PATRICK COWLEY and WONG WING SZE TIFFANY the Joint and Several Trustees in Bankruptcy of the Property of the Bankrupt v. ALL POWERFUL INVESTMENT LTD

HCMP 1076/2020

[2020] HKCFI 3173

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1076 OF 2020

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BETWEEN

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J U D G M E N T

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APPLICATION

1.  By an originating summons dated 27 July 2020 (the “Originating Summons”), Patrick Cowley and Wong Wing Sze, the Joint and Several Trustees in Bankruptcy of the Mr. Lau Yu (the “Bankrupt”), the Plaintiff, apply for, inter alia, declarations and orders that (1) a legal mortgage dated 18 March 2017 in favour of All Powerful Investment Limited (the “Defendant”), be void pursuant to section 42 of the Bankruptcy Ordinance, Cap.6 (the “Ordinance”) and (2) five legal charges executed against a total of 13 properties as set out in Schedule 2 to 6 of the Originating Summons do constitute a transaction at undervalue pursuant to section 49 of the Ordinance and are invalid and void.

MATERIAL FACTS

2.  The Bankrupt was a director and the CEO of General Nice Resources (Hong Kong) Limited (“General Nice”) which went into liquidation on 5 December 2016.

3.  In June 2011, the Bankrupt executed an unlimited joint and several guarantee in favour of HSBC in respect of facilities provided by HSBC to General Nice.

4.  In 2015, HSBC made demands against General Nice for the repayment of outstanding facilities. This resulted in a settlement agreement between, inter alia, HSBC, General Nice and the Bankrupt dated 31 March 2016 (the “Settlement Agreement”).

5.  However, the Bankrupt failed to perform his contractual obligations under the Settlement Agreement.

6.  On 21 November 2016, HSBC issued a statutory demand to the Bankrupt for the payment of US$43,456,862.76 under the Settlement Agreement and the Guarantee.

7.  On 6 January 2017, HSBC presented a bankruptcy petition against the Bankrupt (the “Petition”).

8.  On 5 September 2017, by the order of Deputy High Court Judge Le Pichon (the “Bankruptcy Order”), the Bankrupt was adjudged bankrupt.

9.  The Defendant was a company incorporated in Hong Kong with the Bankrupt as its sole shareholder and director.

10.  In January 2015, the Bankrupt transferred his shareholding in the Defendant to All Powerful Holding Limited (“APHL”) which was incorporated in December 2014. APHL is held by a family trust established by the Bankrupt.

11.  The Bankrupt continued to be the sole director of the Defendant until the day before the Bankruptcy Order.

POST PETITION MORTGAGE

12.  On 18 March 2017, i.e., a date after the presentation of the Petition, the Bankrupt executed a legal mortgage over his property in London in favour of the Defendant.

13.  Under section 42 of the Ordinance, unless validated by the Court, disposition of property (wherever located) made by the bankrupt in the period between the bankruptcy petition and the bankruptcy order are void. See Re Chao Sze Bang Frank, Deceased, A Bankrupt, HCB549/2000 and HCMP2752/2005, unreported, 28 December 2006 and Sanders v Donovan [2012] BPIR 219.

14.  “Disposition” of property include the grant of security interests. In Site Preparations Ltd v Buchan Development Co Ltd 1983 SLT 317, Lord Ross at 319 said:

“In my opinion, “disposition” must be given its natural meaning. If a company creates in favour of a creditor a security over its property which attaches to the property, it is making a disposition of its property in that it is dealing with or settling or transferring its property to another. Creating a floating charge which attaches to the property of the company is dealing with the company’s property, and is thus a disposition of the company’s property.

Some support for this view can be found in a number of English cases such as Re Park Ward & Co. Ltd and Re Steane’s (Bournemouth) Ltd., where it appears to have been accepted without argument that a debenture granted by a company was a disposition of the company’s property made by the company within the meaning of s.227 (or its precursor). I was also referred to Re Gray’s Inn Construction Co. Ltd., but I did not find it of much assistance in this connection, although it does give another example of a “disposition”, namely, paying into a bank account a cheque drawn in favour of the company against which the winding-up order was made.”

15.  There is no dispute that the post-petition mortgage falls within section 42 of the Ordinance. Mr Cheung for the Defendant accepts that the post-petition mortgage was executed without approval of the court.

16.  In the circumstances, I have no difficulties in finding that the post-petition mortgage is void.

TRANSACTION AT UNDERVALUE

17.  The Petition was presented on 6 January 2017. However, in the 1-year period immediately preceding that, the Bankrupt executed various legal charged over his properties in Hong Kong, London and Australia, in favour of the Defendant.

18.  Insofar as Hong Kong properties are concerned:

(1) A mortgage was executed on 23 June 2016 and the consideration is stated as “[the Bankrupt] has applied to the [Defendant] to grant to [the Bankrupt] general credit facilities and the [Defendant] has agreed to grant the same to such extent and upon and subject to such terms and conditions as shall from time to time be mutually agreed or be stipulated by the [Defendant]…”

(2) Another mortgage was executed on 30 June 2016 and the consideration is stated again as “[the Bankrupt] has applied to the [Defendant] to grant to [the Bankrupt] general credit facilities and the [Defendant] has agreed to grant the same to such extent and upon and subject to such terms and conditions as shall from time to time be mutually agreed or be stipulated by the [Defendant]…”

19.  In respect of overseas properties, a mortgage of the Bankrupt’s Australian properties was executed on 5 July 2016 and on the face of the mortgage, no consideration was provided. Similarly, two mortgages of the Bankrupt’s London properties were executed on 18 October 2016 and 22 December 2016 respectively and on the face of the mortgages, no consideration was provided.

20.  Under section 49 of the Ordinance, the Court may avoid transactions at an undervalue entered into by a bankrupt within 5 years of the bankruptcy petition. (See Re: Leung Siu Wai, a bankrupt HCB1440/2014, unreported, 9 July 2020, per Deputy High Court Judge Maurellet SC)

21.  Where the transactions occurred within 2 years of the bankruptcy petition, there is no need to establish the bankrupt’s insolvency at the time of the transactions. (See Re Ding Yi, a bankrupt HCMP 486/2017, unreported, 24 August 2020, per Au-Yeung J.; Yeung Lui Ming and Lai Kar Yan as the Joint and Several Trustees of the Property of Wong Yuk Tung (A Bankrupt) v Tang Mo Lin, Irene and Another, HCA 1197/2015, unreported, 25 July 2019 at §61 per Deputy High Court Judge To.)

22.  A mortgage may be a transaction at an undervalue. In Official Receiver for Northern Ireland v Stranaghan [2010] BPIR 928, Hart J. at §§7-8 said:

“7. In support of the application Mr Gowdy (who appears on behalf of the Official Receiver) relied principally upon the decision of the Court of Appeal in Nurkowski (A Bankrupt), Re; Hill v Spread Trustee Company Ltd and Warr [2006] EWCA Civ 542, [2007] 1 WLR 2404, [2006] BPIR 789, and in particular the observations of Arden LJ at paras [93], [96] and [98]. The facts of Hill are complex, but I consider the following principles can be extracted from those paragraphs:

(i) A grant of security can amount to a transaction for no consideration.

(ii) Whether consideration is given is an objective test.

(iii) If forbearance by the creditor is relied upon to constitute consideration there has to be evidence that the creditor was pressing for repayment.

…

8. Apart from Hill v Spread Trustee Company, there is authority that the prior existence of a debt from A to B is not sufficient valuable consideration for the giving of a security from A to B to secure that debt…”

23.  In Hill v Spread Trustee Co Ltd [2007] 1 WLR 2404, Arden LJ at 2438A-E said:

“Miss Newman, however, sought to argue that as a matter of law the grant of security involved no diminution in the value of Mr Nurkowski’s assets. Therefore the fact that the consideration provided by the trustees was negligible did not bring the transactions within this paragraph. As to that, I would observe that section 423(1)(c) did not refer to a diminution in assets and does not depend on the grant of proprietary rights. The grant of other rights can constitute consideration; this approach is supported by section 425 which refers to “obligations” and “benefits” as well as to property. If it had been necessary to find the grant of a proprietary right, I would provisionally not have accepted the argument that the grant of security in this case did not involve the disposition of any property right in favour of the trustees. Obviously there is no change in the physical assets of the debtor when the security is given but there seems to be no reason why the value of the right to have recourse to the security and to take priority over other creditors, which the debtor creates by granting the security, should be left out of account. In the circumstances, I would respectfully doubt whether the holding in In re M C Macon Ltd [1990] BCLC 324 on which Miss Newman relied could apply to the later charges, which were in fact charges by way of legal mortgage, especially in the light of what was said by Lord Hoffmann and Lord Millett in Bucher v Talbot [2004] 2 AC 298, paras 29 and 51 respectively…”

24.  The following legal principles are applicable in order to determine the issue of an undervalue:

(1) The money or money’s worth of the consideration that the bankrupt received for entering into the transaction (“incoming consideration”) must be ‘significantly less’ than the value in money or money’s worth of the consideration provided by the bankrupt (“outgoing consideration”). This requires a comparison, from the debtor’s point of view, of the incoming consideration and outgoing consideration.

(2) It is not necessary for the Court to ascribe a precise figure to the outgoing consideration or the incoming consideration, as section 49 of the Ordinance will apply when the Court is satisfied that the incoming consideration is significantly, as opposed to negligibly, less than the outgoing consideration.

(3) What constitutes ‘significantly less’ is a question of fact ultimately for the Court to decide. There is no clear guidance as to what constitutes ‘significantly less’ as opposed to ‘less’ as each case has to be decided on its own facts and circumstances. The Court shall approach this question on the basis of absolute and relative values ad having regard to the nature of the transaction.

(4) The value of the consideration in money or money’s worth is to be assessed as at the date of the transaction.

See:  Re Ding Yi, a bankrupt (supra) at §36; Yeung Lui Ming and Lai Kar Yan as the Joint and Several Trustees of the Property of Wong Yuk Tung (A Bankrupt) v Tang Mo Lin, Irene and Another (supra) at §189.

25.  In Trustee in Bankruptcy of Claridge v Claridge [2011] BPIR 1529 at §40, Sales J. said:

“…Although Mr Claridge stood to derive some factual benefit from the transaction, if his wife continued to permit him to reside in the property once it was repaired and renovated, he had no contractual right deriving from the transaction or from anything said and done at the time of the transaction to remain there. In my judgment, assessing the value of the consideration provided by Mrs Claridge at the date of the transaction, it clearly had negligible value in money or money’s worth for Mr Claridge at that date. Therefore, I find that the trustee’s claim under s.339(3)(c) of the 1986 Act is made out.” (Emphasis added.)

26.  Where the transactions involve foreign elements, the following legal principles governs the exercise of the Court’s discretion:

(1) The Court may properly exercise the jurisdiction under section 49 of the Ordinance if, in respect of the relief sought against him, the defendant is sufficiently connected with Hong Kong for it to be just and proper to make the order against him despite the foreign elements. The Court has to look at all the relevant circumstances of the case, in order to ensure that it does not seek to exercise oppressively or unreasonably the very wide jurisdiction conferred by the section. The relevant circumstances include the residence and place of business of the defendant, his connection with the insolvent, the nature and purpose of the transaction being impugned, the nature and locality of the property involved, the circumstances in which the defendant became involved in the transaction or received a benefit from it or acquired the property in question, and whether the defendant acted in good faith.

(2) Sufficient connection may be shown by the residence of the defendant. If he is resident in Hong Kong, or the defendant is a Hong Kong company, the fact that the transaction concerned movable or even immovable property abroad would by itself be unlikely to carry much weight. (See Suppipat v Narongdej [2020] EWHC 3191 (Comm) at [57] and [72] and Re Qin Jun, a bankrupt HCMP 1655/2017, unreported, 17 October 2019.

ANALYSIS

27.  Mr Ho for the Plaintiff submitted that all the mortgages fall squarely within section 49 of the Ordinance. First, the mortgages were all granted within one year of the Petition. The Plaintiff does not have to demonstrate the Bankrupt’s insolvency at the time of the mortgages. I agree.

28.  Secondly, in return for the Hong Kong mortgages, the Bankrupt received the consideration in the form of the Defendant’s agreement to grant to the Bankrupt general credit facilities “to such extent and upon and subject to such terms and conditions as shall from time to time be mutually agreed or be stipulated by the [Defendant].” Mr Ho for the Plaintiff submitted that there is no contractual right for the Bankrupt to demand or draw down any credit as it would be subject to the terms and conditions to be agreed. This is a hardly valuable consideration. I also agree.

29.  More importantly, although the Plaintiff has raised this point as the central point in asserting that the mortgages were transactions at an undervalue, the Defendant has not adduced any evidence to show that any loans or credits were granted to the Bankrupt pursuant to any of the mortgages. Mr Ho for the Plaintiff is right that there is simply no evidence of any actual drawdowns pursuant to the general credit facilities.

30.  Mr Cheung for the Defendant submitted that there was a running account between the Bankrupt and the Defendant. As at 31 March 2016, the Defendant owed the Bankrupt a sum of HK$149,896,303 but as at 31 March 2017, the Bankrupt owed the Defendant a sum of HK$119,887,125, hence, it must mean that the Defendant advanced very substantial sums, pursuant to the general credit facilities to the Bankrupt. I am not convinced that this analysis is correct. First, it is not clear to this Court as to whether the advance of HK$119,887,125 was made pursuant to the general credit facilities or some unsecured running account with the Bankrupt. One disturbing feature in the present case is that none of the directors, or the Bankrupt came forward to explain to the Court whether which sums were drawdown pursuant to the general credit facilities. The Bankrupt was silent and all the subsequent directors chose not to give any explanation on the fund flow between the Bankrupt and the Defendant.

31.  Secondly, the sum of HK$119,887,125 was written off by the Company. Mr Ho is right that if the said sum is related to any of the mortgages, there is no fathomable reason as to why the Defendant would not enforce such outstanding debts against the mortgages but to have the same totally written off. The irresistible inference is that such sum is not related to any of the mortgages.

32.  Thirdly, the Defendant’s repayment of HK$149,896,303 to the Bankrupt shows that the payment records during the relevant financial years could well simply be repayments made by the Defendant to the Bankrupt and not payments made pursuant to the general credit facilities. The Bankrupt and all subsequent directors choose not to give any explanation. 

33.  Fourthly, the Defendant did submit a proof of debt which set out the funds from the Defendant to the Bankrupt from 1 April 2014 to 5 September 2017. The total amount of advances from the Defendant to the Bankrupt after 2 June 2016 was about HK$7.6 million. So putting the Defendant’s case to the highest, the sums that were advanced cannot be commensurate with value of the properties.

34.  Fifthly, it is not at all clear that all the advances after 2 June 2016 were made pursuant to the general credit facilities under the mortgages. Odd sums like HK$71,577.56 and HK$49,411.40 and their equivalent US$ do not sit well with a normal drawdown under a credit facility.

35.  Sixthly, Mr Ho correctly drawn to this Court’s attention that the Defendant’s rationale as set out in the Affirmation of Chan Chung Yi is that:

“12. Since 2014, facing a substantial unsecured loan advanced to Jaffe, APIL felt the need and pressure to protect its financial position and therefore decided to request Jaffe to provide for security for the loans advanced to him who subsequently agreed to such arrangement.

13. As a result, since June 2016, APIL entered into various legal charge agreements with Jaffe whereby the latter charged those properties as more specifically particularized in Schedules 1-6 of the OS to the former.” 

36.  The above explanation does not sit well with Mr Cheung’s submission that the mortgages were executed to provide future advances from the Defendant to the Bankrupt.

37.  Mr Ho for the Plaintiff also submitted that assuming the Bankrupt was indebted to the Defendant at the time of the mortgages, the mere existence of prior indebtedness could not amount to valuable consideration under section 49 of the Ordinance (see Official Receiver for Northern Ireland v Stranaghan (supra) at §8). I agree.

38.  Seventhly, I agree that the Defendant’s failure to explain the deficiencies in the above proof of debt and the apparent contradiction with its own stated rationale for the mortgages merits adverse inferences to be drawn against the Defendant. (See Credit One Finance Ltd v Leung Ying Lok, HCA3146/2016, unreported, 20 November 2020, at §§68-69 per Ng J.)

39.  Finally, in relation to the London and Australian mortgages, there is no evidence that the Bankrupt received any consideration.

40.  I am also of the view that there is more than sufficient connection between the Defendant and Hong Kong and the natural and most appropriate forum to determine the Plaintiff’s application is Hong Kong for the following reasons:

(1) The Defendant is a Hong Kong company;

(2) The mortgages were executed in Hong Kong; and

(3) At all material times, the Defendant was under the control of the Bankrupt in Hong Kong.

41.  For all the reasons stated above, I am of the view that, at the time of the mortgages, viewed from the Bankrupt’s perspective, the incoming consideration was significantly less than the outgoing consideration. There is simply no evidence that the Bankrupt has received any consideration.

PROCEDURAL CHALLENGE

42.  Mr Cheung for the Defendant in his Skeleton Submissions submitted that due to the various unresolved factual disputes between the parties, this Court should make an order that this matter be continued as if it were a matter begun by writ and for the present substantive hearing to be adjourned generally pending discovery and the filing and service of witness statements.

43.  Having considered the matter carefully, I do not consider it fair and just to accede to the Defendant’s said request.  First, there is no proper application before the Court to turn the Originating Summons into a writ action.  Mr Ho for the Plaintiff reminded this Court that all the procedural directions were reached by way of consent.  The Defendant has never raised the issue that this matter should be turned into a writ action.  In fact, Mr Cheung for the Defendant fairly admitted that the Defendant only thought about turning this matter into a writ action upon receiving the Plaintiff’s Skeleton Submissions.

44.  Secondly, the parties have adduced evidence for the purpose of the present hearing. The Defendant has ample opportunity to put in evidence to show that the mortgages were transactions supported by valuable consideration. It chose not to. It will be unfair to the Plaintiff for this matter to be adjourned and to cause further delay in the collection and distribution of the Bankrupt’s assets.

45.  Thirdly, Mr Ho for the Plaintiff submitted that the Defendant’s directors (including the Bankrupt) chose not to give any affirmation evidence. Ms Chan Chung Yi is only the assistant manageress of the Defendant. The Defendant could have produced documents to show what credit facilities were utilized pursuant to which mortgage including exhibiting the relevant ledgers and underlying documents. Again, it chooses not to. In the circumstances, I am of the view that it is just and fair to turn the Originating Summons into a writ action at this stage.

DISPOSITION

46.  For all the reasons stated above, I make an order in terms of paragraphs 1, 2, 3, 4, 5 and 8 of the Originating Summons save and except that the words “and/or unfair preference given to the Defendant pursuant to section 50 of the Bankruptcy Ordinance (Cap.6)” in paragraph 2 be deleted as the Plaintiff is no longer pursuing any claims under the relevant section.

47.  Finally, it remains for me to thank Mr Ho for the Plaintiff and Mr Cheung for the Defendant for their helpful assistance to this Court.