CHEUNG YING LUN AND ANOTHER v. LEGAL WAY LTD AND ANOTHER

HCA 1554/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1554 OF 2012

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J U D G M E N T

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1.  This is the trial of an action in which the plaintiffs seek, inter alia, relief under s 60 of the Conveyancing and Property Ordinance (Cap 219) to set aside the sale of Apartment No 7, 4/F, Block 3, Kai Tak Mansion, 55 Kwun Tong Road, Kowloon (“the Property”) by the 1^st defendant to the 2^nd defendant as a disposition of property with intent to defraud creditors.

2.  While the defendants have each filed an acknowledgment of service indicating an intention to contest the claim at the beginning of the action, they have not taken part in the proceedings beyond that step.

3.  It appears that on 1 November 2013, a notice of appointment of liquidator or provisional liquidator in respect of the 1^st defendant was filed with the Companies Registry.  Enquiry with the Official Receiver’s Office has shown that there is no ongoing compulsory liquidation in respect of the 1^st defendant.  Any liquidation of the 1^st defendant would therefore be a voluntary liquidation.

4.  There is no statutory provision in voluntary winding-up equivalent to s 186 of the Companies Ordinance (Cap 32) which provides:

“When a winding-up order has been made, or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company except by leave of the court, and subject to such terms as the court may impose.”

There is however jurisdiction for the court, upon application under s 255 of the same Ordinance, to exercise its power under s. 181 to stay an action against the company after commencement of its voluntary winding-up: see e.g. Penta-Ocean Construction Co Ltd v Treasure Properties Ltd, HCA 3717/2003, 4 June 2004.

5.  No such application for stay has been made to me.  On the contrary, on 4 November, the eve of the trial, newly appointed solicitors for the 1^st defendant, Messrs. Victor Chiu Tsang & Partners, wrote to the court stating the 1^st defendant agreed that a declaration should made that the transfer of the Property was voidable and an order be made that the relevant agreement and assignment be set aside.  At the same time, the 2^nd defendant sent a similar letter to the court.

6.  However, as Mr Pao who appears for the plaintiffs rightly accepts, declarations are not readily granted by the court by consent or merely because there is no opposition.  The practice has been stated clearly by Buckley LJ in Wallersteiner v Moir [1974] 1 WLR 991, 1029 as follows:

“It has always been my experience, and I believe it to be a practice of very long standing, that the court does not make declarations of right either on admissions or in default of pleading. A statement on this subject of respectable antiquity is to be found in Williams v Powell, where Kekewich J, whose views on the practice of the Chancery Division have always been regarded with much respect, said that a declaration by the court was a judicial act, and ought not to be made on admissions of the parties or on consent, but only if the court was satisfied by evidence. If declarations ought not to be made on admissions or by consent, a fortiori they should not be made in default of defence, and a fortissimo, if I may be allowed the expression, not where the declaration is that the defendant in default of defence has acted fraudulently. Where relief is to be granted without trial, whether on admissions or by agreement or in default of pleading, and it is necessary to make clear on what footing the relief is to be granted, the right course, in my opinion, is not to make a declaration but to state that the relief shall be on such and such a footing without any declaration to the effect that that footing in fact reflects the legal situation.”

7.  Accordingly the trial proceeded on 5 November before me in the absence of the defendants who had chosen not to appear.

8.  On the basis of the documentary evidence and the evidence of Mr Cheung Ying Lun, the first-named plaintiff, I am satisfied that the following primary facts have been established.

9.  The plaintiffs are a husband and wife.  They were the owners of another flat in Kai Tak Mansion, Block 3, namely, Apartment No 9 on 2/F (“Apartment No 9”).  In 2008, the incorporated owners of that building was put into compulsory liquidation.  In December 2008, Mr Chiu Koon Shou and Mr Tsang Fan Wan, both solicitors, were appointed the joint and several liquidators of the Incorporated Owners of Kai Tak Mansion (Block 3).

10.  The plaintiffs believed that on various dates between April and September 2009, Mr Chiu and Mr Tsang, acting surreptitiously and in bad faith, obtained orders on behalf of the incorporated owners for small amounts of arrears of management fees and a charging order against Apartment No 9.  On the strength of the charging order, Mr Chiu and Mr Tsang then, on 2 February 2010, caused Apartment No 9 to be sold to Legal Way Limited (“Legal Way”), ie the 1^st defendant in the present action, for $745,000.  The plaintiffs did not accept the sale and refused to accept the balance of the price of $745,000.  (I am not, of course, in this action in any way determining the allegations of wrongdoing by the plaintiffs against Mr Chiu and Mr Tsang.)

11.  On 17 March 2010, Legal Way purported to sell Apartment No 9 to another company called Karrie Trading Limited for $2,000,000.

12.  At the time of these two sales, the owners of all the units of Kai Tak Mansion (Blocks 1 to 4) were in negotiations with third parties for a joint sale of their interests in the buildings and land for redevelopment.  Eventually, a large number of owners entered into a joint sale agreement with a developer purchaser on 15 July 2010.  The joint sale agreement was completed in January 2012.  The evidence suggests that had they retained title to it, the plaintiffs could have sold Apartment No 9 pursuant to the joint sale agreement for over $4,400,000.

13.  On 21 April 2010 the plaintiffs commenced an action in HCA 550 of 2010 against Karrie Trading Limited, Legal Way, and Mr Chiu and Mr Tsang, claiming a declaration that the two assignments of Apartment No 9 were void and damages for conspiracy.  I shall refer to this action as HCA 550. 

14.  On 23 May 2012, due to the failure by Legal Way to comply with an unless order for specific discovery in HCA 550, Master de Souza made an order striking out its defence and entering judgment therein against Legal Way (the 2^nd defendant therein)  in these terms:

“(a) An order against the 2^nd Defendant for all due account and inquiry, with an order for the 2^nd Defendant to pay those sums found due on the taking of such account and inquiry;

(b) Damages for conspiracy to defraud/injure from the 2^nd Defendant, with the quantum of damages to be assessed;

(c) Interest on any sums payable at judgment rate from 21 April 2010 until payment; and

(d) The costs of the action be paid by the 2^nd Defendant to the Plaintiffs, to be taxed if not agreed.”

The plaintiffs were thus clearly creditors of Legal Way pursuant to that judgment.

15.  HCA 550 was subsequently, in August 2012, set down for trial for 5 days beginning on 10 June 2013.  Eventually the trial did not take place, because the parties came to a settlement in April 2013.  The plaintiffs eventually recovered Apartment No 9 and sold it to the developer for $5.2 million in October 2013.  One of the terms of the settlement was that Legal Way, together with the other defendants in HCA 550, have to pay the plaintiffs the costs of HCA 550 incurred up to 11 April 2013, to be taxed if not agreed.  The plaintiffs’ solicitors in HCA 550 have estimated those costs (on a party and party basis) to be in the region of $2,000,000.

16.  Returning to the events in 2012, what happened soon after judgment was entered against Legal Way in HCA 550 was as follows. 

17.  In addition to Apartment No 9, Legal Way had also acquired Apartment No 7, 4/F, in Kai Tak Mansion (Block 3), ie the Property, from another owner.  There was also a legal challenge against the acquisition, mounted in HCA 551 of 2010, based on similar grounds to those in HCA 550, but this action had been settled by March 2012, pursuant to which title to the Property remained with Legal Way.  The order whereby that action was discontinued was registered in the Land Registry on 26 March 2012, whereupon the Property became unencumbered by any lis pendens.

18.  On 30 May 2012, that is to say, only 7 days after judgment had been entered against it in HCA 550, Legal Way entered into a sale and purchase agreement (“the Agreement”) to sell the Property to Allied Fame Garment Limited (“Allied Fame”), the 2^nd defendant herein, for $2,000,000.  The same firm of solicitors, Messrs Victor Chiu Tsang & Partners, ie the firm of the liquidators of the incorporated owners Mr Chiu and Mr Tsang, acted for both the vendor and purchaser in relation to the Agreement.

19.  On 22 June 2012, Legal Way executed an assignment (“Assignment”) transferring legal title over the Property to Allied Fame.

20.  On 26 June 2012, the Agreement was delivered to the Land Registry for registration.

21.  On 27 June 2012, the Assignment was delivered to the Land Registry for registration.

22.  A generally indorsed writ was issued by the plaintiffs in this action on 30 August 2012 against Legal Way and Allied Fame.

23.  S 60 of the Conveyancing and Property Ordinance provides as follows:

“(1) Subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.”

24.  The principal issue that arises is whether it has been proved that the transfer of the Property by Legal Way to Allied Fame was done “with intent to defraud creditors”. 

25.  In Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417, Ribeiro PJ stated as follows:

“I would formulate the applicable rule for cases like Freeman v Pope as follows. Where it is objectively shown that a disposition of property unsupported by consideration is made by a disponor when insolvent (or who thereby renders himself insolvent) with the result that his creditors (including his future creditors) are clearly subjected at least to a significant risk of being unable to recover their debts in full, such facts ought in virtually every case to be sufficient to justify the inference of an intent to defraud creditors on the disponor’s part. In cases falling outside the rule, that is, in cases where the disposition is made for valuable consideration, or where the disponor is not insolvent or where the disposition does not deplete the fund potentially available to the creditors, an actual intent to defraud creditors must be shown as an inference properly to be drawn on the available evidence before section 60 is engaged.”

26.  Mr Pao for the plaintiffs accepts that the instant case does not fall within the rule in Freeman v Pope.  Accordingly it is necessary for the plaintiffs to persuade me that it is to be inferred from the facts established that Legal Way acted with intent to defraud its creditors.

27.  In this context, the following circumstances are in my opinion especially of significance:

(1)     The price of $2,000,000 for the sale of the Property to Allied Fame was a substantial undervalue.  By January 2012, many owners of Kai Tak Mansion had sold their units pursuant to a joint sale agreement.  The Property could have been sold according to that agreement for over $4,200,000.  Some of the owners who did not enter into the joint sale agreement subsequently sold their units to the developer at a somewhat higher price.  I find that the market value of the Property was in the region of $4,200,000 in May 2012.  There has been no explanation from the defendants to dispute the alleged undervalue or explain why the sale was at an undervalue.  This strongly suggests that the sale to Allied Fame was not a genuine arm’s length transaction.

(2)     The same solicitors firm, being the firm of Mr Chiu and Mr Tsang, acted for both the vendor and purchaser in respect of the Agreement.  This was apparently in violation of rule 5C(1) of the Solicitors’ Practice Rules, which provides:

“Subject to subrules (2), (3), (4) and (5), a solicitor, or 2 or more solicitors practising in partnership or association, shall not act for both the vendor and the purchaser on a sale or other disposition of land for value.”

Again, this suggests the sale and purchase was not a normal arm’s length transaction.

(3)     The Agreement was entered into a mere seven days after judgment was entered by the plaintiffs against Legal Way in HCA 550.  Legal Way must have been aware of the existence of the judgment because its solicitors had written on 22 May 2012 to the plaintiffs’ solicitors stating that Legal Way had no objection to the plaintiffs’ application for judgment in default of compliance with the unless order and would not attend the hearing on 23 May 2012 at which judgment was entered.  The proximity in time between the judgment and the Agreement supports an inference that the sale was influenced by an intention on the part of Legal Way to defeat any enforcement measures.

(4)     The Assignment was entered into on 22 June 2012, before the Agreement was delivered to the Land Registry on 26 June 2012 for registration.  The Agreement was only stamped on 22 June 2012.  It is in my view unusual for a purchaser to have an agreement stamped so late and registered so late, even though it was within the one month period prescribed by s 5 of the Land Registration Ordinance, for this could prejudice the purchaser, for example, by allowing earlier transactions to be completed in the intervening period without notice of his agreement.  It seems to me more likely than not that this unusual course was adopted in this case so that the existence of the Agreement would remain unknown until after the Assignment had been executed, with the result that it would be impossible for the plaintiffs to obtain an injunction to prevent completion of the sale.

28.  Finally, the fact that both Legal Way and Allied Fame are aware of these proceedings but neither of them has put forward any evidence or explanation is also significant.  While a defendant’s absence is not in itself evidence against him, if there is some evidence tending to establish the plaintiff’s case, albeit slender evidence, the defendant’s silence in circumstances in which he would be expected to answer might convert that evidence into proof:Biggs v Rea [1998] AC 786, 798-799; Cotton v James(1830) 1 B. & Ad. 128, 130, 135; R v Inland Revenue Commissioners, Ex parte T C Coombs & Co[1991] 2 AC 283, 300F.

29.  For these reasons, I am satisfied that the inference properly to be drawn is that Legal Way had transferred the Property to Allied Fame with intent to defraud Legal Way’s creditors, in particular the plaintiffs.

30.  It is unnecessary to consider the potential defence under s 60(3) of the Conveyancing and Property Ordinance because the burden of proving that Allied Fame gave valuable consideration in good faith without notice of the intent to defraud creditors lies on Allied Fame as the transferee if it wishes to avail itself of that subsection: Honour Finance Co Ltd v Poon Ting Chau [1990] 2 HKLR 629, 637-639.  Allied Fame has neither pleaded nor proved any fact to show that the exception under s 60(3) applies.

31.  There will therefore be (i) a declaration that the sale of the Property pursuant to the Agreement and Assignment constitutes a disposition of property by the 1^st defendant with intent to defraud creditors and is voidable at the instance of the plaintiffs being persons thereby prejudiced pursuant to s 60(1) of the Conveyancing and Property Ordinance (Cap 219); and (ii) an order that the Agreement and Assignment be set aside.

32.  Having regard to my finding that the 1^st defendant acted with intent to defraud creditors and to its conduct in this litigation, I order costs of the action against it on an indemnity basis.  Costs are awarded against the 2^nd defendant on a party and party basis.