In Yeung Lui Ming v Tang Mo Lin Irene  HKCFI 1848, the Hong Kong Court of First Instance set aside a sale of cemetery sites and a transfer of shares by a bankrupt individual on the basis that they constituted transactions at an undervalue and/or disposals with intent to defraud the creditors.
In arriving at the decision, the Court considered the adequacy of consideration based on what a reasonably well-informed potential purchaser was prepared to pay in arm’s length negotiations. The Court will look at all of the circumstances to determine whether the transactions were commercially sensible or a fraud committed to prejudice the creditors’ positions.
Wong Yuk Tung (the “Bankrupt“) transferred his 20% shareholding in Cheong Tai (the “Company“) to the only other director and shareholder of the Company, Tang Lo Min Irene (“Tang“), for HK$60 million (the “Share Transfer” and the “Sale Agreement“). The Sale Agreement also provided that the Bankrupt would procure that another of his companies, Bright Success Management, would transfer the legal and beneficial ownership of 38 cemetery sites it held in Mainland China to Tang (the “Cemetery Transfer“).
Following their appointment over the Bankrupt’s estate, the Trustees-in-Bankruptcy (the “Trustees“) sought a declaration that the transactions were transfers at an undervalue (under section 49 of the Bankruptcy Ordinance (Cap. 6) (“BO“)) and/or dispositions with intent to defraud creditors under section 60 of the Conveyancing and Property Ordinance (Cap. 219) (“CPO“). The Trustees also sought an order for the defendants (Tang and the Company) to repay the shortfall to them in the consideration which should have been paid.
Section 49(3) of the BO defines a transfer at an undervalue as “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“. It is a question of fact if the consideration actually paid was “significantly less” than the amount that a reasonably well-informed purchaser would be prepared to pay. In determining this question, the Court will consider absolute and relative values and the nature of the transaction.
In this case, although the Court was willing to accept that the valuation of the Sale Transfer at HK$60 million was not substantially less than the value in money’s worth of the sale shares, the Bankrupt never received the full consideration because part of it consisted of unsecured debt owed to the Bankrupt by one of his failing companies. This rendered those debts worthless and that part of the consideration illusory.
Although the Cemetery Transfer was made by Bright Success to Tang’s nominee company, Wintop, and so was not a transfer entered into by the Bankrupt himself, the procurement obligation was given by the Bankrupt and it consisted of a loss in value of his shares in Bright Success. As such, this was a hidden benefit to Tang which should be treated as consideration not received and therefore set off against the consideration received.
The Court considered that payment of consideration representing 13% less than the actual value constituted a transfer at undervalue. When factoring in the ‘illusory’ aspects of the consideration paid (e.g. the worthless unsecured debts), the underpayment was as high as 79%.
The Court also found that the Bankrupt had an intent to defraud his creditors through the Share Transfer. The Bankrupt and Tang had a close business relationship over three decades: Tang had lent over HK$530 million to the Bankrupt and provided the Bankrupt and his son employment and a home in one of her luxurious apartments on Magazine Gap Road. In the circumstances, the Court drew the inference that the Bankrupt transferred the sale shares at an undervalue with intent to defraud the creditors, as he felt morally obliged to improve Tang’s position. The claim failed with regard to the Cemetery Transfer as Bright Success and Wintop were not party to the proceedings.
The Court declared that the Sale Agreement was at an undervalue and the disposition of the sale shares was with the intention of defrauding creditors. Since the sale shares had since been consolidated, the Trustees were not able to recover them in specie and it would be futile for the Court to declare the transfers void. Therefore, Tang was ordered to pay damages to the estate of the Bankrupt in the amount of the shortfall in consideration.
This case serves as a useful reminder that the Court takes a holistic and practical approach in determining whether a bankrupt’s disposal was at an undervalue and/or with intent to defraud creditors. The Court does not just look at valuation but will look at all the circumstances to determine whether a transfer is an arm’s length bargain that makes reasonable commercial sense or not. Even where transfers involve corporate vehicles with separate legal personalities, the Court’s holistic analysis still can catch indirectly such transfers and result in damages being awarded or transfers being declared void.
For more information, please contact Gareth Thomas, Dominic Geiser, Alexander Aitken, Philip Lis or your usual Herbert Smith Freehills contact.