may also be special circumstances which, if established, constitute an exception to an issue estoppel which might otherwise arise.  One example is where there has become available to a party further material relevant to the correct determination of a point involved in the earlier proceedings, being material which could not buy reasonable diligence have been adduced in those earlier proceedings.

32.  There is also some authority for the point that judgments and estoppels are not conclusive in liquidations or bankruptcies, not least if it might prevent the liquidator or trustee from pursuing his statutory duty: see In re Exchange Securities Ltd [1907] 2 KB 23 at 59D-G (a case on estoppel by representation).  A more recent identification of the correct approach in Hong Kong is to be found in Re Tam Mei Kam (unreported, see a CV 87/2012, 8 May 2013, Court of Appeal).  That case involved consideration of the approach to be adopted by the bankruptcy court where the debtor challenges the judgment debt upon which a petition for bankruptcy has been based.  In such a case, the bankruptcy court will treat a judgment for a sum of money as prima facie evidence that the judgment debtor is indebted to the judgment creditor for that sum.  But that may be rebutted, and that is what is meant by “going behind” the judgment.  The rationale for such an approach is twofold: first, bankruptcy affects an individual’s legal status; and, secondly, the bankruptcy court’s exercise of the power and/or duty to enquire into a judgment is necessary to protect a debtor’s real creditors from collusive judgements entered into by the debtor in order to initiate a bankruptcy and thereby reduce the funds available for his real creditors.  Looking at the judgment on a scale running from judgment in default at one end to judgment after full trial on the merits at the other, the general principle is that the bankruptcy court would enquire into such a judgment only if the judgment debtor can show fraud, collusion or miscarriage of justice.

33.  Whilst accepting that principle, I am not sure that it particularly bites on the current situation, and it does not seem to me to require going beyond ordinary principles relating to issue estoppel to decide what might be the appropriate course on the particular facts of this case.

Rejection of Trustees’ Proof

34.  On behalf of the Trustees, Mr Hughes submits that there is a substantial body of documentary evidence before the Court which demonstrates that the Trustees’ Proof amounts to a real debt.  He suggests, and I agree, that as the current application seeks to reverse the rejection of the Trustees Proof by the Liquidators, it may be logical first to consider the position taken by the Liquidators.  But he makes the submission that it was never appropriate for the Liquidators to have issued an outright Notice of Rejection, and at most they should have indicated partial objection or rejection to the amounts in the Trustees’ Proof.  There is some force in Mr Hughes’ point that the suggestion in the notice of rejection that “no documentary evidence” had been provided to substantiate the payments was inappropriate against the fact that there was (unlike in many other cases) a significant amount of documentary evidence showing who paid what to whom and when.  But Mr Yu’s answer is to say what was meant was that there remained no documentary evidence as to the intention of the making of the payments.

35.  The Trustees’ Proof comprises 10 payments (“Payments”) made in the period between 20 July 2007 and 24 August 2011.  Each payment is alleged to have been made for the purpose of discharging the Company’s liabilities to the payee.  The Liquidators have, of course, addressed their mind to each of the Payments, in deciding what stance to take in relation to each of them.

36.  As Mr Yu has categorised them, there are two broad categories of Payments:

(1)     Three of the Payments (together, “Deposit Payments”) were made by Luu to solicitors as deposits for the acquisition of the Property.  The Deposit Payments total $21.8 million.  The Liquidators accept that these payments have been owed by the Company to Luu, but assert that the sums have been repaid, and that that has been found as a fact by (the then) Recorder in the 2017 Decision.  In the Liquidators’ Notice of Rejection, the Liquidators did not rely on the 2017 Decision but asserted that the Deposit Payments should be set off against the sum of $39,551,000 paid by the Company to Luu during the period from 22 December 2007 to 20 June 2011 (“Withdrawals”).

(2)     Seven of the payments (together, “Finance Company Payments”) were made to financiers that had charges or mortgages secured against the Property.  The Liquidators assert that:

(a)     not all of the Finance Company Payments have been proved by the Trustees to be made to discharge the liabilities of the Company, justifying rejection of $6,580,370.97 (Payments 6-9 and part of 10);

(b)     even if the Finance Company Payments were made to discharge the Company’s liabilities, that fact alone is not enough to infer that the amounts discharged were loans advanced by Luu to the Company.  No agreements between Luu and the Company, or even ledgers or accounts recording such Payments as a shareholder’s loan are before the Court;

(c)     even if the Company is under an obligation to repay Luu for the amounts he paid to discharge the Company’s liabilities, the Trustees have not proved that any sum remains outstanding.  Luu withdrew a total sum of $39,551,000 – that is, the Withdrawals –  from the Company’s bank accounts held with the Standard Chartered Bank, and the Trustees have failed to prove that any loans granted by Luu to the Company or other obligations were not satisfied, in full or in part, by those withdrawals.  Indeed, without any ledgers or accounts that identify what the overall outstanding balance might be, the Liquidators assert that it is difficult to see how the Trustees can discharge their burden of proof.

37.  A table showing the details of the Payments, and the Liquidators’ position on each, as taken from Annex 1 to Mr Yu’s submissions, is as follows:

No.	Date	Description	HK$	Liquidators’ position
1	20 July 2007	Cheque issued to Winston Chu & Co (“WC”)	5,000,000	Accept this was a debt owed to Luu Yet, the debt was repaid by Luu appropriating proceeds of the Finance Company Loans
2	27 Aug 2007	Cheque issued to WC	5,900,000
3	4 Oct 2007	Cheque issued to WC	10,900,000
4	19 Sep 2008	Cheque issued to Goldbest	13,015,000	Accept this discharged Company’s debt to Goldbest Yet, this does not constitute a loan by Luu to Company
5	26 Sep 2008	Cheque issued to Goldbest	2,923,200
6	29 Jan 2008	Cheque issued to Freeway	435,000	Do not accept this discharged Company’s debt to Freeway Yet, this does not constitute a loan by Luu to Company
7	5 Oct 2009	Cheque issued to Freeway	280,000
8	5 May 2011	Transfer to Sparkle	877,500	Do not accept this discharged Company’s debt to Sparkle Yet, this does not constitute a loan by Luu to Company
9	24 Aug 2011	Transfer to Sparkle	4,387,870.97
10	24 Aug 2011	Cashier order to HKF	1,112,500	Do not accept this discharged Company’s debt to HKF (save as to $512,500) Yet, this does not constitute a loan by Luu to Company, and the $512,500 was recouped in any event
		Total	44,831,070.97

38.  It may be helpful to note at once in relation to Payment 10 that the issue became limited to the $512,500, as Mr Hughes accepts that the other $600,000 may well have been in repayment of a personal loan taken by Luu, so he does not press for that $600,000.

The Deposit Payments

39.  It is common ground that the Deposit Payments were paid by Luu between 20 July and 4 October 2007 as deposits for the Property, and that this created a debt owed by the Company to Luu.  In any event, that conclusion is fully supported by the contemporaneous documentation, which demonstrates that: (1) Luu was not a party to the sale and purchase agreement for the Property; (2) the purchaser was the Company, which had the sole contractual obligations to pay the Deposit Payments; (3) the Company did not pay the Deposit Payments; (4) Luu paid the Deposit Payments in the three instalment payments; and (5) the Company did not account to or reimburse Luu for his personal payment of the Deposit Payments (at least it did not do so before completion of the purchase).

40.  Nevertheless, the Liquidators seek to rely on the 2017 Decision.  Mr Yu submits that the nature of the Deposit Payments, and that they were repaid, was determined in the 2017 Decision in the course of concluding that the Company did not hold the Property on trust for Luu.  He relies on what he says were various findings made by the Recorder:

(1)     Luu provided the funds required to purchase the Property, including the Deposit Payments, without the assistance of mortgage loans.  Shortly after completion, the Company took out loans from finance companies that were secured by charges or mortgages on the Property: 2017 Decision §§27, 32.

(2)     The Company had no business or operation apart from owning the Property.  It is reasonable to infer that the monies provided by loan from the finance companies were used by Luu.  If the loans proceeds were used by Luu to repay the funds he provided to purchase the Property (instead of Luu borrowing such proceeds from the Company), there would be no room for any presumption of resulting trust to operate: 2017 Decision §33.

(3)     When the Property was sold in 2012, these proceeds of sale were used to discharge all outstanding loans from external financiers.  Luu’s SOA did not state that Luu owed the Company the loans proceeds that he put to his own personal use, which evidences his use of the proceeds to repay the funds he provided to purchase the Property: 2017 Decision §34.

(4)     In conclusion, the funds provided by Luu to acquire the Property were advanced by way of a loan, which Luu regarded as having been repaid through his personal use of the proceeds of the loans made by finance companies.  As it was put by the Recorder in the 2017 Decision §34, Luu “applied the proceeds of the loans (or part thereof) obtained by the Company to repay himself for the amount he had provided to purchase the Property”. That was sufficient to rebut any presumption of resulting trust in Luu’s favour.

41.  Mr Yu submits that the finding that Luu’s loan of the purchase price had been repaid by his personal use of the proceeds of the loans from the finance companies was a necessary and fundamental step of the reasoning leading to the decision that the Company did not hold the Property on trust for Luu.  He submits that the 2017 Decision binds the Trustees and the Liquidators, so that an issue estoppel arises on the finding, in particular, that the Deposit Payments had been repaid to Luu.  For completeness, Mr Yu emphasises that these are not circumstances where a liquidator, when adjudicating a proof of debt, might be entitled to go against a judgment obtained against the wound-up company (and in any event that principle is limited to cases of suspected fraud, collusion or miscarriage of justice, or whether judgment is founded upon some act or omission of the company which unfairly prejudices the interests of creditors).

42.  Mr Yu also submits that, in any event, there is no evidence to contradict the conclusion in the 2017 Decision that the Deposit Payment were repaid.  He relies on the amount of the withdrawals totalling approximately HK$39.55 million; that the SOA did not state that the Company was indebted to Luu; that the Company’s audited financial statements for the years ended 31 March 2009 and 2010 showed a reduction in “amount due to ultimate shareholder” to a figure consistent with the fact that Luu regarded the Deposit Payments as having been gradually repaid to him; and that it is reasonable to infer that the loans received from the finance company exceeded Luu’s loans made towards the purchase price of the Property.

43.  Mr Yu says there is no material impugning the Recorder’s finding in her §34 as to the loan by Luu for the purchase price of the Property, and the later application of the proceeds of the commercial loans (or part thereof) obtained by the Company to repay Luu.  Indeed, Mr Yu says that is entirely consistent with the Company’s own accounting.  No issue of set-off arises, as the Deposit Payments were regarded as having been repaid.

44.  In response, Mr Hughes first refers to the audited financial statements and points out that they always show amounts owed by the Company to Luu, at the very minimum exceeding $15 million.  Of itself, that fact suggests that there were loans from Luu and that the loans made by Luu to the Company were never fully repaid.

45.  Mr Hughes also does not accept the analysis of the effect of the 2017 Decision.  He submits that the only question before the Recorder was as to who was the beneficial owner of the Property when the Company was the legal owner of it.  He says that the Recorder’s approach in §34 was not an essential part of the reasoning, because if removed that would not change the result, and it was also not based on a submission made by other party, and so could give rise to no issue estoppel.  Indeed, the decision really followed the fact that beneficial interest is usually taken to travel with the legal interest.  But in any event, Mr Hughes relies upon the fact that the material now before the Court is greater than that before the Recorder, such that there are “special circumstances” for there to be no binding issue estoppel.

46.  Indeed, as Mr Yu himself accepts, there was a degree of circularity in the Recorder’s reasoning.  The contest before her arose from (1) the Trustees’ reliance on the presumption of resulting trust, but where it was also recognised, where the purchase of a property was made in the name of a company, the “starting premise” is that the purchaser intended both the legal and beneficial interest to vest in the company, and (2) Construction’s submission that the presumption of resulting trust would be rebutted if the purchase price was paid by way of a shareholder’s loan, the Recorder recognising that a shareholder’s expressed intention to seek repayment of a loan is inconsistent with any presumed intention on the part of the shareholder to acquire a beneficial interest in the property.  Ultimately, and this is where the circularity arises, the Recorder found there to have been a loan only on the basis that she thought that there had been repayment of the loan.

47.  Reference can also be made to the 2017 Decision §35, in which the Recorder noted that even if she were wrong in finding that Luu provided the fund to purchase the Property by way of a loan, various other statements from him showed his intention was that the Company was the beneficial owner of the Property.  This point emphasises that the essential question before the Recorder was as to the identity of the beneficial owner of the Property.

48.  In my view, the relevant circumstances (which might be described as special circumstances) include that: the essential question for the Recorder was simply as to the identity of the beneficial owner; there is an element of circularity in her reasoning; the evidence has moved on since that available to the Recorder, and the essence of the task of the Court on the current application is to decide the rights of the claimant in the light of all the evidence before it.  I do not think any issue estoppel actually arises as to the extent of any repayment, as it was certainly not an essential part of the reasoning as to how much of any loan was repaid.  Further, I do not think that it would be appropriate for any issue estoppel to bind the Court on this application.  That is not to say that I might not reach the same conclusion as the Recorder on the evidence now before the Court.  But it is to say that I do not regard myself as bound by the 2017 Decision.

49.  It is necessary instead to consider what evidence there is now before the Court, and what are the proper inferences to be drawn from that evidence.

50.  Also, once the view has been reached that the 2017 Decision is not binding by way of the creation of an issue estoppel as to how much of any loans were repaid, the Liquidators’ position rests on the other evidence relating to payments, repayments and outstanding liabilities, including the reference to the Withdrawals.  As to the Withdrawals, there were also deposits, which cannot be ignored.

51.  But, at least for the early period there is little clear chronological assistance as to the transfer of monies from one party to another, so it seems to me that it is appropriate to deal with the bigger picture in one go.  For that reason, I shall turn also to deal with the position under the Finance Company Payments.

Finance Company Payments

52.  Before turning to the detail of the individual finance company arrangements, the general point might be made that (save for the concession made by Mr Hughes as to the $600,000 referred to above) all of the loan documentation identifies that it was the Company that was the borrower, so that it was the Company that had obligations to repay.  There were also some personal guarantees provided by Luu as security for the lending to the Company.  On the materials including personal cheques and bank or telegraphic transfers, and unlike some other cases which might be distinguished on their facts, there is evidence here to identify to the Liquidators and the Court who made the payments and to whom the payments were made.  Though the fact of payment alone might not be enough to support any presumption that Luu is owed money by the Company, the facts of payment against the other materials identifies the true character and effect of those payments.

53.  Therefore, the primary position would appear to be that if the repayments were actually made by Luu, whether under guarantees or otherwise so as to give rise to a right to repayment, he was entitled to repayment by the Company (and, just as for the Deposit Payments, it is not necessary to show any actual loan agreement between Luu and the Company).  That is, the Company owed Luu for payments he made on its behalf and for its benefit. Those monies are still owed, unless (a) those sums have already been repaid by the Company to Luu, or (b) there is some other technical reason why repayment is not necessary.

54.  Mr Yu describes this as a tripartite situation, between Luu, the Company and the finance companies.  So the question arises as to what is the conclusion to be drawn, namely what is the legal result, from the fact that Luu paid Company debt, if that is shown in respect of any individual payment.  Mr Yu submits that the Trustees need to show (1) that Luu discharged a debt owed by the Company, (2) that gave rise to a cause of action, such as a loan, subrogation or unjust enrichment, and (3) that the sum remains outstanding, that is that it has not been repaid.

55.  Mr Yu relies on the Global March and Big Island cases to say that the Trustees bear the burden of proving on the balance of probabilities that there is a cause of action.  But he says the starting point is that there is no documentary evidence of any agreement that amounts paid by Luu for the Company would give rise to a liability on the part of the Company for repayment.  There is documentary evidence of the payments, but not of the nature of them.  Even if it is demonstrated that Luu has discharged the Company’s own debt, Mr Yu says it is still necessary to demonstrate that Luu became “entitled in law or equity to recoup his payment, for example by subrogation or because the payment was made under compulsion of law”.  The importance of the second element is evident from the Global March case at §§35-36, because (on the facts of the case) the trustee in that case failed to establish by credible evidence that the bankrupt made the payment personally for on behalf of the company and in circumstances which would qualify him to prove the payment as envisaged by the principles.  There, the Court noted that there was a complete lack of evidence that the bankrupt paid the money as a guarantor or surety.

56.  By reference to the passage from Goff & Jones, Mr Yu submits that for an ability to recoup a payment, Luu must prove that he paid the finance companies pursuant to an existing legal liability that he owed to those companies, in addition to any liability owed to them by the Company.  It would be this element of legal compulsion which might render the enrichment of the payee unjust.

57.  Mr Yu complained that the compulsion point was only raised as a point very late, in fact in Mr Hughes’ supplemental skeleton submissions filed the day before the hearing.  It is correct that there is no reference to the legal points on guarantees, or payments made pursuant to guarantees, in the Trustees’ Proof.  But it seems to me that this is a point properly to be explored on a hearing de novo, on whatever evidence is available, and there is certainly plenty of evidence of guarantees.  As Mr Hughes said, in adjudicating the Trustees’ Proof the Liquidators had this material (or at least most of it).  Also, at least to some extent, the development of this point flowed from the arguments identified in Mr Yu’s own skeleton, and subject to the limitation on any evidence, Mr Yu has been able to respond to the point.  Of course, it might give rise to a costs implication.

58.  It is accepted in relation to Goldbest and HKF that there was such a secondary liability arising under guarantees.  During the hearing, Mr Hughes was also able to show that there was a guarantee given to Sparkle.  I accept that.  Although no copy of that guarantee is available, its date appears to cover only Payment 9.

59.  But, Mr Yu asked, was there evidence that any payments made by Luu were paid as the surety or guarantor, and so evidence of payment under compulsion?  He accepted that the payment to HKF was made under compulsion.  But he pointed out that the contract of guarantee itself could exclude an unjust enrichment claim, for example by a waiver of the sort present in the guarantee for the Goldbest loan.  If the surety waives his right to subrogation or an indemnity, then there is no basis for any unjust enrichment claim.  Mr Yu also relies on another passage from Goff & Jones at §39-28, stating that as an equitable remedy designed to reverse unjust enrichment, a claim to be subjugated to a creditor’s extinguished rights may be defeated or limited by any defence or bar that will defeat or limit any cause of action in unjust enrichment.  Amongst other matters, they might also include the objection that the rights claimed would be inconsistent with a valid contract to which the claimant is party with the paid off creditor, the discharged debtor or a third party.

60.  The relevant waiver clause relied on by Mr Yu, headed “Waiver of Subrogation and Other Rights”, reads as follows:

“Each of the Guarantors hereby waives all rights of subrogation and indemnity against the Borrower which he may have, by reason of the performance of any of his obligations under this Guarantee, and agrees not to claim any set-off or counter-claim against the Borrower, or to claim or prove in competition with the Lender in the event of any step to enforce any right of claim whatsoever (including any set-off or counterclaim) against the Borrower in respect of any moneys paid by it to the Lender under this Guarantee and agrees not to demand or accept repayment in whole or in part of any moneys, obligations, or liabilities then or thereafter due to him from the Borrower. Each of the Guarantors will also not exercise any rights as surety in competition with or in priority to any claim of the Lender and will, if required by the Lender, prove in the winding-up or bankruptcy (as the case may be) of the Borrower or any relevant persons and will forthwith deliver to the Lender all amounts received by him in such winding-up or bankruptcy.”

61.  Mr Yu describes this as an unqualified waiver, and that it is also inconsistent with the claimed right to repayment of a loan.  He says maybe this might explain why Luu apparently did not mention any claim to the auditors, perhaps because he did not want to claim.  But it seems to me that the purpose of the waiver clause, in a standard form of document prepared by the lender, is to protect the lender.  Yet, in the consideration of the question whether the enrichment was unjust, that turns on considering the respective positions of (in this case) the Company and Luu, and the position of the lender is irrelevant.  In any event, it seems to me that the clause as a whole is focused on ensuring that the guarantor does not act in a way which competes with the interests of the lender.  It is to protect the lender until full satisfaction of the debt, as the ‘Guarantee’ clause makes clear, and the Company is not a party to it.  Once the debt is fully satisfied, I do not think the waiver would be intended to bite on the private dealings between principal and secondary party, the lender by that point having no interest whatsoever.

62.  Therefore, I reject the submission that any guarantee prevents the claim now put forward by Luu.  Instead, the very existence of the various guarantees assists Luu.  He faced liability if the Company did not pay, and realistically the Company could not pay (except by selling the Property).  It is common ground that the Company was not trading, and had no income, as it had no business or operations other than holding the Property.  So if one asks the obvious question as to who was paying the mortgage and loan interest, and any principal paid off before the Property was sold, it must have been Luu using his own funds.  This is what the evidence shows.

63.  Mr Yu relies on the SOA and the Company’s financial statements.  But, there is perhaps some irony in the fact that it may be possible to go behind Luu’s assertions made by him by signing the Company’s accounts and his own SOA, because there is significant evidence that Luu is unreliable and statements made by him are at least open to serious doubt and require scrutiny.  As the Master recognised, the SOA was far from full and frank.  It can be seen that it gives the address of Luu as still at the Property; it does not mention the directorship of Alphred; the one asset identified being the value in a company is holy and particularised; the liabilities asserted do not even include that of the petitioner for the bankruptcy order; the list of secured creditors includes HK Finance, but does not mention the Company; and the list of unsecured creditors does not mention the Company.  There is force in the submission that the SOA is an unhelpful document, upon which little weight can be placed in either direction for present purposes.

64.  There may be more weight to be placed on the Company’s financial statements, which are audited statements – see below.

65.  Requiring some sort of written loan agreement, or written evidence of an oral loan agreement, between the Company and Luu does not seem to me to be realistic in the circumstances.  Once it is recognised, as the 2017 Decision decides, that the Company was the beneficial owner of the Property, it would seem to me to be extremely unlikely that Luu would have paid off the Company’s debts by way of a gift, and the absence of any formal loan agreement would seem to me simply indicative of the close and no doubt informal relationship between Luu and the Company of which he was the ultimate beneficial owner.  The original purchase arrangements followed by the raising of loan finance by the Company effectively replaced one lender with another. But once Luu came back into the picture by paying off the finance company loans, it seems inherently unlikely that he was doing so by way of gift to the company.  In fact, the lending position almost comes full circle.  The money for repayment of the loans could not have come from the Company itself, except ultimately out of the proceeds of sale.  Insofar as there was ongoing repayment of interest or principal, before the property was sold, that must have come from Luu.  This may be where section 15 of LARCO bites.

66.  Focusing on the point of repayment, Mr Yu relies upon the audited accounts for 2009 and 2010.  He says it is not really open to the Trustees to say that they are not reliable or truthful, precisely because they are contemporaneous and audited.  That Luu might be regarded as having been less than truthful or forthcoming from around 2012 does not, says Mr Yu, impact the reliability of the audited accounts.  Though the underlying ledgers and accounting materials are apparently not available, they would have shown a loan if there was one, but other than that there is some proof of payment there is no proof here that that was regarded as a shareholder’s loan.

67.  Mr Yu also relies on the statement of Barma J (as he then was) in Re Ocean Time Development Limited (unreported, HCCW 334, 336, & 338/2004, 1 June 2006).  Barma J accepted that it is no doubt correct to say that the Court is not bound to accept the accounts of the company at face value, but he considered that weight should be given to the fact that the accounts in question have been audited, because that is a process which requires the auditor to satisfy himself that the accounts provide a true and fair view of the company’s financial position.  He accepted that where there is evidence to show that the accounts are, or may be, inaccurate, or to cast doubt on the way in which the auditor carried out his duties, this will be a factor to take into account.  But absent such evidence, it seems that significant weight will be given to audited accounts.

68.  The 2009 accounts relate to the period from 26 April 2007 (date of incorporation) to 31 March 2009.  They contain the auditors’ opinion that the financial statements give a true and fair view of the state of the Company’s affairs as at 31 March 2009.  There is also a statement of fundamental uncertainty, in that though the accounts have been prepared on a going concern basis, the validity of that basis depends upon adequacy of financial support as committed by its shareholders, but that uncertainty had been adequately accounted for.  On the balance sheet as at 31 March 2009 the Property is given a net book value of approximately $109.6 million, and the current liabilities include an amount due to an ultimate shareholder in the sum of $36,533,997.

69.  Whilst that entry identifies some loan from Luu to the Company, it is wholly inconsistent with the idea that there has not been any repayment of loans.  Indeed, it is now known that even if one takes a net position of the withdrawals from the Company’s accounts, that also helps to explain the reduction in indebtedness reflected in the 2010 accounts.  There, the amount due to an ultimate shareholder has reduced to $15,094,165.  Just because there is a difference in the figures, that they do not match, does not mean that there cannot be an inference drawn.

70.  There is also a further note, Note 14, in the 2009 accounts which is helpful in providing context.  That note deals with the financial instruments by category, and splits the financial liabilities of the Company between the amount due to the ultimate shareholder and “finance lease”.  As already stated, the former figure is $36,533,997, and the note shows the latter figure to be $83,396,948 (the SCB loan).  Together, they total $119,930,945.  It is the difference between that figure and the “at cost” of the Property of around $113 million which leads to the accumulated loss for the period of approximately $6.28 million.

71.  This is consistent with the chronology surrounding the purchase of the Property, where no money was borrowed until after the completion of the purchase.  It lends support to the inference drawn by the Recorder that Luu paid the entirety of the purchase price, then arranged for the Company to obtain external finance, and used funds raised by the Company from that external financing to repay himself, at least to some extent. Hence the shift in the ratio of those to whom financial liabilities are owed, as shown in the accounts.

72.  That there were further repayments is supported by the 2010 accounts, which show the amount due to the ultimate shareholder reducing to the approximately $15 million figure, whilst the other financial liabilities are said to comprise a “finance lease” liability of $79,390,840 and “short-term borrowing” (which is the Sparkle facility) of $30 million, together totalling $124,485,005.

73.  The logic of these matters supports the inference.  Also, there is no other individual basis for thinking the auditors might not have performed their role appropriately.  I am, therefore, satisfied on the evidence that whatever financial provision Luu had provided to the Company by way of loans, the amount of the loans had been repaid save to the extent revealed by the audited accounts.  By reference to the snapshot date of 31 March 2010, the Company still owed Luu in excess of $15 million which it had not yet repaid to him.

74.  But the question arises as to what happened after 31 March 2010.  By reference to the schedule of withdrawals made by Luu from the Company’s account (Annex 2 to Mr Yu’s skeleton submissions), the total withdrawals after 31 March 2010 and until 20 June 2011 were $13,591,000.  In the same or similar period from 31 March 2010 to 16 August 2011, the deposits made by Luu to the Company (Annex 3 to Mr Yu’s skeleton submissions) totalled $2 million.  There might also be the use of funds, amounting to repayment, as a result of use in some other way.

75.  Mr Yu also relied on the fact that it is now common ground that the only payment made by Luu of a loan to the Company from HKF was in the sum of $512,500, but that is against the total amount of the loans taken from HKF in the period August 2010 to March 2011 of $10.5 million (albeit there is a manuscript note on one of the documents to suggest that $1 million was repaid on 31 March 2011).  Mr Yu posed the question where the bulk of that lent money went, if not to Luu.  Indeed, the prior question is why the Company would have borrowed the money in the first place when it had no operations except holding the Property, and the obvious inference is that it was borrowed for Luu, either to effect a repayment of all or some part of any loan that he might previously have made to the Company or for some other purpose decided by him.  As an example, by way of the Liquidators’ further submission provided after the conclusion of the oral hearing, it was pointed out that the $2.5 million loan made by HKF in March 2011 was not received by the Company, but was apparently used to set-off against a different loan granted to a company called Fine Vast Corporation Ltd, then owned by Luu.

76.  These points emphasise, it is said on behalf of the Liquidators, that it would be wrong to assume that the net payments by the Company to Luu out of its own bank accounts constitute the totality of the sums that Luu may have applied as repayment of any loans he advanced to the Company. I agree.  Indeed, these kinds of point tend to suggest that Luu regarded the Company’s assets, including its ability to borrow against the security of the Property, as something to which he could have ready recourse for whatever purpose he had in mind at any given time.  The transfer to and fro would likely have given rise to lending and repayment, leaving a net balance in varying sums from time to time – effectively by the running of a current account between Luu and the Company.  By reference to the ‘snapshot’ dates of the financial year ends, this is what the audited accounts demonstrate.

77.  Mr Yu accepts there is a “certain murkiness” in the current position, but asserts that does not prevent drawing inferences from the materials that are available.  It may even be that there is some argument that the Liquidators have a claim against the Trustees, but for present purposes that can be ignored.  On the question as to whether the Trustees have a claim against the Liquidators, Mr Yu submits that the Trustees have failed to discharge their burden.  I agree that the legal principles identify that, where there is relatively little documentation, that necessitates considering inherent likelihoods or probabilities against the context of the burden of proof.

78.  Mr Yu submits that even on the face of the new material, it is unlikely that the Recorder would have come to a different conclusion.  He also accepts that, assuming the 2017 decision is not binding, the real question is whether the Court should now come to a different conclusion on the materials now available.  But, he says, the answer is inevitably the same; far from impugning the Recorder’s reasoning, the additional materials support it, and should lead the Court now to the same result.

79.  Lastly, Mr Yu says that if the payments made to Luu from the Company were not repayments of the loans, then without a proper explanation as to what they were, they would appear to have been misappropriations for which the Trustees must now account.

80.  I also take into account that the sums raised through external financing were not held in cash within the Company, but had been extracted for some purpose.  This is also consistent with the payment down of outstanding amounts which might have constituted shareholders loans from Luu.  Further, when the Property was sold there was relatively little equity, once the outstanding finance loans were repaid.  It would seem logical that the equity left was the result of the increase in the value of the Property over the years since its original purchase.

81.  It is probably not possible, and it is in any event not necessary, to consider each of the Payments in turn as to whether each loan that any Payment might have constituted was individually or specifically paid off at a particular time.  The reality seems to have been that sums lent to the Company were repaid, further sums were lent (through payment of sums for which the Company and Luu were both liable, and which gave rise to a right of reimbursement which it would be unjust if the Company did not meet) on the running current account indicated by the entries in the audited accounts for 2009 and 2010.

82.  I accept that the character and effect of the various payments made by Luu for the benefit of the Company was that the payments constituted loans from him as the ultimate shareholder.  There is considerable evidence identifying that significant sums were repaid to Luu, by his use of sums raised through external financing.  Therefore, the real and determinative question on this application seems to me to be whether it is possible to identify that at the time the ‘music stopped’ any particular sum remained repayable to Luu.  Whilst there may, at first blush, be some force in the submission that the Liquidators should have indicated only partial objection or rejection to the amounts in the Trustees’ Proof, the question remains as to which part or parts should properly have been accepted.

Result

83.  Towards the end of his submissions, Mr Hughes provided two possible broad brush calculations which might enable one to reach a net amount due from the Company to Luu.  One calculation starts from the amount recorded as being due to Luu in the audited financial statements for 2010, deducting the net amount paid to Luu from the bank accounts of the Company, adding in the Sparkle payments being Payments 8 and 9 and the accepted limited part of the payment to HKF being Payment 10.  That gives a calculated figure of $9,320,203.  The second calculation took a simpler approach of starting with the claimed figure in the Trustees’ Proof and deducting from it the apparent net amount paid to Luu from December 2007.  That gives a calculated figure of $10,139,238.

84.  However, I think those calculations – attractively simple as they might be – are really in fact too simplistic.  They ignore a number of the surrounding circumstances and the vagaries of evidence, which lead to potentially different inferences to be drawn.

85.  In circumstances I have canvassed above, I do not think I can be satisfied that the Trustees have discharged their burden to show on the balance of probabilities an entitlement to any specific sum.  In other words, I do not think there is sufficient credible evidence to prove a real debt in any specific amount.

86.  For that reason, the Trustees’ application must fail, and the summons is dismissed.

Costs

87.  At present, I see no reason why the costs should not follow the event, so that the Liquidators’ costs are to be paid by the Trustees to be taxed if not agreed.  However, in the first instance, I shall simply make a costs order nisi, which will become absolute after 14 days if neither the Trustees nor the Liquidators seek to vary it. If any variation is sought, that application will be dealt with on paper.  The party seeking variation should apply by letter within the 14 day period, identifying the varied order sought and the reasons for it.  The other party will then have 14 days to respond.  No further submissions will be required before the matter is determined on the papers.