TRADEPOWER (HOLDINGS) LTD (IN LIQUIDATION) v. TRADEPOWER (HONG KONG) LTD AND OTHERS

HCA 1796/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1796 OF 2005

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REASONS   FOR   DECISION

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INTRODUCTION

1.  Tradepower (Holdings) Limited (“Holdings”) was wound up by an order of the Court of First Instance on 10 April 2000 upon a creditors petition presented by Elimor Finance Limited (“Elimor”). 

2.  The current liquidators of Holdings commenced this action on 14 September 2005 to set aside a deferred share scheme (“Scheme”), implemented in September 1999, pursuant to which 3,749 “A” shares in Tradepower Hong Kong Limited (“Tradepower HK”) held by Holdings were converted to “B” non-voting shares, and 9 new “A” shares were issued to Girvan Limited (“Girvan”).

3.  Holdings’s primary case is that the Scheme effectively rendered its shares in Tradepower HK worthless and made Girvan the sole shareholder of Tradepower HK in place of Holdings. It was a disposition of Holdings’s property with intent to defraud creditors and hence voidable under section 60 of the Conveyancing and Property Ordinance, Cap 219 (“CPO”).

4.  The Defendants to the action are Tradepower HK, Girvan, Mdm Chan Ho Yun Ping (“Mdm Ho”), Mr David A Sonnenberg (“Mr Sonnenberg”) and Mr Harold S Divine (“Mr Divine”).

5.  At the end of the trial, I held that I was not satisfied that the Scheme was entered into with intention to defraud creditors of Holdings. Accordingly I dismissed the action with costs to be taxed if not agreed.  These are my reasons for coming to that decision.

THE PARTIES

6.  I shall first set out the main parties and their relationship in more detail.

7.  Holdings, Tradepower HK and Girvan were related companies in the sense that Holdings and Girvan, and Tradepower HK indirectly through Holdings, were at all material times owned by Mr Sonnenberg and Mr Divine. As stated above, Mr Sonnenberg and Mr Divine were directors of all three companies.

8.  Mr Sonnenberg is now in his sixties. Mr Divine is 86. In the early 1970s, they set up a group of companies (“Group”) which carried on trading business in the Asia Pacific region. Prior to 1996, there were other companies in the Group, including companies which for convenience I will refer to simply as “Tradepower Taiwan”, “Tradepower Thailand” and “Tradepower Associates”. As their names indicate, Tradepower Taiwan and Tradepower Thailand were companies operating in those countries. Tradepower Associates was a Hong Kong trading company. There were also regional offices in various cities in the PRC.

9.  Mr Sonnenberg was resident in Hong Kong from around 1973 to 1983, when he returned to live and work in New York. He was the “managing partner” of the Group. Mr Divine, on the other hand, was resident in the US throughout and did not take active part in the day-to-day management of the Group’s business.

10.  The business of the Group was mainly two-fold. The companies acted as buying agents of electronic and electrical goods for US retailers, and also traded as exporters on their own account.

11.  Girvan was not a trading company. It was a real-estate investment company of Mr Sonnenberg and Mr Divine.

WITNESSES AND EVIDENCE GENERALLY

12.  Before I proceed to set out the material facts, I should say something about the witnesses and their evidence generally.

13.  In terms of the objective facts, they are largely documented in the contemporaneous documents and not in dispute.

14.  Three witnesses gave viva voce evidence at the trial. Mr Kenny Tam, one of the joint liquidators of Holdings, gave evidence on behalf of Holdings. However, Mr Tam’s evidence is based primarily on the documents as has no personal knowledge of any of the material facts. In so far as any part of his evidence consists of his opinions, I would disregard them.

15.  Mr Sonnenberg and Mdm Ho testified for the Defendants. Mr Divine filed a signed witness statement, but he was unable to come to Hong Kong for the trial due to his advanced age and his health. Nevertheless, his witness statement is admissible hearsay evidence, subject to such weight as I may attribute to it. As shall be apparent in later parts of this judgment, I have come to my factual findings primarily on the basis of the contemporaneous documents and the evidence of Mr Sonnenberg and Mdm Ho.

16.  Mr Sonnenberg is, in my judgment, a credible witness. So is Mdm Ho. It is my distinct impression that both of them were obviously trying their best to tell the Court what actually happened so many years ago and the reasons leading to the Scheme being implemented. Their evidence is also consistent in material respects with the contemporaneous documents. Having heard and observed them giving evidence, and despite thorough and skilful cross-examination by Mr Jin Pao, counsel appearing for Holdings, I am satisfied that I should accept their evidence unless any particular aspect of their evidence is shown to be wrong by undisputed contemporaneous documents or other incontrovertible evidence.

THE FACTS

17.  The following is a summary of the salient facts as I find them to be on the basis of the evidence.

18.  Since its establishment in the 1970s, the Group had been trading profitably until the early 1990s. Since around 1992, however, the fortune of the Group began to decline. The Group’s major customer in the US went into Chapter 11 bankruptcy in February of that year. Sales, and thus profit, dropped sharply. Efforts to rescue the Group’s business proved ineffective. By around August 1996, Mr Sonnenberg and Mr Divine decided to bring the Group’s business to conclusion and sought buyers for the trading operations which could be sold.

19.  They eventually sold various trading operations to a company which I will simply call “Grandlink”. Two ladies were behind Grandlink: one Mrs Lee, who had been the general manager of the Group, and her partner one Mdm Au. According to Mr Sonnenberg, “in-principle” agreement was reached with Mrs Lee and Mdm Au in around August 1996. Very shortly after that in-principle agreement, Mrs Lee and Mdm Au took over the day-to-day operation of the trading business. Almost immediately they dismissed all but one of the existing staff and discontinued the computer system previous used by the Group for keeping accounts. The sale was finalised, or formalised, in agreements apparently executed in September 1998.

20.  Grandlink did not takeover Holdings and Tradepower HK. Since around August 1996, these companies did not have any trading activities.

21.  Tradepower HK was the owner of three units in a commercial building, namely, Units 1312 to 1314 and Carpark spaces B7 and B8 of Peninsula Square, 18 Sung On Street, Hunghom, Kowloon (“Properties”). Tradepower HK purchase the Properties in 1994 for around HK$23 million, with a mortgage of just over US$2 million repayable over 10 years. Mr Sonnenberg frankly admitted that it was an aggressive purchase at a time when the Group’s business was declining. It was a bold step taken with a view to bolstering the Group’s image to attract more customers and business. Unfortunately the strategy did not work out as intended.

22.  Although the Properties had been rented out, the rental income was insufficient to service the mortgage repayments. Hence funds had to be made available for Tradepower HK to enable it to continue paying the mortgage repayments to prevent the mortgagee taking possession and putting the Properties under a “fire sale” in a depressed market. 

23.  Since Holdings did not have any income either, Mr Sonnenberg and Mr Divine caused Girvan, which had funds, to make periodic payments to Tradepower HK to enable the latter to pay the mortgage repayments and discharge other outgoings relating to the Properties. Mr Sonnenberg’s evidence is that such financial assistance from Girvan started from around August 1996 when Tradepower HK ceased trading and lasted until the mortgage was discharged in around 2005.

24.  Two different figures have been given as to the total amount Girvan had transferred or paid to Tradepower HK: in the Defence of Girvan, the sum pleaded is HK$2.3 million, whereas in the joint Defence of Mr Sonnenberg and Mr Divine and in their witness statements the figure is put at more than HK$4 million. The Defence is not able to provide documentary evidence of all the payments made by Girvan to Tradepower HK, but there are available transfer advices showing that from January 1998 to November 2001, Girvan had transferred over HK$3.6 million to Tradepower HK. Those transfer advices show transfers of around HK$750,000 in the year 1998 and a further HK$600,000 or so from January 1999 up to 18 September 1999.

25.  In my view, the precise amount paid by Girvan to Tradepower HK is not important. What is important is that Mr Sonnenberg believed (and I would observe that Mr Pao very fairly accepts that this was Mr Sonnenberg’s belief) that by providing such funding, Girvan had acquired a beneficial ownership in the Properties.

26.  Returning to the narrative, on 5 May 1997, Elimor commenced an action in the Court of First Instance against Holdings. The claim is for breach of contract, in relation to two shipments of umbrellas sold by Holdings to Elimor. Elimor’s claim was that the umbrellas were defective and unmerchantable. The amount claimed was over US$900,000, comprising of repayment of price paid, loss of import duty and loss of profit on re-sale.

27.  Mr Sonnenberg’s evidence is that he was in Europe when he learnt of Elimor’s claim, and he specifically paid a visit to Elimor’s office in Switzerland to try to inspect the umbrellas. He said firmly, and I accept, that his attitude was that if the claim was unfounded, he must argue it; but if the claim was well founded, he must make compensation. He was unable to inspect any umbrella because, he was told, the umbrellas were all in Russia. Mr Sonnenberg said that he did not believe in the accuracy of an inspection certificate issued by certain inspection agencies in Moscow. He also gave considerable details of the background to this transaction which led him to take such a view but which I do not find necessary to set out here.

28.  Elimor applied for summary judgment and on 28 September 1998 obtained interlocutory judgment for damages to be assessed. Holdings appealed against that judgment. On 7 January 1999, Mr Justice Sakhrani dismissed the appeal.

29.  Mr Sonnenberg said that his understanding of a judgment with damages to be assessed was that the amount of damages payable was still subject to argument. Given his suspicions over the claim, Mr Sonnenberg anticipated that Holdings would contest the damages aspect vigorously with a view to minimising or even extinguishing the claim. He said, and I accept, that he did not receive any legal advice that the appeal was likely to be unsuccessful, and he was not advised on the likely amount of damages which Elimor might be able to prove.

30.  On 9 December 1998, Mr Sonnenberg and Mr Divine signed a board resolution of Holdings passing the following resolutions:

“On the proposal of the chairman [Mr Sonnenberg], duly seconded by Mr Harold S Divine, it was resolved as follows:

(1)   The Company will be dormant soonest possible.

(2)   All shares of Tradepower (Hong Kong) Ltd held by the Company would be sold to interested parties. Further Option would be contemplated if no buyers came out.”

31.  Mr Sonnenberg explained that this resolution had nothing to do with the interlocutory judgment which was then under appeal. In his mind, Elimor was not yet entitled to anything. He said, and I accept, that the timing of this resolution probably had something to do with the formalisation or conclusion of the sale of the trading companies to Grandlink, which took place around September 1998.

32.  Between December 1998 and August 1999, Mr Sonnenberg and Mr Divine unsuccessfully tried to find a buyer for Tradepower HK’s shares.

33.  Hence in August 1999, the situation was that:

34.  Mr Sonnenberg said that he and Mr Divine found that state of affairs unacceptable. This was perfectly understandable. In Mr Sonnenberg’s mind (and I have little doubt that it was also in Mr Divine’s mind), Girvan had acquired a beneficial interest in the Properties by virtue of its paying Tradepower HK substantial amounts to repay the mortgage and would in all likelihood have to continue doing so, but it was not entitled to any interest in the Properties or even any security for the money it had paid and would have to continue to pay Tradepower HK. 

35.  Thus Mr Sonnenberg asked Mdm Ho to consult the Group’s auditors to see what could be done to regularise the position. Mdm Ho’s evidence in this respect, which is substantially unchallenged and which I accept, is that she discussed the matter with the auditors who advised her to seek further professional advice from Express Consultants Services Limited (“Express”). 

36.  The advice from Express was that there should be a corporate restructuring of Tradepower HK so that Girvan would become its controlling shareholder. Express’ advice was found in a letter dated 20 August 1999 addressed, at Mdm Ho’s request, to Mr Sonnenberg. It is faxed to him on or about the same date. The contents of this letter may suggest that the corporate restructuring idea might have come from Tradepower HK. However, Mdm Ho’s clear evidence is that the advice originated from Express. I have no hesitation in accepting that evidence.

37.  By a board resolution passed on 23 August 1999, Mr Sonnenberg and Mr Divine agreed with the proposal. The Scheme was implemented in September 1999.

38.  The details of the Scheme involved the following steps:

39.  Thus at the end of the Scheme, Girvan would be beneficially owning all the “A” shares in Tradepower HK, while Holdings would be holding 3,749 “B” shares which were, for all intent and purposes, worthless.

40.  The formal documents implementing the Scheme, signed by Mr Sonnenberg, Mr Divine and Mdm Ho as directors or shareholders of the companies, were filed with the Companies Registry on 18 September 1999.

41.  The next important event is the presentation of the winding-up Petition on 28 February 2000. Holdings was wound up on 19 April 2000.

42.  The assessment of damages took place before Master Ho and by a final judgment dated 20 December 2002, but only filed on 7 February 2003, damages were assessed at US$977,654.35, the full amount of Elimor’s claim based on the latest version of the Statement of Claim as re-amended on 24 September 1999. The undisputed evidence is that the liquidators did not request any assistance from Mr Sonnenberg, Mr Divine or Mdm Ho to contest the assessment, which appears to have been unopposed. Indeed, Mr Sonnenberg’s unchallenged evidence is that he had no idea about the assessment hearing until after the commencement of these proceedings.

SECTION 60 CPO

43.  The action is brought pursuant to section 60 of the CPO. Only subsection (1) is of relevance to this action:

“(1) … every disposition of property made … with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.”

44.  It is clear that to come within subsection (1), there must be:

(1)     a disposition of property;

(2)     which was made with intent to defraud creditors.

45.  The CPO does not defined what is or amounts to a “disposition”. I shall address the question of disposition later on.

46.  As to “intent to defraud creditors”, it is not disputed that deceit is not a necessary element, but there must be the existence of a dishonest intention at the time of the disposition: Lloyds Bank Ltd v Marcan [1973] 1 WLR 1387 (CA) at 1390H-1391C per Russell LJ, 1392B-G per Cairns LJ; see also Skink Ltd v Comtowell Ltd [1994] 2 HKC 286 (CA) at 289D-H.

47.  Counsel’s research unearthed no significant decision on section 60 in Hong Kong. However, I was referred to a useful recent decision of the High Court of Australia.

48.  Cannane v J Cannane Pty Ltd (1998) 192 CLR 557 is concerned with section 121 of the Bankruptcy Act 1966, which is similar to our section 60. The main issue in that case was whether a transfer of shares was effected with intention to defraud creditors, but the facts are quite different from the present case.

49.  In the joint judgment of Brennan CJ and McHugh J (now a Non-Permanent Judge of our Court of Final Appeal), one finds the following useful guidance on the mental element at 565-567:

“[10] … At the time when the Wisbeck shares were transferred, the relevant provisions of s. 121 read as follows:

“(1) Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.”

The critical term for present purposes is “with intent to defraud creditors”. Provisions of this kind, based on 13 Eliz I c 5, have been considered by courts in various jurisdictions and it is clearly established that the party seeking to avoid a disposition of property has the onus of proving an actual intent by the disponor at the time of the disposition to defraud creditors. The creditors whom the fraudulent disponor of property might intend to defeat need not be existing creditors; they may be future creditors. The intent prescribed by s.121(1) is an intent to defraud any present or future creditors. But, as the intent must accompany the disposition, it must relate to the effect of disposing of property then existing.

…

[12] Although the party impugning the disposition of property must show an actual intent to defraud creditors at the time of the disposition, the intent may be inferred from the making of a disposition which, to adopt the words of Lord Hatherley LC in Freeman v Pope, “subtracts from the property which is the proper fund for payment of [the] debts, an amount without which the debts cannot be paid”. The “proper fund” may consist in assets out of which future creditors as well as present creditors would be entitled to be paid a dividend in respect of what is owing to them. Therefore a subtraction of assets which, but for the impugned disposition, would be available to meet the claims of present and future creditors is material from which an inference of intent to defraud those creditors might be drawn. Whether that inference should be drawn depends upon all the circumstances of the case.

[13] If property be disposed of by sale and the sale price received by the disponor is equal to the true value of the property at the time of the disposition, the creditors have an undepleted fund against which to prove their debts. But if property is sold for an undervalue or is given away, that fact is relevant to the intent to be attributed to the disponor in disposing of the property. The value of property at the time of disposition may reflect, of course, the prospect of its future increase or decrease in value. But disposition of property at an undervalue is only a fact from which, dependent on the surrounding circumstances, an inference of fraudulent intent may be drawn. In Williams v Lloyd; In re Williams [(1934) 50 CLR 341 at 372, 377, 378], a majority of the Court declined to draw that inference when the disponor was in financially sound position and transferred property to his wife and children because his wife sought to have the family property preserved against the hazard of loss by her husband.

[14] Section 121 is not enlivened merely by showing that the disposition has reduced the assets available to the creditors when the disponor is adjudicated bankrupt. It is the disponor’s intent to deprive creditors of assets against which (or against the proceeds of which) they would otherwise be entitled to prove their debts that enlivens the operation of s.121. As Dixon CJ said in Hardie v Hanson [(1960) 105 CLR 451 at 456]:

“The phrase ‘intent to defraud creditors of the company’ suggests that present or future creditors of the company will, if the intent is effectuated, be cheated of their rights.” ” (footnotes omitted)

50.  In a separate concurring judgment, Gaudron J observed, at 571-572 under the heading “Intention to defraud”:

“[30] It is notoriously difficult to provide an exhaustive statement as to what is involved in the concepts of “fraud” and “intent to defraud”. “Fraud” involves the notion of detrimentally affecting or risking the property of others, their rights or interests in property, or an opportunity or advantage which the law accords them with respect to property. Conversely, it is not fraud to detrimentally affect or risk something in or in relation to which others have no right or interest or in respect of which the law accords them no opportunity or advantage. And there is no intent to defraud if the person in question believes that others have no right or interest in or in relation to the property concerned and that the law accords them no opportunity or advantage with respect to that property.

[31] It is to be remembered that the operation of s.121(1) depends on the intent of the bankrupt or, where it is applied in a company winding up, the intent of the company concerned. What is in issue in each case is, as Dixon J said in Williams v Lloyd; In re Williams, a “real intent”. And as Starke J observed in the same case, “[f]raud … is not to be presumed”. That is not to deny that it may take very little to justify a finding of fraud or intent to defraud for the purposes of s.121(1) of the Act if the person or company concerned disposes of assets when facing financial difficulties. Even so, the real intent must be ascertained.” (footnotes omitted)

See also Gummow J at 578 para [54].

51.  I am satisfied that I should be guided by these authorities, including the authorities referred to in them.

HOLDINGS’S CASE

52.  Mr Pao, on behalf of Holdings, advanced the case that the Scheme was obviously a “disposition” of Holdings’s property, ie, the interest which Holdings held in Tradepower HK. As a result of the Scheme, Holdings lost all meaningful rights to receive any income or return from its shares in Tradepower HK or to vote. In short, the deferred shares which Holdings continued to hold have become completely worthless.

53.  Mr Pao further submitted that dishonest intention could be inferred from the objective facts and all the circumstances of this case. In an admirably concise and focused submission, he contended that the Scheme was:

“a disposition by Holdings of valuable asset to oneself for no consideration at a time when it knew it had a substantial claim against it by a creditor, without any valid alternative explanation for that disposition.”

INTENTION TO DEFRAUD CREDITORS

54.  I shall consider the dishonest intention question first, and propose to do by reference to each of the five “component parts” of Mr Pao’s contention on intention to defraud creditors.

(1) Common Ownership

55.  This is not in dispute. Holdings and Girvan were at all material times owned by Mr Sonnenberg and Mr Divine. 

56.  Moreover, subject to whether the Scheme constituted a “disposition” as a matter of law, it is not seriously disputed by the Defence that the practical effect of the Scheme was to make Girvan the owner of Tradepower HK in place of Holdings.

(2) Knowledge of Claim and Timing of Scheme

57.  Mr Pao’s main submission under this head is that at the time of the Scheme, Mr Sonnenberg and Mr Divine knew of Elimor’s claim, they knew that interlocutory judgment had been entered against Holdings, and the claim was a substantial one. There was no cogent evidence that they had considered the claim to be negligible or something that Holdings could meet in any event, nor was there cogent evidence to explain why or how Holdings could have met Elimor’s claim. The ultimate outcome of the assessment, submitted Mr Pao, was conclusive indication of the substantial nature of the claim. Mr Pao therefore submitted that it was clearly operating in the minds of the directors that there was a claim which was likely to be substantial when the Scheme was put in place.

58.  I am unable to agree with Mr Pao. There could be no doubt that the directors knew of the existence of a claim. They also must have known that there was an interlocutory judgment entered against Holdings in September 1998 for damages to be assessed, and the dismissal of that appeal in early January 1999. But the directors did not pass the resolution to put Tradepower HK into “dormant” mode immediately after the interlocutory judgment. Rather, they only did so after a few months. This was hardly consistent with them having been advised, or labouring under any real apprehension, that Holdings was going to be burdened with a substantial monetary judgment in the near future. On the other hand, it was consistent with the finalisation or completion of the sale of the trading companies to Grandlink, which took place in around September 1998.

59.  What is even more telling is the fact that the Scheme was not initiated, let alone put in place, until sometime in August 1999, some seven months after the dismissal of the appeal. One would have thought that if the directors were acting under any intention to beat Elimor to the assets of Holdings, they would have taken steps to do so much earlier than August 1999. Moreover, there was no sign of any particular urgency in the actual steps to implement the Scheme: the advice from Express came on 20 August 1999, the directors resolved to proceed on 23 August 1999, and the actual formalities were not completed until mid-September 1999, more than three weeks later.

60.  Mr Pao made a point that there was no satisfactory explanation as to precisely why the Scheme was effected in September 1999. I reject that submission. There is the explanation from Mr Sonnenberg that after December 1998, attempts were made to sell the shares of Tradepower HK, which proved to be unsuccessful, and the directors then decided that the irregularity in terms of Girvan’s financing of the mortgage repayments for the Properties should be regularised. I find that evidence entirely credible. True it is that there is no clear evidence as to precisely when the directors came to that conclusion, but in my view eight months seems to me reasonable.

61.  Thus the timing did not indicate any intention to defraud creditors. Indeed, had the Scheme took place earlier, Mr Pao would presumably have advanced the argument that it was done close to the dismissal of the appeal and hence indicative of an intention to defraud creditors.

62.  In terms of means to satisfy Elimor’s claim, Mr Sonnenberg’s evidence, which I accept, is that he understood that the claim had not even been crystalised and Holdings had all the opportunities to challenge the assessment. This is consistent with Mr Justice Sakhrani’s judgment, p 7, although I place no weight on this since the judgment was only produced after conclusion of Mr Sonnenberg’s evidence and he was not asked as to whether he had sight of or had been advised about its contents. 

63.  Mr Sonnenberg also testified, and I accept, that he genuinely believed Elimor’s claim to have been grossly exaggerated. In this connection, I do not think the much later assessment of damages, which in all probability was unopposed, served as any meaningful guide to the directors’ belief back in August-September 1999 of the likely amount of damages or when that liability would arise.

64.  On the other hand, it is accepted by Mr Tam that when Holdings went into liquidation, it had about HK$2 million in cash. Mr Sonnenberg’s evidence in re-examination is that in September 1999, Holdings should have around US$287,000 or US$297,000 in cash, mainly representing debts collected from one of Holdings’s agents in London. Those figures tally broadly with the HK$2 million given by Mr Tam and I accept that in September 1999, Holdings either had around HK$2 million or a real expectation of receiving this sum soon, which would have been made available to meet Elimor’s claim once assessed. There is no other evidence to suggest that the directors believed that Holdings would not be able to meet Elimor’s claim out of its own assets or through assistance from associated companies. I should add that other than Elimor, Holdings had no “outside” creditors.

65.  I am therefore not prepared to place the weight which Mr Pao so forcefully urged me to place on the timing of the Scheme. In my view, when properly analysed, the timing of the Scheme did not support the inference of dishonest intention. Rather, it suggests the contrary.

(3) No Consideration

66.  Mr Pao submitted that this is a critical aspect of the case. Relying on the dicta of Cairns LJ in Marcan at 1392D, Mr Pao made the submission that where the conveyance is voluntary it is easier to infer a dishonest intention than when it is made for consideration.

67.  I accept that a voluntary transfer is a material, even a very powerful factor, to indicate that the transfer was done with dishonest intention. However, each case must depend on its own facts and one must look at all the circumstances of the case without any presumption that a voluntary transfer demonstrates such intention. Mr Pao accepted as much in his opening submissions.

68.  Mr Colin Wright, on behalf of the Defendants, relied on the following facts to contend that there was consideration for the Scheme:

69.  In my view, it is unnecessary to go into the fine arguments advanced by counsel on both sides as to whether these “claims” could have, as a matter of law, amounted to consideration for the new shares in Holdings issued to Girvan. The factual reality is simply that “consideration” or “waiver of claims” in the legal sense were simply not matters which the directors had in mind when effecting the Scheme. In my view, Mr Pao is justified in his submissions that these are legal arguments advanced by the Defendants’ legal advisers ex post facto in support of the Defence case, no doubt in the best interest of their clients.

70.  I would therefore proceed on the basis that the directors did not act on the belief that Girvan would or did provide valuable consideration for the Scheme.

(4) No Valid Reason for the Scheme

71.  Despite Mr Pao’s able arguments to the contrary, in my judgment there was a valid and credible reason for the Scheme.

72.  As I have already mentioned above, what was operating in Mr Sonnenberg’s and Mr Divine’s mind was the idea that Girvan had, by virtue of its financial support of Tradepower HK, acquired a beneficial interest in the Properties which was likely to increase in the future. But Girvan had no interest, direct or otherwise, in Tradepower HK or the Properties. In those circumstances, it is in my view reasonable for businessmen like Mr Sonnenberg and Mr Divine to find the situation unacceptable and wish to rectify it. Hence they sought advice from professionals to regularise the situation, and they were advised by Express that the Scheme was the proper method to do so.

73.  In my judgment, there was a clear aim of the Scheme, namely, to “align” the beneficial ownership of Tradepower HK (and indirectly the Properties) with Girvan which in fact serviced, and would have to continue to service, the mortgage repayments. It was, in my view, a natural and reasonable thing for Mr Sonnenberg and Mr Divine to do at the time.

74.  Mr Pao submitted that there were other alternatives to the Scheme, such as creating a security over the Properties in favour of Girvan. It is questionable whether the other alternatives suggested could have worked. But even if they could, there is no evidence that Mr Sonnenberg and Mr Divine were advised of any other alternatives. They were advised by professionals to adopt the Scheme, and they accepted that advice.

75.  I am not satisfied that there was no legitimate or valid reason for the Scheme.

(5) The Shares were Valuable Assets

76.  There could be no doubt that the shares of Tradepower HK in September 1999 were valuable assets, in the sense that there was a net asset value attributable to them.

77.  The precise value, however, is difficult to ascertain. There is a “brief valuation report” prepared by a firm of surveyors dated 22 November 1999 valuing the “open market value” of the Properties, but without the carparks, at HK$10 million as at the date of the report. That report, moreover, did not state the basis of valuation (whether it was on vacant possession basis or not). There is no evidence on the provenance of that report.

78.  Holdings relied on a valuation obtained by the Official Receiver from the Rating and Valuation Department assessing the “market value” of the Properties as at 17 September 1999, but with only one carpark, at HK$13.5 million. But the government valuation was on vacant possession basis, when at all material times the Properties were tenanted which obviously might lower the market value particularly in a weak market as it was in 1999.

79.  So neither report is particularly helpful. 

80.  It is perhaps fair to say that the market value of the Properties in September 1999 would probably be closer to HK$10 million, given that they were tenanted and the market was weak. I would assume that the market value was around $10.5-11.5 million. On that basis, the net equity in the Properties was around HK$3.5-4.5 million, given that the outstanding principal on the mortgage was about HK$7 million.

81.  Holdings did not have much other valuable fixed assets. Based on the management accounts of Tradepower HK as at 30 September 1999, there were current assets totalling around HK$1.5 million. But the vast majority of that was a sum of HK$1.2 million under Girvan’s current account. The accuracy of that figure must be open to doubt given that the evidence shows that money movements were all the other way. Be that as it may, the management accounts shows net current assets at about HK$640,000.

82.  On that basis, the net asset value of Tradepower HK’s shares in September 1999 would be about HK$4-5 million. That is a weighty factor that I should take into account. 

83.  On the other hand, Girvan had been making payment to Tradepower HK since around August 1996. The total amount of such payments could not be ascertained with any reasonable accuracy, but that fact must also be taken into account.

OVERALL ASSESSMENT OF EVIDENCE

84.  Looking at all the evidence in the round, and having carefully considered counsel’s persuasive submissions, I am not satisfied that Mr Sonnenberg and Mr Divine, or for that matter Mdm Ho, effected the Scheme with a dishonest intention to defraud the creditors of Holdings. It seems to me that, objectively viewed, their intention was to regularise what was reasonably considered to be an unacceptable situation created by the mismatch between the beneficial ownership of the Properties with the party which had been providing a substantial part of the funds needed for acquiring the Properties and which would have to continue to provide such funding. And they did so many months after the dismissal of the appeal against the interlocutory judgment, when they believed that the liability to Elimor had yet to crystallise, and when they did not have any positive belief that the assets of Holdings would not have been able to meet that liability if and when ascertained.

85.  That being the case, Holdings fails to prove an essential element of its cause of action and the action must be dismissed.

WHETHER THE SCHEME WAS A DISPOSITION OF PROPERTY

86.  In view of my finding on the dishonest intention issue, any finding on the disposition issue would be strictly obiter. Nevertheless, I would venture to express a view.

87.  “Disposition” is not defined in the CPO. It is defined in a number of Ordinances, but the contexts of those Ordinances are very different so those statutory definitions provide little assistance on the question.

88.  Counsel’s diligence did not unearth any relevant authority on the point.

89.  For the Defendants, Mr Wright submitted that in its ordinary meaning, “disposition” connotes a transfer or alienation of property or property rights. On that basis, there was no disposition of Tradepower HK’s shares in this case since Holdings continued to hold its 3,749 shares in Tradepower HK. The fact that the rights attributable to those shares have been temporarily diminished, or even extinguished, is irrelevant. It may be possible that in some future date those rights could be restored to their previous level or even enhanced.

90.  I reject that submission, which overly focuses on the form of the transaction. The prospects of the deferred shares being reinstated in the future are, with respect, fanciful.

91.  In my view, one must look at the substance of the transaction and ask whether as a matter of practical reality, the property in question has been disposed of.

92.  The effect of the Scheme, both intended and practical, is clear. It is to change the shareholder – or owner – of Tradepower HK from Holdings to Girvan. There could be no doubt that by virtue of the Scheme, Girvan replaced Holdings as Tradepower HK’s holding company. As Mr Pao astutely pointed out, the audited accounts of Girvan for year 2000 shows that Girvan considered itself directly owning 100% of the equity in Tradepower HK.

93.  Given that there is no dispute that rights attached to shares are “property”, there is in my view no doubt that the Scheme served to dispose of Holdings’s rights in Tradepower HK to Girvan.

94.  Moreover, even on Mr Wright’s case, there was the transfer of the 1 share previously held by Mrs Lee to Mdm Ho.

95.  In my judgment, therefore, the Scheme was a disposition of Holdings’s rights in the shares in Tradepower HK to Girvan.

COSTS AND POSTSCRIPT

96.  At the end of the trial on 27 February 2008, I dismissed the action with costs to be taxed if not agreed.

97.  After the hearing, the solicitors acting for the liquidators applied by letter to vary the costs order so that I may reserve the question of costs until after these Reasons are made available.

98.  I saw no reason to accede to that request. Counsel for Holdings did not advance any submissions why costs should not follow the event. Nor did the solicitors’ letter give any reason why I should revisit the costs order.

99.  Accordingly, that application was refused on 28 February 2008.

100.  It remains for me to thank counsel for their most valuable assistance.