YU TAI YEE BERYL AND ANOTHER v. RARE EARTH BATTERY INTERNATIONAL HOLDING CO LTD AND OTHERS

HCB 4005/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4005 OF 2012

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D E C I S I O N

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Introduction

1.  Mr Winston Chung (“the Bankrupt”) was declared bankrupt on 27 February 2013.  The applicants are his Trustees in Bankruptcy (“the Trustees”).

2.  The Trustees’ case is that the Bankrupt is the beneficial owner of the 4 respondents, all incorporated in the BVI, ie Rare Earth, Mei Li, Seven One and Winston Battery Trading, respectively.  In respect of each of the 4 respondents, the Trustees seek a declaration that all of its shares form part of the Bankrupt’s estate. 

3.  In respect of Mei Li, the Trustees further seek an order to set aside the Bankrupt’s transfer of his share in Mei Li to Rare Earth.

4.  The 4 respondents have been served and did not appear in this hearing.

5.   The 5^th respondent, Madam Huang Bin, has not filed any affirmation in opposition despite given leave to do so.  She is absent today.

Rare Earth and Mei Li

6.  The Bankrupt used to be the sole director and shareholder of Mei Li. 

7.  A short chronology of salient facts is as follows:

29.7.2011	HCA 1283/2011 commenced by creditors against Winston Chung seeking repayment under a deed
28.9.2011	Winston Chung transferred his share in Mei Li to Rare Earth at US$1; Madam Huang Bin was the sole shareholder of Rare Earth
20.6.2012	Bankruptcy petition presented by plaintiffs in HCA 1283/2011
27.2.2013	Bankruptcy order made; Bankrupt resigned as director of Mei Li

8.  HCA 420/2011 was an action commenced in 2011 by the petitioning creditors against, amongst others, Mei Li and Winston Chung for breach of an acquisition agreement.  Mei Li applied for summary judgment against the 3^rd plaintiff (“ListCo”). 

9.  The Bankrupt resigned as director of Mei Li on the date of his bankruptcy order.  On the same day, Madam Huang Bin, was appointed as sole director of Mei Li.  

10.  Mei Li’s application for summary judgment in HCA 420/2011 was dismissed by To J on 5 March 2013.  To J held that:

(a)  Madam Huang Bin was the Bankrupt’s trustee and puppet;

(b)  The transfer of one share to Rare Earth was only an attempt by the Bankrupt to insulate his assets from his imminent bankruptcy and he remained as the beneficial owner with effective control over the share, Madam Huang Bin and Mei Li (§33);

(c)   That solicitors for Mei Li (“CLCMC”) had no authority to act on behalf of Mei Li.

11.  On 19 March 2013, Mei Li applied for leave to appeal.  CLCMC acted on its behalf. There was a dispute as to whether or not To J’s judgment was final or interlocutory.  The Court of Appeal held that To J’s judgment was not confined to a determination of the authority of CLCMC but it also finally determined a number of substantive issues including, amongst others, those set out in §§10(b)-(c) above.  See CACV 146/2016, Judgment date 11 April 2017 (“CA’s judgment”), §§12-14.

12.  The Court of Appeal also noted that Mei Li itself had no interest in the intended appeal and that the real protagonist was the Bankrupt, Madam Huang Bin or CLCMC: §18 of CA’s judgment.  CLCMC undertook to cause Madam Huang Bin to be added as a party to the intended appeal: §22 of CA’s Judgment.

13.  Subsequent to CA’s judgment, Madam Huang Bin substituted herself for Mei Li as the appellant.  However, by a letter dated 21 August 2017, CLCMC acting on behalf of Madam Huang Bin, informed the Court of Appeal that the appeal would not be pursued and the appeal was thus dismissed.  The effect was that Madam Huang Bin was content with the findings of To J in paragraph 10 above.

14.  In Res judicata, 4^th ed, §9.44, the learned author states:

“A res judicata estopped against the beneficiary binds the trustee by privity of interest and vice versa, and a res judicata estoppel binding on former trustees binds the new.”

15.  To J’s judgment bound the Bankrupt as a beneficiary.  It also binds Madam Huang Bin, the trustee.  There is issue estoppel and no defence to the Trustee’s application for a declaration of beneficial ownership.

16.  In addition, in his IVA proposal, the Bankrupt admitted that he was the beneficial owner of all the shares in Rare Earth and Mei Li, and that Madam Huang Bin was his bare trustee.

17.  Mr Francis Ng was the former Vice President acting for the Bankrupt from November 2011 to November 2012.  He assisted the Bankrupt to list the shares of the Winston Group.  Mr Ng had told an investment bank by email on 27 April 2012 (ie after the transfer to Rare Earth in September 2011) that Mei Li was 100% owned by the Bankrupt.  Mr Ng was told both before and after this email by the Bankrupt that that was the position. 

18.  For all these reasons, I am satisfied that Mei Li and Rare Earth belonged beneficially to the Bankrupt’s estate.

19.  The Bankrupt transferred his share in Mei Li to Rare Earth within 9 months before presentation of the bankruptcy petition.  Mei Li held convertible bonds issued by a ListCo that were worth HK$760 million; and was a substantial shareholder of the ListCo holding over 4 billion shares.  The consideration of US$1 was clearly at an undervalue and hence void under section 49 of the Bankruptcy Ordinance.

Seven One

20.  In the IVA proposal, the Bankrupt admitted that he was the sole and ultimate beneficial owner of Seven One; and that Madam Huang Bin was his bare trustee of the Bankrupt holding the shares in Seven One.

21.  Seven One was incorporated in BVI.  It holds substantial assets including shares in a US listed company called Balqon Corporation.  Seven One filed a Statement of Beneficial Ownership with the United States Securities and Exchange Commission on 20 December 2010 stating that the sole shareholder of Seven One was the Bankrupt. 

22.  In the Annual Report of Balqon Corporation for the fiscal year ending December 2013 (ie. even after the date of the Bankruptcy Order dated 27 February 2013) it was still stated in the footnote on page 57 that the Bankrupt was the Chairman of Balqon Corporation and he had the power to vote and dispose of the securities held by Seven One. 

23.  I am satisfied that the Bankrupt was and is the beneficial owner of Seven One.

Winston Battery Trading

24.  This company, incorporated in BVI, has not been disclosed in the IVA proposal of the Bankrupt.  This company uses proforma invoices that bear the same address of the industrial park of the Winston Battery Group and the Bankrupt’s usual and last known address in these proceedings.  Madam Huang Bin was stated on the website as 商務部主任 of Winston Battery Trading.  She was the person whom Francis Ng dealt with in relation to the documentary credit of Winston Battery Trading in HSBC.

25.  Dickson Kong was the Bankrupt’s accountant responsible for administering his BVI companies.  Mr Kong said that Madam Huang Bin was appointed director of Winston Battery Trading.  Apart from that, she was also director of Mei Li, Rare Earth, New Billion and Thunder Sky Battery (which were all parties in To J’s case).  Those companies were arranged, with others, in a complicated group structure that one was the subsidiary of another and Madam Huang Bin was the ultimate shareholder.

26.  Francis Ng, confirmed that the Bankrupt has told him that the company was beneficially owned by the Bankrupt. The Bankrupt, not Madam Huang Bin, had the sole control of the company’s bank account. 

27.  I am satisfied that, like the other respondents, Winston Battery Trading is also beneficially owned by the Bankrupt. 

Conclusion

28.  None of the respondents have filed affirmations to rebut the allegations of the Trustee.  This court draws adverse inference against them and finds that the Bankrupt is the beneficial owner of all 4 respondents.  Madam Huang Bin was his bare trustee holding shares on his behalf. The transfer of Mei Li’s share to Rare Earth was a transaction at an undervalue and I set it aside under section 49 of the Bankruptcy Ordinance.

29.  I make the declarations sought and order the 5^th respondent to execute, within 7 days, all necessary documents to transfer all the shares in the 1^st to 4^th respondents to the Trustees, failing which Mr Ho Hing Chung of KB Chau & Co shall be empowered to sign the necessary documents to effect the transfers.

30.  Costs should follow the event and, on a nisi basis, should be borne by the respondents.  I summarily assess costs of the Trustees at $490,000.

31.  I thank Mr Chong for his assistance.