OSMAN MOHAMMED ARAB AND ANOTHER v. LEUNG WAI HAN AND ANOTHER

HCA 605/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 605 OF 2014

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JUDGMENT
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1.  The plaintiff applies for summary judgment on one of the claims in the action against both defendants. The claim is for the vesting of the defendants’ property known as Flat B on the 25^th Floor of the Fu Yi Yuen in Chi Fu Fa Yuen, Pokfulam, Hong Kong (“the Chi Fu Property”) unto the plaintiff under section 51A(1)(a) of the Bankruptcy Ordinance, Cap 6 (“the Ordinance”).

2.  The cause of action is that the transfer of the Chi Fu Property by the bankrupt Mr Leung Moon Chuen to the defendants was a transaction at an undervalue or an unfair preference given by the bankrupt to the 2nd defendant.

The undisputed Facts

3.  The following facts are undisputed and are taken from the written submissions of Mr Tony Chow, counsel for the defendants:

(1) The defendants are the daughters of the bankrupt.

(2) On or about 29 April 1996, the Chi Fu Property was purchased by the bankrupt and his wife (i.e., the defendants’ mother) (“Mdm. Chow”) as joint tenants.

(3) On or about 29 April 1996, a mortgage was taken out under the joint names of the bankrupt and Mdm. Chow.  The mortgage was discharged on or about 18 May 1998.

(4) On or about 25 August 2000, the bankrupt and the 2nd defendant purchased a flat in Lung Tak Court, Stanley as joint tenants (“the Lung Tak Property”) (a property subject to another claim in the action but not involved in this application).

(5) On 2 May 2008, Mdm. Chow passed away.  Upon the registration of Mdm. Chow’s death certificate on 29 January 2009, the bankrupt, as the surviving joint tenant, became the sole legal owner of the Chi Fu Property.

(6) On 19 September 2008, the Lung Tak Property was sold and HK$1,146,793.75 net sale proceeds were realized.

(7) On 19 September 2008, a sum of HK$941,793.75 of the proceeds was deposited into the 2nd defendant’s bank account.  On 22 September 2008, the 2nd defendant made two separate transfers of HK$707,993.75 and HK$103,300 (or a total sum of HK$811,293.75) out of the same account to the bankrupt.

(8) On or about 9 February 2009, the bankrupt mortgaged the Chi Fu Property in favour of Good Harvest Finance Limited for “all monies”. The mortgage was discharged on or about 10 August 2009.  (The 2nd defendant has said in an affirmation in opposition to this application that the defendants were unaware of this mortgage.)

(9) On or about 10 August 2009, the bankrupt mortgaged the Chi Fu Property in favour of Hang Seng Bank, with the 2nd defendant as the guarantor for HK$3,000,000 (“the prior mortgage”).  The prior mortgage was discharged on or about 7 October 2011.

(10) On or about 1 September 2011, the bankrupt entered into an agreement with the defendants to sell the Chi Fu Property to them as tenants in common for HK$4,100,000.

(11) By a redemption letter dated 6 October 2011, the Hang Seng Bank confirmed the total amount payable for early redemption of the prior mortgage at HK$2,906,034.33.

(12) On or about 7 October 2011, the defendants obtained a mortgage in their names on the Chi Fu Property in favour of the Hang Seng Bank for HK$2,800,000 (“the existing mortgage”).  The money from the existing mortgage was paid to the account of the bankrupt for discharge of the prior mortgage prior to completion of the sale to the defendants. 

(13) The bankruptcy petition was presented against the bankrupt on 2 May 2013. 

(14) The bankruptcy order was made against him on 31 July 2013.

(15) The plaintiff is the joint and several trustees-in-bankruptcy of the bankrupt.

(16) The defendants are associates of the bankrupt within the meaning of section 51B of the Ordinance and that the sale of the Chi Fu Property to them was during the relevant time within the meaning of section sections 50(1)(a) and 51(1)(b) of the Ordinance.  But the plaintiff is not alleging that the 1st defendant had been a creditor of the bankrupt.

The plaintiff’s pleaded case

4.  The plaintiff’s case on the Chi Fu Property as pleaded in paras 6 to 11 of the Statement of Claim is as follows:

“6. On 7 October 2011, by an assignment registered in the Land Registry under memorial no. 11102401810070, the bankrupt transferred the Chi Fu Property to the Defendants for a purported consideration of HK$4,100,000 (the “Assignment of Property”).

7. No consideration has in fact been paid by the Defendants to the bankrupt for the Assignment of Property.

8. In the premises:-

(1) the bankrupt has received no consideration for the Assignment of Property;

(2) the Assignment of Property took place within a relevant time within the meaning of sections 49(1) and 51(1) and (2) of the Ordinance, namely within a period of 2 years ending on 2 May 2013; and

(3) the Assignment of Property accordingly is a transaction at an undervalue within the meaning of section 49(1) of the Ordinance.

9. Alternatively, if:-

(1) at the material times the Defendants were the bankrupt’s creditors or sureties or guarantors for any of his debts or other liabilities; and

(2) the Assignment of Property was for settlement of any indebtedness owed by the bankrupt to the Defendants.

10. Given:

(1) the Assignment of Property has the effect of putting the Defendants into a position which, in the event of the bankrupt’s bankruptcy, will be better than the position they would have been in if the Assignment of Property had not been done;

(2) the bankrupt was presumed to have been influenced in deciding to give the unfair preference by a desire to produce in relation to the Defendants the effect pleaded in paragraph 10(1) above under section 50(5) of the Ordinance due to the fact that the Defendants are associates of the bankrupt;

(3) the Assignment of Property took place within a relevant time within the meaning of sections 50(1) and 51(1)(b) of the Ordinance, namely within a period of 2 years ending on 2 May 2013; and

(4) the bankrupt was presumed to be insolvent at that time or have become insolvent in consequence of the Assignment of Property under section 51(2) of the Ordinance due to the fact that the Defendants are associates of the bankrupt.

11. In the premises, the Assignment of Property is an unfair preference given by the bankrupt to the Defendants within the meaning of section 50(1) of the ordinance.”

The defence

5.  The defendants pleaded in paras 4 to 7 of their amended defence and counterclaim the following defence to this claim.  They pleaded that the relationship between the bankrupt and Mdm. Chow deteriorated since the birth of the 1st defendant in October 1986.  The bankrupt moved to live in Macau in the late 1980s.  He only paid infrequent visits to Mdm. Chow and made little contribution to the defendants’ upbringing.  It was discovered in the 1990s that he had an extra-marital affair with another person in Macau.  The relationship between the bankrupt and Mdm. Chow thus deteriorated further.

6.  The Chi Fu Property was bought in 1996.  Mdm. Chow provided all the purchase money from her savings.  The bankrupt was made a joint tenant of the property solely to facilitate the application of a mortgage to finance the purchase. 

7.  It was the common intention of Mdm. Chow and the bankrupt at the time of purchase that this property would be beneficially owned by Mdm. Chow and the defendants to the exclusion of the bankrupt.

8.  When the Lung Tak Property was purchased in 2000, it was the intention of Mdm. Chow and the defendants that the 2nd defendant would have the beneficial interest of this property and the 1st defendant would own the Chi Fu Property upon the death of Mdm. Chow.  This intention was not conveyed to the bankrupt.

9.  The defendants also pleaded that the instalments due on the prior mortgage and all the decoration and other expenses incurred on the Chi Fu Property were paid off by Mdm. Chow and the defendants.  The 2nd defendant later said in her affirmation that neither she nor the 1st defendant had recollection of how the purchase price was paid as they were too young then.  But Mdm. Chow’s younger sister had told her that Mdm. Chow had said that the entire purchase price for this property came from Mdm. Chow’s savings.

10.  The defendants further pleaded that the Chi Fu Property had been exclusively occupied by Mdm. Chow till her death on 2 May 2008. They also pleaded that the bankrupt had told Mdm. Chow, the defendants and their relatives that this property belonged to Mdm. Chow and the defendants only.  When Mdm. Chow was still alive, the bankrupt had also repeatedly assured her and the defendants’ relatives that he would change the owners of the property to the defendants.

11.  By reason of the foregoing, the defendants pleaded that the bankrupt, upon the death of Mdm. Chow in May 2008, had become the legal owner of the property but holding the beneficial interest of the same on constructive trust for the benefit of the 1st defendant.

12.  The defendants further pleaded that after the sale of the Lung Tak Property on 19 September 2008, the defendants agreed that they would share the beneficial interest of the Chi Fu Property equally.  They together paid all the rates and utility, management and decoration expenses.

13.  In or around 2009, the bankrupt sought their permission to mortgage this property as he said he was in financial difficulty.  He, in return for their permission, promised that he would be solely responsible for repaying the mortgage.

14.  In reliance on these promises, the defendants gave the bankrupt consent who then mortgaged the property to the Hang Seng Bank on 10 August 2009 for a loan of HK$3,000,000 for his own use (the prior mortgage).  The 2nd defendant also acted as the guarantor of this loan. 

15.  The bankrupt paid the mortgage repayments from September 2009 to around July 2011 when he told the defendants that he could not discharge the mortgage repayments because of financial difficulty.  If the bankrupt should default on the mortgage payments, the 2nd defendant as the guarantor would be liable to the bank.  The bank might also enforce the prior mortgage on the property. In order to avoid such problems, the defendants and the bankrupt agreed that they would redeem the prior mortgage and the bankrupt would transfer the legal title of the flat to them.

16.  Pursuant to this agreement, the bankrupt and the defendants entered into a memorandum of sale and purchase whereby the defendants would purportedly purchase the property from the bankrupt at HK$4,100,000.  The defendants also created a mortgage on the property on 7 October 2011 in favour of the Hang Seng Bank to secure a loan of HK$2,800,000 to pay off the prior mortgage (the existing mortgage).  The amount outstanding on the prior mortgage as at 6 October 2011 was HK$2,906,034.33.

17.  The defendants thus pleaded that the bankrupt never had any beneficial interest in the Chi Fu Property and its assignment by the bankrupt to them was not an assignment of its beneficial interest to them.  The assignment thus did not need consideration and was not for no consideration or at an undervalue.  It was also not an unfair preference by the bankrupt for the defendants.

18.  The defendants also pleaded by way of an alternative that if the bankrupt was indeed the sole beneficial owner of the property after Mdm. Chow’s death, he and the plaintiff are estopped from asserting such interest against the defendants because he had repeatedly represented to Mdm. Chow and the defendants that this property belonged to them and to his exclusion and the defendants had relied on these representations and acted to their detriment. The defendants pleaded that they had in reliance on the representations spent considerable sums of money to renovate the property.  That included a sum of over HK$100,000 for a decoration in April to June 2011.  They also paid the rates and the other expenses above-mentioned.  They also consented to the bankrupts’ creation of the prior mortgage in August 2009 with the 2nd defendant as the guarantor of the loan advanced by the bank to the bankrupt.  They also, in reliance on the belief that they were the beneficial owners and the bankrupt’s assignment of the property to them was valid, created the existing mortgage on 7 October 2011 in favour of the bank for a loan of HK$2,800,000 to pay off the prior mortgage.

19.  Finally, the defendants pleaded that if the bankrupt should be the beneficial owner of the Chi Fu Property when he assigned it to them in October 2011 and in the event that the assignment should be set aside, they should be subrogated to the rights of the bank under the prior mortgage.

20.  The facts pleaded in the defence case are repeated in an abbreviated form by the 2^nd defendant in an affirmation filed on 2 April 2015 to oppose this application.

The June 2014 meeting

21.  In making this application, the plaintiff is relying on the evidence it obtained from the 2nd defendant in a meeting between the representatives of the plaintiff and the 2nd defendant on 19 June 2014.  What the plaintiff learnt in the meeting about background leading to the assignment of the Chi Fu Property by the bankrupt to the defendants was different from the matters pleaded in the defence and verified by the 2nd defendant in her affirmation. 

22.  In the meeting, the 2nd defendant, in explaining the assignment of the Chi Fu Property by the bankrupt to the defendants, produced three original Chinese documents to the plaintiff’s representatives and allowed them to make copies thereof.  The copies are exhibited in an affirmation filed in support of this application.  They are (i) a loan agreement dated 3 September 2008 and made between the bankrupt as the borrower and the 2nd defendant as the lender with the 1st defendant as the witness (“the loan agreement”); (ii) an undertaking dated 5 August 2009 given by the bankrupt to the 2nd defendant with the 1st defendant as witness (“the undertaking”); and (iii) an acknowledgement dated 1 September 2011 signed by both the bankrupt and the 2nd defendant and witnessed by an unidentified person (“the acknowledgement”). 

23.  One Ms Ng Yee Lok also known as Edna Ng, a senior accountant of the plaintiff who attended the meeting also prepared an attendance note.  Ms Ng said in her affirmation in support of this application that the contents of the note are an accurate summary of the matters discussed in the meeting.  The 2nd defendant challenged the accuracy of the note in her affirmation of opposition filed on 2 April 2015.  Ms Ng then exhibited in an affirmation in reply filed on 22 April 2015 a CD containing an audio record of the meeting.  Mr Tony Chow, counsel for the defendants has not pursued the issue of the accuracy of the note in his submissions.  I find that the note contains an accurate summary of the matters discussed in the meeting.

24.  The 2nd defendant further opposed the plaintiff’s use of anything she had said or given in the meeting.  Her ground was that Ms Ng had told her at the beginning of the meeting that whatever she said in the meeting would not be used against her without her consent (A91, para 31(b)).  However, this allegation is not supported by the audio record of the meeting which started from the very beginning of the meeting.  I find that Ms Ng had not made the promise as alleged by the 2nd defendant.

25.  According to Ms Ng’s note, the bankrupt’s family used to live in a low cost housing flat in the Wah Fu Estate and the bankrupt was the registered tenant.

26.  Regarding the purchase of the Chi Fu Property by the bankrupt and Mdm. Chow as joint tenants on 29 April 1996, the 2nd defendant said in the meeting that she did not know who paid the purchase price and the mortgage instalments as they were dealt with by the bankrupt and Mdm. Chow.  The mortgage was created on the date of purchase and discharged on 18 May 1998.

27.  On 25 August 2000, the bankrupt and the 2nd defendant purchased the Lung Tak Property as joint tenants.  This property is in the Home Ownership Scheme and the bankrupt had to surrender the tenancy of the Wah Fu Estate flat in order to be eligible to purchase this flat (hence, he was made a purchaser). The purchase price for this flat was paid by Mdm. Chow solely and Mdm. Chow gave this flat to the 2nd defendant as a gift to celebrate her 19th birthday.

28.  Within about 100 days after the death of Mdm. Chow on 2 May 2008, the bankrupt asked the 2nd defendant to sell the Lung Tak Property as he was in need of money.  This property was then sold and the 2nd defendant received the net proceeds of HK$940,052.  She lent the bankrupt HK$840,000 out of this sum. 

29.  She produced the loan agreement dated 3 September 2008 to prove the loan.  The loan agreement stated that the bankrupt had borrowed HK$840,000 from the 2nd defendant and he would repay the same in 48 instalments of HK$17,500 each commencing 15 November 2008.  It also provided that the bankrupt had charged the Chi Fu Property, which belonged to him, to the 2nd defendant.  The bankrupt also undertook that if he should be unable to repay the loan, he would sell the property to the 2nd defendant. He further undertook that he would not sell or let out the property to others before fully repaying the loan to the 2nd defendant.

30.  After the death of Mdm. Chow, the bankrupt became the sole owner and beneficiary of the Chi Fu Property.  This property was then mortgaged under the prior mortgage to Hang Seng Bank on 10 August 2009 for HK$3,000,000 with the 2nd defendant as the guarantor. 

31.  The bankrupt also signed the undertaking dated 5 August 2009 to the 2nd defendant.  By the undertaking, he admitted that he had only repaid the first instalment of the HK$840,000 loan and had defaulted on the rest. He wanted to borrow HK$3,000,000 from Hang Seng Bank and requested the 2nd defendant to be her guarantor.  He promised to the 2nd defendant that he would pay her HK$47,000 interest on the outstanding loan by making monthly repayments of HK$18,500 each to the 2nd defendant.  He also promised the 2nd defendant that he would promptly repay the mortgage instalments to avoid the 2nd defendant as the guarantor to be called upon by the bank to repay.  He also undertook that if he should fail to honour either promise, he would unconditionally sell his property, the Chi Fu Property, to compensate his failure to fully repay the money he owed the 2nd defendant.

32.  Then in the middle of 2011, the bankrupt told the 2nd defendant that he could not repay the prior mortgage and asked the 2nd defendant to repay it.  The 2nd defendant then made a deal with the bankrupt to the effect that the bankrupt would sell the Chi Fu Property to the defendants to set off the HK$840,000 loan.

33.  It is undisputed that the amount then due on the prior mortgage was HK$2,906,034.33 and HK$2,800,000 of which was repaid by the defendants who borrowed this sum from the bank and secured it by the existing mortgage on the property.  Regarding the balance of the outstanding sum at HK$106,034.33, the 2nd defendant said in the meeting that she did not know how it was discharged.  But the stamp duty for the assignment on sale to the defendants was paid by the defendants in cash.

34.  The bankrupt also signed the acknowledgment dated 1 September 2011.  He said in the acknowledgment that he was unable to repay the 2nd defendant the loan in the loan agreement dated 3 September 2008 and the undertaking dated 5 August 2009.  He confirmed that he would sell the Chi Fu Property to the 2nd defendant for HK$4,100,000.

35.  He further said in the acknowledgment that the 2nd defendant should pay him 30% of the price at HK$1,230,000.  After negotiation, both sides agreed that the HK$1,230,000 would be used to set off all the monies that he had borrowed from the 2nd defendant.  This meant that the sum did not have to be transferred to his account and would be used in the set off.

The plaintiff’s doubt on the authenticity of the three documents

36.  Mr Chow for the defendants referred to the query by Ms Ng on the authenticity of the loan agreement, the undertaking and the acknowledgment.  Ms Ng said in para 8 of her supporting affirmation:

“When I viewed the originals, it appeared to me, as a layman without any professional knowledge in the field of graphology, that the Chinese Documents were all written with the same type of blue pen (if not the same blue pen). The authenticity of the Chinese Documents looks suspicious to me. They were presumably signed at different times during a period of 4 years, yet the handwriting, format and style of these documents seem to suggest they were prepared and executed at the same time.”

37.  However, the defendants have not sought to retract the case given by the 2nd defendant in the meeting as supported by the three documents produced by her or to explain the discrepancies of facts with the defence case.  The plaintiff is therefore at liberty to make use of them in support of this application.

38.  Furthermore, even if the evidence and documents provided by the 2nd defendant in the meeting should be doubtful, that does not give credence to the pleaded defence as supported by the affirmation in opposition.  I wonder why the 2nd defendant would provide the explanation and documents in the meeting if the truthful defence case is the pleaded one.

The link between the claims for the Chi Fu and Lung Tak Properties

39.  Mr Chow submitted that on the strength of the pleaded defence, the claim for the Chi Fu Property should be resolved together with the claim for the proceeds of the Lung Tak Property.  Since the plaintiff is proceeding with the Lung Tak Property claim to the trial, the Chi Fu Property claim should likewise be deferred to the trial. 

40.  The link made between the Lung Tak Property claim and the Chi Fu Property claim as pleaded in the defence case is that Mdm. Chow had given the beneficial interests in the Lung Tak Property and the Chi Fu Property to the 2nd and 1st defendants respectively.

41.  I however do not feel that the issue of the ownership of the beneficial interest in the Lung Tak Property has to be resolved together with the issue of the ownership of the beneficial interest in the Chi Fu Property.  For one thing, the Lung Tak Property was registered in the names of the bankrupt and the 2nd defendant whilst the Chi Fu Property was in the names of the bankrupt and Mdm. Chow.  The explanation given by the 2nd defendant in the June 2014 meeting also alleged that the beneficial interest in the Lung Tak Property was solely owned by the 2nd defendant whilst the beneficial interest in the Chi Fu Property was solely owned by the bankrupt. 

42.  The alleged vesting of beneficial interests in the two properties unto the two defendants as pleaded in the defence was not simultaneous nor for related reasons.  These two issues are not intertwined.  It is open to the trial judge to find that the beneficial interest in the Lung Tak Property was vested in the 2nd defendant solely even if I should now decide that the beneficial interest in the Chi Fu Property was vested solely in the bankrupt.

43.  I therefore do not consider the defendants’ allegation that the 1st defendant owned all the beneficial interest in the Chi Fu Property would compel me to defer the plaintiff’s claim for this property to the trial.

The discrepancies of facts between the defence and the June 2014 meeting

44.  Though the plaintiff’s case on the Lung Tak Property is that the bankrupt should own ½ of that property and thus ½ of its proceeds of sale and the plaintiff does not accept that there was the HK$840,000 loan from the 2nd defendant to the bankrupt, the plaintiff for the purpose of this application is willing to proceed on the basis that there was such a loan.

45.  There are some facts that are common to both the defence case as pleaded and supported by the 2nd defendant’s affirmation and the evidence given by the 2nd defendant in the June 2014 meeting on why the Chi Fu Property was assigned to the defendants.  Both versions said that the 2nd defendant was the sole beneficial owner of the Lung Tak Property, a sum of HK$840,000 out of the proceeds of sale of this property was lent by the 2nd defendant to the bankrupt, and no payment of money had been made by the defendants to the bankrupt for the assignment of the Chi Fu Property despite his acknowledgement in the assignment that he had received the consideration of HK$4,100,000 from them (B9). 

46.  The reason for no payment as explained by the 2nd defendant in the June 2014 meeting was as set out in the acknowledgment dated 1 September 2011, the undertaking dated 5 August 2009 and the loan agreement dated 3 September 2008.  It was related to the lending of HK$840,000 out of the proceeds of the Lung Tak Property by the 2nd defendant to the bankrupt which loan was set off as part of the purchase price payable by the defendants. 

47.  However, the reason for no payment as given in the defence case is that the bankrupt was merely the legal owner of the property holding it on trust for the benefit of the 1st defendant or the defendants.  Hence, he was not entitled to payment for the assignment.  But the defendants say that when he assigned the property to them, he had “made off” with the balance of the Lung Tak Court loan with interest at (HK$840,000 + HK$47,000 (interest as stated in the undertaking)–HK$17,500 (repaid instalment) =) HK$869,500 and the outstanding sum due to the bank under the prior mortgage at HK$2,906,034.33 or a total of HK$3,775,534.33 (A88, para 22).

48.  I would reiterate here that in the June 2014 meeting, the 2nd defendant said that of the outstanding sum of HK$2,906,034.33, the defendants only discharged the bulk of it at HK$2,800,000 by a fresh mortgage and she did not know how the balance of HK$106,034.33 was discharged (B31).  If the balance was not discharged by the defendants, then the sum that the bankrupt had “made off” was only HK$869,500 + HK$2,800,000 =) HK$3,669,500.

49.  However, the plaintiff does not accept the defence case that the bankrupt had no beneficial interest in the Chi Fu Property.  The plaintiff referred to the loan agreement, the undertaking and the acknowledgment in which the bankrupt had repeatedly referred to the Chi Fu Property as his property.  The plaintiff thus submitted that the defence case that the bankrupt was merely the trustee of and had no beneficiary interest in this property is unbelievable.

50.  I note that the defendants do not challenge the fact that the loan agreement, the undertaking and the acknowledgment were provided by the 2nd defendant to the plaintiff in the June 2014 meeting.  Their only defence on this point is the alleged promise by Ms Ng of the plaintiff that whatever explanation and information given by the 2nd defendant in the meeting would not be used against the defendants in any proceedings.  I have already ruled against this alleged promise above. 

51.  The defence case is thus in line with the contents of the loan agreement that there was the HK$840,000 loan, but it differs from the agreement in that the bankrupt had said in the agreement that the Chi Fu Property was his.  The 2nd defendant did not explain this discrepancy.

52.  The bankrupt further undertook in the undertaking to pay the 2nd defendant HK$47,000 interest on the HK$840,000 loan.  This HK$47,000 interest was utilized by the 2nd defendant in para 22 of her affirmation in opposition (A88) when she calculated the amount that the bankrupt had “made off”.  But she again did not explain the discrepancy between the defence case and the undertaking as the bankrupt had referred in the undertaking to the Chi Fu Property as his.

53.  Regarding the acknowledgment that evidenced the sale of the Chi Fu Property at HK$4,100,000 and the set off of the loan of HK$840,000, the 2nd defendant just ignored it as if it did not exist.

Findings of facts

54.  In the light of the failure of the defendants to explain the discrepancies between the 2nd defendant’s explanation in the June 2014 meeting and the defence case, I find the defence allegation that the bankrupt had no beneficial interest in the Chi Fu Property unbelievable.  I also find the allegation that the bankrupt had repeatedly represented to Mdm. Chow and the defendants that the bankrupt had no beneficial interest in this property unbelievable.  Hence, there is no estoppel against the bankrupt or the plaintiff as pleaded by the defendants. 

55.  In the premises, there is nothing to challenge the force and effect of the documents registered in the Land Registry against the Chi Fu Property.  On the strength of these documents, I hold that after the death of Mdm. Chow, the bankrupt was the sole legal and beneficial owner of this property and he assigned it to the defendants in such capacity.

56.  On the question of whether the defendants had paid HK$2,800,000 or HK$2,906,034.33 for the discharge of the prior mortgage, I have already referred to the discrepancy between what the 2nd defendant had said in the June 2014 meeting and the defence case.  The defence case says that the defendants had paid the whole of HK$2,906,034.33, but the 2nd defendant said in the June 2014 meeting that they had only paid HK$2,800,000 and she did not know how the balance of HK$106,034.33 was paid.

57.  Though the defendants have not made any attempt to explain this discrepancy, I do not think I can find the defence case on this point unbelievable as the bankrupt appeared to be impecunious and might not have the resources to pay the HK$106,034.33.  I therefore do not discard the possibility that this sum had been paid by the 1st defendant who has not given any evidence so far.

58.  In the premises, I find that the bankrupt had assigned the legal and beneficial interests in the Chi Fu Property to the defendants in consideration of their payment of HK$2,800,000 or alternatively HK$2,906,034.33 for discharge of the prior mortgage and the set off of the loan.  The total consideration was at HK$3,669,500 or HK$3,775,534.33.

The relevant provisions in the Bankruptcy Ordinance

“49 (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.

(2) The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that debtor had not entered into that transaction.

(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 a transaction with that person on terms that provide for him to receive no consideration;

…; 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.

50 (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) given an unfair preference to any person, the trustee may apply to the court for an order under this section.

(1) The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that debtor had not given that unfair preference.

(2) For the purposes of this section and sections 51 and 51A, a debtor gives an unfair preference to a person if-

(a) that person is one of the debtor's creditors or a surety or guarantor for any of his debts or other liabilities; and

(b) the debtor does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the debtor's bankruptcy, will be better than the position he would have been in if that thing had not been done.

(4) The court shall not make an order under this section in respect of an unfair preference given to any person unless the debtor who gave the unfair preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (3)(b).

(5) A debtor who has given an unfair preference to a person who, at the time the unfair preference was given, was an associate of his (otherwise than by reason only of being his employee) is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (4).

51 (1) Subject to subsections (2) and (3), the time at which a debtor enters into a transaction at an undervalue or gives an unfair preference is a relevant time if the transaction is entered into or the unfair preference given-

(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;

(b) in the case of an unfair preference which is not a transaction at an undervalue and is given to a person who is an associate of the debtor (otherwise than by reason only of being his employee), at a time in the period of 2 years ending with that day; and

…

(2) Where a debtor enters into a transaction at an undervalue or gives an unfair preference at a time mentioned in subsection (1)(a), (b) or (c) (not being, in the case of a transaction at an undervalue, a time less than 2 years before the end of the period mentioned in subsection (1)(a)), 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).

51A (1) Without prejudice to the generality of section 49(2) or 50(2), an order under either of those sections with respect to a transaction or unfair preference entered into or given by a debtor who is subsequently adjudged bankrupt may (subject as follows)-

(a) require any property transferred as part of the transaction, or in connection with the giving of the unfair preference, to be vested in the trustee as part of the estate;” (emphasis supplied)

Decision on the undervalue claim

59.  If a sale is at an undervalue, that means the consideration provided by the other side is less than the money or money’s worth of the consideration provided by the debtor.  If the bankrupt or the other party to the transaction is providing something of a money’s worth, the value of that should be judged objectively or should be the market price.  Hence, in the present case, it is the market price of the Chi Fu Property as at 7 October 2011 that is relevant for considering whether the sale of it to the defendants was at an undervalue.

60.  The plaintiff relies on the acknowledgment dated 1 September 2011 (B24) and the assignment and takes the price stated in these documents at HK$4,100,000 as the market price of the property on 7 October 2011.

61.  The defendants’ case on the then market price of the property is slightly different.  The 2nd defendant said in para 27 of her affirmation that the then market value of the flat was around HK$4,000,000.  She produced some transactions of similar flats in Chi Fu Fa Yuen which she obtained from the internet. Nine of these transactions were of flats of the same size as the Chi Fu Property (B336-337).  These flats were in different blocks on different floors and of different orientations.  They were transacted in July and September of 2011. Of these transactions, the consideration of one was at HK$3,500,000 and another was at HK$4,100,000.  The remaining seven were all above HK$4,100,000.

62.  However, there is no evidence of the characteristics of these flats vis-à-vis those of the Chi Fu Property and no adjustment can be made to their prices to make them reflective of the then market price of the Chi Fu Property.  There is therefore uncertainty on the market price of the Chi Fu Property at the material time.  It can only be said that the market price was somewhere around HK$4,000,000 or HK$4,100,000.

63.  I would firstly take HK$4,100,000 as the market price and consider the extent of the undervalue.  The bankrupt said in the acknowledgment that the 2nd defendant should pay him 30% of the price of HK$4,100,000.  That was HK$1,230,000 million.  I suppose the balance of HK$2,870,000 was treated to have been settled by the defendants’ discharge of HK$2,906,034.33 due under the prior mortgage.

64.  The plaintiff relied on the acknowledgement and submitted that the bankrupt in fact only received HK$840,000 by way of set off of the loan he owed the 2nd defendant for the HK$1,230,000 that he was supposed to receive. There was thus an undervalue of HK$390,000.

65.  If the repayment of HK$17,500 and interest of HK$47,000 as stated in the undertaking dated 5 August 2009 (B24) are included, the net sum repayable to the 2nd defendant would be (HK$840,000 + HK$47,000–HK$17,500 =) HK$869,500. The undervalue would then be at (HK$4,100,000–HK$869,500–HK$2,800,000 (new mortgage loan) =) HK$430,500.

66.  If however the defendants should have discharged the whole sum due under the prior mortgage at HK$2,906,034.33, then the undervalue would be at (HK$4,100,000–HK$869,500–HK$2,906,034.33 =) HK$324,465.67.

67.  With the market price at HK$4,100,000, the undervalue would be HK$390,000 (9.5%), HK$430,500 (10.5%) or HK$324,465.67 (7.9%).

68.  However, if the market value should be at HK$4,000,000, the undervalue would only be HK$290,000 (7%), HK$330,500 (8%) or HK$224,465 (5.4%).

69.  Since there is no expert evidence on the market value of the Chi Fu Property at the material time, I cannot tell whether the sale was indeed at an undervalue or whether the undervalue was at 5%, 7% or more. 

70.  Furthermore, it is not any undervalue will suffice for the purpose of section 49(3)(c) of the Ordinance.  A transaction at an undervalue for the purpose of the section should be a transaction for a consideration which is “significantly less”than the consideration provided by the debtor. Whether the consideration provided by the defendants was “significantly less” is a question of fact.  I note that there are cases where undervalues at 2.6%, 5.9% and 7% were held not to be “significantly less” (Personal Insolvency Law and Practice (4th ed.) para. 20.45 to 20.46; Pagemanor Ltd. v. Ryan [2002] BPIR 593 at 602 and Re London Local Residential (No. 2) [2005] BPIR 163 at para. 17).

71.  In the light of the uncertainty of the market price of the Chi Fu Property at the material time, I am not prepared to give summary judgment to the plaintiff on the ground that the sale was at an undervalue.

Decision on the unfair preference claim by set off of loan

72.  The plaintiff pleaded that the defendants were the bankrupt’s creditors or sureties or guarantors and the assignment of the Chi Fu Property to the defendants was for settlement of the indebtedness owed by the bankrupt.

73.  The evidence in fact proved that the debt was owed by the bankrupt to the 2nd defendant only.  I am of the view that the plaintiff’s pleaded case covers this scenario as well.

74.  The plaintiff submitted that the bankrupt had given the 2nd defendant an unfair advantage by assigning the property to her for a consideration that included the full settlement of the loan.  This is so whether the defendants had settled HK$2,906,034.33 due under the prior mortgage or just HK$2,800,000. The loan owed by the bankrupt to the 2nd defendant, regardless of whether it was just HK$840,000 or HK$869,500 as stated in the undertaking, was settled in full.

75.  The plaintiff further submitted that since the 2nd defendant is an associate of the bankrupt, it is presumed unless the contrary is shown that the bankrupt, in giving the unfair preference to the 2nd defendant, was influenced by a desire to put the 2nd defendant into a better position in the event of his bankruptcy (section 50(4) and (5)).  The unfair preference was also given within a relevant time of two years as the transaction took place on 7 October 2011 whilst the bankruptcy order was made on 2 May 2013 (section 51(1)(b)).  By his admission in the acknowledgment (B26) that he was unable to repay the loan to the 2^nd defendant, the bankrupt was also insolvent at the time when he gave the 2nd defendant the unfair preference (section 51(2)(a)).

76.  Mr Chow for the defendants submitted that it is not the plaintiff’s case that the defendants are the bankrupt’s creditors.  They of course are not, but the 2nd defendant was.  She is no longer a creditor because the debt due to her had been settled.

77.  Mr Chow further submitted that the defendants had raised a triable issue on whether the presumption under section 50(5) that the bankrupt had been influenced by the desire to produce the effect under section 50(3)(c) had been rebutted because the 2nd defendant had said in para 26 of her affirmation the following:

“26. Furthermore, I verily believe the bankrupt’s decision to ‘sell’ us the property was not prompted by any desire to put us at preference to other creditors. The assignment of the Chi Fu Property was driven by the fact the bankrupt was no longer able/willing to repay and was proposed by the bankrupt clearly in the sole motive of getting out of the First HSB Mortgage; in turn, I do not see how the 1st defendant and I can be said to have ‘benefitted’ from the arrangement at all as we are now made to be heavily in debt and have lost Lung Tak Property all due to the bankrupt’s undoing.”

78.  However, I agree with Mr Law for the plaintiff that there is no evidence from the bankrupt to rebut the statutory presumption.  If the bankrupt should have sold the flat in the market, he would have received the full value of it.  That would mean the discharge of the prior mortgage and a cash payment to him of over HK$1,100,000.  Now that he had assigned the flat to the defendants, he only obtained a set off of the loan owed to the 2nd defendant which was below HK$1,100,000 and the discharge of the prior mortgage.  Prima facie, the transaction was not to his personal benefit but to the benefit of the defendants in particular his creditor the 2nd defendant.  He needed to explain why he had done so if he was not influenced by the beneficial effect on the 2nd defendant.  But he did not.

79.  Mr Chow further submitted that the 2nd defendant as a creditor had gained no advantage as she had given new value for the property. He referred to The Joint and Several Liquidators of Faith Dee Ltd v Yip Shu Chee, HCCW 237 of 2005 (unreported, 5 February 2013 per DHCJ M Ng) at para 45 and submitted that the assignment of the flat by the bankrupt to the defendants was a simultaneous exchange of property and money in a sale and purchase.  Hence, it was not a preference.

80.  I disagree with this submission.  The set off of the loan due from the bankrupt to the 2nd defendant is a payment by the 2nd defendant by utilizing a past indebtedness.  It is not the giving by the 2nd defendant of a new value or new fund.  It is a preference to her as it is a full repayment to her of the debt and has put her in a better position if the debtor should be adjudged a bankrupt within two years of the transaction and the transaction had not taken place (see Roy Goode: Principles of Corporate Insolvency Law (4th ed) paras 13-83 and 13-84).

81.  Mr Chow also pointed out that the 1st defendant was not a creditor of the bankrupt.  However, section 50(3) takes effect if a debtor gives an unfair preference to a person and the court under section 50(2) shall make an order to restore the position to that had the debtor not given the preference. These sections would apply regardless of whether any 3rd party is involved in the transaction by which the preference was given.

82.  In the premises, I find that the bankrupt in assigning the Chi Fu Property to the 2nd defendant on 7 October 2011 had given the 2nd defendant an unfair preference within a relevant time and when the bankrupt was insolvent. 

Decision on the unfair preference claim by release of guarantee

83.  The plaintiff also pleaded that the 2^nd defendant’s liability as a guarantor under the prior mortgage was released upon discharge of that mortgage and the discharge was also an unfair preference.  However, the 2nd defendant had assumed a fresh liability of just a slightly smaller amount in being one of mortgagors under the new mortgage.  There was also a possibility that the balance due under the prior mortgage at HK$106,034.33 was not paid by the bankrupt who was apparently impecunious then.  Hence, I would not find on this application that the release of the 2nd defendant’s liability as a guarantor under the prior mortgage was an unfair preference.

Decision

84.  In the light of my finding that an unfair preference had been given by the bankrupt to the 2^nd defendant, I would order the vesting of the Chi Fu Property unto the plaintiff as part of the estate of the bankrupt pursuant to sections 50(2) and 51A(1)(a) of the Ordinance.  I would further order the defendants to deliver up vacant possession of the property to the plaintiff.  For this reason, I would also order the plaintiff to assume the liabilities of the mortgagors under the existing mortgage without prejudice to the bank’s rights as against the defendants.

85.  It is the plaintiff’s case that the current market value of the property is at HK$8,560,000.  The plaintiff has produced some valuation evidence obtained from the internet though the basis of the valuation is not revealed. The amount owed to the bank under the current mortgage should be no more than HK$2,800,000. The plaintiff’s written submissions thus put the net equity of the flat at HK$5,760,000. I would therefore order the plaintiff to take steps forthwith to redeem the existing mortgage by the sale of the property or otherwise. 

86.  I would also order the plaintiff to pay the defendants all that they had spent in effecting the assignment of the property by the bankrupt to them and the mortgage instalments that they had paid under the existing mortgage. If the defendants can prove that they had also paid off the HK$106,034.33 due under the prior mortgage or any part thereof, the plaintiff shall repay such sum to them as well.  The plaintiff however need not reimburse the defendants the rates, management, utility and decoration expenses that they had spent and paid as they had the benefit of the occupation of the property and enjoyed the benefit of such payments.

87.  I do not think the defendants need to file a proof of debt for the expenses and payments that I will order the plaintiff to pay them though the 2nd defendant may have to do so for the loan of HK$840,000 or HK$869,500 (if this loan can survive the plaintiff’s attack in the Lung Tak Property claim). I am ordering the plaintiff to reimburse the defendants these expenses and payments not because they are debts due from the bankrupt but as sums payable under section 50(2) for the purpose of the restoration.  Since I am ordering the defendants to deliver up vacant possession of the property to the plaintiff now, I see no reason for delaying the payment of these monies to the defendants.  This is so in the light of the substantial net equity in the property that is vested immediately unto the plaintiff.

Order

88.  I therefore make an order that:

(1) the Chi Fu Property be vested in the Plaintiff as part of the estate of Leung Moon Chuen (梁滿全) pursuant to section 51A(1)(a) of the Bankruptcy Ordinance; Cap. 6;

(2) the defendants do deliver up vacant possession of the Chi Fu Property to the plaintiff;

(3) the vesting of the Chi Fu Property in the plaintiff is without prejudice to the force and effect of the existing mortgage executed by the defendants in favour of the Hang Seng Bank Limited and registered at the Land Registry by memorial no. 11102401810084 and the liabilities of mortgagors thereof save and except that the plaintiff shall also assume immediately all the liabilities of the mortgagors including the liability to pay off the instalments due under the mortgage; 

(4) an account be taken of:

(i) all sums paid by the defendants or either of them in effecting the assignment of the Chi Fu Property by the bankrupt to them;

(ii) all payments made by the defendants or either of them for the discharge of any sum due under the mortgage registered by memorial no. 11102401810084; and

(iii) the sum of HK$106,034.33 or any part thereof that had been paid to the Hang Seng Bank by the defendants or either of them for discharge of the prior mortgage;

(5) payment by the plaintiff to the defendants of the sums to be accounted for in the said account; and

(6) costs of this application be paid by the defendants to the plaintiff to be taxed.