LAU HAK SHING v. CHAN KWOK HUNG AND ANOTHER

DCCJ 3758/2015

[2018] HKDC 1448

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3758 OF 2015

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DECISION

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Introduction

1.  This is the hearing of the 2^nd defendant’s summons taken out on 12 June 2017 applying for (a) leave to amend her defence and (b) the plaintiff’s statement of claim to be struck out pursuant to Order 18, rule 19 of the Rules of the District Court.

2.  In this action, the plaintiff claims against the 1^st and 2^nd defendants under section 60 of the Conveyancing and Property Ordinance, Cap 219. 

3.  The two defendants were husband and wife until their divorce in 1998.  Before that, they jointly owned a family home at Flat 15, 28^th Floor, Block A, Ching Nga Court, No 3 Nga Ying Chau Street, Tsing Yi, New Territories (“the Property”). In October 1997, the 1^st defendant commenced divorce proceedings. On 15 July 1998, the family court made a number of ancillary relief orders. The order which is presently material is a transfer order under which the 1^st defendant was to transfer his interest in the Property to the 2^nd defendant free from encumbrance (“the Transfer Order”).  The transfer was effected by an assignment dated 27 August 1999 (“the Assignment”), following the consent given by the Housing Authority.

4.  The plaintiff now seeks to set aside the Assignment, alleging that it was executed by the 1^st defendant with intent to defraud creditors.

5.  The writ was issued on 15 August 2015.  However, the writ and the statement of claim were not served on the 2^nd defendant until June of the following year.  The 2^nd defendant, then acting in person, filed a defence in Chinese in August 2016.  She was subsequently granted legal aid in January 2017.  In her amendment application, she seeks leave to effectively replace the home-made defence by another version prepared by her lawyers.  At the hearing, she was represented by Mr Earl Deng, counsel.

6.  The 1^st defendant has to date not entered an appearance in these proceedings.

7.  What immediately stands out from the above chronology is the long time lapse between the Assignment and the present action, the latter seeking to set aside the former.  They are over 16 years apart.  One should also make a mental note of these three dates: 15 July 1998 (the date of the Transfer Order), 27 August 1999 (the date of the Assignment) and 15 August 2015 (the date of writ).  They will feature prominently in the discussion below.

8.  The summons came before me in January this year.  In the course of submissions, a legal point arose on the construction of section 4(4) of the Limitation Ordinance, Cap 347.  The issue was whether the section imposes a 12-year limitation period on an application to set aside (as opposed to enforce) a court order.  This legal point would be relevant if it is necessary for the plaintiff to set aside the Transfer Order in order to set aside the Assignment under section 60 of the CPO.  If so, the Transfer Order being made in July 1998, time would have already run out against the plaintiff in July 2010, long before the present writ was issued in August 2015, subject to any applicable statutory extension of the time bar.

9.  The hearing was adjourned for the 2^nd defendant to reflect on the viability of the above limitation defence and, if she wished to pursue it, to lodge a revised draft amended defence to that effect.  A revised draft was subsequently lodged and the summons was restored for hearing on the issue of limitation alone.

10.  Mr Derek JY Chan, appearing for the plaintiff, confirmed that the plaintiff does not object to the amendment application based on the revised version but he does so without accepting that the proposed amendments are legally sustainable. 

Jurisdiction

11.  First and foremost, however, I must be satisfied that the District Court has jurisdiction to hear and determine a claim made under section 60 of the CPO.

12.  The District Court is a court of limited civil and criminal jurisdiction.  It only has such jurisdiction and powers as are conferred upon it by the District Court Ordinance, Cap 336 and other enactments of law in force: section 3(2) of the DCO.

13.  Practice Direction 27 provides general guidance on civil proceedings in the District Court and para 4 imposes a requirement that all writs and originating summonses “should contain a plea that the relief sought do fall within the jurisdiction of the District Court, specifying which section(s) of sections 32 to 39 of [the DCO] do apply to the case”. (The practice direction will be revised on 3 December 2018.  Para 4, as revised, requires the plea to specify “which jurisdiction-conferring section(s) of the [DCO] or other enactment” do apply to the case.)

14.  The plaintiff has not complied with this requirement in his statement of claim.  One cannot tell from the pleading on which enactment he is relying.

15.  The CPO itself contains no provision conferring jurisdiction on the District Court to hear a claim under section 60.  (This is to be contrasted with section 12 of the CPO, under which a vendor or purchaser may apply to the court in respect of any question arising out of a contract for the sale of land.  Section 12(b) expressly confers jurisdiction on the District Court to hear such an application if the parties consent to it.)

16.  At the hearing, Mr Chan relied on section 36 of the DCO.  The section confers jurisdiction on the District Court to hear an action in which the title to an interest in land is in question, whether or not the action would otherwise come within the jurisdiction of the court, provided that the land is within the prescribed monetary limit: Ng Cho Chu v Chan Wing Hung [2017] 4 HKLRD 396 at para 42, per Kwan JA.  Here, the plaintiff asks for the Assignment to be set aside.  Hence the title to the Property comes into question.  The rateable value, as orally confirmed at the hearing, was $97,240 and is thus below the current stipulated threshold of $240,000.

17.  I therefore hold that the District Court has jurisdiction to hear the action.  (This ruling, however, does not apply to a claim which concerns property other than land.)

Legal principles on striking out

18.  The legal principles governing striking out are well-known. 

19.  It is only in plain and obvious cases that the court should exercise its summary powers to strike out any pleading.  It should not decide difficult points of law at this interlocutory stage.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out: see Hong Kong Civil Procedure 2018 at 18/19/4.

The plaintiff’s pleaded case and the affidavit evidence

20.  I set out below the plaintiff’s pleaded case. For the purpose of the striking out application, the facts as alleged are generally to be taken as true and at their highest in favour of the plaintiff.

21.  The plaintiff ran a hardware trading business from the late 1980’s to the mid-1990’s.  He employed the 1^st defendant as a sales manager to handle the supply and sale of hardware goods.

22.  In around December 1993, the plaintiff discovered irregularities in the financial accounts of the business.  The supplier invoice references were inconsistent with the corresponding sales involve references.

23.  The 1^st defendant issued to the plaintiff a memorandum of confession/repentance dated 16 December 1993.  In it, the 1^st defendant admitted that he had misappropriated the assets of the business in the sum of about $100,000.  He sought forgiveness and offered to repay the moneys owed to the plaintiff by instalments.

24.  Upon further investigation, it was discovered that the 1^st defendant had fabricated fictitious invoices over time to misappropriate sale proceeds of over $125,000 and stock worth about $240,000 in value.

25.  The plaintiff reported the 1^st defendant’s wrongdoing to the police in late December 1993.  The 1^st defendant was prosecuted.  The criminal trial took place in about May 1995.  He was acquitted.

26.  The 1^st defendant failed to pay back to the plaintiff any of the money owed.  The plaintiff commenced civil proceedings against him by a writ action in December 1999 (“the Civil Action”).

27.  Although the 1^st defendant filed a defence in the Civil Action, he did not attend the trial.  In his absence, final judgment for a sum of about $366,000 with interest (“the Judgment Sum”) was entered against him on 18 August 2003.  The 1^st defendant has failed to pay any part of the Judgment Sum to date.  (The date of judgment is another important date as will be seen below.)

28.  After investigations, the plaintiff discovered that the 1^st defendant took steps to transfer or dissipate his assets.  The plaintiff avers that the 1^st defendant did so to defeat and frustrate any recovery action that might be taken by the plaintiff.

29.  The plaintiff pleads that to the best of his knowledge, the Property was the 1^st defendant’s “most significant asset and only immovable property”.  Upon investigation, the plaintiff found out about the 1^st and 2^nd defendants’ divorce, the Transfer Order and the Assignment.

30.  The material plea in support of the section 60 claim is contained in para 15 of the statement of claim.  The plaintiff relies on the following primary facts to support an inference that the Assignment was executed by the 1^st defendant with intent to defraud creditors.

31.  First, to the best of the plaintiff’s knowledge, in around February 1994, the 1^st defendant commenced a business under the name of “Tiger Leader Company” (“TLC”), a partnership, using the name of the 2^nd defendant’s sister, who took a majority of the business.  A few months after his acquittal, the 1^st defendant joined TLC.  His sister-in-law left TLC in March 1997.  TLC ceased business in January 2002.  It can be inferred that the 1^st defendant caused the cessation of TLC’s business while the Civil Action was in progress and before the court gave judgment so as to make himself judgment-proof in respect of the Judgment Sum.

32.  There is in fact no dispute between the parties that the sister-in-law played no role in the business of TLC save for the use of her name as its owner.  In her affirmation, the 2^nd defendant said:-

“In around this time, [the 1^st defendant] suggested that he should start a new business and asked if my sister, Chiu Lo Yee, would be able to lend her name first. He explained to me that it would be better to use another persons name as he was under investigation. … Insofar as I understand, Chiu Lo Yee never took part in the management of Tiger Leader Company nor shared in its profits, if any.”

33.  Secondly, by the time the 1^st defendant commenced the divorce proceedings in 1997, he knew that he was indebted to the plaintiff for at least $100,000.

34.  Thirdly, at all material times, the 1^st defendant knew that he had no other significant asset to satisfy the debt owed to the plaintiff apart from his interest in the Property.

35.  Fourthly, the Transfer Order had the effect of depriving the 1^st defendant and his creditors of his only or most significant asset and does not appear to have been genuinely contested by the 1^st defendant.

36.  Affidavit evidence has been filed by both parties in relation to the striking out application.  At this interlocutory stage, it is not the task of the court to resolve any factual dispute or make any factual finding on controversial matters.  It is therefore not necessary to set out the evidence in detail.  It would instead be sufficient to note that the following factual allegations have been made.

37.  The 2^nd defendant gave an account of her marriage with the 1^st defendant, the birth of their only son, how the marriage began to break down from about 1994 and their separation since mid-1995.  She alleged that in the divorce proceedings, her lawyers were “largely successful in their negotiations and managed to obtain” the Transfer Order and the other ancillary reliefs.  Amongst other things, she had custody of the son, maintenance payments for the son and a lump sum order.  After the divorce, the 2^nd defendant did not communicate often with the 1^st defendant. Neither she nor her son has heard from him at all since around 2004.  She was therefore extremely surprised to receive the writ from the plaintiff in 2016.  Her position is that the ancillary reliefs were genuinely granted in the divorce proceedings and were not part of any fraud on the 1^st defendant’s creditors.

38.  The 2^nd defendant also complained about the lateness of the plaintiff’s action.  In particular, after obtaining judgment in the Civil Action in August 2003, the plaintiff could have sought to enforce the judgment straightaway.  Instead it was not until almost 12 years later that he commenced the present action.

39.  In his opposing affirmation, the plaintiff repeated the factual allegations in his statement of claim.  In addition, he said he believed that the divorce between the 1^st and 2^nd defendants was a sham and perpetrated for the purposes of transferring all of the 1^st defendant’s assets so that he could make himself judgment proof.  He highlighted that the Transfer Order was not made after trial and since it involved the most significant asset owned by the 1^st defendant, he is extremely suspicious that the settlement negotiations between the two defendants were bona fide.  He believed that the 2^nd defendant knowingly took part in the deception and facilitated the transfer of the 1^st defendant’s interest in the Property to her. 

40.  As to his delay in taking out the present section 60 application, he explained that the Director of Legal Aid had refused to grant legal aid to him to enforce the judgment obtained in the Civil Action.  He therefore “used [his] own methods” to try to enforce the judgment, by, eg, sending letters to the 1^st defendant to demand payment of the Judgment Sum and waiting outside the Property.  But all these efforts were of no avail.  He then met with a few traffic accidents between 2012 and 2016 and became wheelchair-bound.  He was eventually granted legal aid and was able to commence the present action on 15 August 2015, just a few days before he was time-barred to enforce the judgment in the Civil Action.

41.  In his further affirmation, he said that shortly after obtaining the judgment in the Civil Action, he asked one of his friends who worked as a legal clerk to conduct a land search of the Property.  It was only upon reviewing the land search results that he found out for the first time about the divorce proceedings, the Transfer Order and the Assignment.

42.  Mr Deng initially put forward four grounds for striking out.  The 2^nd defendant now also wishes to pursue the limitation defence under section 4(4) of the Limitation Ordinance.  I shall refer to that as the fifth ground.

The first ground

43.  The first ground is entitled “Claim does not purport to set aside Divorce Order” in the written submissions.  It is not a straightforward ground.  As I understand it, the argument is, in essence, as follows:-

(a) The fundamental flaw of the plaintiff’s claim is that the statement of claim only seeks to set aside the Assignment but not the Transfer Order.

(b) As matters stand, the court does not have jurisdiction to entertain the plaintiff’s claim.  This is because the Transfer Order is extant and must be obeyed and was duly obeyed.  In the absence of an appeal against the Transfer Order or an order that the Transfer Order was obtained by fraud, the court does not have the power to set aside the Assignment on its own.

(c) It is therefore incumbent on the plaintiff to make a claim to set aside the Transfer Order. 

(d) Should the plaintiff attempt to do this now by amending the statement of claim to plead that the Transfer Order should also be set aside, this amounts to a new claim and a new cause of action. It is so because, in addition to the present pleas, the plaintiff would also have to plead that the 1^st and 2^nd defendants had intentionally misled the court and that the 1^st defendant had misrepresented to the court that he was in a position to transfer his interest in the Property free from encumbrances.

(e) This new claim is now time barred because it is in effect a claim to enforce the Judgment Sum.  It is now more than 12 years after the judgment was entered against the 1^st defendant in the Civil Action (in August 2003).  As such, the court would not allow any amendment to such effect in the present proceedings.

(f) In sum, while the Transfer Order stands, the Assignment cannot be set aside.  Therefore, the plaintiff’s claim is bound to fail.

44.  Mr Chan’s reply to that is a short one.  He criticised the argument as “no more than a red herring”.  He submitted that it is not necessary to set aside the Transfer Order in order to claim relief under section 60 of the CPO.  This is because the plaintiff seeks a declaration of a limited scope, namely that the Assignment is void as against the plaintiff and only to the extent necessary to satisfy the Judgment Sum.  Subject to that, the Transfer Order “will not be disturbed and the Assignment remains valid against the world”. 

45.  While I do not agree with Mr Chan’s submission, I would at the same time reject Mr Deng’s first ground.

46.  Section 60 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.”

47.  In the statement of claim, the plaintiff seeks a number of reliefs.  The first relief sought is a declaration that the Assignment is void as a disposition contravening section 60 of the CPO.  Further or alternatively, the plaintiff asks for an order that the Assignment be set aside.  He goes on to seek an order that the 1^st defendant’s interest in the Property do stand charged with the payment of the Judgment Sum and that such interest (or the Property) be sold by way of enforcement of the charge.  In view of the nature and the scope of the reliefs sought, it is impossible for me to accept Mr Chan’s submission that the Assignment will “[remain] valid against the world”.  If the plaintiff’s claim is upheld, the 1^st defendant’s original half share is liable to be sold as a result.  In these circumstances, how can the Assignment possibly remain valid against the world?

48.  In this striking out application, the plaintiff’s factual case, as pleaded, is taken to be true.  The case as disclosed is that the Assignment was executed to put into effect the Transfer Order, no more and no less.  It is therefore arguable that for the purpose of section 60, the “disposition of property” comprised, in this case, both the 1^st defendant’s participation in the making of the Transfer Order as well as the Assignment itself.  However, neither party has argued the case from this perspective and counsel have not cited any authority on section 60 which deals with a disposal of property made pursuant to a court order.  In any event, given the relationship between the two, as a matter of logic, I accept Mr Deng’s submission that the Transfer Order would necessarily have to be set aside if the Assignment is to be declared void under section 60.

49.  Returning to the plaintiff’s pleaded case, it must be recognised that the facts giving rise to the making of the Transfer Order and the Assignment, as set out in paras 33 to 35 above, are identical. In the context of pleadings, this is significant.  It means that Mr Deng’s suggestion that a new plea to set aside the Transfer Order amounts to a new cause of action or a new claim is wrong.  This is because the facts which the plaintiff will rely on to set aside the Transfer Order at trial have already been pleaded.  There is no new material fact.  (Whether or not these pleaded facts are sufficient to ground a relief under section 60 is subject to challenge under Mr Deng’s third ground.  There is a further question of whether section 4(4) of the Limitation Ordinance imposes an independent 12-year time bar on the setting aside of the Transfer Order.  I shall shortly return to these two issues.) 

50.  Hence there is simply no new cause of action as submitted by Mr Deng.  It follows that the plaintiff does not have any time bar issue even if he seeks leave to amend the statement of claim now.  In any event, as a matter of analysis, in my view, the setting aside of the Transfer Order is a consequence which would necessarily follow if the court finds in favour of the plaintiff on the facts and on the law.  It may be said that it is a relief as much as the setting aside of the Assignment is itself a relief.  As such, I am not inclined to think that there is any compelling need for the plaintiff to expressly seek to set aside the Transfer Order in his pleading as ultimately it is the Assignment which he is most concerned to have set aside. But if I am wrong about this, an amendment application which effect is simply to explicitly spell out the relief would be a technical matter and should not be susceptible to any substantive challenge, such as the time bar issue.

51.  I therefore reject the first ground of striking out.

The second ground

52.  The second ground is also not entirely straightforward.  As I understand it, the argument runs as follows:-

(a) The statement of claim only pleads to the 1^st defendant’s intent to defraud creditors.  There is no pleading at all that the 2^nd defendant had conspired with, or colluded with, the 1^st defendant to deprive the plaintiff of the Judgment Sum.

(b) Therefore, at most, the plaintiff can only claim against the 2^nd defendant for being in knowing receipt of the Property.  (And the plaintiff will have to amend his pleading to say so.) 

(c) But in that case, the 2^nd defendant would have a complete defence under section 20(2) of the Limitation Ordinance. That section provides for a 6-year limitation period for ‘knowing receipt’ liability.  Time therefore expired 6 years after 27 August 1999, ie the date of the Assignment.

(d) The present writ was issued long after that. Hence the claim against the 2^nd defendant is bound to fail.

53.  Mr Chan’s reply is that knowing receipt and its applicable limitation period has no relevance at all in this claim.  Here, the plaintiff is merely a judgment creditor of the 1^st defendant and he is invoking the usual rights exercisable by a creditor under section 60 of the CPO to enforce the Judgment Sum.  It is not a claim for any proprietary or beneficial interest in the Property in the first place.  The plaintiff’s claim against the 1^st defendant is not for breach of trust.  It therefore follows that the plaintiff has no claim against the 2^nd defendant for any accessory liability whether in knowing receipt or otherwise.  The 2^nd defendant is joined as the subject-matter of the claim, ie the half interest in the Property, was transferred to her.  She is therefore a necessary party in this section 60 application.  The time bar issue raised by Mr Deng is simply not relevant.

54.  I agree with Mr Chan.  It is for the plaintiff to formulate his own cause of action.  This claim is brought under section 60 of the CPO.  The plaintiff does not assert any proprietary or beneficial interest in the Property as such.  Subject to the discussion under the fifth ground below, the plaintiff’s application under section 60 is within time.  A creditor may apply under section 60 to set aside a disposal of property so long as the debt relied upon by the creditor is subsisting and is not itself time-barred: Butterworths Hong Kong Conveyancing and Property Law Handbook (4^th ed) at [60.08], citing Re Maddever (1884) 27 Ch D 523, 531-532.  Subject to that, there is no separate time bar which applies to an application under section 60.  Here, at the time when the current writ was issued, the Judgment Sum remains subsisting and the action is therefore within time.

55.  It is not for a defendant to dictate to a plaintiff that the latter should pursue a specific cause of action and then to complain that that specific cause of action, which the plaintiff is not pursuing, is time-barred and hence the plaintiff’s claim must be struck out.  This is illogical. 

56.  I therefore reject the second ground.

The third ground

57.  Under the third ground, the 2^nd defendant contends that the plaintiff’s case fails to disclose fraud or dishonesty on the part of the 1^st defendant, as required under section 60, and that it is therefore without a solid foundation.  The claim is started in the hope that something will turn up in the course of the proceeding.  It is therefore an abuse of the process of the court and ought to be struck out. 

58.  Mr Deng relied on the Court of Appeal decision in The New China Hong Kong Group Ltd v Ng Kwai Kai Kenneth HCA 519/2010, 11 February 2011, at paras 60-67.  It too concerns a striking out of a section 60 claim.  Fok JA explained what is required of a plea of fraud or dishonesty under section 60, at para 65:-

“In this regard, it is trite that fraud or dishonesty must be “distinctly alleged and as distinctly proved” and that it must be “sufficiently particularised”. Particulars of facts which are consistent with honesty are not sufficient. It is not open to the court to infer dishonesty from facts which have not been pleaded or from facts which have been pleaded but are consistent with dishonesty: see Three Rivers DC v Bank of England (No.3) [2003] 2 AC 1 per Lord Millett at §§ 184 & 186.” (emphasis added)

59.  Mr Deng submitted as follows:-

(a) The matters pleaded in para 15 of the statement of claim (recited in paras 31, 33 to 35 above) “cannot even begin to infer a fraud and dishonest motive as required” (emphasis added).

(b) They “could equally have been based on honest motives” (emphasis added), given that there is no specific plea that the divorce was a sham or that the 2^nd defendant was still holding on behalf of the 1^st defendant his half share in the Property.

(c) The pleadings are also consistent with honesty, namely that the divorce was genuine.

60.  This ground goes to the fundamental issue of whether the 1^st defendant’s alleged intent to defraud creditors is sufficiently pleaded. 

61.  In Hong Kong, the modern starting point of any discussion of the requisite intent under section 60 must be the Court of Final Appeal decision in Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417. 

62.  The issue of intent concerns the state of mind possessed by the disponor.  Whether he had the requisite intent to defraud is a matter of fact to be inferred from the evidence as a whole: paras 85(c) and 87.

63.  How does the court go about resolving this factual issue?  Ribeiro PJ construed the section in accordance with the rule in Freeman v Pope (1869-70) LR 5 Ch App 538, at para 88:-

“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 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 s.60 is engaged.”

64.  His lordship added, at para 91:-

“Whether the disponor was insolvent at the material time and whether the disposition was made for consideration are questions of fact to be objectively determined.” (emphasis added)

65.  For cases falling outside the rule in Freeman v Pope, whether the disposal was executed with the requisite intent is, again, a question of fact to be determined by looking at the whole of the circumstances surrounding the disposal: Skink Ltd (in liquidation) v Comtowell Ltd [1994] 2 HKC 286 at 291E-F, per Godfrey JA; Cheung Ying Lun v Legal Way Ltd [2014] 1 HKLRD 106 at paras 25-26, per G Lam J.

66.  Mr Chan took issue with the third ground in two ways.  First, the facts as presently pleaded, he submitted, are sufficiently particularised to support a prima facie case and the plaintiff should be entitled to have the case tested at trial.  Secondly, and alternatively, Mr Chan relied on the rule in Freeman v Pope, as interpreted in Tradepower, and submitted that the requisite intent to defraud is presumed or readily inferred.

67.  I am of the view that, first, the requisite intent is sufficiently pleaded; and, secondly, it is also arguable that the plaintiff’s pleaded case comes within the rule in Freeman v Pope.  Hence the third ground ought to be rejected.

68.  I shall deal with Mr Chan’s grounds in reverse order.

69.  In the statement of claim, the plaintiff pleads that the 1^st defendant signed a memorandum of confession/repentance in December 1993 admitting that he owed the plaintiff about $100,000.  Hence the 1^st defendant can be inferred to have knowledge of his debt to the plaintiff at the time when he commenced divorce proceedings in 1997.  The plaintiff also pleads that the 1^st defendant knew at that time that he had no other significant asset to satisfy the debt apart from his interest in the Property.  The pleading continues to say that the Transfer Order had the effect of depriving the 1^st defendant and his creditors of his only or most significant asset. 

70.  I am satisfied that the above pleas give rise to an arguable case of insolvency when the Transfer Order was made.  Although the statement of claim does not expressly say that the 1^st defendant was “insolvent” at the material time, the facts as pleaded are sufficient to support such a finding.  Whether these facts can be proved is of course a matter for the trial.

71.  Separately, I am also satisfied that there is an arguable case that there was no consideration tendered for the transfer. 

72.  Ribeiro PJ highlighted in Tradepower that the question of whether the disposition was made for consideration is a question of fact to be determined objectively (para 91).  Here, the evidence suggests that the Transfer Order, together with the other ancillary reliefs granted, were made after negotiations by the parties.  On the one hand, there was no money paid by the 2^nd defendant in return for the transfer. On the other hand, it may legitimately be contended on her behalf that the ancillary reliefs should be looked at as a whole and the fact, as alleged, that 2^nd defendant had given up her request for periodical payment in the divorce proceedings could be regarded as sufficient consideration.

73.  The question of whether there was consideration is therefore arguable and has to be resolved at trial.  (At the hearing, Mr Deng relied on Hill v Haines [2008] 1 Ch 412 and a number of bankruptcy cases for the proposition that a transfer made pursuant to an order for ancillary relief, whether contested or not, is deemed to be “consideration” to defeat a claim by a trustee in bankruptcy to set aside a transaction entered at an undervalue under section 49 of the Bankruptcy Ordinance, Cap 6.  He argued that by analogy, this proposition should equally and consistently apply to the term “consideration” as used in section 60(3) of the CPO.  The outcome is that there was, as a matter of law, consideration for the transfer, which would take the present case outside of the rule in Freeman v Pope.  I do not think it is necessary for me to deal with these authorities.  First, those cases relate to the bankruptcy regime and have no direct application to section 60 of the CPO.  Secondly, as accepted by Mr Deng, he has not been able to find any direct authority on the interpretation of the word “consideration” used in section 60(3).  It follows that the question of “consideration” is likely to be a question of both fact and law in the present context where the Property was disposed of pursuant to a court order.  As such, the issue should be left to trial.)

74.  It therefore follows that the plaintiff has an arguable case of inferring the requisite intent to defraud by relying on the rule in Freeman v Pope. 

75.  I now return to Mr Chan’s first point, namely that even not relying on Freeman v Pope, the plaintiff has put forward a sufficiently pleaded case of the requisite intent to defraud.

76.  Where a case under section 60 falls outside the rule in Freeman v Pope, it is necessary to infer from the evidence an actual intent to defraud on the disponor’s part: Tradepower at paras 54 and 88.

77.  What precisely amounts to such an actual intent is a nuanced question.  The case law, as discussed in Tradepower, provides the following guidance.

78.  First, it is well established that although the words “intent to defraud creditors” are used in the section, it is a shorthand expression and what qualifies is an “intent to delay, hinder or defraud creditors and others”: Skink, para 291C-D, per Godfrey JA, cited in para 63 in Tradepower.

79.  Secondly, it should therefore follow that the requisite intent should be understood in a “broader” sense, ie broader than ordinary fraud.  There is, however, a difference in judicial opinions of exactly what that “broader” sense means.

80.  In Lloyds Bank Ltd v Marcan [1973] 1 WLR 339, a case concerning section 172 of the Law of Property Act 1925, Pennycuick V-C (at first instance) contemplated that the intent could be one which did not involve actual deceit or dishonesty.  His lordship stated, at 344 (and the passage was cited in Tradepower at para 59):-

“I think it is fairly clear that the word “defraud” in this subsection is designed to reproduce the expression “hinder, delay or defraud” in the Statute of Elizabeth, and is not intended to be confined to cases of fraud in the ordinary modern sense of that word, ie as involving actual deceit or dishonesty. … The word “defraud” in the context of s.172, and having regard to the history of its statutory predecessor, must, I think, carry the meaning of depriving creditors of timely recourse to property which would otherwise be applicable for their benefit.” (emphasis added)

81.  The first instance decision was upheld on appeal: [1973] 1 WLR 1387.  Ribeiro PJ described the Court of Appeal decision in that case as “influential”.  His lordship recited the differently formulated views of Russell LJ and Cairns LJ on the scope of the requisite intent at para 68.

82.  Russell LJ said, at 1390H:-

“If he disposes of an asset which would be available to his creditors with the intention of prejudicing them by putting it, or its worth, beyond their reach, he is in the ordinary case acting in a fashion not honest in the context of the relationship of debtor and creditor.” (emphasis added)

83.  Cairns LJ said, at 1392B-C:-

“… it is clear from the words of the enactment that fraud has to be established before a transaction can be avoided. In my opinion, fraud involved dishonesty and I cannot go with Pennycuick V-C in his observation [1973] 1 WLR 339, 344 that the word “defraud” in s.172 “is not intended to be confined to cases of fraud in the ordinary modern sense of that word, ie as involving actual deceit or dishonesty.” It is clear enough that deceit is not a necessary element, but in my view dishonest intention is, at any rate when the conveyance is for consideration.” (emphasis added)

84.  The decision was also considered by Penlington JA in Skink (at 289C-I).  It would appear that as a matter of law, the words “intent to defraud”, when understood in the “broader” sense, require a plaintiff to prove a dishonest intention on the part of the disponor, actual deceit not being an essential element, but the notion of dishonesty is to be assessed in the special context of the relationship of debtor and creditor.

85.  Thirdly, the court is not concerned with the motive or purpose of the disponor when he disposed of the property in question but the objective consequence of the disposal and its effect on the creditors.

86.  When discussing the decision in Freeman v Pope,Ribeiro PJ stated, at para 45(d):-

“That the settlor may have been motivated by other concerns and given no thought to his creditors in making the disposition was not relevant …”

87.  His lordship went on (in sub-paras (d) and (e)) to quote the following passages from Freeman v Pope to make good the point (not reproduced in full here):-

“It seems to me that the difficulty felt by the Vice-Chancellor arose from his thinking that it was necessary to prove an actual intention to delay creditors, where the facts are such as to shew that that the necessary consequence of what was done was to delay them. If we had to decide the question of actual intention, probably we might conclude that the settlor, when he made the settlement, was not thinking about his creditors at all, but was only thinking of the lady whom he wished to benefit; and that his whole mind being given up to considerations of generosity and kindness towards her, he forgot that his creditors had higher claims upon him, and he provided for her without providing for them.

…

I am quite willing to believe that he had no deliberate intention of depriving his creditors of a fund to which they were entitled, but he did an act which, in point of fact, withdrew that fund from them, and dealt with it by way of bounty …” (emphasis added)

88.  His lordship returned to the same point when he discussed (at para 78) the New Zealand Supreme Court’s decision in Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 in which it was held that the phrase “intent to defraud” should be regarded as “shorthand for intent to hinder, delay or defeat a creditor in the exercise of any right of recourse of the creditor in respect of property of the debtor” (emphasis added) and that this involved showing a dishonest intention on the debtor’s part and that this was a question of fact.

89.  In that case, the Supreme Court explained the distinction between the debtor’s purpose and his intention and how that distinction guided the court in its search for the requisite intent:-

“It is not necessary to show that the debtor wanted creditors to suffer a loss, or that it was his purpose to cause loss. …

Whenever the circumstances are such that the debtor must have known that in alienating property, and thereby hindering, delaying or defeating creditors’ recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amounts owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor’s wish to cause them loss.” (at paras 53-54) (emphasis added)

90.  There is therefore an objective element in the inquiry into the intention of the disponor.

91.  Applying the above, my present task is therefore to ascertain whether the plaintiff’s pleaded case supports a dishonest intention on the part of the 1^st defendant in the context of the special relationship of debtor and creditor.  In my inquiry, I am not concerned with what had motivated the 1^st defendant to dispose of his interest in the Property.  Motive is irrelevant.  Further, it is not essential to establish actual deceit exercised by the 1^st defendant on the plaintiff.  Instead I should be concerned with what was the natural effect of that disposal on his creditors and whether the 1^st defendant had known or must have known that to be the effect at the time of the disposal.  If so, as a matter of law, the 1^st defendant is taken to have intended that effect.  If the effect, as pleaded, was to expose the plaintiff to a significantly enhanced risk of not recovering the debt, the plea would not be consistent with honesty.  Applying New China, the plea ought to be allowed to be tried.

92.  In my view, the statement of claim has disclosed a sufficiently pleaded case of dishonest intention on the part of the 1^st defendant in the “broader” sense required in section 60.  The relevant pleas are recounted in paras 31, 33 to 35 above and summarised by me in para 69 above.  The focus here is not the motive but instead the objective effect of the disposal on his creditors and the 1^st defendant’s knowledge of that effect when he made the disposal.  Such knowledge and objective effect has been expressly pleaded.

93.  I therefore reject Mr Deng’s submission as legally unsustainable.  Its flaw lies in its focus on the motive of the 1^st defendant – see the italicised words in para 59 above.  The divorce might well have been genuine and the 1^st defendant might have sincerely wanted to give his interest in the Property to the 2^nd defendant as part of the overall divorce negotiations.  But all these matters are irrelevant in that so long as the 1^st defendant knew that the disposal would have the effect of hindering or delaying the plaintiff in his recourse to the 1^st defendant’s assets for the satisfaction of the debt, the 1^st defendant is regarded as possessing a dishonest intention in the sense contemplated in section 60.

94.  I should add that Mr Chan also relied on the plea concerning TLC and the 2^nd defendant’s sister-in-law “lending” her name to the 1^st defendant.  That shows that the 1^st defendant was engaged in questionable behaviour when conducting his own business.  However, it seems to me that such fact, if established, may provide a factual background against which the 1^st defendant’s conduct is to be assessed but, as things now stand, has no direct relevance to his intention when he disposed of his interest in the Property.

95.  For the above reasons, I reject the third ground.

The fourth ground

96.  Under the fourth ground, the 2^nd defendant complains that the present claim is an abuse of process in the Henderson v Henderson sense in that it could have been litigated when the plaintiff claimed against the 1^st defendant in the Civil Action.  Instead in the Civil Action, the plaintiff did not bring forward any plea as to the relief now sought, such as a charging order against the 1^st defendant’s interest in the Property.  The plaintiff could have and should have also brought forward his present allegation that the divorce was a suspected sham.  The plaintiff’s claim should therefore be struck out.

97.  There is no merit in this ground.  Mr Chan submitted, and I accept as valid, that the plaintiff’s claim against the 1^st defendant in the Civil Action was for monetary relief only.  After judgment was obtained, the plaintiff tried to get repayment from the 1^st defendant.  But nothing came out of it.  The plaintiff, then with the assistance of legal aid, commenced the present proceedings with a view to enforcing the judgment in the Civil Action.  I fail to see how the steps taken by the plaintiff, as alleged, amounts to an abuse of process of the court.  There is nothing inherently wrong or improper for him not to seek a charging order or the like relief in the Civil Action.  The fourth ground must be rejected.

The fifth ground

98.  In her affirmation, the 2^nd defendant said that she was “extremely surprised” to receive the writ in 2016.  After all, the Assignment was made in 1999 and the last time she heard from the 1^st defendant was around 2004.  Their son also stated on affirmation that he had not seen or heard from his father, the 1^st defendant, for more than 10 years.  He and his mother had had nothing to do with the 1^st defendant who had abandoned the family and had disappeared altogether since 2004.  The 2^nd defendant as a single parent had brought him up.  The son accused the plaintiff of bringing an unfounded and belated claim against his mother in respect of the family home.  His mother now has no choice but to defend the claim on her own.  In doing so, she has to recount the painful memory of what she had gone through in her unhappy marriage more than 20 years ago.

99.  The sentiment expressed by both the 2^nd defendant and the son is clear.  Although not phrased as such in the affirmation evidence, they feel that, in addition to the claim being unfounded, the 2^nd defendant is being unduly vexed by a stale claim which the plaintiff has unreasonably sat on until now.

100.  This is the kind of consideration which, among others, underlines and justifies the imposition of limitation periods in general.  Is there a time bar in this case preventing the plaintiff from setting aside the Transfer Order?  This is the issue under the fifth ground. 

101.  Section 4(4) of the Limitation Ordinance provides:-

“An action shall not be brought upon any judgment after the expiration of 12 years from the date on which the judgment became enforceable, and no arrears of interest in respect of any judgment debt shall be recovered after the expiration of 6 years from the date on which the interest became due.” (emphasis added)

102.  I have expressed my view that on the facts as pleaded, the Transfer Order and the Assignment ought to be set aside at the same time.  As explained in para 8 above, it therefore falls to be considered whether section 4(4) of the Limitation Ordinance would operate to impose a 12-year limitation period on the setting aside of the Transfer Order.  This turns on the construction of the words “brought upon”.  They certainly cover an action to directly enforce a judgment.  They also cover a bankruptcy petition founded on a judgment debt: Re Li Man Hoo [2013] 4 HKLRD 247.  But, beyond that, should the words be construed liberally to also cover any action to set aside a judgment or otherwise impugn it?

103.  If section 4(4) applies (and subject to any statutory extension of the limitation period), the 2^nd defendant would have a complete defence.  The Transfer Order was made in July 1998.  The section 4(4) limitation period expired in July 2010.  The present writ was issued in August 2015, more than five years after time ran out.  As such, the plaintiff would be barred from pursuing the present claim to set aside the Transfer Order (and hence the Assignment).

104.  The plaintiff’s position is that there is no limitation period for a party to set aside an order or a judgment obtained by fraud.  In support, Mr Chan made detailed written submissions in which he carefully analysed the language of section 4(4), the purpose of statutory limitation periods, and the underlying policy of the statutory regime.

105.  On the contrary, the 2^nd defendant’s position is less than clear.  In his written submissions, Mr Deng wrote: “There is no limitation period for a party to apply to set aside a judgment or order obtained by fraud.”  Hence it would appear that he took the same view as Mr Chan.  However, at the resumed hearing, Mr Deng orally confirmed to the court that it is in fact the 2^nd defendant’s primary position that section 4(4) does apply to impose such a limitation period.  But, save for stating the position, he said that he could not take his submission any further.

106.  I have to say that I find the 2^nd defendant’s position on this issue confusing and do not know what to make of it.

107.  In any event, I do not find it necessary to make any ruling on the issue at this interlocutory stage. This is because even if, contrary to Mr Chan’s submission, section 4(4) does bar the plaintiff from setting aside the Transfer Order, his alternative position is that the limitation period ought arguably to be extended under section 26(1) and whether the extension applies can only be resolved at trial.

108.  Section 26(1) provides as follows:-

“Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either – (a) the action is based upon the fraud of the defendant … the period of limitation shall not begin to run until the plaintiff has discovered the fraud … or could with reasonable diligence have discovered it.”

109.  Mr Chan submitted that:-

(a) Section 26(1) applies because the present action is based upon the 1^st defendant’s intent to defraud and arguably falls within the section.

(b) Whether the limitation period would be extended in favour of the plaintiff would therefore turn on (i) when he in fact found out about the Transfer Order and (ii) when he could have discovered it with reasonable diligence.

(c) As to (i), in his affirmation, the plaintiff stated that he only found out about the Transfer Order shortly after he obtained the judgment in the Civil Action, ie on 18 August 2003.  If true, time would only start to run from late August 2003 and had not yet expired when the present writ was issued on 15 August 2015.  At the hearing, Mr Deng accepted that whether that was the case can only be resolved at trial and not now.

(d) As to (ii), Mr Chan said that it is not a straightforward question.  It depends on the circumstances and an assessment of a multitude of factors.  In determining whether a plaintiff could with reasonable diligence have discovered a fraud, the court would also take into account the personal characteristics of the plaintiff: Chow How Yeen Margaret v Pharmaceuticals Inc HCA 537/2013, 18 September 2013 at paras 35-52; Angela Yang v AXA Wealth Management (HK) Ltd HCA 2016/2014, 30 November 2017 at paras 51-54, both citing the leading authority on section 26(1), namely the Court of Final Appeal decision in Peconic Industrial Development Ltd v Lau Kwok Fai (2009) HKCFAR 139, paras 29-33.

(e) The question of when a person possessing the personal characteristics of the plaintiff in the circumstances of the case could with reasonable diligence have discovered the Transfer Order and the circumstances leading to it is a fact-sensitive one and cannot therefore be definitively resolved at this stage.  Hence the 2^nd defendant has failed to demonstrate that the plaintiff is bound to fail on the extension issue.

110.  On the contrary, Mr Deng argued that the issue in (ii) can be decided now on the basis of the materials before the court.  He relied on the plaintiff’s own evidence that since the 1^st defendant’s acquittal in 1995, the plaintiff had been trying to seek repayment from him, by sending letters and waiting for him outside the Property.  Further, according to what the plaintiff confirmed to the trial judge in the Civil Action on 18 August 2003, he waited outside the Property again about three months before and on that occasion, he only saw the 2^nd defendant there, but not the 1^st defendant.  The plaintiff therefore ought to have been aware latest by about May 2003 that the 1^st defendant was no longer living in the Property.  It follows that with reasonable diligence, the plaintiff ought to have investigated about the title and, if he had done so, he would have found out about the Transfer Order and the Assignment.

111.  I do not accept Mr Deng’s submissions.  The material question here is whether during the period between July 1998 (when the Transfer Order was made) and August 2003 (shortly after judgment was entered in the Civil Action), the plaintiff could with reasonable diligence have found out about the Transfer Order and the surrounding circumstances.  The resolution of the question requires an inquiry into the personal characteristics of the plaintiff, what he had done (and, perhaps more materially, what he had not done) and a determination of how that measures up to the “reasonable diligence” threshold. 

112.  I accept Mr Chan’s submission that the inquiry involves factual issues to be resolved.  The evidence relied on by Mr Deng is not of such an unequivocal nature that I can make findings on the facts one way or the other on affidavit evidence alone at this interlocutory stage.

113.  I therefore reject the fifth, and the last, ground for striking out.

Conclusion

114.  Having ruled out all the grounds relied on by the 2^nd defendant, I dismiss her striking out application.  There being no objection to her amendment application, I direct that:-

(a) The 2^nd defendant do have leave to amend her defence in the form of the revised version;

(b) The 2^nd defendant do file and serve on the plaintiff and the 1^st defendant the amended defence within 7 days from the date of this decision; and

(c) The plaintiff do file and serve on the 1^st and 2^nd defendants his reply, if any, within 28 days thereafter.

115.  I further make an order nisi that the plaintiff do have costs of the 2^nd defendant’s summons including any reserved costs, to be taxed if not agreed, with certificate for counsel and that the plaintiff’s and the 2^nd defendant’s own costs be taxed in accordance with the Legal Aid Regulations.