WONG TAK MAN, STEPHEN AND ANOTHER v. CHEUNG SIU FAI AND ANOTHER

HCMP1431/2012

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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REASONS FOR DECISION

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Introduction

1.  In these proceedings, the trustees in bankruptcy of the Bankrupt applied for an order to set aside :

(1) the 43 transfers made by the Bankrupt to the 1^st respondent, his younger brother, between 5 September 2003 and 4 September 2008  in the total sum of HK$31,584,244.88; and

(2) the 3 transfers made by the Bankrupt to the 2^nd respondent, the 1^st respondent’s wife, between the same period in the total sum of HK$7,090,000.00

pursuant to section 49 and/or section 50 of the Bankruptcy Ordinance[1] as transactions under value and/or unfair preferences, as the case may be.

2.  By summons dated 14 September 2012, the respondents applied to strike out the 34 transfers made by the Bankrupt to the 1^st respondent and the 2 transfer made by the Bankrupt to the 2^nd respondent between 3 October 2003 and 30 June 2006 (“the Period”),[2] totaling HK$32,284,245.00 (collectively “the 36 Transfers”) on the grounds that the trustees’ claim discloses no reasonable cause of action; and that the claim is scandalous, frivolous, vexatious and an abuse of process.

3.  After hearing counsel, I dismissed the respondents’ application.  I had indicated that I would hand down the reasons for my decision, which I now do.

Background

4.  At all material times, the Bankrupt was a quantity surveyor practicing in Hong Kong.  The 1^st respondent was a director of Merrill Lynch.  The 2^nd respondent was a civil servant.

5.  In or around February 2005, the Bankrupt opened a margin account and a futures account with Quam Securities Company Limited (“Quam”). According to the account mandate signed by the Bankrupt, he had a personal monthly income of HK$50,000.00 and personal net worth of up to HK$1 million. Despite his financial worth, the Bankrupt had since trading very actively and heavily in securities and derivatives.  In July 2007, he suffered a substantial loss of over HK$13 million.  He suffered a further loss or about HK$6 million between August and October 2007.  By August 2008, he owed Quam about HK$17 million.  He failed to settle the indebtedness despite repeated requests.  On 25 August 2008, Quam petitioned for his bankruptcy.  On 26 November 2008, he was adjudicated bankrupt.

6.  The trustees then carried out investigation into the Bankrupt’s affairs.  They soon discovered that the Bankrupt had received substantial funds from a number of parties including the respondents directly in the accounts maintained with Quam and his bank accounts with Standard Chartered Bank.  The 1^st respondent had deposited HK$21,030,000.00 into the Quam accounts between 28 May 2005 and 7 July 2008 and HK$780,000.00 into his SCB account on 9 July 2007.  The 2^nd respondent had deposited HK$4,560,000.00 into his SCB account between 22 September 2004 and 10 August 2007.  Various parties had also received payments from the Bankrupt through his SCB account.  The 1^st respondent had received a total of HK$31,584,245.00 between 3 October 2003 and 21 June 2007, the 2^nd respondent, HK$7,090,000.00 between 24 December 2003 and 13 February 2007.

7.  The trustees interviewed the respondents 14 January 2012.  According to the record of interview, the 1^st respondent had this to say :

“20. He said that he participated in the ‘fund raising’ of the Bankrupt since the Bankrupt started his active trading (in or around early 2000). He said he had make tens of millions of payment to the Bankrupt and he estimated that the net outflow to the Bankrupt was at least HK$20 million (ie the outstanding amount due from the Bankrupt to him). He further said that the size of his payments to the Bankrupt ranged from Hong Kong dollars several hundreds of thousands to several millions.

21. When we asked for better explanation as to the term ‘fund raising’, he explained that his payments to the Bankrupt can be categorised into : 1) invest or co-invest in the Bankrupt’s investment project; and 2) loan to the Bankrupt.

22. Mr Cheung claimed that he could not identify whether the individual payment was a loan or an investment. He added that for loan, it was most likely for the Bankrupt to satisfy ‘margin call’. The margin call repayment was required to be paid in the Bankrupt’s name or from the Bankrupt’s bank account. Hence, cash deposits were made to Quam’s account by Mr Cheung in order for the Bankrupt to present the deposit slip to Quam. He said that he did not record down the details of his payments to the Bankrupt, or he would not verify the actual use of the payments by the Bankrupt. He repeated that he had prepared to ‘fully write off’ any payments he made to the Bankrupt. Conversely, he said that he would expect that the Bankrupt would pay him bank if the Bankrupt was able and he ahd requested so.

23. Mr Cheung reiterated that he only joined or co-invested in the investment with the Bankrupt as requested by the Bankrupt, but without any involvement in the investment decision making. He claimed that he has been very cautious about the SFC regulation and would not invest in anything which he may have conflict.

24. He said he would not ask the Bankrupt for the details of the investment and even if the Bankrupt did mention to him, he would not take it serious or ‘close his ears’. He said he would only discuss with the Bankrupt about the market direction.

25. When Mr Cheung was further asked if he had not kept an account on his payments to the Bankrupt, he would have no idea how much the Bankrupt had owed him.  He admitted this and further admitted that for the payment from the Bankrupt to him, he would not know whether it was a repayment of loan or return of investment.”

8.  The 2^nd respondent’s version is similar :

“5. Mrs Cheung claimed that she had no idea about the Bankrupt’s securities trading pattern and the amounts involved. She said that she had trusted the Bankrupt on investment since she was told by her husband that the Bankrupt was good at investment and that it was trustworthy to ask him to invest for her. At some family gatherings, she chatted with the Bankrupt and the Bankrupt claimed that he was able to predict the market accurately. However, she could not recall the details about this.

6. Mrs Cheung would pay to the Bankrupt direct (by cash or cheque), or through her husband ‘to consolidate’ (集齊). When Mrs Cheung was further asked about what she meant by ‘to consolidate’ and whether the Bankrupt invested for others, she said she had no idea about this.

7. Mrs Cheung said that she did not maintain any record of how much and when she paid the Bankrupt and she did not keep any account regarding her payments to the Bankrupt. She said if the payments were made before or around 2005 to 2006, it would more likely be for investment. If the payment was made around or after 2007 or 2008, it would more likely be a loan to the Bankrupt. She further claimed that she had never asked the Bankrupt the products he invested on her behalf, or the profits or losses of the investment.

8. She alleged that she would inform the Bankrupt if she needed the money and the Bankrupt would then pay her back. She reiterated that she did not record how much and when the Bankrupt paid her.

9. When Mrs Cheung was asked why she had so much money for investment, she said her husband offers to her his entire income and she is responsible for the management of her family’s financial resources. She declined to provide further information about the financial background of her family.

10.    When Mrs Cheung was asked about her knowledge on investments, she said that she had experience in trading stocks and index futures.”

9.  Based on the explanations given by the respondents, the trustees took the view that the transfers made by the Bankrupt to them were gifts.  They therefore took out the present proceedings by way of originating summons dated 10 July 2012.

Discussion

10.  Although the originating summons made reference to both sections 49 and 50 of the Bankruptcy Ordinance, the trustees relied solely on section 49 for present purposes.  The relevant provisions of section 49 stipulate :

“(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.

...

(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 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.

11.  Section 51 provides :

“(1) Subject to subsections (2) and (3), the time at which a debtor enters into a transaction at an undervalue ... is a relevant time if the transaction is entered into ...

(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;

...

(2) Where a debtor enters into a transaction at an undervalue ... at a time mentioned in subsection (1)(a) ... (not being, in the case of a transaction ... 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.”

12.  Pursuant to section 51B(2), for the purpose of sections 49 to 51A, a person is an associate of a debtor if that person is the debtor’s spouse, or is a relative, or the spouse of a relative of the debtor or his spouse.

13.  Section 51A enables the court to make various orders with respect of a transaction caught by section 49.  Simply put, a transaction is liable to be set aside by the court if it is (a) at an undervalue and (b) made at a relevant time.

14.  Here, the trustees’ case is that the 36 Transfers were at an undervalue because they were gifts by Bankrupt to the respondents.  They were also made at a relevant time because the Bankrupt was during the Period insolvent.  The trustees in particular relied on the presumption of insolvency under section 51(2) in that the 36 Transfers, which were at an undervalue, were made by the Bankrupt to the respondents, who are undisputedly his associates.

15.  It is trite that striking out should only be made in plain and obvious case.  There should be no trial on affidavit and disputed facts are to be taken in favour of the party sought to be struck out.  The claim must be obviously unsustainable, the pleadings unarguable had and that it be impossible, not just improbable, for the case to succeed before a court will strike out : Ha Francesa v Tsai Kut Kan (No 1).[3]  In my view, the respondents have failed to satisfy the test for striking out.

16.  Mr Koo, for the respondents, first argued that there is no basis whatsoever to support the trustees’ case that the 36 Transfers were gifts.  He said that the mutual transfers of moneys between the Bankrupt and the respondents represented co-investments and/or loans to the Bankrupt although the respondents could not specify which is which.

17.  However, based on what the respondents had said during the interview, I agree with Mr Maurellet, for the trustees, that it is reasonably arguable that there were indicators to support the trustees’ case that the transfers between the parties were gifts.

18.  The 1^st respondent now has this to say in his 2^nd affirmation :

“5. At all material times, My Elder Brother was a quantity surveyor practicing in Hong Kong. Since about 1998, My Elder Brother had been actively trading stocks, various other securities and derivative products; and he had successfully gained considerable profits around 2000 during the technology boom period. Thereafter, in about 2001, My Elder Brother, who wanted to act as a fund manager, set up a fund, which was in effect a private ‘fund’ commonly found in the investment market, and he, apart from trading for his own benefit only, permitted others, mainly his relatives and close friends to invest in his fund, and I became one of the co-investors investing in My Elder Brother’s ‘fund’.

6. Like most of the investment funds in the market, in respect of all monies paid by investors to My Elder Brother for his ‘fund’, My Elder Brother had no primary liability to repay all of them.  The amount that My Elder Brother would be liable to repay to investors depended on the net equity value of the ‘fund’.  For instance, if My Elder Brother’s ‘fund’ made positive returns (ie having an increase in its net equity), My Elder Brother would be liable to repay to investors not only their respective invested sums but also the corresponding increase in net equity of the fund, on a pro-rata basis according to their respective shares of interest in the fund, subject to deduction of any commission payable to My Elder Brother.  On the other hand, if the ‘fund’ suffered any loss (ie its net equity decreased), My Elder Brother would be obliged to repay to investors the decreased net equity of the fund, on a pro-rata basis according to their respective shares of interest in the fund. In other words, if the net equity of My elder Brother’s ‘fund’ dropped to zero or even negative, My Elder Brother would have no liability to make any repayment to the investors at all.  Accordingly, My Elder Brother’s overall liabilities to make repayment to investors of his ‘fund’ would in no way exceed the net equity of the fund.  In other words, unless the net equity of the ‘fund’ falls below zero, My Elder Brother should be remaining solvent.”  

19.  What the 1^st respondent has said does not tally with what he and his wife told the trustees at their interview.  More importantly, Mr Koo has failed to explain the legal nature or effect of the transfers made between the Bankrupt and the respondents including the 36 Transfers based on what the 1^st respondent now said.  He submitted, without citing any authority, that the moneys paid by the respondents to the Bankrupt were trust moneys.  This is a new submission only raised for the first time at the hearing.  For present purpose, I need not express a definite view on it.  I only need to say that I have doubt if a trust relationship had been created between the parties based on what the 1^st respondent now said.

20.  Mr Koo next argued that when the 36 Transfers were made, the Bankrupt was solvent.  None of the 36 Transfers was therefore made at a relevant time.

21.  For present purposes, as I have said, it is reasonably arguable to say that the 36 Transfers were gifts.  So it follows that it is reasonably arguable that they were transactions made at an undervalue within the meaning of section 49.  The presumption in section 51(2) bites.  The respondents bear the burden of rebutting the presumption.  Mr Koo argued that the Bankrupt was evidently solvent by referring to the net equity values of the “funds” kept by him as shown in the statements of the Quam accounts.  But these are incomplete financial data.  As rightly submitted by Mr Maurellet, the trustees have explained why in their assessment based on the available financial information, the Bankrupt was, on a reasonably arguable basis, insolvent.  I do not think the respondents have been able to rebut the presumption.

22.  Finally, the 1^st respondent complained in his second affirmation that the trustees brought the present proceedings against him and his wife to bring pressure on them on behalf of Quam.  This is a very serious allegation but wholly lacking in substance.  It must be rejected.

Conclusion

23.  The respondents have failed to satisfy me that the trustees’ claim for the 36 Transfers disclosed no reasonable cause of action or that it was oppressive and an abuse of process.  I therefore dismissed their striking out application.

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