RE LEE PRISCILLA HWANG

HCB 7452/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 7452 OF 2009

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REASONS FOR DECISION

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1. The application before me was a summons for a validation order under s. 42 of the Bankruptcy Ordinance (Cap. 6). The application is unusual in that the applicant is the bankrupt herself, Mrs Priscilla Hwang Lee, 5 years after she was adjudicated bankrupt and the payments sought to be validated were not direct payments made by Mrs Lee but payments made by a company said to have been acting as agent for her. The application was opposed by Mrs Lee’s trustees in bankruptcy. I dismissed the summons after hearing the parties, with reasons to be handed down. These are my reasons.

2. The relevant facts fall within a narrow compass.  The bankruptcy petition on the basis of which Mrs Lee was adjudicated bankrupt was presented on 27 May 2009.  It was served on Mrs Lee on 1 June 2009.  The bankruptcy order was made on 31 August 2009.

3. Between 27 May and 31 August 2009 certain payments were made to a number of third parties in discharge of Mrs Lee’s liabilities.  On Mrs Lee’s calculation they total approximately $1.63 million, of which a validation order is sought for payments totalling approximately $1.4 million.  They are enumerated in the summons as follows:

“(a) HK$750,000 to Joseph Li & Co., Solicitors;

(b) HK$300,000 to Grant Thornton, Accountant;

(c) HK$100,000 to Liu, Choi & Chan, Solicitors;

(d) HK$59,062.71 being banks and credit card payment;

(e) HK$33,600 being salaries paid to domestic maids;

(f) HK$57,172 being travelling expenses;

(g) HK$4,190 being activities expenses for children; and

(h) HK$105,308.31 being miscellaneous expenses”

4. These sums were however not paid directly by Mrs Lee out of her bank account.  Instead, they were paid directly by a company, namely, Oasis Consulting HK Limited (“OCHKL”), of which Mrs Lee and her husband were directors at all material times.  In particular, the sums were paid by cheques drawn by OCHKL on The Hongkong and Shanghai Banking Corporation Limited in favour of the payees.

5. According to Mrs Lee, there was an arrangement whereby on 25 February 2009, she advanced a sum of $5 million by way of loan to OCHKL.  She then directed OCHKL from time to time to make payments to third parties to settle her personal and family expenses.  Any such payments would correspondingly reduce OCHKL’s indebtedness to her in respect of the loan of the $5 million.

6. From 25 February 2009 to the date of the bankruptcy petition, certain amounts were paid in this way by OCHKL.  There is disagreement about the exact total amount paid during that period though the trustees do not dispute that OCHKL’s indebtedness to Mrs Lee was as a result reduced pro tanto.

7. It is the payments made between 27 May 2009 and 31 August 2009 by OCHKL to third parties, and in particular those payments identified in the summons, that are in issue.

8. S. 42 of the Bankruptcy Ordinance (Cap. 6) provides as follows:

“(1) Where a person is adjudged bankrupt, any disposition of property made by that person in the period to which this section applies is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court.

(2) Subsection (1) applies to a payment (whether in cash or otherwise) as it applies to a disposition of property and, accordingly, where any payment is void by virtue of that subsection, the person paid shall hold the sum paid for the bankrupt as part of his estate.

(3) This section applies to the period beginning with the day of the presentation of the petition for the bankruptcy order and ending with the vesting of the bankrupt's estate in a trustee.

…”

9. On behalf of Mrs Lee, Mr David Chen submitted that OCHKL in effect acted as Mrs Lee’s bank or agent in making those payments and that the sum of $5 million advanced by Mrs Lee to OCHKL in February 2009 was in substance “prepayment of personal expenses”. Relying on the decision of the English Court of Appeal in Hollicourt (Contracts) Ltd (in liq) v Bank of Ireland [2001] Ch 555, he submitted that, on the facts of the present case, the only disposition falling within the scope of s. 42 of the Bankruptcy Ordinance was the payments to the third parties and that there was no relevant disposition in favour of OCHKL that attracted the application of s. 42.

10. Mr Richard Hudson, who appeared for the trustees, submitted in riposte that there was no contemporaneous evidence to show that OCHKL acted as agent or the banker of Mrs Lee as alleged.  He referred to, inter alia, (i) the promissory note dated 25 February 2009 issued by OCHKL which simply contained a promise to repay the principal sum of $5 million; (ii) a letter issued by OCHKL itself dated 31 July 2013 to the trustees stating that the money lent was OCHKL’s money which it was free to use as it wished; and (iii) a draft report on the financial position of Mrs Lee and her husband commissioned by them and dated October 2009 which stated that the loan of $5 million was provided to OCHKL to support its “operating costs”.

11. On that basis, the trustees’ position is that OCHKL was simply a separate third party who agreed to pay certain expenses on behalf of Mrs Lee.  It was free to agree with Mrs Lee that upon paying the expenses on her behalf, its liability on the loan to Mrs Lee would pro tanto be reduced by set off.  But by virtue of s. 35 of the Bankruptcy Ordinance, no such set off was available after OCHKL received notice of the bankruptcy petition, which (as is common ground) it did on 1 June 2009. S. 35 provides as follows:

“Where there have been mutual credits, mutual debts or other mutual dealings between a bankrupt against whom a bankruptcy order is made under this Ordinance and any other person proving or claiming to prove a debt under the bankruptcy order, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings and the sum due from the one party shall be set off against any sum due from the other party and the balance of the account, and no more, shall be claimed or paid on either side respectively; but a person shall not be entitled under this section to claim the benefit of any set-off against the property of a bankrupt in any case where he had, at the time of giving credit to the bankrupt, notice that the petition had been presented.” (emphasis added)

12. Mr Hudson submitted that, thereafter, any payment made by OCHKL on behalf of Mrs Lee was made at its own risk.  If Mrs Lee was adjudicated bankrupt and OCHKL wished to be reimbursed, it could not set off its right to reimbursement against the debt it owed to Mrs Lee.

13. The trustees’ fall-back position is that even if OCHKL acted like a bank, there was nevertheless a disposition of Mrs Lee’s property when her credit balance with OCHKL was reduced, in addition to the disposition in favour of the third party payees. For that proposition Mr Hudson referred me to the Court of Appeal’s decision in Bank of East Asia Ltd v Rogerio Sou Fung Lam and another t/a Lam & Co (a firm) [1988] 1 HKLR 181 which he relied upon as a precedent binding on this court.

14. It is clear from the brief description above that these arguments have implications not only for OCHKL but also the third party payees.  The corollary of Mr Chen’s argument and the trustees’ fall-back position is that, if the payments are not ratified by the court pursuant to s. 42, the dispositions in favour of the payees are void and they will be liable to pay back the sums to the trustees. If, however, the trustees are correct in their primary position then OCHKL would have to bear the consequences of having paid the expenses after the bankruptcy petition, ie it would have to repay the balance of the $5 million loan to the trustees without any deduction on account of those expenses, and then seek to recover any reimbursement from Mrs Lee or her bankrupt estate.

15. In my view it plainly follows from this that the present application was not properly constituted. Neither OCHKL nor the third party payees were made party to the application. No notice of the application was given to the third party payees.  This is no mere technical objection.  For all I know, the payees may well align themselves with the contention of the trustees, taking the position that they had been paid by a separate person, ie OCHKL, who was not acting as agent for Mrs Lee, that the payments they received are not caught by s. 42, and that they are not at risk of having to repay any sum to the trustees.  They may well have relevant evidence to adduce in relation to the terms on which and the circumstances in which they agreed to provide services to Mrs Lee in the first place and accepted payment made by OCHKL for such services.  In these circumstances it would in my view not be right to proceed to deal with the bankrupt’s application in their absence.

16. Conversely, as Mr Chen accepted, the bankrupt herself has no financial interest in the outcome of this application.  That being the case it is difficult to see what standing she has to seek an order from the court for ratification of the payments made.  It is true that in the context of the trustees’ application for suspension of her discharge from bankruptcy, the court had found that the bankrupt’s conduct in paying $5 million to OCHKL and in causing OCHKL subsequently to pay her expenses was unsatisfactory (see Master Hui’s decision in HCB 7452 & 7453 of 2009 dated 9 May 2014 and the Court of Appeal’s reasons for decision in CACV 112 & 113 of 2014 dated 30 July 2014), but as Mr Chen also accepted, any ratification by a court order now would not operate to negative that finding.  All that the bankrupt seeks now appears to me to be some sort of reputational redress.  That is not a proper basis on which to mount the present application.

17. For these reasons, since those who have an interest in the matter have not applied and the person who has applied has no interest, I dismissed the summons at the end of the hearing.