THE TRUSTEES v. ELIZABETH CHAO

HCB 549/2000 & HCMP 2752/2005
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

IN BANKRUPTCY PROCEEDINGS NO. 549 OF 2000

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And

MISCELLANEOUS PROCEEDINGS NO. 2752 OF 2005

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BETWEEN

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(Heard together)

Dates of Hearing : 17 and 18 October 2006

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REASONS  FOR  JUDGMENT

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Introduction

1. At the conclusion of the hearing of these two matters, I gave judgment in favour of Elizabeth Chao, the respondent in the first mentioned proceedings and the plaintiff in the second.  I said that I would hand down my reasons at a later date.  I do so now.

2. To understand the issues that fell for determination in the two sets of proceedings, it is necessary first to give some brief background.

3. Elizabeth Chao married Chao Sze Bang, known as Frank Chao, in London in October 1960.  Three children were born of the marriage.

4. In 1976, when it was planned that one of the children should further his education in England, an apartment was purchased in London.  The London apartment, as I will call it, is the subject matter of both sets of proceedings.

5. On 22 February 2000, a company called Bright Islands Corporation presented a petition seeking Frank Chao’s bankruptcy.  It was owed a sum exceeding US$6,300,000.  In July of that year, Frank Chao applied to have the petition struck out and in October he obtained an order to that effect.  Bright Islands Corporation appealed.

6. At about the same time; that is, in early 2000, the marriage having fallen upon unhappy times, Elizabeth Chao instituted divorce proceedings against her husband.  The petition was issued on 6 April 2000.  Her husband, it seems, opposed a divorce and proposed that there should be an agreement of separation.  In the result, a deed of separation was signed by the couple on 30 June 2000.  The deed was not incorporated into any order of court.  Paragraph One of the deed was to the following effect :

“The Husband shall forthwith at his cost transfer all his legal and beneficial interest in the property [i.e. the London apartment] known as 19 Eresby House, Rutland Gate and Storeroom 19 and one carpark, London SW7 to the Wife free from any encumbrance.”

7. Some eight months after the deed had been signed, on 17 February 2001, Frank Chao died.

8. Some six or seven weeks after the death, Elizabeth Chao put the London apartment on the market and in July of that year she sold it for a sum £701,799.

9. Almost a year later, on 15 March 2002, the Court of Appeal allowed the appeal of Bright Islands Corporation, setting aside the striking out of its petition for Frank Chao’s bankruptcy.  On 22 April 2002, pursuant to the judgment of the Court of Appeal, an order of bankruptcy was made.

10. On 12 August 2005, the trustees of Frank Chao’s bankrupt deceased estate applied by way of notice of motion for a declaration in terms of s.42 of the Bankruptcy Ordinance, Cap.6.  They sought a declaration that the purported transfer, in terms of the deed of separation, by Frank Chao of his interest in the London apartment to his wife, Elizabeth Chao, was void.  A further declaration was sought to the effect that, Frank Chao’s interest in the London apartment having been 50%, Elizabeth Chao must pay over 50% of the proceeds she had received on the sale of the apartment, a sum of £351,000.

11. On 16 December 2005, Elizabeth Chao instituted her own counter-proceedings by way of originating summons seeking to safeguard her interest in the proceeds of the London apartment.  She sought an order that the deed of separation, or at least that part of it transferring her late husband’s interest in the London apartment to her, be approved or ratified. 

12. On 15 May 2006, it was ordered by consent that the two sets of proceedings should be heard together and that was how they both came before me.

The trustees’ action

13. As I have said, the trustees action was by way of notice of motion seeking a declaration pursuant to s.42 of the Bankruptcy Ordinance.  The relevant provisions of s.42 read :

“(1) Where a person is adjudged bankrupt, any disposition of property made by that person in the period to which this section applies is void except to the extent that it is or was made with the consent of the court, or is or was subsequently ratified by the court.

(2) …

(3) This section applies to the period beginning with the day of the presentation of the petition for the bankruptcy order and ending with the vesting of the bankrupt’s estate in a trustee.”

14. For the trustees, it was argued that the fact that the London apartment was transferred to Elizabeth Chao in matrimonial proceedings did not, by that fact alone, give her an absolute protection from the reach of s.42.  In short, it was still capable of amounting to a ‘disposition of property’ for the purposes of s.42 and could therefore be declared void unless ratified by a court dealing with the bankruptcy proceedings : see, for example, In re Flint (a bankrupt) [1993] Ch.319.

15. The trustees contended that other unsecured creditors in the bankrupt estate had been left worse of by reason of the disposition of the London apartment and that there were no special circumstances which warranted a validation of the transfer.  As to the broad guiding principles in respect of validation, Buckley LJ, in Re Gray’s Inn Construction Co. Ltd [1980] 1 All ER 814 said :

“Since the policy of the law is to procure so far as practicable rateable payments of the unsecured creditors’ claims, it is, in my opinion, clear that the court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interests of the unsecured creditors as a body.” 

Elizabeth Chao’s first ground

16. On behalf of Elizabeth Chao, two bases of opposition were advocated.  The first ground was to the following effect; namely, that despite the wording of paragraph one of the deed of separation – to the effect that all of Frank Chao’s ‘legal and beneficial’ interest in the London apartment was transferred to his wife – as at the date of signature of the deed he in fact held no beneficial interest, his interest being no more than bare legal title.  This was because he had earlier disposed of his beneficial interest to his wife and had done so for value.

17. The deed of separation, it was said, was a document drawn up in family proceedings.  These were proceedings which were not focused so much on the niceties or technical intricacies of property law but were focused instead on dividing assets that before, whoever held title, had all been considered to be family assets.  Read in that context, and in its historical context, paragraph one of the deed of separation was not a knowing admission on the part of Elizabeth Chao that her husband held any beneficial interest in the London apartment.  It was no more than confirmation that the husband agreed to transfer all his interest in what was then a family asset to his wife.  That interest, when analysed, consisted of no more than bare legal title.  But prudence dictated, in the context of family proceedings, that the husband should make over all his title, the greater of course including the lesser.

18. That being the case, there was in fact no disposition by Frank Chao of any beneficial interest in the property, he having none to dispose of, and nothing therefore that fell for consideration under s.42 of the Bankruptcy Ordinance.

19. Whether, at the time signing the deed of separation, Frank Chao had any beneficial interest in the London apartment capable of being transferred to his wife was, of course, an issue of fact.  On the evidence as it was presented, I was satisfied that the probabilities favoured Elizabeth Chao’s assertion that, some three years before the signing of the deed, her husband had divested himself of any beneficial interest in the property in her favour.  It was for that reason that I gave judgment in her favour.

20. The question, of course, is how, on the probabilities, I came to that determination.  To answer that it is necessary to consider the history of the acquisition and disposal of the London apartment.  In her affidavits, Elizabeth Chao explained how she had been the prime moving force behind the purchase of the London apartment in 1976.  As she put it in her affidavit of 8 December 2005 :

“I wished to purchase a London home and proposed this to my husband.  Although we were living in Hong Kong at the time, we had decided to send our eldest son, Rawley, to study in England in September 1976.  It was also our intention that our other two children, Joachim and Anastasia would follow him to England later to continue their studies.  I wanted a property in London as a base for myself and the children while they were studying in England.

I recall that my husband was not as interested as I was in purchasing a property in London.  He regarded Hong Kong as his base and did not share my affinity to England to the same extent.  However, he did not oppose my idea nor wish to stand in my way and was prepared to help me fulfil my wish.”

21. It is not uncommon for affluent Hong Kong couples, who have themselves been educated in the United Kingdom – for example, who have gone to university there – to seek to have their children educated there and to secure a United Kingdom base for visiting the children and the like.  The purchase of a London property for such purposes has been common enough.  There was therefore nothing inherently implausible in Elizabeth Chao’s assertions.

22. The London apartment was purchased with the assistance of a Mr Simon Agace who at the time worked as an estate agent and estate advisor.  In a witnessed but unsworn statement dated 19 April 2004, Mr Agace explained that, after the London apartment had been purchased, he always dealt with Elizabeth Chao in respect of it.  His memory of the intention of the parties in 1976 was to the following effect :

“I was aware at the time that the flat was bought for Betty [Elizabeth Chao] and the children.  I recommended that the children each own a small share of the flat in order to maximise deductions available under estate duties payable at the time.  I remember that my recommendations were taken up and that the flat was in fact beneficially owned by Betty and the children.

I recall being told by Frank and Betty at the time that the beneficial ownership interests were recorded in a trust document and that Frank had set up a trust.”

23. As for the mortgage arrangements, Mr Agace’s memory was that he introduced Elizabeth Chao and her husband to a mortgage broker —

“I think it was Knute Robson of Crouche Reoch who I dealt with at that time.  I remember that the mortgage brokers preferred to have the names of Frank and Betty Chao on the title, as Frank was the only one with an income.  They recommended against having the children on the title as banks were not keen to lend to properties where minors were parties, as this made foreclosure difficult, if necessary.  Therefore, having the children’s names on the title would have made getting a mortgage impossible.  Mortgages to non residents in those days were not easy so it would not have been possible for the children to have been on the title deeds.

This was a further reason why the trust document was drawn up to record the ultimate beneficial ownership of the flat, which was different from that shown on the title deeds.”

24. In her affidavit of 8 December 2005, Elizabeth Chao confirmed that the intended beneficial owners of the London apartment were intended to be herself and the children only :

“My husband was not initially concerned about retaining any interest in the property.  I wanted him to remain as joint legal owner with me to hold the beneficial interests of our three children until they grew up.  We agreed that at the end of the mortgage term, my husband would then transfer his legal title to each of the children in equal shares, i.e. one-sixth to each child, but this was to be subject to my consent and if I did not consent to the transfer to the children then my husband’s title would vest in me.”

25. Elizabeth Chao recalled that a trust deed was prepared on the basis of the advice from Mr Agace.  She had searched for the deed, she said, but had been unable to find it.  She assumed it must have been kept

somewhere in her husband’s papers but mislaid.  For the trustees, it was submitted that there never had been such a trust deed.  It was an invention.  For that to be demonstrated, of course, it meant that Elizabeth Chao, her son and Mr Agace had to be shown to have lied, effectively to have together attempted to pervert the course of justice.

26. As part and parcel of the submission that no reliance could be placed on Elizabeth Chao’s version of events, Mr Maurellet, counsel for the trustees, criticised the fact that Mr Agace had put his signature to a statement only and not to a sworn document.  It was his submission that in the circumstances little, if any, weight should be given to what he said.  In the absence of evidence to the contrary, he submitted, it had to be assumed that not having Mr Agace go on oath was a deliberate decision on the part of Elizabeth Chao. 

27. At this time it must be recorded that no oral testimony was led.  The parties were content for the matter to be determined on the papers; that is, on the exhibits and the affidavits.

28. It meant, of course, that I could not come to any findings of credibility as to Elizabeth Chao and her witnesses unless the version of events asserted by them was so unlikely, so in opposition to the documentary evidence that was available, that I could give it no credence or at least insufficient credence to let it determine the balance of probabilities.  In my judgment, however, the version of events put forward by Elizabeth Chao was plausible and, on its face, was quite capable of belief.  I could well understand how it was she said she came into possession of the London apartment, how she was advised by Mr Agace at the time and how it was that beneficial ownership was determined.  I could well understand how, when the marriage broke down in 2000, knowing of the husband’s problems in respect of various legal proceedings taken against him, she should be anxious to sign a deed to ensure that her interests in the London apartment were protected.

29. During the course of submissions, I detected the suggestion that the deed of separation was itself just a device to put assets beyond the reach of creditors, Elizabeth Chao obviously a willing party in this.  But by the time I had digested all the evidence, I thought it highly unlikely that the matrimonial proceedings were just an elaborate device.  There was nothing of substance to suggest this.

30. As for the failure of Mr Agace to sign an affidavit, that did not concern me.  Mr Agace (a retired fellow of the Royal Institution of Chartered Surveyors at the time when he made his statement) would have understood the importance of making a statement that was, to the best of his memory, a truthful statement.  He would, I am sure, have understood that a knowing deceit would leave him open to both professional and criminal penalties.  Of course, a sworn statement would have been better.  But there was no reason to think that Mr Agace, fearing of perjuring himself, would have been prepared to put his signature to an untruthful, unsworn statement at the instigation of Elizabeth Chao but not to a sworn one.

31. That Elizabeth Chao had a motive to lie was self-evident.  By the seeming deceit of her late husband as to what monetary assets he was able to give to her she had found herself relatively poorly off.  The proceeds from the sale of the London apartment were one of the few assets she had left.  But in many civil matters where the disposition of valuable assets are at stake there is a motive to lie.  The issue, however, is not simply the question of motive, it is whether that motive has resulted in the presentation of knowingly false evidence.

32. In the present case, if the trustees were correct, it meant that Elizabeth Chao, her son and Mr Agace had conspired together to build what frankly was a pretty solid edifice of falsity on the foundation of existing documents.  But, in my judgment, there was no basis on which I could come to any such conclusion.  Indeed, I found that much of the documentary evidence supported Elizabeth Chao’s assertions in a convincing way.

33. As to how it was financially that the London apartment was purchased, Elizabeth Chao said that the full purchase price was taken from an account in the joint names of herself and her husband with Standard Chartered Bank.  The purchase price, therefore, was paid in equal half shares by herself and her husband.

34. However, as it was never intended that her husband should hold a beneficial interest in the London apartment, his half of the purchase price taken from the joint account was understood to have been ‘lent’ to her.  Her husband, she said, needed his half share for business purposes.  In the result a mortgage loan for roughly his half share was raised.  That is the mortgage referred to by Mr Agace.  In the result, said Elizabeth Chao —

“On 21 March 1977 a 25 year term, interest only, mortgage of £25,000.00 was registered by London and Manchester Assurance on the property.  A net amount of £24,805.86, after deducting certain fees, was paid into the client account of Messrs Gouldens, the solicitors who were acting for us.  Bank of England permission was required to remit the funds back to Hong Kong.”

35. It was Elizabeth Chao’s evidence that, shortly before the mortgage funds were obtained, her husband changed his mind, saying that he would like to retain some interest in the property : a one-eighth interest.  On this basis, as I understood it, Elizabeth Chao retained 50% beneficial interest while the children and her husband had equal shares in the remaining 50%; that is, one-eighth each.  In the result, said Elizabeth Chao —

“Out of the £4,800 (deposit) and £44,732 (balance of purchase price) paid, I, in effect, paid half of these sums amounting to £24,766.45.  Out of my husband’s advance of £24,766.45, £20,000 was repaid to him [for use by him in his business affairs] so he had in effect invested only £4,766.45 into the ‘equity’ of the flat.”

36. As to the £20,000 due to the husband, Elizabeth Chao said :

“On 26 March 1977, Messrs Gouldens confirmed in a letter that it had complied with the instructions given with respect to the disbursement of the mortgage advance and that £5,000.00 had been paid to Venture Shipping (Managers) Ltd, a company controlled by my husband and £15,000.00 to an account in Banque Nationale de Paris, Hong Kong, also in the name my husband.”

37. It is to be recorded that a copy of the letter of 26 March 1977 from Gouldens – together with copies of other relevant correspondence, documents and the like – were exhibited in evidence.  Nothing appeared in those documents to unambiguously support Elizabeth Chao’s assertions as to beneficial ownership of the London apartment.  The trust deed, if available, would of course have gone directly to that issue.  However, on my reading, the documents did lend general support for her assertions.

38. As for the failure to locate the trust deed, while it was a matter to which I gave anxious consideration, it has to be remembered that it was essentially an ‘internal’ family document – different, for example, from a set of title deeds that may likely be kept at a bank – and I did not find it inherently improbable that over a period of three decades it may have become mislaid.

39. In all the circumstances; that is, on the basis of all the evidence, I was satisfied that, when the purchase of the London apartment had been completed, even though Elizabeth and Frank Chao appeared on the title deeds to be joint owners, Frank Chao, in fact, only enjoyed a one-eighth beneficial ownership, holding the other three-eighths for each of his children.

40. In the following years, as to the payment of the mortgage interest, Elizabeth Chao said that this was paid jointly out of general living expenses.  Once the children were grown up, she said, they also contributed.

41. In an affidavit dated 8 December 2005, Joachim Chao, the second son of the family, confirmed what was the general understanding in the family as to beneficial ownership of the London apartment :

“From the time we were sent to school in the U.K., my late brother, my sister and I were all aware of the fact that the flat was purchased by my mother.  It was always referred to as her flat.  While I was too young at the time to be directly involved in the legal arrangements for holding the beneficial ownership of the flat, I was fully aware of the beneficial ownership structure my parents had put in place for the flat.

As I grew up and started working in 1986, I started making contributions to the costs of upkeeping the flat, and on occasions paid the mortgage interest and life assurance premiums connected to the flat [a policy of his father’s life].”

42. In his affidavit, Joachim Chao said that he was the one who suggested to his mother that she should take over ‘full beneficial ownership’ of the London apartment.  This suggestion, he said, was made in 1997, shortly before he got married and when he was moving out of the apartment.

43. So that his mother could have full beneficial ownership, he said, he and his sister, Anastasia, the two surviving children, agreed to transfer their shares in the beneficial ownership to the mother.  In any event, he said, they had always regarded the apartment as being the mother’s, the implication being that they didn’t see themselves as in fact giving up anything that was really their entitlement.  As he put it :

“We did this in order to help my mother, but we knew that the transfer of legal title of ‘the children’s shares’ was subject to her consent.  We always regarded the flat as belonging to my mother in any case.”

44. Joachim Chao said that he was the one who suggested, in or about June 1997, close to his wedding, that his mother should ask his father to transfer his one-eighth share in the apartment and formally make over full title to her.  In his affidavit, he explained his reasoning in the following terms :

“I suggested to my mother … that she should speak to my father and ask him to ‘give’ her his one-eighth share of the flat and to ask him to transfer the legal title of the flat solely into her name.  I was worried that he may not be prepared to do that.  So I suggested to her that she should buy out his share at the prevailing ‘market value’ in order to secure full beneficial ownership of the flat.  I made this suggestion to my mother as I was worried about her situation.  It was generally known in Hong Kong that my father was a wealthy businessman, however, he was not always generous or fair to her financially.  I knew that my mother hated asking him for money, so I had to push her to speak to him about the flat.  My sister and I thought that it was important for her to take full control of the flat, so she would not feel totally dependent on him.”

45. Joachim Chao continued in his affidavit by saying :

“My mother did speak to my father on or around 15^th June, 1997 about the flat.  He immediately agreed to sell his one-eighth share for the market price.  They agreed that the market price of the flat was approximately GBP500,000, and it was calculated that she should pay him HK$750,000.  I was told by my mother that she had paid my father this sum soon after 23 June, 1997.  As far as I was concerned the matter was settled and that my father was soon to transfer title of the flat to my mother.”

46. As to the relationship between herself and her husband in mid-1997, Elizabeth Chao said that it had deteriorated.  They were having difficulties in the marriage.  As a consequence, she said :

“I was concerned to safeguard my position as Rawley [the eldest son] had since passed away and Joachim and Anastasia both had stable careers.  Rawley left everything to me in his Will and Joachim and Anastasia both agreed that the property should be in my sole name.  Therefore, I decided to take matters into my own hands.”

47. The evidence showed that Elizabeth Chao and her deceased son had shared in the ownership of a New York apartment which was sold.

48. As to how it was that a figure of HK$750,000 was agreed upon for the husband’s beneficial share, Elizabeth Chao said :

“From time to time, Simon Agace had provided me with a verbal valuation of the property.  Around this time, I was told that the value of the property was around £500,000.00.  Therefore, the net value after the deduction of the outstanding mortgage principal was about £475,000.00.  The prevailing exchange rate was US$1.62 to the sterling pound giving a value in Hong Kong dollars of HK$750,000.00 for my husband’s one eighth share.

The sum of HK$750,000.00 (US$96,886.71) was transferred by me to my husband on 23 June 1997.  After the receipt of this sum by my husband, he no longer owned a beneficial interest in the property.”

49. That there was a transfer of HK$750,000 from Elizabeth Chao to her husband on 23 June 1997 was not denied.  Copy documents of the Chekiang First Bank Ltd speak to such a transfer.

50. The Chekiang First Bank documents were not, of course, proof absolute.  There could have been any number of reasons why, with the husband having diverse business interests, an arranged transfer through his wife could have been made.  But that being said, there was nothing to suggest that the transfer was clearly not for the purpose asserted by Elizabeth Chao.  It came at about the time Joachim Chao said he moved out of the London apartment, about the time he was marrying and about the time – plausibly, I think – he suggested to his mother that she should secure full beneficial ownership of the apartment for herself.

51. Of course, even though Elizabeth Chao may have paid her husband for his beneficial interest in the apartment, there still remained an interest only mortgage in place.  The affidavits of Elizabeth Chao and her son, Joachim, were to the effect that, Frank Chao having raised the mortgage loan in the first place for his own purposes, it was he who agreed to clear the debt.  Mortgage redemption quotes were obtained but not acted upon.  That such quotes were obtained was not disputed.  Three quotations dated 10 October 1997, 5 January 1998 and 20 December 1998 were exhibited in evidence.  Here again the documentary evidence meshed with Elizabeth Chao’s version of events.

52. As to the payment of the mortgage debt and formal transfer of full title, Elizabeth Chao said :

“My husband offered to prepay the mortgage and recover the amount from the life assurance policy on maturity.  He requested mortgage redemption quotes from Stroud and Swindon several times between 1997 and 1999 which he showed to me to indicate he was moving towards doing what was previously agreed, but he did not actually repay the mortgage until early 2000.

In early 2000, my husband prepaid the mortgage which showed that he was preparing to transfer the legal title to the property into my sole name as previously agreed.  However, his health was poor at the time and he was in hospital for a long period during this time.  I did not press him as he could not have dealt with this matter during February or March 2000, but I had no doubt that he would follow through and implement what had been agreed once he was better.”

53. As to the transfer itself, Elizabeth Chao said that by April 2000 her husband’s behaviour had made it impossible for married life to continue.  In the result, she instituted proceedings for divorce.  This led to negotiations between herself and her husband and the signing of the deed of separation on 30 June 2000.

54. To repeat, paragraph one of the deed was to the following effect :

“The Husband shall forthwith at his cost transfer all his legal and beneficial interest in the property [i.e. the London apartment] known as 19 Eresby House, Rutland Gate and Storeroom 19 and one carpark, London SW7 to the Wife free from any encumbrance.”

55. Paragraph one of the deed is to be read with paragraph 5 which was to the following effect :

“Upon the Husband compliance with his obligation in paragraph 1 above, the Wife hereby agrees to apply to withdraw her Petition for Divorce with no order as to costs.”

56. In my judgment, it is important to record that the major asset dealt with in the deed of separation was not the London apartment but was Frank Chao’s inheritance from the estate of his late father, an estate it seems of very considerable worth still in the process of being wound up.  In this regard, paragraph two of the deed said :

“The Husband hereby assigns 50% of his legal and beneficial interest in the estate of the Husband’s father Chao Tsao Yee who died on the 17^th May 1999 to the Wife having represented to the Wife that his share shall have a value of not less than HK$70 million and that therefore the value of the interest assigned to the Wife has and will have a value of not less than HK$35,000,000.00”  [my emphasis]

57. Again it will be seen that the phrase ‘legal and beneficial interest’ was employed, the same phrase in two successive clauses.  It was argued for the trustees that the phrase would not have been employed without a purpose, that it was drawn by lawyers and had to read therefore to mean that in both instances Elizabeth Chao acknowledged that a beneficial interest was to be transferred not simply bare title.

58. Indeed, as I understood it, Mr Maurellet, for the trustees, while he conceded that much of the earlier history expounded by Elizabeth Chao appeared plausible, argued that the correspondence entered into between her and her husband’s lawyers in negotiating the deed of separation, and in drafting it, revealed the true position.  As he put it, I should give particular weight to these documents because they plainly showed how the parties were conducting themselves and how they regarded ownership of the London apartment.  What Elizabeth Chao was now saying in her affidavits, he said, was to be viewed ‘with a healthy degree of scepticism.’

59. It had to be borne in mind, said Mr Maurellet that, when these negotiations were taking place, the husband was the subject of bankruptcy proceedings.  That being the case, surely it would have been of special importance that Elizabeth Chao should identify not merely the fact that she wished transfer of the London apartment into her name but also the fact that she was seeking no more than transfer of bare legal title.

60. Mr Maurellet pointed to the fact that an 11 April 2000, a few days after the issue of the divorce petition, the solicitors for Elizabeth Chao served notice to sever joint the tenancy of the London apartment.  That notice – essentially in standard form – was to the following effect :

“I, Elizabeth Chao … your fellow joint tenant at law and in equity of the property described in the Schedule [the London apartment] hereto hereby give you notice pursuant to the Law of Property Act 1925 Section 36(2) that I desire to serve our joint tenancy in equity so that as from the date of this Notice you and I shall hold the said property on trust for sale for ourselves as tenants in common in equal shares as if there had been an actual severance.”

61. Mr Maurellet pointed also to a letter from the husband’s solicitors dated 20 April 2000 in which reference is made to the husband’s ‘50% interest’ in the London apartment.  It is interesting to note, however, that this letter was not a letter offering settlement but instead provided Elizabeth Chao with a ‘general summary’ of her husband’s ‘current financial situation’.  It explained that the husband was due to inherit HK$70 million from his father’s estate but warned that he was involved in legal proceedings which could determine his ‘entire entitlement’ to his inheritance.  It explained that the husband’s shares in the family business, Wah Kwong Shipping Holdings, were charged to various banks.  It spoke of the husband owning race horses.  But then it went on to say :

“Our client is prepared to transfer to your client all his 50% interest in the joint property at 19 Eresby House, Rutland Gate and Storeroom 19, London SW7 1BG.”

62. Considered in context, I did not read that as necessarily amounting to a statement that the husband held a 50% beneficial interest.  It was equally, in my view, to be read as an acceptance by the husband that he did not count the London apartment as one of his substantive assets and was prepared – as the wife had sought – to transfer his bare title.

63. It was, of course, a fact that, in negotiating a settlement, Elizabeth Chao’s solicitors demanded that the husband transfer not simply bare title but beneficial title : see, for example, their letter of 19 June 2000.  The deed of separation was to the same effect.  The language was plain enough.  But did that amount to a knowing acknowledgement by Elizabeth Chao at that time that her husband in truth held a 50% beneficial interest in the apartment?

64. In other circumstances it may well, on balance, have had to be taken as amounting to just such an acknowledgement.  But I return to the fact that the letters were written and the deed drawn up in the context of family proceedings.  In such proceedings it is fundamental that, in looking to an equitable division of the assets, very little turns on the fact that one spouse owns an asset or may even have purchased it from the other spouse.  The first principle is that it remains a ‘family’ asset and will be apportioned as equity demands.  In family proceedings, therefore, little turns on the technicalities of ownership.  That being the case, in my view, it would have been understandable that the solicitors advising Elizabeth Chao would not have been so concerned with accurately describing the true nature of the husband’s interest but rather with ensuring that all of that interest, whatever it may be, should be transferred.

65. Little, if anything, would have been served at that time in debating the exact nature of the husband’s interest.  Equally, in my view, it would have been understandable that Elizabeth Chao would not have cared to quibble over the issue provided she was assured that all her husband’s interest, whatever in legal terms it may be, was given to her.

66. As for the notice of severance to which I have made reference, that is often a standard step taken to protect a client’s interests.  As such, in my judgment, it was not to be taken as necessarily revealing the true nature of the beneficial ownership of the London apartment at that time.

67. Having come to these determinations, it must not be assumed that I gave no weight at all to the plain language employed by the solicitors in negotiating the deed of separation.  But I was obliged to look at the evidence as a whole and to do so, in so far as the evidence would permit me, not in a narrow technical way but in a way that enabled me to bear in mind what would have been the factual realities.

68. In summary, while there were certain aspects of Elizabeth Chao’s case that caused an initial degree of concern, having considered the evidence and heard submissions, I was satisfied that, on balance, she had demonstrated :

(i) that her late husband had never owned more than a one-eighth beneficial interest in the London apartment, and

(ii) that in 1997, at the behest of his wife, he had transferred that beneficial interest to her at a fair market value, at least as the two of them in good faith believed it to be.

69. In the circumstances, I was satisfied that, whatever the deed of separation purported to agree, the husband at that time was only capable of transferring bare legal title to his wife and that is what was done.

70. In the light of those findings, I was satisfied that nothing of any value fell for consideration under s.42 of the Bankruptcy Ordinance.

71. Having found for Elizabeth Chao in respect of her first ground, I was satisfied that the issue was then fully determined and that there was no need to move to a determination of her second ground.  However, if only because it may be relevant in respect of costs, something briefly should be said of her second ground.

72. First, it should be recorded that, in my judgment, if Elizabeth Chao had been forced to rely on her second ground only, although not the easiest of the matters, I would have found against her.

Elizabeth Chao’s second ground

73. Mr Coleman SC, counsel for Elizabeth Chao presented her second ground of challenge on the following basis; namely, that the deed of separation, at the time it was signed, was a genuine compromise of extant matrimonial proceedings.  As such, it constituted good consideration and, in all the circumstances, it would be fair and just in terms of s.42 of the Bankruptcy Ordinance for the court to ratify at least paragraph One of the deed.  Mr Coleman argued in support of this ground of challenge that, if the Family Court in June 2000 had been asked to ratify the deed of separation, it is inconceivable that it would have refused to do so. 

74. The petition for divorce, said Mr Coleman, had been issued by Elizabeth Chao at a time when she had no knowledge of the bankruptcy proceedings instituted against her husband.  The petition had been founded on a genuine breakdown of the marriage brought about by the husband’s conduct.  There was no evidence of any substance, he said, to support the contention that the matrimonial proceedings had been simply an elaborate device to avoid assets falling into the hands of creditors.

75. As I have said, however, it was my opinion that, if the matter had rested on this court ratifying paragraph One of the deed of separation pursuant to s.42 of the Bankruptcy Ordinance, Elizabeth Chao would have found herself in difficulties.

76. Bright Island filed its petition for bankruptcy on 10 February 2000.  It was only on 6 April 2000, nearly two months later, when Frank Chao was seriously ill in hospital, that Elizabeth Chao filed her petition for divorce.  It was her case that at the time she had no knowledge of the bankruptcy proceedings.  That may be so.  Even if scepticism is aroused, there is no evidence to disprove it.  However, by 30 June 2000 when the deed of separation was signed, Elizabeth Chao, through those advising her, would have been well aware of most, if not all, of the following :

(i) That bankruptcy proceedings had been instituted against her husband and were current.

(ii) That judgment for a sum in excess of US$3 million had been obtained by Kwantung Bank against her husband.

(iii) That her husband had apparently failed to pay salaries due to certain ships’ crews.

(iv) That her husband’s shares in Wah Kwong, his main business, had been charged to various banks and had little, if any, net value.

77. In addition, Elizabeth Chao would have been aware that there had been scant; that is, inadequate, disclosure on the part of her husband in the on-going matrimonial proceedings.  It is a first principle that, absent compelling circumstances, a matrimonial settlement should not in prudence be agreed until the true nature and extent of the matrimonial assets are known.  However, in the present case, even though disclosure by Frank Chao had been inadequate, Elizabeth Chao had signed the deed of separation.  In such circumstances, taking all matters into account, I was of the opinion, on balance, that Elizabeth Chao, in signing the deed, would have been motivated, in part at least, by the consideration that she should secure for herself what she could before, almost inevitably, creditors in bankruptcy sought to include all the matrimonial assets in the bankrupt estate.

78. As Mr Maurellet, for the trustees, pointed out, Elizabeth Chao’s legal advisors would have been well aware of the requirement of s.42 when the deed of separation was signed.  He pointed to the fact that the deed of separation was not validated at the time by an order of the Family Court.  It was his submission that the probabilities pointed to the fact that it was not even submitted for validation because, if the court had been aware of all the circumstances, it may have refused validation. 

79. It was not for me to come to any finding of fact on that submission.  But, as I have said, it was clear on all the evidence that the deed was signed in full recognition of the husband’s grave financial difficulties being experienced at that time, those difficulties being contained in the context of a current petition for his bankruptcy presented to the Court of First Instance.

80. Of course, cases will arise in which a property adjustment order is made in matrimonial proceedings, that order having the effect of eliminating a bankrupt’s interest in a particular property, very often the matrimonial home.  But the fact that such an order has been made in matrimonial proceedings will not of itself remove the disposition from the reach of s.42 of the Bankruptcy Ordinance.  In this regard, for example, see In re Flint (a bankrupt) cited in para.14 above. 

81. There may be occasions, however, depending on the facts in each case, in which a wife’s right to claim financial relief in matrimonial proceedings from her husband may provide the necessary consideration to give sufficient value to prevent the transaction being considered to be a transaction at less than true value.  In this regard, see, for example, Re Abbott, ex p Trustee of Property of the Bankrupt v. Abbott [1983] Ch 45.  This was a case decided under s.42 of the Bankruptcy Act 1914.  A wife compromised her claim for a property adjustment order in return for a part of her husband’s share of the proceeds of sale of the home which they had jointly owned.  The wife had no knowledge of her husband’s insolvency.  The husband became bankrupt within two years of the consent order made in the matrimonial proceedings and his trustee applied to set aside the order.  The relevant part of section 42 provided that any settlement of property, not being a settlement made in favour of a purchaser in good faith and for valuable consideration, should be void in bankruptcy in the event of the settlor’s bankruptcy within two years of the settlement.  It was held that, in compromising her claim, the wife had given valuable consideration and that she had acted in good faith since she had at the time no knowledge of her husband’s insolvency.

82. In the present case, however, when the deed of separation was signed, Elizabeth Chao knew of her husband’s difficulties, particularly of the bankruptcy petition.  In addition, on the evidence put before me, it was not clear, even on balance, that she had necessarily compromised her claim in a manner which would afford her the protection of the principles enunciated in Re Abbott.

83. In summary, for the reasons briefly outlined, I would not have been prepared under s.42 of the Bankruptcy Ordinance to ratify the deed of separation insofar as it may have transferred any beneficial interest in the London apartment by Frank Chao to Elizabeth Chao.

Costs

84. On the basis that Elizabeth Chao had been successful, I ordered that there be an order nisi of costs in her favour.  I made it an order nisi because I was aware of the fact that, with two actions involved, although both now joined, there may be good reason to adjust that costs order.