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Patrick Cowley And Wong Wing Sze Tiffany The Joint And Several Trustees In Bankruptcy Of The Property Of The Bankrupt v All Powerful Investment Ltd

Judgment Cited authorities 4 Cited in Precedent Map Related
Vincent
Judgment Date30 December 2020
Neutral Citation[2020] HKCFI 3173
Judgement NumberHCMP1076/2020
Subject MatterMiscellaneous Proceedings
CourtCourt of First Instance (Hong Kong)
HCMP1076/2020 PATRICK COWLEY and WONG WING SZE TIFFANY the Joint and Several Trustees in Bankruptcy of the Property of the Bankrupt v. ALL POWERFUL INVESTMENT LTD

HCMP 1076/2020

[2020] HKCFI 3173

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1076 OF 2020

_______________

IN THE MATTER OF LAU YU also known as Jaffe Lau (柳宇) (“the Bankrupt”)

and

IN THE MATTER of sections 42, 49, 50, 51A and 58 of the Bankruptcy Ordinance (Chapter 6)

____________

BETWEEN

PATRICK COWLEY and WONG WING SZE TIFFANY
the Joint and Several Trustees in Bankruptcy of the Property of the Bankrupt		 Plaintiff

and
ALL POWERFUL INVESTMENT LIMITED Defendant

____________

Before: Deputy High Court Judge William Wong SC in Court
Date of Hearing: 22 December 2020
Date of Decision: 30 December 2020

_______________

J U D G M E N T

_______________

APPLICATION

1. By an originating summons dated 27 July 2020 (the “Originating Summons”), Patrick Cowley and Wong Wing Sze, the Joint and Several Trustees in Bankruptcy of the Mr. Lau Yu (the “Bankrupt”), the Plaintiff, apply for, inter alia, declarations and orders that (1) a legal mortgage dated 18 March 2017 in favour of All Powerful Investment Limited (the “Defendant”), be void pursuant to section 42 of the Bankruptcy Ordinance, Cap.6 (the “Ordinance”) and (2) five legal charges executed against a total of 13 properties as set out in Schedule 2 to 6 of the Originating Summons do constitute a transaction at undervalue pursuant to section 49 of the Ordinance and are invalid and void.

MATERIAL FACTS

2. The Bankrupt was a director and the CEO of General Nice Resources (Hong Kong) Limited (“General Nice”) which went into liquidation on 5 December 2016.

3. In June 2011, the Bankrupt executed an unlimited joint and several guarantee in favour of HSBC in respect of facilities provided by HSBC to General Nice.

4. In 2015, HSBC made demands against General Nice for the repayment of outstanding facilities. This resulted in a settlement agreement between, inter alia, HSBC, General Nice and the Bankrupt dated 31 March 2016 (the “Settlement Agreement”).

5. However, the Bankrupt failed to perform his contractual obligations under the Settlement Agreement.

6. On 21 November 2016, HSBC issued a statutory demand to the Bankrupt for the payment of US$43,456,862.76 under the Settlement Agreement and the Guarantee.

7. On 6 January 2017, HSBC presented a bankruptcy petition against the Bankrupt (the “Petition”).

8. On 5 September 2017, by the order of Deputy High Court Judge Le Pichon (the “Bankruptcy Order”), the Bankrupt was adjudged bankrupt.

9. The Defendant was a company incorporated in Hong Kong with the Bankrupt as its sole shareholder and director.

10. In January 2015, the Bankrupt transferred his shareholding in the Defendant to All Powerful Holding Limited (“APHL”) which was incorporated in December 2014. APHL is held by a family trust established by the Bankrupt.

11. The Bankrupt continued to be the sole director of the Defendant until the day before the Bankruptcy Order.

POST PETITION MORTGAGE

12. On 18 March 2017, i.e., a date after the presentation of the Petition, the Bankrupt executed a legal mortgage over his property in London in favour of the Defendant.

13. Under section 42 of the Ordinance, unless validated by the Court, disposition of property (wherever located) made by the bankrupt in the period between the bankruptcy petition and the bankruptcy order are void. See Re Chao Sze Bang Frank, Deceased, A Bankrupt, HCB549/2000 and HCMP2752/2005, unreported, 28 December 2006 and Sanders v Donovan [2012] BPIR 219.

14. “Disposition” of property include the grant of security interests. In Site Preparations Ltd v Buchan Development Co Ltd 1983 SLT 317, Lord Ross at 319 said:

“In my opinion, “disposition” must be given its natural meaning. If a company creates in favour of a creditor a security over its property which attaches to the property, it is making a disposition of its property in that it is dealing with or settling or transferring its property to another. Creating a floating charge which attaches to the property of the company is dealing with the company’s property, and is thus a disposition of the company’s property.

Some support for this view can be found in a number of English cases such as Re Park Ward & Co. Ltd and Re Steane’s (Bournemouth) Ltd., where it appears to have been accepted without argument that a debenture granted by a company was a disposition of the company’s property made by the company within the meaning of s.227 (or its precursor). I was also referred to Re Gray’s Inn Construction Co. Ltd., but I did not find it of much assistance in this connection, although it does give another example of a “disposition”, namely, paying into a bank account a cheque drawn in favour of the company against which the winding-up order was made.”

15. There is no dispute that the post-petition mortgage falls within section 42 of the Ordinance. Mr Cheung for the Defendant accepts that the post-petition mortgage was executed without approval of the court.

16. In the circumstances, I have no difficulties in finding that the post-petition mortgage is void.

TRANSACTION AT UNDERVALUE

17. The Petition was presented on 6 January 2017. However, in the 1-year period immediately preceding that, the Bankrupt executed various legal charged over his properties in Hong Kong, London and Australia, in favour of the Defendant.

18. Insofar as Hong Kong properties are concerned:

(1) A mortgage was executed on 23 June 2016 and the consideration is stated as “[the Bankrupt] has applied to the [Defendant] to grant to [the Bankrupt] general credit facilities and the [Defendant] has agreed to grant the same to such extent and upon and subject to such terms and conditions as shall from time to time be mutually agreed or be stipulated by the [Defendant]…”

(2) Another mortgage was executed on 30 June 2016 and the consideration is stated again as “[the Bankrupt] has applied to the [Defendant] to grant to [the Bankrupt] general credit facilities and the [Defendant] has agreed to grant the same to such extent and upon and subject to such terms and conditions as shall from time to time be mutually agreed or be stipulated by the [Defendant]…”

19. In respect of overseas properties, a mortgage of the Bankrupt’s Australian properties was executed on 5 July 2016 and on the face of the mortgage, no consideration was provided. Similarly, two mortgages of the Bankrupt’s London properties were executed on 18 October 2016 and 22 December 2016 respectively and on the face of the mortgages, no consideration was provided.

20. Under section 49 of the Ordinance, the Court may avoid transactions at an undervalue entered into by a bankrupt within 5 years of the bankruptcy petition. (See Re: Leung Siu Wai, a bankrupt HCB1440/2014, unreported, 9 July 2020, per Deputy High Court Judge Maurellet SC)

21. Where the transactions occurred within 2 years of the bankruptcy petition, there is no need to establish the bankrupt’s insolvency at the time of the transactions. (See Re Ding Yi, a bankrupt HCMP 486/2017, unreported, 24 August 2020, per Au-Yeung J.; Yeung Lui Ming and Lai Kar Yan as the Joint and Several Trustees of the Property of Wong Yuk Tung (A Bankrupt) v Tang Mo Lin, Irene and Another, HCA 1197/2015, unreported, 25 July 2019 at §61 per Deputy High Court Judge To.)

22. A mortgage may be a transaction at an undervalue. In Official Receiver for Northern Ireland v Stranaghan [2010] BPIR 928, Hart J. at §§7-8 said:

“7. In support of the application Mr Gowdy (who appears on behalf of the Official Receiver) relied principally upon the decision of the Court of Appeal in Nurkowski (A Bankrupt), Re; Hill v Spread Trustee Company Ltd and Warr [2006] EWCA Civ 542, [2007] 1 WLR 2404, [2006] BPIR 789, and in particular the observations of Arden LJ at paras [93], [96] and [98]. The facts of Hill are complex, but I consider the following principles can be extracted from those paragraphs:

(i) A grant of security can amount to a transaction for no consideration.

(ii) Whether consideration is given is an objective test.

(iii) If forbearance by the creditor is relied upon to constitute consideration there has to be evidence that the creditor was pressing for repayment.

…

8. Apart from Hill v Spread Trustee Company, there is authority that the prior existence of a debt from A to B is not sufficient valuable consideration for the giving of a security from A to B to secure that debt…”

23. In Hill v Spread Trustee Co Ltd [2007] 1 WLR 2404, Arden LJ at 2438A-E said:

“Miss Newman, however, sought to argue that as a matter of law the grant of security involved no diminution in the value of Mr Nurkowski’s assets. Therefore the fact that...

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