XCHRX RE: CHAN WOON WING and EX PARTE: LUN KEE POULTRY LTD. ("Company")

HCB144/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO.144 OF 2000

------------

-----------------------

D E C I S I O N

-----------------------

1. This is an application for consent by Chan Woon Wing ("the Applicant") pursuant to section 42 of the Bankruptcy Ordinance. Subsection (1) provides as follows :

" 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."

The application is opposed by Lun Kee Poultry Limited ("the Company"). The relevant chronology is as follows.

2. On 1 December 1999, the Applicant entered into a sale and purchase agreement for the sale of a property registered in his name to Tsoi Tsz Ying and Symin Tuen Nicola as purchasers for HK$3,115,000. Completion is due to take place today at 5 p.m.

3. The Company served a statutory demand on the Applicant on 15 December 1999. The Applicant is a taxi driver and not conversant with the English language. Surprisingly, the statutory demand served on him was in the English language only. This is contrary to what is the normal practice these days where the recipient may not be conversant with English. Statutory demands are normally in both Chinese and English to forestall any difficulty the recipient may have in understanding what he has to do if he wishes to set aside the statutory demand. No steps were taken by the Applicant to set aside the statutory demand and on 24 December 1999, he entered into the formal sale and purchase agreement.

4. On 12 January 2000, the Company issued a bankruptcy petition against the Applicant. On 15 January, the Applicant sought legal advice.

5. I should also mention that the Applicant is a shareholder and one of five directors of the Company. There is an ongoing dispute between the shareholders of the Company and a section 168A petition, coupled with section 177 relief was presented on 16 July 1999.

Is completion of a pre-petition sale and purchase agreement a 'disposition' within section 42?

6. The first question which arises is whether section 42 applies to completion of a pre-petition sale and purchase agreement. Counsel for the Company submitted that in view of subsection (6) of section 42, the court's consent is wholly unnecessary and for that reason, no consent should be given. Subsection (6) reads as follows :

" A disposition of property is void under this section notwithstanding that the property is not or, as the case may be, would not be comprised in the bankrupt's estate; but nothing in this section affects any disposition made by a person of property held by him on trust for any other person."

7. That question has previously been considered. The relevant authorities are set out in Re M.W. Lee & Sons Enterprises Ltd [1999] 2 HKC 686 at 691F to 692F. In Re French's (Wine Bar) Ltd [1987] BCLC 499, Vinelott J held that in the context of the equivalent of section 182 of the Companies Ordinance, the completion of an unconditional contract which was capable of being specifically enforced and which was entered into before the presentation of the petition was not a disposition of the property of the company. To similar effect is Re Margart Pty Ltd [1985] BCLC 314.

8. Whilst on the authorities it would appear that completion of a pre-petition contract which is unconditional and can be specifically enforced does not constitute a disposition of the property of the debtor, as a matter of practice and prudence, the court's consent is regularly obtained. If, as counsel for the Company submits, it is unnecessary for such consent to be obtained under section 42, then I cannot see any harm in making the order. The unsecured creditors would not be worse off if, in any event, the transaction does not involve any disposition within section 42.

Is consent under section 42 a bar to section 49 relief?

9. The Company's principal concern is that the transaction may be at an undervalue and if a bankruptcy order were subsequently to be made in the petition, any consent on the part of the court would prejudice the trustee in bankruptcy's right to apply for an order under section 49 of Cap. 7.

10. What is the evidence before the court? On its face, the transaction is an arm's length transaction. There is at present no evidence to the contrary. It is not a case where the consideration is obviously a sham. The property has an area of 732 sq.ft. and the purchase price is $3.1 million odd. Although there is no valuation as such before the court, there is a letter from Midland Realty International Limited ("Midland") "certifying" that the price of $3.115 million as at 1 December 1999 was a reasonable market price at the time. Midland was the agent in the transaction and for that reason, it might be said that its views cannot be considered impartial. On the other hand, as an agent, it stands to receive a commission out of the transaction and it would normally be in the interest of the agent to endeavour to obtain the highest price. Be that as it may and whilst I do not regard the Midland letter as a valuation as such, it is at least some support that the price is reasonable.

11. So all the Company is able to say is that it does not have evidence to show that the transaction is at an undervalue as it has not had the time to look into the question or to come up with any evidence since it only had notice of the application late yesterday. It is not suggested that there is reason to believe that the sale is at an undervalue or is otherwise improper which, but for time constraints, could be made good.

12. Even if one were to assume for present purposes that the transaction, contrary to what appears on its face, is at an undervalue, what is the effect of any consent of the court to that transaction?

13. What section 42 does is to render void ipso facto any "disposition" that is within the section unless the consent of the court is obtained. The court's consent renders the transaction a pre-petition transaction such that it would not ipso facto be void. So, in the present case, had the transaction been concluded before the service of the petition, assuming, for example, that completion had taken place prior to the presentation of the petition on 12 January 2000, the transaction would not be deemed to be void. Nevertheless, were a bankruptcy order to be made on the petition within five years of completion, it is a transaction that is susceptible to a section 49 order should the facts warrant such an order. The types of orders that can be made in that situation are to be found in section 51A. For example, the court could require that any property transferred as part of the transaction be vested in the trustee as part of the bankrupt's estate, or require any person to pay in respect of benefits received by him from the debtor, such sums to the trustee as the court may direct : see paragraphs (a) and (d) of section 51A.

14. So it seems to me that if the court were to grant its consent under section 42, such consent would not preclude the trustee in bankruptcy from applying for an order under section 49, assuming the facts warranted the making of such an application. Put differently, the court's consent under section 42 is not determinative of the bona fides of the transaction.

15. It is tolerably clear that in the absence of the court's consent under section 42, the transaction which is due for completion later this afternoon, would in all probability be derailed. As there is nothing irregular on the face of the transaction, and no evidence of any impropriety or of suspicious circumstances (such as a sale to connected persons), a prima facie normal commercial transaction should be allowed to take effect and that it should not be upset by the withholding of consent unless there is good reason so to do. In the present case, there is none.

16. What (if any) prejudice would result to the Company? First of all, as the petition has not been heard, a bankruptcy order is not bound to be made. The alleged debt underlying the petition is premised on a report or investigation prepared by a firm of accountants retained by the Company. This is not a case where the debt cannot be disputed, for example, where moneys are due under banking facilities granted to the debtor. It would not appear to me to be right to proceed on the basis that the petition is bound to succeed. At the moment, that is wholly at large. Secondly, although the Company is concerned that the transaction may not be bona fide, the Company will not be prejudiced by the court granting its consent pursuant to section 42. As I endeavoured to explain earlier, section 49 remains applicable. The court's consent does not put the bona fides of the transaction beyond question : the court is not here being asked to make any findings as to the bona fides of the transaction, but simply to consent to the completion of a transaction that was entered into well before any petition was in place.

17. In these circumstances, it would not be a proper exercise of my discretion to withhold consent which would in all likelihood lead to the transaction falling through with possibly grave consequences for the Applicant and the purchasers in respect of which there may not be any or any adequate redress.

18. Accordingly, I will make an order in granting the court's consent to the transaction described in paragraph 1 of the summons pursuant to section 42. Paragraph 2 seeks additional relief relating to the application of the proceeds of sale. That does not fall within the purview of section 42 and I do not propose to make an order in terms of paragraph 2 of the draft order.

19. Costs be in the petition.