DONALD EDWARD OSBORN AND ANOTHER v. KOO YAT TING

HCMP 1434/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1434 OF 2014

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J U D G M E N T

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Introduction

1.  This is the application of the Plaintiffs pursuant to section 49 of the Bankruptcy Ordinance, Cap 6 (“BO”) for (i) a declaration that the sale and conveyance by Mr Cheng Joi Kuen, Kenny (“Bankrupt”) of the property known as Unit A, 1/F (including Flat Roof & Garden), Block 18, and Car Parking Space 52, G/F, Greenview Garden, No. 31 Razor Hill Road, Sai Kung, New Territories, Hong Kong (“Property”) to the Defendant is void as a transaction at an undervalue; and (ii) an order that the Defendant do convey and deliver vacant possession of the Property to the Plaintiffs.

2.  Section 49(1) of BO provides that where a bankrupt has (i) at a relevant time (ii) entered into a transaction with any person at an undervalue, the trustee may apply to the court for an order under that section.  Hence, in order to succeed, the Plaintiffs must satisfy the dual requirements that the sale and conveyance of the Property took place “at a relevant time” and was a transaction “at an undervalue”.

Background

3.  Eagle Speed Global Manufacturing Limited (“Eagle Speed”) was a company incorporated in Hong Kong on 18 December 2002. On the same day, the Bankrupt was appointed its first director. On 18 February 2003, the Defendant was also appointed as a director of Eagle Speed. From  6 March 2003 until its voluntary liquidation on 11 July 2005, the Bankrupt was a 65% shareholder of Eagle Speed.

4.  On 5 September 2003, the Bankrupt became the registered owner of the Property having purchased it at the price of HK$3,038,000. The Property was encumbered by a First Legal Charge dated 5 September 2003 (“First Charge”) in favour of GE Capital (Hong Kong) Limited (“GE Capital”) securing all monies owed by the Bankrupt.

5.  On 11 July 2005, members of Eagle Speed passed a special resolution resolving that the company could not, by reason of its liabilities, continue its business and that it be wound up voluntarily. Both the Bankrupt and the Defendant were still directors of Eagle Speed at the time of the special resolution.

6.  By an Agreement dated 24 October 2005 (“Sale and Purchase Agreement”), the Bankrupt sold the Property to the Defendant at the price of HK$5,000,000. The initial deposit of HK$2,500,000 was stated in the Sale and Purchase Agreement to have been received by the Bankrupt on or before 24 October 2005. The balance of the purchase price in the sum of HK$2,500,000 was payable on completion ie 28 October 2005. The Plaintiffs said, according to statements of the Bankrupt’s two accounts with the Bank of China (Hong Kong) Limited (“BOC”), there was no indication that the Bankrupt had received the initial deposit.

7.  On 28 October 2005, the First Charge granted by the Bankrupt was discharged, the Defendant became the registered owner of the Property and another First Legal Charge was created by the Defendant as sole mortgagor in favour of GE Capital, securing all monies owed by the Bankrupt and the Defendant as borrowers. The amount of the loan granted by GE Capital to the Bankrupt and the Defendant was HK$2.5 million (“Loan”).

8.  Prior to completion of the sale, the Bankrupt owed GE Capital approximately HK$2.268 million. Upon completion of the sale, draw down of the Loan and redemption of the First Charge, a net sum of HK$229,473.09 was remitted by GE Capital to the Bankrupt and the Defendant as borrowers.  The monthly instalment repayment of the Loan was made by the Bankrupt by way of direct debit from his BOC account.  Between 29 October 2005 and 29 June 2010, the Bankrupt had paid over HK$1.14 million to GE Capital.  Afterwards, the monthly instalment repayment was made by the Defendant.

9.  In the Plaintiffs’ opinion, the Bankrupt received little or no benefit for selling the Property to the Defendant.

10.  On 28 June 2010, a bankruptcy petition was presented against the Bankrupt in HCB 4763 of 2010. A bankruptcy order was made on 8 September 2010.

BO

11.  Section 49 of BO provides:

“(1) Subject to this section and sections 51 and 51A, where a debtor is adjudged bankrupt and he has at a relevant time (defined in section 51) entered into a transaction with any person at an undervalue, the trustee may apply to the court for an order under this section.

(2) The court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that debtor had not entered into that transaction.

(3) For the purposes of this section and sections 51 and 51A, a debtor enters into a transaction with a person at an undervalue if-

…

(c) he enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the debtor.” (emphasis added)

12.  Section 51 of BO provides:

“(1) Subject to subsections (2) and (3), the time at which a debtor enters into a transaction at an undervalue … is a relevant time if the transaction is entered into …

(a) in the case of a transaction at an undervalue, at a time in the period of 5 years ending with the day of the presentation of the bankruptcy petition on which the debtor is adjudged bankrupt;

…

(2) Where a debtor enters into a transaction at an undervalue … at a time mentioned in subsection (1)(a), (b) or (c) (not being, in the case of a transaction at an undervalue, a time less than 2 years before the end of the period mentioned in subsection (1)(a)), that time is not a relevant time for the purposes of sections 49 and 50 unless the debtor-

(a) is insolvent at that time; or

(b) becomes insolvent in consequence of the transaction…

but the requirements of this subsection are presumed to be satisfied, unless the contrary is shown, in relation to any transaction at an undervalue which is entered into by a debtor with a person who is an associate of his (otherwise than by reason only of being his employee). (emphasis added)

13.  Section 51B of BO provides:

“(1) For the purposes of sections 49 to 51A, any question whether a person is an associate of another person shall be determined in accordance with this section.

…

(4) A person is an associate of a debtor whom he employs or by whom he is employed and for this purpose, any director or other officer of a company shall be treated as employed by that company.”

“Relevant Time”

14.  In gist, Mr Sheppard contends that (i) the sale and conveyance of the Property took place at “a relevant time” as defined in section 51(1)(a) of BO in that it was entered into more than 2 years but within “the period of 5 years ending with the day of the presentation of the bankruptcy petition”; and (ii) the Defendant was an “associate” of the Bankrupt so that the requirements under section 51(2) of BO are presumed to be satisfied.

15.  I shall deal with the two contentions in reverse order.

16.  On the question of “associate”, the Plaintiffs claim that by reason of the Defendant’s directorship of Eagle Speed and the Bankrupt’s 65% shareholding in and directorship of Eagle Speed, she is an “associate” of the Bankrupt pursuant to section 51B(4) of BO: paragraph 9 First Affirmation of Victor Yat Kit Jong. I disagree.

17.  Under section 51B(4), the Defendant will be treated as an “associate” of the Bankrupt only if she is either the employer or employee of the Bankrupt. That is not the case here. The fact that the Defendant and the Bankrupt were at the time of the Sale and Purchase Agreement co‑directors of Eagle Speed does not, without more, render one the employee or employer of the other.

18.  It is true that by the express wording of section 51B(4), a  director of a company is to be treated as employed by it. Hence, the Defendant was by virtue of her directorship treated as employed by Eagle Speed. So was the Bankrupt. However, under the principle of Saloman v Saloman & Company Ltd [1897] AC 22, Eagle Speed is a separate legal entity distinct from its shareholder viz the Bankrupt. The principle has from time to time been reaffirmed by high authorities: Gerber Garment Technology Inc v Lectra Systems Ltd. [1997] RPC 443 at 479; Johnson v Gore Wood & Co [2002] 2 AC 1 at 61G‑H; Prest v Prest [2013] 2 AC 415 at [8].

19.  It follows that while the Defendant is to be treated as employed by Eagle Speed, she is not to be treated as employed by the Bankrupt just because the latter owned 65% of Eagle Speed. If so, this court cannot see how the Defendant can or should be regarded as an “associate” of the Bankrupt by virtue of section 51B(4).

20.  Under section 51B(6), a company is an associate of a debtor if that debtor has control of it. By virtue of his 65% shareholding in Eagle Speed, the Bankrupt can be said to have control of it: see section 51B(8)(b). It follows that Eagle Speed is an “associate” of the Bankrupt. But it still does not follow that the Defendant is, by virtue of her being a director of Eagle Speed, an “associate” of the Bankrupt.

21.  On the question of “relevant time”, section 51(2) provides that where a debtor enters into a transaction at an undervalue at a time mentioned in subsection (1)(a) ie within 5 years (but not less than 2 years) ending with the day of the presentation of the bankruptcy petition, that time is not a relevant time for the purpose of section 49 unless the debtor–

(1) is insolvent at that time; or

(2) becomes insolvent in consequence of the transaction.

22.  In the present case, the Plaintiffs do not seek to prove, the burden being on them, (i) the Bankrupt was insolvent as at 24 October 2005; or (ii) the Bankrupt became insolvent in consequence of entering into the Sale and Purchase Agreement. Instead, the Plaintiffs are content to rely on the presumption in section 51(2) ie the requirements of that sub‑section are presumed to be satisfied in relation to any transaction at an undervalue which is entered into by a debtor with a person who is an associate of his (otherwise than by reason only of being his employee).

23.  Given this court’s conclusion that the Defendant is not an “associate” of the Bankrupt, the Plaintiffs cannot bring themselves within the presumption in section 51(2). In these circumstances, the Plaintiffs cannot satisfy this court that the transaction in question took place “at a relevant time” for the purpose of section 49.

24.  That is enough to dispose of the present application.

“Transaction at an undervalue”

25.  On this requirement, Mr Sheppard relies solely on section 49(3)(c) of BO in that the sale and conveyance of the Property was “for a consideration the value of which… is significantly less than the value… of the consideration provided by the debtor.”

26.  On its face, section 49(3)(c) prescribes a straightforward exercise of comparing (i) the consideration provided by the Defendant for the purchase of the Property and (ii) the consideration provided by the Bankrupt. Prima facie, the consideration provided by the Defendant was the agreed purchase price ie HK$5 million and the consideration provided by the Bankrupt was the market value of the Property at the time of the sale. If, for instance, the Property was worth much more than HK$5 million, the requirement of section 49(3)(c) would be satisfied.

27.  The problem with the Plaintiffs’ approach to this issue is that they have not adduced any valuation evidence on the market value of the Property. Instead, they have opted for a “shortcut” by suggesting that there was no evidence the Defendant had paid the initial deposit of HK$2.5 million or the balance of the purchase price on completion.  

28.  As far as the initial deposit is concerned, receipt of it has been acknowledged by the Bankrupt in the Sale and Purchase Agreement itself so it cannot be said that there is no evidence of payment. The fact that the initial deposit was not paid into the Bankrupt’s BOC accounts does not mean that it was not paid at all.

29.  As for the balance of purchase price, the evidence before this court suggests that on completion, the bulk of the Loan was used to redeem the First Charge and only a sum of HK$229,473 was due from GE Capital.  There is nothing to suggest that GE Capital had failed to pay this sum to the solicitors for the Defendant and the Bankrupt upon the draw down of the Loan to complete the sale. If so, it simply means the Bankrupt did not receive in cash the bulk of the balance of purchase price.

30.  What the Plaintiffs seem to be insinuating is that the sale of the Property is a sham. What in fact happened was that the Bankrupt had conveyed the Property to the Defendant for nothing; in other words, he had made a gift to the Defendant within the meaning of section 49(3)(a). But that is not the way the Plaintiffs characterized the transaction in the First Affirmation of Victor Yat Kit Jong or how Mr Sheppard stated his clients’ case to this court when questioned.

31.  In any event, on the evidence before this court, the Defendant was one of the borrowers of the Loan and thus has incurred personal liability to GE Capital. The Loan in turn was used to pay off the Bankrupt’s pre-existing indebtedness and to redeem the First Charge. It  therefore cannot be said that the Defendant had provided no consideration for the Property.

32.  To conclude, this court is not satisfied that the sale and conveyance of the Property from the Bankrupt to the Defendant comes within the ambit of section 49(3)(c) of BO.

Disposition

33.  For the above reasons, the Plaintiffs’ application is hereby dismissed.