Chen Yung Ngai Kenneth, One of the Joint and Several Trustees of the Property of the Bankrupt, Li Shu Chung v. Johnnie Yam, Jacky Lee & Co (A Firm) and Others

HCMP 2221/2021

[2024] HKCFI 361

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2221 OF 2021

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JUDGMENT

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Backgrounds

1.This is the trial of the Amended Originating Summons dated 30 December 2021 (“Amended OS”) whereby the plaintiff as trustee-in-bankruptcy (“Trustee”) claims inter alia for:

(1)  a declaration that the transfers from Li Shu Chung (“Bankrupt”) to the 1^st defendant (“JYJL”) between 15 January 2019 and 5 April 2019 totalling GBP 118,699.59 (“1^st Sum”) be declared void pursuant to s.42 of the Bankruptcy Ordinance (Cap 6) (“BO”); and

(2)  an order that the 1^st Sum be vested in the Trustee.

2.The Bankrupt is a serial litigant who has since 2015 been involved in and lost several court proceedings.  Costs orders aggregating over HK$11.1 million were made against the Bankrupt which formed the basis of his bankruptcy.  The courts have consistently made adverse findings against the Bankrupt’s credibility[1].

3.The 1^st defendant JYJL is a firm of solicitors.  The 2^nd defendant (“KLG”) is another firm of solicitors.  The 3^rd defendant (“Joesh”) is a BVI company which is either owned or controlled by the Bankrupt and/or his wife Ms Karen Li (“Karen”)[2].  Joesh was added as the 3^rd defendant pursuant to the Order of Master Sabrina Ho dated 13 July 2022.

4.After the bankruptcy petition (“Petition”) was presented on 24 September 2018 and before the bankruptcy order was made on 11 October 2019, the Bankrupt transferred out of his bank account maintained with NatWest Bank (“Account”) a total of:

(a)  £118,699.59 (“1^st Sum”) to JYJL between 15 January 2019 and 5 April 2019 (as particularised in Annex A of the Amended OS); and

(b)  £26,847.18 (“2^nd Sum”) to KLG between 23 January 2019 and 23 April 2019.

5.It is the Trustee’s case that the 1^st Sum and 2^nd Sum (collectively the “Sums”) were dispositions of property made by the Bankrupt after the day of presentation of the Petition and before the vesting of the Bankrupt’s estate in the Trustee.  They are thus void under s.42 of BO.

6.Prior to the commencement of these proceedings, the Trustee demanded the return of the Sums from JYJL and KLG respectively.  JYJL and KLG did not initially respond to such letters.  Instead, Messrs. Jones Day (“Jones Day”), purportedly acting for Joesh, responded to the Trustee’s letters on 20 August 2021[3] claiming that:

(1)  The Bankrupt was jobless and at all material times his maintenance and financial support came from his wife, Karen; and

(2)  The Sums were monies paid into the Account by Karen for the Bankrupt to hold such monies on trust earmarked for settlement of JYJL and KLG’s fee notes.

7.The Trustee contends that despite repeated requests, Joesh, Jones Day, JYJL and KLG have not produced any meaningful evidence to support the contention that the Sums had been held on trust by, and therefore did not beneficially belong to, the Bankrupt.  The Trustee thus initiated these proceedings.

8.Subsequent to the institution of these proceedings, the claim against KLG was eventually settled upon KLG’s payment of the 2^nd Sum (HK$269,004.40).  The present trial thus involves only JYJL and Joesh in respect of the 1^st Sum.

9.I will eventually analyse the evidence in detail but it is pertinent to note the Trustee’s case at this juncture.  The Trustee’s contends that even after the commencement of these proceedings and that ample opportunities had been given for to the defendants to file evidence, the contentions of Joesh and JYJL remain bare assertions without any supporting documentary evidence.  Furthermore, the versions of stories put forward by Joesh, Jones Day, and JYJL are different and inconsistent.  The Trustee submits that the alleged trust arrangement for payment of the alleged legal fees is vague and incredible.  There are thus factual disputes which require this Court to assess and weigh the evidence adduced by the defendants.

Proper approach to evidence

10.It is not in dispute between the parties that this case is governed by the provisions of s.42 of BO. S.42(1) provides:

“ 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.”

11.S42(3) further provides:

“ 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.”

12.S42(6) provides for an exception on which JYJL and Joesh rely:

“ 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.”

13.S42 BO applies to dispositions of the bankrupt’s property, regardless of the location of such property (i.e. whether in Hong Kong or abroad): Re Lau Yu (A Bankrupt) [2021] 3 HKC 28, [2020] HKCFI 3173 at §13.

14.In the present case, documentary evidence clearly establishes (and it is not disputed by JYJL and Joesh) that the 1^st Sum constitutes such a disposition of property under S42.  It is further accepted by both counsel representing JYJL and Joesh that the burden of proof is on them to establish the exception under S42(6).  Counsel for JYJL and Joesh further accepted that this S42(6) exception is unlike a restitutionary defence in that it is insufficient to establish that payment of the 1^st Sum was supported by valuable consideration.  The sole question, as both counsel for JYJL and Joesh put in their respective skeleton arguments, is whether the 1^st Sum was paid pursuant to a Quisclose trust.

15.In response to the Amended OS and the 1^st Affirmation made by the Trustee in support of the Amended OS, JYJL filed (a) the 1^st Affirmation of Yam Kee Cheong (“1^st Yam”) in support of Joesh’s joinder application; and (b) the 2^nd Affirmation of Mr Yam (“2^nd Yam”) in opposition to the Amended OS. For Joesh, it had filed (a) the 1^st Affirmation of Karen Li (“1^st Karen”) in support of Joesh’s joinder application; (b) the 2^nd Affirmation of Karen Li (“2^nd Karen”)[4] in opposition to the Amended OS; and (c) the 3^rd Affirmation of Karen Li (“3^rd Karen”).  Joesh’s application for leave to rely on the 3^rd Karen at this hearing was in fact the subject of a Summons returnable before me on the day of the hearing.  The Trustee initially objected to the application on the ground of lateness and further submitted that it did not prove anything. In the end, Mr Chen, counsel for the Trustee fairly accepted that this court could consider the contents of the 3^rd Karen on de bene esse basis. 

16.As mentioned earlier, this Court has to resolve disputed questions of fact on the basis of the affidavit evidence filed.  At a hearing before Master Sabrina Ho on 13 July 2022, apart from pursuing its joinder application, Joesh also applied for these proceedings to be continued as if it was begun by writ and/or for directions to be given on cross-examination on the basis that there would be factual disputes.  The Trustee opposed to both applications.  In the end, the learned Master did not accede to Joesh’s conversion application and did not give any direction on cross-examination of deponents.  Thereafter and up to this hearing, the Trustee had not applied for the cross-examination of the defendants’ deponents despite his stance that the deposed trust arrangement for payment of alleged legal fees is vague and incredible.

17.Mr Lai, counsel for Joesh submitted that the Originating Summons is not a procedure to be used to resolve factual disputes. In the absence of an order that a matter be continued as if begun by writ, or that there should be cross-examination of the deponents of the affirmations, if the Court is of the view that the factual issues cannot be resolved on affirmation evidence alone at the substantive hearing of the originating summons, the originating summons must be dismissed. Mr Lai referred me to Yuen Yin Kwan v Sino Insurance Brokers Group Ltd. [2020] 1 HKLRD 1117 and Harrison Liu v. Personal Representative of the Estate of Li Kwok Mi [2021] HKCFI 2527.

18.In Yuen Yin Kwan, the applicant applied by an originating summons for declaration that certain documents filed with the Companies Registry concerning her appointment as the company secretary of the respondent company were null and void because she never accepted the appointment.  The respondent resisted the application and deposed that the applicant had in fact agreed to the appointment.  At §10 of the Judgment, Recorder Stewart Wong SC said:

“ Despite the factual dispute, there is no direction that the matter be continued as if begun by writ, or that there should be cross-examination of the deponents of the affirmations before me. When I raise this at the hearing, both counsel ask me to resolve the dispute by considering the affirmation evidence of the deponents each saying that the other side’s case is unbelievable. I shall therefore consider whether the case of each side as presented on affirmation is believable, so as to see if I can resolve the dispute on affirmation evidence. If I cannot, then, as I have pointed out to Mr Pang, counsel for the applicant, he would fail on the burden of proof and I would have to dismiss this Originating Summons, given that there is no application to have the matter continued as if begun by writ or for cross-examination. Mr Pang fairly accepts this to be the case.”

It is to be noted that in the end, the learned Recorder analysed the affidavit evidence in detail and was able to come to a conclusion, on balance of probability, that the applicant’s evidence should be accepted. His Lordship thus granted the relief sought.

19.Harrison Liu was also the hearing of an originating summons concerning disputed beneficial ownership of a property.  DCHJ Paul Lam SC was faced with a situation not materially different from that facing this Court. His Lordship said (at §§84 to 86):

“ 84. O.28, r.8(1), RHC, provides that where, in the case of a cause or matter begun by originating summons, it appears to the Court at any stage of the proceedings that the proceedings should for any reason be continued as if the cause or matter had been begun by writ, it may order the proceedings to continue as if the cause or matter had been so begun and may, in particular, order that any affidavits shall stand as pleadings, with or without liberty to any of the parties to add thereto or to apply for particulars thereof. O.28, r.4(3), RHC, provides that, the Court shall, at as early a stage of the proceedings on the summons as appears to it to be practicable, consider whether there is or may be a dispute as to fact and whether the just, expeditious and economical disposal of the proceedings can according best be secured by hearing the summons on oral evidence or mainly on oral evidence and, if it thinks fit, may order that no further evidence shall be filed and the summons shall be heard on oral evidence or partly on oral evidence and partly on affidavit evidence, without or without cross-examination of any of the deponents, as it may direct.

85. This case has come before the Court on 6 November 2019 (which was the first hearing of the originating summons), 2 June 2020 (which had been treated as the second directions hearing though it was supposed to be the substantive hearing), and 2 December 2020 (which was the third directions hearing). Apparently, P has not applied for an order that these proceedings should continue as if they had been begun by writ under O.28, r.8; or that the deponents of the affirmations should give oral evidence and be cross examined under O.28, r.4(3). If P intended to challenge the credibility of D4’s affirmation evidence, this is what he should have done. On the other hand, upon reading the affirmations in reply made by P and Lau Hoi Yiu, D4 should appreciate that P did not accept the truthfulness of his factual assertions. He should have considered to make an application pursuant to O.28, r.8 or O.28. r4(3) if P did not do so. I was informed at the hearing that the question whether oral evidence should be heard had been considered at the hearing on 6 November 2019. It is unclear what submissions had been made by the parties, and why the learned Judge decided to set down the case for hearing with 2 days reserved without oral evidence. Nevertheless, as I mentioned, both parties confirmed that they would like the Court to decide the issues on affirmation evidence only. They must take the consequence.

86. I accept that, in these circumstances, it does not mean that I must, or should, accept whatever D4 has said. However, there must be a very high hurdle for P to surmount in order to convince me why I should reject D4’s evidence.”

20.On the basis of the above authorities, I asked Counsel for the Trustee Mr Chen whether he would accept that the Trustee bears a high hurdle in seeking to convince this Court that assertions of the trust arrangement should be rejected.  Mr Chen sought to distinguish the two authorities on the basis that in the present case, the burden of proof rests on the defendants.  With respect, I cannot agree. The court’s approach as propounded by these two authorities relates to how the court (faced with factual disputes) should assess the evidence of a deponent in an originating summons proceedings when the opponent challenges the veracity of his/her evidence and yet does not seek to put him/her under cross-examination.  The court’s approach does not and should not depend on where the burden of proof lies.  In fact, it is clear from the dictum of Recorder Stewart Wong SC that he applied the same standard towards the evidence of each opposing party.

21.In my view, the approach of DHCJ Paul Lam SC is both fair and sound in principle. Since the Trustee disputes the affidavit evidence of the defendants yet consciously refrained from subjecting the respective deponent to cross-examination, this Court is deprived of the benefit of observing and analysing the responses of that deponent under cross-examination which is the customary process of testing one’s credibility in our adversarial system.  The Trustee should thus be prepared to convince this Court that the evidence of this deponent should nonetheless be rejected as not credible solely on the basis of inherent probabilities in the light of undisputed evidence and all available contemporaneous records/documents adduced.  Whether this hurdle is crossed or not depends on the facts and evidence of each case.  What I understand DHCJ Paul Lam SC as saying is that it is normally not an easy task and the Court would not lightly reject the affidavit evidence of such a deponent.

22.However, in the Written Reply Submissions filed by the Trustee, Mr Chen raised another submission which is in my view more fundamental.  He submitted that on the authority of Bieber v Teathers Ltd [2013] 1 BCLC 248, even putting the defendants’ evidence to the highest, no Quistclose trust can be established as a matter of law. In other words, Mr Chen submitted that the evidence adduced by the defendants, even if true, still could not as a matter of law establish the Section 42(6) exception.

23.In Bieber, Patten LJ (at §14) first quoted the principles of law summarized by the learned trial judge concerning the establishment of a Quistclose trust as reviewed and expounded by the House of Lords in Twinsectra Ltd v Yardley [2002] 2 All ER 377 as follows:

“ [16] First, the question in every case is whether the payer and the recipient intended that the money passing between them was to be at the free disposal of the recipient: Re Goldcorp Exchange [1994] 2 BCLC 578, [1995] 1 AC 74 and Twinsectra Ltd v Yardley [2002] 2 All ER 377 at [74], [2002] 2 AC 164.

[17] Second, the mere fact that the payer has paid the money to the recipient for the recipient to use it in a particular way is not of itself enough. The recipient may have represented or warranted that he intends to use it in a particular way or have promised to use it in a particular way. Such an arrangement would give rise to personal obligations but would not of itself necessarily create fiduciary obligations or a trust: Twinsectra [2002] 2 All ER 377 at [73], [2002] 2 AC 164.

[18] So, thirdly, it must be clear from the express terms of the transaction (properly construed) or must be objectively ascertained from the circumstances of the transaction that the mutual intention of payer and recipient (and the essence of their bargain) is that the funds transferred should not be part of the general assets of the recipient but should be used exclusively to effect particular identified payments, so that if the money cannot be so used then it is to be returned to the payer: Toovey v Milne (1819) 2 B & Ald 683 and Quistclose Investments [1968] 3 All ER 651 at 654, [1970] AC 567 at 580.

[19] Fourth, the mechanism by which this is achieved is a trust giving rise to fiduciary obligations on the part of the recipient which a court of equity will enforce: Twinsectra [2002] 2 All ER 377 at [69], [2002] 2 AC 164. Equity intervenes because it is unconscionable for the recipient to obtain money on terms as to its application and then to disregard the terms on which he received it from a payer who had placed trust and confidence in the recipient to ensure the proper application of the money paid: Twinsectra at [76].

[20] Fifth, such a trust is akin to a “retention of title” clause, enabling the recipient to have recourse to the payer’s money for the particular purpose specified but without entrenching on the payer’s property rights more than necessary to enable the purpose to be achieved. It is not as such a “purpose” trust of which the recipient is a trustee, the beneficial interest in the money reverting to the payer if the purpose is incapable of achievement. It is a resulting trust in favour of the payer with a mandate granted to the recipient to apply the money paid for the purpose stated. The key feature of the arrangement is that the recipient is precluded from misapplying the money paid to him. The recipient has no beneficial interest in the money: generally the beneficial interest remains vested in the payer subject only to the recipient’s power to apply the money in accordance with the stated purpose. If the stated purpose cannot be achieved then the mandate ceases to be effective, the recipient simply holds the money paid on resulting trust for the payer, and the recipient must repay it: Twinsectra [2002] 2 All ER 377 at [81], [87], [92] and [100], [2002] 2 AC 164.

[21] Sixth, the subjective intentions of payer and recipient as to the creation of a trust are irrelevant. If the properly construed terms upon which (or the objectively ascertained circumstances in which) payer and recipient enter into an arrangement have the effect of creating a trust, then it is not necessary that either payer or recipient should intend to create a trust: it is sufficient that they intend to enter into the relevant arrangement: Twinsectra at [71].

[22] Seventh, the particular purpose must be specified in terms which enable a court to say whether a given application of the money does or does not fall within its terms: Twinsectra at [16].

[23] It is in my judgment implicit in the doctrine so described in the authorities that the specified purpose is fulfilled by and at the time of the application of the money.  The payer, the recipient and the ultimate beneficiary of the payment (that is, the person who benefits from the application by the recipient of the money for the particular purpose) need to know whether property has passed.”

24.After noting that the above summary of principles were agreed by the parties at the trial, Patten LJ continued to say [at §15]:

“ Both sides accepted this as an accurate statement of the relevant principles. I would only add by way of emphasis that in deciding whether particular arrangements involve the creation of a trust and with it the retention by the paying party of beneficial control of the moneys, proper account needs to be taken of the structure of the arrangements and the contractual mechanisms involved. As Lord Millett stressed in Twinsectra Ltd v Yardley [2002] 2 All ER 377 at [73], [2002] 2 AC 164 and the judge repeated in para [17] of his own judgment, payments are routinely made in advance for particular goods and services but do not constitute trust moneys in the recipient’s hands. It is therefore necessary to be satisfied not merely that the money when paid was not at the free disposal of the payee but that, objectively examined, the contractual or other arrangements properly construed were intended to provide for the preservation of the payer’s rights and the control of the use of the money through the medium of a trust. Critically this involves the court being satisfied that the intention of the parties was that the moneys transferred by the [payor] should not become the absolute property of [payee] (subject only to a contractual restraint on their disposal) but should continue to belong beneficially to the [payor] unless and until the conditions attached to their release were complied with.” [Emphasis added]

25.Mr Chen pointed out (and this was not disputed by counsel for the 1^st and 3^rd defendants) that in all the affirmations filed by Karen, she never gave evidence as to any conversation, discussions or communication between herself and the Bankrupt before she effected the transfer of money from her bank account to the Account.  Neither did she give evidence as to any conversation, discussions or communication between herself and the Bankrupt after she effected such transfer.  It is important to set out the relevant parts of Karen’s evidence:-

(1)  In 1^st Karen at §8.3.1, she said: “At all material times, [the Bankrupt] was already jobless, hence, lacked his own financial income and could only be supported financially by me.”.  Then at §8.3.2, she said: “In respect of each of the 13 payments made to the 1^st defendant and the 5 payments made to the 2^nd defendants, the monies were paid into [the Bankrupt’s] account by me for [the Bankrupt] to hold such monies on trust for the Company earmarked for settlement of each of the 1^st and 2^nd defendants’ fee notes with any balance meant for [the Bankrupt’s] living expenses”.

(2)  In 2^nd Karen, she said to the same effect at §§13.1 and 13.2. Then at §13.4.3, when she tried to explain why the subject transfers were labelled by her as “Living Expenses” in the bank statements of the Account, she said: “In so far as the sums intended for the payments of legal fees was concerned, there was surely no intention that the sums would be at the free disposal of Ken otherwise then for the settlement of the outstanding fee”.

26.Mr Chen submitted that the above bare assertions of Karen do not amount to evidence of what was the mutual intention between her and the Bankrupt.  At most, they are evidence of Karen’s own subjective intention which is irrelevant [see the Sixth principle quoted in §23 hereinabove].  Furthermore, since Karen gave no evidence as to the conversations, discussions or communication between herself and the Bankrupt both before and after the said transfers of money into the Account, there is no evidence from which this Court can objectively ascertain and construe the “structure of the arrangements and the contractual mechanism involved”. There is no evidence from which this Court can objectively conclude whether it was the mutual intention of Karen and the Bankrupt that: (i) the moneys transferred were not at the free disposal of the Bankrupt; and (ii) the moneys transferred should not be part of the general assets of the Bankrupt but should be used exclusively to effect particularly identified payments so that if the moneys could not be so used then they are to be returned to Karen, who retained her beneficial interest over the moneys.  Mr Chen emphasized that the mere fact that Karen had paid the moneys to the Bankrupt for the latter to use it in a particular way is not of itself enough [see the Second principle quoted in §23 hereinabove].

27.On the contrary, Mr Chen referred me to the contemporaneous bank statements of the Account which show a picture that is inconsistent with the existence of such a mutual intention:

(1)  Prior to 20 September 2017, the Account was in zero balance.  On that day, The Bankrupt paid in £50,200.  Then up to mid-October, the Bankrupt effected numerous payments in the nature of expenditures[5].

(2)  The Bankrupt continued to make expenditure payments in the subsequent months until the balance was reduced to £30,846.77 on 17 January 2018 when he topped the Account up for another £10,000[6].

(3)  The Bankrupt continued to top up the Account from time to time in regular sums of £10,000 which were described as “Li SC Self Transfer”[7].  In the meantime, numerous payments in the nature of expenditures were made out of the Account until 1 June 2018[8]. So up to this stage, the Bankrupt was clearly using his own monies in the Account.

(4)  Then on 4 June 2018, there was apparently a credit of £62,833.74[9].  There is no evidence of the source of this credit although the reference to “601236” indicates that it could be a cheque.  Karen did not say in her affirmations that it was her money. Furthermore, one can see in later bank statements that deposits were made into the Account from time to time by “Charlotte Fisher”.  It would thus seem that the Bankrupt continued to have other sources of fund contrary to what Karen sought to portray.

(5)  The next substantial credit to the Account came from Karen on 30 October 2018 in the sum of £20,000 described as “Living Expenses”.  It was an online transaction by Karen who deliberately described it as for living expenses[10].  By the time of that paid-in, the Account was still in healthy credit balance of £19,325.

(6)  The Bankrupt continued to made payments of expenditure out of the Account leaving a credit balance of £29,463.36 before Karen made another online deposit of £20,000, again described by her as “Living Expenses” on 5 November 2018[11].

(7)  On 30 November 2018, Karen made another online deposit of £20,000, again described by her as “Living Expenses” even though the Account still had a credit balance of £13,751.44[12].

(8)  Karen made her online deposit of “Living Expenses” of £20,000 in two tranches on 27 December 2018 and 3 January 2019[13].  Again, before such deposits, the Account was still in health credit balance.

(9)  Then on 9 January 2019 and 11 January 2019, Karen made two more online deposits of £20,000 each, describing them consistently as “Living Expenses”[14].  Thus, up to this time, it is readily apparent that Karen would from time to time deposit roundup figures of “Living Expenses” into the Account for the Bankrupt to use at his free disposal.

(10)  On 14 January 2019, Karen made another online deposit of £20,000 describing it as “Living Expenses”[15].  Certainly, she did not earmark this deposit as for paying legal fees of the Company.  This is to be contrasted with a number of occasions when Karen made deposits into the Account for some specific purposes, she would stipulate such purposes in her online transaction description and would not describe them as “Living Expenses”[16].  Furthermore, after receiving Karen’s deposit, the Bankrupt continued to make 8 expenditure payments before the first subject payment of £9,649.90 to the 2^nd defendant on 15 January 2019.  Similarly, prior to making the 2^nd subject payment of £9,659.01 to the 2nd defendant on 16 January 2019, the Bankrupt continued to make 4 payments of expenditure.

(11)  Then on 17 January 2019, Karen made another online deposit of £20,000 describing it as “Living Expenses”[17].  Again, she did not earmark this deposit as for paying legal fees of the Company.  After receiving Karen’s deposit, the Bankrupt continued to make 6 expenditure payments before the 3^rd subject payment of £9,664.78 to the 2^nd defendant on 17 January 2019.  Similarly, prior to making the 4^th subject payment of £9,614.67 to the 2nd defendant on 18 January 2019, the Bankrupt continued to make 3 payments of expenditure.

(12)  Then on 21 January 2019, Karen made another deposit of £20,000 into the Account describing it again as “Living Expenses”.  Another deposit of £20,000 described by Karen as “Living Expenses” was made to the Account on 23 January 2019[18].  The last deposit Karen by into the Account in the month of January was effected on 31^st January 2019.  Again, it was described by her as “Living Expenses”[19].

28.Counsel for the 1^st defendant Ms Lau and counsel for the 3^rd defendant Mr Lai did not challenge the legal principles expounded in Beiber.  Ms Lau submitted that the 1^st defendant has no first hand knowledge of the trust. Both Ms Lau and Mr Lai urged the Court to note the proximity of the timing of Karen’s deposits into the Account and that of the Bankrupt’s paying out to the 1^st defendant.  They submitted that the total of £40,000 paid by Karen on 14^th and 17 January 2019 matched closely with the total of £38,588.36, all made to the 1^st defendant.  They also stressed that the Bankrupt was the point of contact between the 1^st and 3^rd defendants such that Karen should not be criticized for not effecting payments to the 3^rd defendant directly.

29.In reply, Mr Chen submitted, and I agree with him, that the submissions of Ms Lau and Mr Lai provided no adequate answer to the point that there was no evidence from which this Court could objectively conclude that there was a mutual intention that the funds transferred should not be part of the general assets of the Bankrupt but should be used exclusively to effect payment of legal fees, so that if the money cannot be so used then it is to be returned to Karen.  On the contrary, when Karen made the two deposits, she consciously described them as for “Living Expenses”.  Similarly described payments made by her into the Account had habitually been at the Bankrupt’s free disposal. Karen provided no evidence of her conversations, discussions or communication with the Bankrupt before and after she made the subject deposits.  Karen’s evidence at most amounted to evidence of her subjective understanding or intention. That is insufficient to establish a Quistclose trust.

30.In my judgment, on this point alone, I can conclude that the 1^st and 3^rd defendants have failed to discharge their burden of proof of establishing an exception under Section 42(6).  In the circumstances, it is strictly unnecessary for me to rule on whether the factual version put forward by Karen was incredible.

31.For the sake of completeness, I am of the view that even applying the high hurdle requirement explained by DHCJ Paul Lam SC in Harrison Liu, and basing on inherent improbabilities and inconsistency with contemporaneous documents, I could conclude that Karen’s evidence was incredible for the following reasons:

(1)  the bare assertion of Karen that the subject transfers were “earmarked for settlement of each of the 1^st and 2^nd defendants’ fee notes” is directly contradicted by contemporaneous bank statements of the Account as mentioned in paragraph 27 above.  As a matter of inherent probability, if Karen had intended to restrict the Bankrupt’s use of the funds transferred, she could have and would have expressly stated or indicated so.  Instead, she consciously labelled the subject transfers as “Living Expenses”. Karen’s attempt to explain why this label was adopted is in my view entirely absurd and incredible; and

(2)  it is apparent from Karen’s own evidence that she did not care to find out what were the exact amounts of the alleged fee notes before she effected the subject transfers.  Neither is there evidence that she subsequently took steps to ensure that the Bankrupt did remit moneys to the 1^st and 2^nd defendants to settle the relevant fee notes.  Such cavalier attitude is inherently incompatible with an intention to ‘earmark” her transfers for the specific purpose of settling fee notes of the 1^st and 2^nd defendants. It is also inherently incompatible with an intention that the transfers would have to be returned if not so applied for such specific purposes.

32.In conclusion, I find for the plaintiff and make the following orders:

(1)  the transfers from the Bankrupt Li Shu Chung to the 1^st defendant between 15 January 2019 and 5 April 2019 totalling GBP118,699.59 (details of which are set out in Annex A annexed to the Amended Originating Summons herein) are hereby declared void pursuant to section 42 of the Bankruptcy Ordinance (Cap.6);

(2)  the said sum of GBP118,699.59 be vested in plaintiff as one of the joint and several trustees of the property of the Bankrupt Li Shu Chung; and

(3)  there be a costs order nisi that the 1^st and 3^rd defendants do pay to the plaintiff costs of these proceedings to be taxed, if not agreed, on party-and-party basis. This costs order nisi shall become absolute if no application for variation is made within 14 days from the date hereof. 

Mr David Chen and Ms Stephanie Wong, instructed by DS Cheung & Co, for the Plaintiff

Ms Queenie Lau and Ms Natalie So, instructed by Johnnie Yam, Jacky Lee & Co, for the 1^st Defendant

Mr Lai Chun Ho, instructed by Jones Day, for the 3^rd Defendant