RE CHAN KIT CHING t/a DOUBLE STAR (LAM LAM) FASHION WHOLESALE

HCB 7315/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7315 OF 2007

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D E C I S I O N

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Introduction

1.  This is an application taken out by the Official Receiver (“Official Receiver”) as trustee of the property of the bankrupt, Ms Chan Kit Ching (“the Bankrupt”) trading as Double Star (Lam Lam) Fashion Wholesale (“Double Star”). This application is made pursuant to section 30A(3) of the Bankruptcy Ordinance (“the Ordinance”).  The Official Receiver seeks for an order that the automatic discharge of Ms Chan from her bankruptcy be suspended on the grounds as set out in section 30A(4)(c) and (d) of the Ordinance, namely that: -

(a)  Ms Chan, as a bankrupt has failed to co-operate in the administration of her estate; and

(b)  as a bankrupt, the conduct of Ms Chan in respect of the period before and the period after the commencement of her bankruptcy has been satisfactory.

2.  The bankruptcy order against Ms Chan was made on 14 November 2007.  If not for this application, Ms Chan, who has not been previously adjudged bankrupt, would be discharged from her bankruptcy on 14 November 2007; that is upon the expiration of 4 years from the date of the bankruptcy order as per sections 30A(1) and (2) of the Ordinance.

3.  Ms Chan was made a bankrupt upon the presentation of a bankruptcy petition by the creditor a Mr Chan Kwok Hing trading as Tai Chuen Piece Goods Co (“the Petitioning Creditor”).  By a Summary Procedure Order dated 14 February 2008, the Official Receiver was appointed as trustee of the property of Ms Chan without a creditors’ committee.  According to the Official Receiver, there is only one proof of debt received and that is from the Petitioning Creditor in the sum of $1,359,859.91.  The bankruptcy assets recovered so far amount to only $3,064.22.

The Complaints

4.  Initially, the Official Receiver relied on 3 complaints in support of the 2 grounds of objection set out in paragraph 1 above.  They are as follows: -

(a)  Ms Chan has failed to disclose her interest in 9 PRC properties[1] (“the PRC Properties”) in her statement of affairs (“the 1^st Complaint”);

(b)  She has failed to respond to the Official Receiver’s queries made on 7 February 2011 in relation to the PRC Properties (“the 2^nd Complaint”); and

(c)  She had transferred the PRC Properties to a 余司賢 (“Mr Yu”) on 20 October 2005 which constituted a transaction at undervalue and which rendered her pre-bankruptcy conduct unsatisfactory (“the 3^rd Complaint”).

5.  At the hearing, Mr Lam, solicitor for the Official Receiver informed the court that the Official Receiver would not pursue the 1^st Complaint in support of the present application, nor would the Official Receiver rely on the failure on the part of Ms Chan to respond to the various letters sent to her previous usual addresses.  I shall now deal with the 2^nd and 3^rd Complaints.

Failure to respond to OR’s queries dated 7 February 2011 – the 2^nd Complaint

6.  Ms Chan and her husband a Mr Lee Yat Ming (“Mr Lee”) were the shareholders and directors of Double Star.  Investigation by the Official Receiver revealed that Ms Chan is also the sole registered owner of the PRC Properties.  She has however failed to disclose her ownership of the PRC Properties in her statement of affairs.

7.  Further investigation by the Official Receiver revealed that Ms Chan and Mr Lee had signed an agreement (“the Agreement”) with Mr Yu on 20 October 2005.  According to the Agreement, Ms Chan and Mr Lee had agreed to transfer the PRC Properties to Mr Yu in satisfaction of a debt in the total sum of RMB1.6 million owed by them to Mr Yu (“the debt”).  The Official Receiver is of the view that such a transfer or transaction may be caught by section 49 of the Ordinance as an undervalue transaction.  According to the Official Receiver, there is no documentary proof from Ms Chan showing that the debt was in fact owed by them to Mr Yu.

8.  Various requisitions were then raised by the Official Receiver in respect of the transfer of the PRC Properties by Ms Chan and Mr Lee.  By reply letters dated 31 May 2010, 11 August 2010 and 29 November 2010, Ms Chan, through her solicitors Messrs Cham & Co, explained that the PRC Properties had not been disclosed in her statement of affairs as she thought that she no longer had any interest in the PRC Properties after signing the Agreement on 20 October 2005.  A written Chinese legal opinion in support of such contention is also sent to the Official Receiver by Ms Chan’s solicitors.  Ms Chan further explained that the PRC Properties were orally pledged to Mr Yu back in 2003 as a security for the payment of the debt owed to him.  There is no documentary proof of the debt.

9.  Ms Chan stated that in 2005, they encountered financial difficulties. They were not able to repay the mortgages for the PRC Properties.  As a result, they signed the Agreement with Mr Yu transferring the PRC Properties to him as repayment of a series of preceding debts owed by Mr Lee to Mr Yu.

10.  According to Ms Chan, the value of the PRC Properties amounts to about RMB 1.6 million and the outstanding mortgage was RMB 0.8 million.  Upon signing of the Agreement, Mr Yu settled all the outstanding mortgages.  All the title deeds to the PRC Properties were also given to Mr Yu.

11.  Ms Chan further explained that the PRC Properties are still registered in her sole name because Mr Yu had failed to take steps to complete the formal transfer of the PRC Properties.  She stated that an authorization letter had been signed by her authorizing Mr Yu to complete the formality of transferring the PRC Properties to him, however Mr Yu had failed to do so as he was not prepared to pay the additional tax and expenses involved in the transfer which is not less than RMB400,000.

12.  According to the Affirmation of Ms Chan dated 8 December 2011 (“the Affirmation of Ms Chan”), Mr Yu had in or about April 2011 demanded her to execute some conveyancing documents in connection with the PRC Properties.  She declined to do so as she was by then already a declared bankrupt.  As Ms Chan had refused to execute the documents, Mr Yu instituted legal proceedings in 中國廣東省中山市第一人民法院 (“the PRC Court”) on 12 May 2010.  On 10 November 2010, a 執行裁定書 was issued by the PRC Court and the PRC Properties of Ms Chan were seized.

13.  Not at all satisfied with the explanations given by Ms Chan, by a letter dated 7 February 2011, the Official Receiver requested Ms Chan through her solicitors to provide: -

(a)  further information regarding details of the mortgage to which the PRC Properties were subject;

(b)  the authorization letter allowing Mr Yu to transfer the PRC Properties; and

(c)  the financial information in relation to Double Star.

14.  However, and according to the Official Receiver, no reply has been received from Ms Chan nor her legal representatives in respect of the said letter of 7 February 2011.  The Official Receiver is of the view that this amounts to a failure on the part of Ms Chan to co-operate with the Official Receiver in the administration of her estate.

15.  Mr Yip, Counsel for Ms Chan, submitted that though no reply has been rendered by Ms Chan to the Official Receiver’s letter of 7 February 2011, Ms Chan had already dealt with the previous requisitions raised by the Official Receiver in relation to the PRC Properties.

16.  In my view, that is not a good excuse for not replying to the Official Receiver’s letter of 7 February 2011.  The fact that Ms Chan had previously provided some information to the Official Receiver relating to the PRC Properties is not an answer to the complaint that she has not provided any reply to the Official Receiver’s letter of 7 February 2011.  Nor would that exonerate Ms Chan’s duties, as a bankrupt, to provide the further information as requested by the Official Receiver.  The court noted that the further information required are in fact follow-up questions to some of the previous answers provided by Ms Chan.  She, as a bankrupt, is under a statutory duty to respond promptly and timeously to these requisitions raised by the Official Receiver.  She has a positive duty to cooperate with the Official Receiver in the administration of her estate.  As stated by Yuen JA in Re Leung Yat Yung (The bankrupt) (No 2) [2007] 4 HKC 192 at paragraph 62: -

“…… a bankrupt is not permitted to adopt a ‘catch me if you can’ approach. He cannot wait and see if the trustee in bankruptcy manages to piece together the jigsaw of his financial affairs, and then when he is required to answer the trustee’s questions, try to get away with revealing as little as he can according to the strict letter of the questions. Instead, he should pro-actively reveal the complete picture of his financial affairs to the trustee, and where pieces do not appear to fit, in that his conduct or transactions appear to be inconsistent, it is for him to explain the inconsistencies and convince the trustee of the true state of affairs. The more complex the bankrupt’s transactions, the more difficult the task of the trustee in bankruptcy, and so the more comprehensive the bankrupt’s disclosure should be.”

17.  As further stated in the judgment of Le Pichon J (as she then was) in the case of Li Tat Kong v Official Receiver & Anor [2000] 3 HKC 360, at page 23 that: -

“…… it is incumbent on the bankrupt to make a full and frank disclosure and to proffer all pertinent information regarding his assets and financial dealings to the trustees.”

18.  Indeed, the court noted that not only has Ms Chan failed to provide the answers to the further information requested, but also her solicitors had challenged the authority of the Official Receiver in raising the previous requisitions in relation to the PRC Properties.  In the letter from the solicitors dated 21 July 2010, it is stated: -

“…… it was never stated in your said letter the basis why our client is under duty to answer your question. Please enlighten us whether it is your position that our client is under legal duty to answer the questions you stated in the said letter. If so, please provide us with the relevant section of the ordinance you relied on with authority.”

19.  The solicitors took the view that the Official Receiver was not entitled to raise queries for transactions completed within the 2 years’ time immediately preceding the date of the commencement of the bankruptcy proceedings save and except in limited circumstances (see paragraph 18 of the Affirmation of Ms Chan).  That must be wrong.  As pointed out by Mr Lam, and pursuant to section 51(1)(a) of the Ordinance, the relevant period for a transaction at an undervalue is 5 years ending with the day of the presentation of the bankruptcy petition on which the debtor is adjudged bankrupt.  In my view, the Official Receiver is perfectly entitled to make the investigation and raise queries regarding the transfer of the PRC Properties by Ms Chan to Mr Yu which is suspected to be a transaction at an undervalue.

20.  In my view, the failure on the part of Ms Chan to provide the further information requested by the Official Receiver amounts to a failure to co-operate in the administration of her estate.  On the evidence, I find that the 2^nd Complaint and the “failure to co-operate” ground have been established.

Transaction at an undervalue – the 3^rd Complaint

21.  The Official Receiver takes the view that the transfer of the PRC Properties by Ms Chan to Mr Yu is caught by section 49 of the Ordinance as an undervalue transaction and that such a pre-bankruptcy conduct of Ms Chan is unsatisfactory.

22.  Mr Lam relies on sections 49(1) and (3)(a) of the Ordinance which provide: -

“49. Transactions at an undervalue

(1) Subject to this and sections 51 and 51A, where a debtor is adjudged bankrupt and he has at a relevant time (defined in section 51) entered into a transaction with any person at an undervalue, the trustee may apply to the court for an order under this section.

(2) ……

(3) For the purposes of this and sections 51 and 51A, a debtor enters into a transaction with a person at an undervalue if—

(a) he makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no consideration;

(b) ……

(c) ……”

23.  Mr Lam submitted that the transfer of the PRC Properties to Mr Yu is an undervalue transaction as per section 49(3)(a) of the Ordinance as no consideration had been received by Ms Chan.  He referred the court to the Affirmation of Ms Chan where she stated that she is only a housewife with no connection with the business of Double Star and that the debts were owed by her husband Mr Lee to Mr Yu and not by her.  Mr Lam stated that no action has been taken in respect of this undervalue transaction as there is insufficient funding in the bankruptcy estate.

24.  Mr Lam further submitted that at the time of the transfer of the PRC Properties, Ms Chan should be aware that she was subject to an outstanding judgment debt in the principal sum of $650,000 under HCA 3759/1998.  However, she had chosen to transfer the PRC Properties to Mr Yu instead of repaying the judgment debt to the judgment creditor.  This is, as submitted by Mr Lam, unsatisfactory conduct and that the society would not be prepared to condone such conduct without expressing disapproval.

25.  Mr Yip disagreed with the submissions of Mr Lam.  He stated that the Official Receiver cannot invoke section 49 of the Ordinance as Ms Chan is still the registered owner of the PRC Properties.  He submitted that since the PRC Properties have not been transferred to Mr Yu, the alleged unsatisfactory conduct must fail.

26.  Mr Yip further argued that even if the PRC Properties have been transferred to Mr Yu on 20 October 2005, there is no valuation evidence from the Official Receiver to show that it is an undervalue transaction.

27.  In respect of the judgment debt under HCA 3759/1998, Mr Yip submitted that the judgment creditor in the said High Court Action is only an unsecured creditor.  On the contrary, Mr Yu who was in possession of title deeds of the PRC Properties, was a secured creditor.  Mr Yip argued that Mr Yu should have priority over the judgment debt of the judgment creditor in terms of repayment.

28.  In reply to the above arguments of Mr Yip, Mr Lam submitted that whether the ownership of the PRC Properties had been transferred to Mr Yu or not would depend on whether the legal concept of “beneficial interest” is recognized by the PRC laws.  But in any event, the ownership of the PRC Properties is irrelevant as it is the conduct of Ms Chan in dealing with her PRC Properties that matters.

29.  Mr Lam submitted that irrespective of whether the PRC Properties have been transferred to Mr Yu or not, the conduct of Ms Chan is unsatisfactory.  He stated that if the Ms Chan had successfully transferred the beneficial interests of the PRC Properties to Mr Yu, the transaction would be caught by section 49 as no consideration has been received by Ms Chan.  This would render Ms Chan’s conduct unsatisfactory.  If Ms Chan still remains to be the registered owner of the PRC Properties, her conduct in dealing with the PRC Properties would still be regarded as unsatisfactory as she had caused the PRC Properties to be kept out of the reach of the trustee, i.e. by signing the Agreement which led to the subsequent seizure of the PRC Properties by the PRC Court.  Mr Lam submitted that in either way, the signing of the Agreement by Ms Chan without receiving any consideration and at the time when she was subject to an outstanding judgment debt is by itself an unsatisfactory conduct.

30.  I have considered the above submissions.  I agree with Mr Lam that it is the conduct of Ms Chan in dealing with the PRC Properties that matters and not whether the PRC Properties had been successfully transferred to Mr Yu or not.  And having considered the evidence, I accept the submissions by Mr Lam that the pre-bankruptcy conduct of Ms Chan in dealing with the PRC Properties is unsatisfactory.

31.  In my view, if the debt is not owed by Ms Chan, it would not be right for her to transfer the PRC Properties to Mr Yu by signing the Agreement with the result that the Official Receiver is prevented from getting hold of the PRC Properties for realization and distribution to her creditors.  This is not to mention that she had not received any consideration for the transfer.  Nor do I think that it is right for her to transfer the PRC Properties to Mr Yu in view of the outstanding judgment debt that she has to satisfy.  I do not accept the argument of Mr Yip that Mr Yu is a secured creditor with a priority over the judgment creditor in HCA 3759/1998.  It is to be noted that the judgment was entered in favour of the judgment creditor on 21 February 2003, long before Mr Yu became a secured creditor when the title deeds of the PRC Properties were given to him on 20 October 2005, i.e. on the date that the Agreement was signed by the parties.

32.  Indeed, I have serious doubts as to whether the transfer of the PRC Properties is based on a genuine repayment of the debts to Mr Yu.

33.  In the first place, Ms Chan could not produce any documentary evidence to prove that money had been advanced by Mr Yu to her husband Mr Lee.  It is to be noted that according to Ms Chan, Mr Yu had advanced a series of loans to Mr Lee in the total sum of no less than RMB1.6 m.  This is not an insubstantial sum and for which one would expect that there should be some documentary evidence recording the payments and/or receipts of the money between Mr Yu and Mr Lee. But there is none save and except the Agreement.

34.  Also, Ms Chan has stated in her Affirmation that the PRC Properties were subject to mortgage.  However and despite request by the Official Receiver, not a single piece of mortgage document or record has been produced by Ms Chan to substantiate the same.

35.  Further, the evidence in respect of whether the debt is owed by Mr Lee or jointly by Mr Lee and Ms Chan is rather inconsistent.  In the Affirmation of Ms Chan, she stated that the debt was owed by Mr Lee to Mr Yu (see paragraph 24 of the Affirmation of Ms Chan).  However, in the reply letter by her solicitors to the Official Receiver dated 11 August 2010, it is stated that the debt was owed by them jointly.

36.  Inconsistent evidence can also be found in respect of the allegation by Ms Chan that Mr Yu had demanded her to execute some conveyancing documents in relation to the PRC Properties.  According to Ms Chan, Mr Yu demanded her to sign the documents in about April 2011.  When she refused to sign the documents, Mr Yu commenced legal proceedings in the PRC Court and subsequently obtained judgment against her and Mr Lee.  However, it should be noted that 執行裁定書 was issued by the PRC Court (which is exhibited as “CKC-8” in the Affirmation of Ms Chan) on 10 November 2010 which was about 5 months before the alleged demand made by Mr Yu.  In this regard, I do not exclude the possibility of a typing mistake in respect of the date (i.e. April 2010 and not April 2011), however Mr Yip has not addressed the court on this issue despite that this has been raised in the written submissions of Mr Lam dated 19 March 2012.

37.  In my view, the above matters have cast a serious doubt on the evidence and credibility of Ms Chan in respect of the alleged debt and indeed on the genuineness of the alleged transfer of the PRC Properties to Mr Yu.  And having considered the matter and the submissions of Mr Lam, I am satisfied that the Official Receiver has established the ground that the pre-bankruptcy conduct of Ms Chan in dealing with the PRC Properties has been unsatisfactory.

Conclusion

38.  On the evidence, I am satisfied that the Official Receiver has established the grounds that Ms Chan has failed to co-operate with the Official Receiver in the administration of her estate and that her pre-bankruptcy conduct has been unsatisfactory.  In my view, there had been failings on the part of Ms Chan which justified a delay of her rehabilitation.

39.  In deciding the appropriate period of suspension, I agree that the court should be guided by the principle that its ‘jurisdiction to suspend an order of discharge is a penal jurisdiction and the length of refusal should be apportioned to the just infliction of punishment on the bankrupt’ (see Butterworks Hong Kong Bankruptcy Law Handbook, 4^th edition at page 147).  In the present case, I have taken into account that the unsatisfactory pre-bankruptcy conduct of Ms Chan occurred back in 2005 which is some 6½ years ago.  I have also considered that after the commencement of the bankruptcy order on 14 November 2007, there is no other complaint against Ms Chan save and except her failure to reply to the letter of the Official Receiver dated 7 February 2011; the subject matter of the 2^nd Complaint.  I also take note of the fact that it is not a case where Ms Chan has totally failed to provide any information to the Official Receiver in respect of the transfer of the PRC Properties.  She has through her solicitors replied to some of the queries raised by the Official Receiver.  And having considered all the circumstances, I am of the view that the appropriate period of suspension should be 1 year and 3 months.  Accordingly, I order that the relevant period should cease to run for a period of 1 year and 3 months commencing from 13 November 2011.

Costs

40.  On the question of costs, I see no reason why costs should not follow the event.  I shall order Ms Chan to pay the costs of this application to the Official Receiver.  Such costs is to be assessed on a summary basis and on a date to be fixed before me with 30-minute reserved.  As the Official Receiver has already submitted a statement of costs, I direct the solicitors for Ms Chan to lodge and serve on the Official Receiver a brief list of objection 7 days before the hearing.

Schedule 1
Particulars of the 9 PRC Properties

(a)  三鄉平東市場住宅1幢303房

(b)  三鄉平東市場舖位27號

(c)  三鄉平東市場舖位28號

(d)  三鄉平東市場舖位29號

(e)  三鄉平東市場北二街41號

(f)  三鄉平東市場北二街43號

(g)  三鄉平東市場北二街45號

(h)  三鄉平東市場北二街47號

(i)  三鄉平東市場北二街49號