RE: CHAN WOON WING ("the Debtor") and EX PARTE: LUN KEE POULTRY LIMITED ("the Petitioner")

HCB000144A/2000

HCB144/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO.144 OF 2000

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RE:	CHAN WOON WING ("the Debtor")
EX PARTE:	LUN KEE POULTRY LIMITED ("the Petitioner")

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Coram: Hon Le Pichon J in Court

Dates of Hearing: 5 and 12 May and 14 June 2000

Date of Order: 14 June 2000

Reasons Handed Down: 19 June 2000

 

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R E A S O N S

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1. On the third day of the hearing of a bankruptcy petition, counsel for the petitioner Lun Kee Poultry Limited ("the Company") informed the court that his client would not be pressing for a bankruptcy order. The bankruptcy petition was accordingly dismissed and after hearing counsel's submissions on costs, I awarded costs in favour of the respondent. Counsel for the Company applied for written reasons of the costs order on the basis that his client intended to appeal against it.

2. The bankruptcy petition was presented on the basis that the respondent was indebted to the Company in the sum of HK$1,036,887, being the balance due from the respondent to the Company as at 31 July 1999 under the Company's current account with the respondent as a director. The respondent is one of five directors of the Company. Prior to this bankruptcy petition, winding-up proceedings against the Company were commenced by another shareholder director, namely, Kwan Kam Wah ("Mr Kwan"). The statutory demand in the present case was served after the institution of those winding-up proceedings by Mr Kwan.

3. It would appear from the affirmation filed in support of the bankruptcy petition that the alleged indebtedness is founded on a Special Investigation Report prepared by accountants retained by the Company. It appears from the Special Investigation Report that the report itself was based, inter alia, on unaudited financial statements of the Company for the period 1 July 1998 to 31 July 1999.

4. The petition was set down for a one-day hearing which took place on 5 May 2000. At the commencement of the hearing, counsel for the Company maintained that viva voce evidence was unnecessary and that the court could reach a determination simply on the evidence filed. It was further submitted that the Company no longer had to rely on the Special Investigation Report because of the respondent's admission that $5 million of the Company's money had been paid into his account. The Company accepted the respondent's explanation of what he did with $4 million of that sum, but insisted that it was incumbent on the respondent as a matter of law to account for the balance, namely, the sum of $1 million. Of course, this was inconsistent with the Company's case that the respondent was indebted to it not for $1 million but for $1,036,887 precisely.

5. At the end of that day's hearing, I concluded that it was necessary to hear the evidence of the respondent on certain matters arising from the evidence filed. Directions were then given for the respondent to file a further affirmation (which was duly done on 9 May 2000) and for his attendance for cross-examination at the adjourned hearing on 12 May. At that hearing, counsel for the Company sought leave to file further evidence in reply. As a result, cross-examination of the respondent did not proceed and the hearing was further adjourned.

6. Meanwhile, the Company issued a subpoena requiring Mr Kwan to testify at the hearing which had been adjourned to 15 June. The respondent was duly cross-examined and in the course of that examination, it emerged that there were certain bank transfer or deposit slips in existence. Those had not been exhibited and the respondent was directed to make them available after the lunch adjournment. Mr Kwan who appeared in response to the subpoena was also cross-examined by counsel for the Company. At the conclusion of Mr Kwan's examination, the petition was effectively abandoned.

7. Counsel for the Company submitted that there should be no order as to costs; alternatively, that his client should only bear a part rather than the whole of the respondent's costs.

8. Under the general rule of costs following the event, it would be appropriate to order costs against the Company. I should not depart from the normal rule without good reason. There is none. In my judgment, there was no valid basis for the statutory demand : the Company could not have honestly believed that the respondent was indebted to it for the sum of $1,036,887.

9. It is necessary to state the essential facts on which my conclusion is based. There were two payments. The first was a cheque drawn on the Company's account with the Nanyang Commercial Bank in the sum of $1.5 million on 28 August 1998 and the second was another cheque drawn on the same account in the sum of $3.5 million on 12 September 1998. Both cheques were deposited into the respondent's bank account with the same bank. The cheques were signed by two of the Company's authorized signatories. It was the respondent's case that all the directors were present at the bank when these transfers took place and that the monies were received by him as agent for the Company to be dealt with as directed by the Company. The Company was indebted to Mr Kwan and it was with the knowledge and consent of all present that the monies were paid by the respondent into Mr Kwan's account immediately after the monies were deposited into his account. The Company never sought to adduce evidence to rebut the evidence of the respondent as to the circumstances of the transfers. Rather, it acknowledged that there was no issue as to the first payment of $1.5 million. What I find extraordinary is that the Company never bothered to explain why it paid $3.5 million to the respondent on 12 September 1998. The non-production of the bank deposit slips by the respondent until the eleventh hour was immaterial in that it did not in any way affect the explanation the respondent had given.

10. A bankruptcy petition is a serious matter and should not be brought unless the petitioner honestly believed the debt to be due. On the facts, the Company could not have reasonably believed that the respondent was truly indebted to it as alleged.

11. The bankruptcy proceedings have every appearance of having been brought in order to exert pressure on Mr Kwan in the winding-up proceedings with whom the respondent was perceived to be siding in the dispute between the shareholders. Had an application been made for costs on a different basis (such as on an indemnity basis), I would readily have entertained such an application. The Company's strategy was little short of disgraceful.

12. I see no valid reason for depriving the respondent of costs where he has been subjected to considerable and unnecessary stress in having to contest a bankruptcy petition which was wholly unmeritorious.

 

 

 

Representation:

Mr Benjamin Chain, instructed by Messrs Bobby Tse & Co., for the Petitioner

Miss Karen Cheung, instructed by Messrs Liu, Chan & Lam, for the Debtor

 

HCB144/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO.144 OF 2000

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RE:	CHAN WOON WING (Holder of Hong Kong Identity Card No.XXXXXX) ("the Applicant")
EX PARTE:	LUN KEE POULTRY LIMITED ("Company")

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Coram: Hon Le Pichon J in Chambers

Date of Hearing: 18 January 2000

Date of Decision: 18 January 2000

 

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D E C I S I O N

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1. This is an application for consent by Chan Woon Wing ("the Applicant") pursuant to section 42 of the Bankruptcy Ordinance. Subsection (1) provides as follows :

" 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."

The application is opposed by Lun Kee Poultry Limited ("the Company"). The relevant chronology is as follows.

2. On 1 December 1999, the Applicant entered into a sale and purchase agreement for the sale of a property registered in his name to Tsoi Tsz Ying and Symin Tuen Nicola as purchasers for HK$3,115,000. Completion is due to take place today at 5 p.m.

3. The Company served a statutory demand on the Applicant on 15 December 1999. The Applicant is a taxi driver and not conversant with the English language. Surprisingly, the statutory demand served on him was in the English language only. This is contrary to what is the normal practice these days where the recipient may not be conversant with English. Statutory demands are normally in both Chinese and English to forestall any difficulty the recipient may have in understanding what he has to do if he wishes to set aside the statutory demand. No steps were taken by the Applicant to set aside the statutory demand and on 24 December 1999, he entered into the formal sale and purchase agreement.

4. On 12 January 2000, the Company issued a bankruptcy petition against the Applicant. On 15 January, the Applicant sought legal advice.

5. I should also mention that the Applicant is a shareholder and one of five directors of the Company. There is an ongoing dispute between the shareholders of the Company and a section 168A petition, coupled with section 177 relief was presented on 16 July 1999.

Is completion of a pre-petition sale and purchase agreement a 'disposition' within section 42?

6. The first question which arises is whether section 42 applies to completion of a pre-petition sale and purchase agreement. Counsel for the Company submitted that in view of subsection (6) of section 42, the court's consent is wholly unnecessary and for that reason, no consent should be given. Subsection (6) reads as follows :

" A disposition of property is void under this section notwithstanding that the property is not or, as the case may be, would not be comprised in the bankrupt's estate; but nothing in this section affects any disposition made by a person of property held by him on trust for any other person."

7. That question has previously been considered. The relevant authorities are set out in Re M.W. Lee & Sons Enterprises Ltd [1999] 2 HKC 686 at 691F to 692F. In Re French's (Wine Bar) Ltd [1987] BCLC 499, Vinelott J held that in the context of the equivalent of section 182 of the Companies Ordinance, the completion of an unconditional contract which was capable of being specifically enforced and which was entered into before the presentation of the petition was not a disposition of the property of the company. To similar effect is Re Margart Pty Ltd [1985] BCLC 314.

8. Whilst on the authorities it would appear that completion of a pre-petition contract which is unconditional and can be specifically enforced does not constitute a disposition of the property of the debtor, as a matter of practice and prudence, the court's consent is regularly obtained. If, as counsel for the Company submits, it is unnecessary for such consent to be obtained under section 42, then I cannot see any harm in making the order. The unsecured creditors would not be worse off if, in any event, the transaction does not involve any disposition within section 42.

Is consent under section 42 a bar to section 49 relief?

9. The Company's principal concern is that the transaction may be at an undervalue and if a bankruptcy order were subsequently to be made in the petition, any consent on the part of the court would prejudice the trustee in bankruptcy's right to apply for an order under section 49 of Cap. 7.

10. What is the evidence before the court? On its face, the transaction is an arm's length transaction. There is at present no evidence to the contrary. It is not a case where the consideration is obviously a sham. The property has an area of 732 sq.ft. and the purchase price is $3.1 million odd. Although there is no valuation as such before the court, there is a letter from Midland Realty International Limited ("Midland") "certifying" that the price of $3.115 million as at 1 December 1999 was a reasonable market price at the time. Midland was the agent in the transaction and for that reason, it might be said that its views cannot be considered impartial. On the other hand, as an agent, it stands to receive a commission out of the transaction and it would normally be in the interest of the agent to endeavour to obtain the highest price. Be that as it may and whilst I do not regard the Midland letter as a valuation as such, it is at least some support that the price is reasonable.

11. So all the Company is able to say is that it does not have evidence to show that the transaction is at an undervalue as it has not had the time to look into the question or to come up with any evidence since it only had notice of the application late yesterday. It is not suggested that there is reason to believe that the sale is at an undervalue or is otherwise improper which, but for time constraints, could be made good.

12. Even if one were to assume for present purposes that the transaction, contrary to what appears on its face, is at an undervalue, what is the effect of any consent of the court to that transaction?

13. What section 42 does is to render void ipso facto any "disposition" that is within the section unless the consent of the court is obtained. The court's consent renders the transaction a pre-petition transaction such that it would not ipso facto be void. So, in the present case, had the transaction been concluded before the service of the petition, assuming, for example, that completion had taken place prior to the presentation of the petition on 12 January 2000, the transaction would not be deemed to be void. Nevertheless, were a bankruptcy order to be made on the petition within five years of completion, it is a transaction that is susceptible to a section 49 order should the facts warrant such an order. The types of orders that can be made in that situation are to be found in section 51A. For example, the court could require that any property transferred as part of the transaction be vested in the trustee as part of the bankrupt's estate, or require any person to pay in respect of benefits received by him from the debtor, such sums to the trustee as the court may direct : see paragraphs (a) and (d) of section 51A.

14. So it seems to me that if the court were to grant its consent under section 42, such consent would not preclude the trustee in bankruptcy from applying for an order under section 49, assuming the facts warranted the making of such an application. Put differently, the court's consent under section 42 is not determinative of the bona fides of the transaction.

15. It is tolerably clear that in the absence of the court's consent under section 42, the transaction which is due for completion later this afternoon, would in all probability be derailed. As there is nothing irregular on the face of the transaction, and no evidence of any impropriety or of suspicious circumstances (such as a sale to connected persons), a prima facie normal commercial transaction should be allowed to take effect and that it should not be upset by the withholding of consent unless there is good reason so to do. In the present case, there is none.

16. What (if any) prejudice would result to the Company? First of all, as the petition has not been heard, a bankruptcy order is not bound to be made. The alleged debt underlying the petition is premised on a report or investigation prepared by a firm of accountants retained by the Company. This is not a case where the debt cannot be disputed, for example, where moneys are due under banking facilities granted to the debtor. It would not appear to me to be right to proceed on the basis that the petition is bound to succeed. At the moment, that is wholly at large. Secondly, although the Company is concerned that the transaction may not be bona fide, the Company will not be prejudiced by the court granting its consent pursuant to section 42. As I endeavoured to explain earlier, section 49 remains applicable. The court's consent does not put the bona fides of the transaction beyond question : the court is not here being asked to make any findings as to the bona fides of the transaction, but simply to consent to the completion of a transaction that was entered into well before any petition was in place.

17. In these circumstances, it would not be a proper exercise of my discretion to withhold consent which would in all likelihood lead to the transaction falling through with possibly grave consequences for the Applicant and the purchasers in respect of which there may not be any or any adequate redress.

18. Accordingly, I will make an order in granting the court's consent to the transaction described in paragraph 1 of the summons pursuant to section 42. Paragraph 2 seeks additional relief relating to the application of the proceeds of sale. That does not fall within the purview of section 42 and I do not propose to make an order in terms of paragraph 2 of the draft order.

19. Costs be in the petition.

 

 

 

Representation:

Mr Benjamin Chain, instructed by Messrs Bobby Tse & Co., for the Company

Miss Karen Cheung, instructed by Messrs Liu, Chan & Lam, for the Applicant

Miss Angel Li, for the Official Receiver