Chen Yung Ngai Kenneth and Sun Wing Sze (Being the Joint and Several Liquidators of Best Year Enterprises Ltd (in Liquidation)) v. Sin Kwok Lam and Another

HCMP 973/2022

[2025] HKCFI 741

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 973 OF 2022

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BETWEEN

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JUDGMENT

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INTRODUCTION

1.This is the trial of the Originating Summons dated 21 July 2022 by which Best Year Enterprises Limited (“the Company”), through the Liquidators, seeks recovery of 3 payments totalling HK$14,300,000 from the 1^st Defendant (the “Subject Payments”), the particulars of which are as follows:

(1) The sum of HK$7,000,000 paid to the 2^nd Defendant on 18 October 2017 on the grounds of transaction at an undervalue or unfair preference.

(2) The sum of HK$5,000,000 paid to the 1^st Defendant himself on 3 November 2017 on the ground of unfair preference.

(3) The sum of HK$2,300,000 paid to the 2^nd Defendant on 10 January 2018 on the grounds of transaction at an undervalue or unfair preference.

2.At the conclusion of the trial, the Liquidators indicate to this Court that they will not be claiming against the 1^st Defendant, Mr Sin Kwok Lam (“Mr Sin”), on the ground of transaction at an undervalue. Hence, the only live issue before this Court is unfair preference within the meaning of section 266 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (the “Ordinance”).

MATERIAL FACTS

3.The facts in this case are relatively straightforward. The Company was incorporated on 19 June 2007 in the British Virgin Islands. Mr Sin, the 1^st Defendant, was the sole director and shareholder of the Company until 5 March 2018.

4.Mr Sin was also the sole shareholder and director of Enhance Pacific Limited (“EPL”), the 2^nd Defendant. It is significant that Mr Sin admits that EPL at all material times was his corporate vehicle and alter ego.

5.Mr Sin was at all material times also the chairman and executive director of First Credit Finance Group Limited (“First Credit”). The Company had a bank account maintained with The Hongkong and Shanghai Banking Corporation Limited (account no. 400-819330-838) (“the HSBC Account”). The Company never had active business operations and was a special purpose vehicle to hold the shares of First Credit.

6.In early 2016, the Company entered into the following agreements:

(1) The Company deposited 365,656,000 shares of First Credit (“the First Credit Shares”) into CSL Securities Limited (“CSL”) under a margin loan agreement (“CSL Margin Loan Agreement”). Although the exact execution date of CSL Margin Loan Agreement is unknown, on 8 April 2016 and 4 May 2016, CSL deposited over HK$40 million to the Company, and Mr Sin withdrew HK$40 million from the Company on the same days.

(2) By Revolving Loan Facility dated 1 January 2016 (“Mr Sin’s Loan Agreement”), Mr Sin agreed to provide revolving loan facility line up to HK$100,000,000 to the Company. It is pertinent to note that Mr Sin accepted that it was not contemplated that the purpose of Mr Sin’s Loan Agreement was to repay loans under CSL Margin Loan Agreement.

(3) By Margin Client’s Agreement dated 16 February 2016 (“Jun Yang Margin Agreement”), the Company deposited 173,000,000 shares of First Credit in a margin securities trading account (“Jun Yang Margin Account”) of Jun Yang Securities Company Limited (“Jun Yang”) in return of provision of loan from Jun Yang.

7.On 10 November 2016, the Company sold 21,200,000 shares of First Credit and retained 559,856,000 shares of First Credit. In other words, a total of 538,656,000 (i.e. 173,000,000 + 365,656,000) shares of First Credit then owned by the Company were deposited to Jun Yang and CSL as collaterals pursuant to Jun Yang Margin Agreement and CSL Margin Loan Agreement.

8.The share price of First Credit shares fell from HK$0.530 per share on 31 August 2017 to HK$0.100 on 30 September 2017.

9.On 8 September 2017, Jun Yang informed Mr Sin that the debit balance of the Jun Yang Margin Account (HK$55,155,175.64) exceeded the value of the collateral securities (HK$51,660,000). Jun Yang made several margin calls to the Company from 8 to 15 September 2017, but the Company failed to comply with the margin calls . Thus, Jun Yang liquidated the collateral securities in September 2017.

10.As of 25 September 2017, the Jun Yang Margin Account had a debit balance of HK$29,001,258.73.

11.On 26 September 2017, Jun Yang demanded the Company to pay the outstanding sum under the Jun Yang Margin Agreement. On 16 October 2017, Jun Yang issued another demand letter to the Company.

12.On 18 October 2017, the Company paid HK$7,000,000 by cheque to EPL. On 3 November 2017, the Company paid HK$5,000,000 by cheque to Mr Sin.

13.The share price of First Credit dropped significantly shortly before 24 November 2017, and trading of shares in First Credit was suspended with effect from 9 a.m. on 24 November 2017.

14.On 10 January 2018, the Company paid HK$2,300,000 by cheque to EPL.

15.In February and March 2018, the Company sold the First Credit Shares:

(1) On 9 February 2018, the Company sold the First Credit Shares to EPL for a cash consideration of HK$9,982,408.80 (at HK$0.0273 per share). However, there is no documentary evidence of the Company’s receipt of the cash consideration. I accept that Mr Sin was evasive when he was asked how EPL paid the consideration to the Company. He said the consideration was not necessarily in cash without positively stating how the consideration was paid, when he clearly was privy to the transaction. Yet the relevant document (i.e., Form 2) stated that the consideration was in cash.

(2) On 2 March 2018, Mr Sin sold all his shareholding in EPL to a Mai Shao Hang.

(3) On 8 and 12 March 2018, EPL sold 145,160,000 and 129,840,000 shares of First Credit to an unknown buyer at HK$0.08 per share and HK$0.09 per share in cash respectively.

16.On 5 March 2018, the Company paid HK$200,000 to Messrs. Titus & Co., leaving a balance of HK$392.24 at the HSBC Account.

17.Then Mr Sin transferred the share of the Company to Mr Yan Xiancheng at US$1.

18.There was no further activity in the HSBC Account until it was closed on 27 September 2018. Mr Sin admitted that the Company was doomed to fail because there was nothing left in the Company after the sale of the First Credit Shares.

19.On 8 and 12 March 2018, EPL sold 145,160,000 and 129,840,000 shares of First Credit to an unknown buyer at HK$0.08 per share i.e. HK$11,612,800 and HK$0.09 per share i.e. HK$11,685,600 respectively. The sale price of First Credit shares to the unknown buyer(s) was much higher than the sale price of First Credit shares from the Company to EPL.

20.On 13 July 2018, Jun Yang filed the Statement of Claim in HCA 2815/2017 to claim against the Company for the outstanding sum under the Jun Yang Margin Agreement.

21.On 3 January 2019, Jun Yang obtained a judgment of HK$32,592,234.85 against the Company under HCA 2851/2017.

22.On 28 February 2019, Jun Yang presented a petition against the Company.

23.On 24 June 2019, the Company was wound up by the Court.

24.It is the Liquidators’ case that at the time the Subject Payments were transferred out from the Company to Mr Sin and EPL, the Company was insolvent on cash flow basis. It is not disputed that at the material time when the Subject Payments were made, the Company could not pay the sum due to and demanded by Jun Yang.

25.Further, the main assets of the Company were cash at bank in the HSBC Account, and shares of First Credit. The share price of First Credit dropped significantly in September 2017. The trading of shares of First Credit has been suspended on 24 November 2017. Thus, the value of the shares of First Credit was very low when the Company made the payment to EPL on 18 October 2017 and Mr Sin on 3 November 2017, and practically zero when the Company made the payment to EPL on 10 January 2018.

26.The Liquidators submitted that even if one assumes that the subsequent sale of First Credit Shares by the Company to EPL did take place and was a genuine transaction (which is not admitted), the value of the First Credit Shares was only HK$9,982,408.80.

27.Mr Lee for the 1^st Defendant submitted that the Court is not precluded from taking into account the intrinsic value of the assets held by the Company when considering the company’s financial position as a whole. Although First Credit had a market price at the material time, Mr Sin has testified that it was holding at least HK$1 billion worth of net assets at the time and there is no apparent reason to doubt this as Mr Sin was then the chairman and executive director of First Credit. This would have more than covered the Company’s various liabilities at the time. However, this is not the way one determines the balance sheet position of the Company. Listed securities are valued by its market price not by its intrinsic value. In any event, Mr Sin had not produced any evidence to support his case that First Credit was then holding at least HK$1 billion net assets.

28.As to the Company’s cash assets, the cash balance of the HSBC Account were:

(1) HK$13,058,402.62 as at 18 October 2017;

(2) HK$16,839,387.02 as at 3 November 2017;

(3) HK$8,252.47 as at 10 January 2018.

29.On the other hand, the Company was heavily in debt. The Liquidators received a total of 10 proof of debts as of July 2022 claiming around HK$257 million.

30.The major creditors include Jun Yang. According to the Statement of Claim in HCA 2851/2017, this figure stood at HK$29,277,247.70 as of 25 September 2017.

31.Mr Sin himself filed 2 proofs of debt in the amounts of about HK$19,000,000 and HK$133,517,591.

32.I have no hesitation to find that at the time when the Subject Payments were made to Mr Sin and EPL, the Company was insolvent. The Company could not pay its debts due to Jun Yang. The market value of the First Credit Shares was far lower than the sum due to Jun Yang. As a matter of fact, the Company transferred its First Credit shares to EPL on 9 February 2018 at less than HK$10 million.

ANALYSIS

33.The 1^st Defendant, Mr Sin, advances several separate defences in the present proceedings.

(A) EPL has never been a creditor, surety or guarantor of the Company’s debts or liabilities.

34.It is submitted that EPL has never been a creditor, surety or guarantor of the Company’s debts or liabilities. In the absence of any evidence of its being used to perpetrate fraud or evade legal obligation and liability, the mere fact that it is wholly owned by Mr Sin is neither here nor there and does not justify ignoring EPL’s separate legal personality or circumventing a mandatory statutory requirement.

35.It is submitted that this goes to this Court’s jurisdiction. There is no getting round the clear statutory wording, which exhaustively defines the persons against whom an unfair preference can be established i.e. a creditor, surety or guarantor of the Company’s debts or other liabilities. The incontrovertible evidence shows that (i) the Company owed debts to Mr Sin (ii) EPL was not a guarantor or surety of those debts or the Company’s other liabilities (iii) the Company did not owe any other debt or liability to EPL.

36.It is therefore unsurprising that in Sam Express (HK) Limited v Supreme Day Investment Limited (Unreported, HCMP 80/2007, 12 June 2007), DHCJ L Chan (as he then was) observed (at §16) that there must be evidence that the transferee was a creditor of the insolvent company before there could be any question of fraudulent preference. If there was no such evidence, the fact that the transferee was an associate of the company would be of no significance. The same must also apply to unfair preference.

37.The Company seeks to rely on the fact that EPL was Mr Sin’s “alter ego” but this does not in any way assist. One naturally starts with Court of Appeal’s judgment in Winland Enterprises Group Inc v Wex Pharmaceuticals Inc & Anor [2012] 2 HKLRD 757, where it was held that the court will only lift the corporate veil of a company if (i) it is a façade or a puppet of the parent company used to perpetrate fraud or (ii) evade legal obligation and liability. However, unless the use of the corporate veil for such illegitimate purpose is proved, the use of the façade or that a company is a puppet of its parent company without more does not justify the lifting of the corporate veil (at §54).

38.In Dransfield Holdings Limited (in liquidation) v Pearl Oriental Oil Limited (formerly known as Pearl Oriental Innovation Limited) (Unreported, HCMP 1392/2011, 29 May 2012). DHCJ L Chan (as he then was) accepted Mr Godfrey Lam SC’s (as he then was) submission that “the corporate veil should not be lifted by the mere fact that it was a wholly owned subsidiary of the defendant…Otherwise, the statutory provision allowing all the shares of a company to be owned by a sole shareholder will be defeated” (at §50). Further, the fact that the company had no apparent business did not make it a sham for evading liability in law (at §51). The unfair preference claim was accordingly struck out (at §§67-70).

39.There is no evidence to show (and there has never been any allegation) that EPL was used to perpetrate fraud, or to evade legal obligation and liability. Applying established principles binding on this Court, there is no conceivable scope to lift the corporate veil of EPL in the present case. It follows that the Court has no jurisdiction to order Mr Sin to repay Subject Payments 1 and 3, which were made to EPL.

40.There is no dispute about the legal principles relied upon by Mr Lee for the Mr Sin. However, I do not find it necessary at all to pierce the corporate veil in the present case.

41.It is Mr Sin’s own evidence under cross-examination that the purpose of the Subject Payments was to repay loans owed by the Company to him personally. However, the Company paid to EPL instead of Mr Sin in respect of the two payments totalling HK$9,300,000. Mr Sin decided whether the Company would pay the money to him or EPL. When the Company made the EPL Payments, the Company’s liability to Mr Sin would be reduced by the same amount. Therefore, from the perspective of the Company, making the EPL Payments to EPL had the same effect of making the payments to Mr Sin.

42.Further, after EPL received the EPL Payments, the money would and did go to Mr Sin personally.

43.Hence, it is quite clear to this Court that, as a matter of analysis, EPL received the payments as agent for and on behalf of Mr Sin. On Mr Sin’s own evidence, EPL was a conduit or an intermediary through which the sums paid to EPL were then channelled back to Mr Sin. In other words, all the Subject Payments were paid to Mr Sin.

44.I am not at all convinced that a creditor can simply cause money to be first transferred to a third party (not a creditor as defined under the Ordinance) and then arrange that third party to transfer the same sum to himself (a creditor) to get around the statutory prohibition under section 266 of the Ordinance. That cannot be right.

45.Further, Mr Ho for the Liquidators also informed this Court that the Liquidators would not claim against EPL, hence, there is no issue of double recovery.

(B) Mr Sin was a secured creditor of the Company

46.Secondly, Mr Sin submitted that he was a secured creditor of the Company qua assignee of CSL’s rights over the Pledged Shares under the CSL Margin Loan Agreement pursuant to an oral agreement or by way of subrogation. Being entitled to be paid the Subject Payments in priority to other unsecured creditors anyway, no preference arises. A secured creditor (to the extent of his security) cannot be preferred since he cannot be said to be worse off when the company goes into liquidation.

47.Mr Sin’s case is that he was at the material time a secured creditor of the Company holding security of a value in excess of the Subject Payments and was therefore entitled to be paid the Subject Payments, either directly or indirectly through EPL, ahead of other unsecured creditors. Mr Sin asserts that:

(1) On 1 January 2016, he entered into the Revolving Loan Facility Agreement with the Company whereby he, as lender, agreed to provide a revolving loan facility up to a limit of HK$100,000,000.00 to the Company, as borrower for a period of 36 months.

(2) At all material times before September 2017, the Company has held 559,856,000 First Credit Shares. 173,100,000 of such shares were deposited into a margin securities trading account with Jun Yang pursuant to the Margin Agreement.

(3) Under the CSL Margin Loan Agreement, the Company’s remaining 386,756,000 First Credit shares were deposited into a margin securities trading account with CSL and used as security (the “Pledged Shares”) for the provision of a loan of approximately HK$100 million by CSL to the Company.

(4) In or around mid-2017, pursuant to an oral agreement entered between Mr Sin and the then Responsible Officer of the Convoy Group, Mr Mak Kwong Yiu Mark, CSL agreed to assign its rights over the Pledged Shares to Mr Sin on an ongoing basis in proportion to the amount repaid by the Company under the CSL Margin Loan Agreement (the “Oral Agreement”).

(5) From around August 2017 up to January 2018, Mr Sin then procured various third parties to pay more than HK$92 million into the Company and 4 companies, namely Create Profit Enterprises Limited, Gold Medal Hong Kong Limited, China Asset Credit Limited and Blackmarble Capital Limited (“Create Profit”, “Gold Medal”, “China Asset”, “Blackmarble”, or collectively the “4 Companies”), to extend loans of HK$42 million to the Company to repay the outstanding debts owed by the Company to CSL under the CSL Margin Loan Agreement.

(6) By January 2018, Mr Sin had cleared off the Company’s outstanding debts owed to CSL. Mr Sin confirmed this at a public press conference on 22 January 2018. The Company also accepts that, for the purpose of the present proceedings, its debts to CSL are of nil value.

(7) When CSL later reneged from the Oral Agreement and refused to allow Mr Sin to withdraw the Pledged Shares, Mr Sin duly procured the Company to commence HCA 187/2018 against CSL on 30 January 2018.

(8) Negotiations persisted until July 2018, during which Mr Sin and Ng Wing Fai and Hock Yap of the Convoy Group agreed that Mr Sin could pay a lesser amount of HK$68 million to Convoy Collateral Limited (“CCL”) to (i) pay off Mr Sin’s own personal debts owed to CCL and settle, inter alia, HCA 187/2018 and (ii) procure CSL to assign its security over the Pledged Shares to Mr Sin personally i.e. the Revised Agreement.

(9) On 16 July 2018, Mr Sin managed to procure HSBC to issue a cashier order in the amount of HK$68 million to CCL.

(10) On 31 July 2018, Mr Sin, EPL, the Company, CCL and CSL executed a Settlement Deed in full and final settlement of all disputes between them.

48.The significance of this is that from around mid-2017 onwards, given that Mr Sin has repaid more than HK$14,300,000 i.e. the total amount of the Subject Payments worth of the Company’s debts owed to CSL, he would be entitled to CSL’s security of an equivalent amount and be paid the same ahead of other unsecured creditors of the Company.

49.As a matter of legal analysis, this would have arisen by way of equitable assignment and/or subrogation:

(1) Under common law, a security interest is strictly limited to four types: contractual lien, pledge, mortgage, or equitable charge. A contractual lien or pledge both depend on the delivery of possession of an asset and therefore cannot apply to intangibles such as shares: Huen Wai Kei v Choy Kwong Wa Christopher [2014] 4 HKLRD 782 at §75 per Kwan JA (as she then was). It follows that the Pledged Shares under the CSL Margin Loan Agreement could only be subject to either a charge or mortgage. As nothing suggests that interest in the Pledged Shares had been conveyed to CSL, it is more likely to have been an equitable charge.

(2) Pursuant to the Oral Agreement, Mr Sin would have become an assignee of CSL’s rights under the CSL Margin Loan Agreement in respect of the Pledged Shares (to the extent of the value of his repayment) by way of an equitable assignment: see e.g. Hsu Ching Fang v Ng Chor Kuen Anors [2023] HKCFI 725 at §101 per Recorder William Wong SC for the requirements of equitable assignment, specifically the fact that no particular form is required and such an assignment can be effected orally.

(3) On Mr Sin’s case, by Subject Payment 1 on 18 October 2017, Mr Sin had through various third parties (excluding the 4 Companies) advanced around HK$59 million to the Company. Between 8 August and 13 October 2017, i.e. the last repayment before 18 October 2017, the Company had repaid HK$81 million to CSL. If one then cross-references the Liquidators’ analysis table, at least HK$49 million would be attributable to Mr Sin. Mr Sin would thus have enjoyed an equitable charge over the Pledged Shares of a corresponding value. Since HK$49 million exceeded the amount of the Subject Payments, Mr Sin would in turn be entitled to be paid the Subject Payments ahead of other unsecured creditors.

50.Having heard Mr Sin’s testimony and considered the evidence carefully, I am of the view Mr Sin fails to prove the existence of the Oral Agreement and the Revised Agreement. I do not find Mr Sin to be a credible witness. First and foremost, there is a complete lack of any contemporaneous documents to point to the existence of the Oral Agreement. Mr Ho for the Liquidators is correct in submitting that the Company executed the CSL Margin Loan Agreement with CSL. Mr Sin entered into two loan agreements with CCL. Mr Sin, EPL, the Company, CCL, and CSL also executed the Settlement Deed. These are clear examples which agreements between Mr Sin and the Company on one hand, and CSL and CCL on the other hand were in writing. Further, the amount involved in the transactions were substantial. It is inherently improbable for the Oral Agreement and the Revised Agreement to be formed orally. Even if it was formed orally, there is no reference to any communications between the relevant parties.

51.Secondly, Mr Sin said that he did not formalize the Oral Agreement or reduce the same into writing because the amount was insignificant to him due to his wealth. That may be so, but it does not explain why his counterparty, being substantial corporations would choose to reach an oral agreement with Mr Sin with no documentation at all. I do accept that there are situations where businessmen just relied on words of honour. However, one must examine this issue within the relevant factual context. In the present case, there was a history or pattern that CSL and the Company have previously executed the CSL Margin Loan Agreement for the Company to surrender the First Credit Shares as security. I accept Mr Ho’s submission that if a new security were to be created in favour of Mr Sin, there was no good reason why the same would not be concluded in writing as well.

52.Thirdly, there were a few occasions which Mr Sin could have asserted the Oral Agreement and the Revised Agreement, but Mr Sin did not do so. Mr Ho set out the following incidents:

	Date	Omission
(1)	30/01/2018	Omission to refer to the Oral Agreement in the Statement of Claim in HCA 258/2018.
(2)	31/07/2018	Omission to refer to the Oral Agreement and the Revised Agreement in the Settlement Deed.
(3)	02/09/2019	Omission to assert that Mr Sin was a secured creditor of the Company.
(4)	17/06/2020	Omission to refer to the Oral Agreement and the Revised Agreement, and omission to assert that Mr Sin was a secured creditor in the letter from Messrs. Jones Day.
(5)	03/08/2020	Omission to assert that Mr Sin was a secured creditor of the Company.

53.On 30 January 2018, Mr Sin filed the Statement of Claim under HCA 258/2018 against CCL and specifically pleaded the following:

“10. It is averred that while Best Year and Enhance Pacific pledged the First Credit Shares to CSL in return for margin facilities, at the time when the First Credit Shares were intended to be withdrawn from CSL, such margin facilities were not in debit and therefore the First Credit Shares were not subject to any subsisting security interest in favour of CSL. Accordingly, Best Year and/or Enhance Pacific were (and still are) entitled to withdraw the First Credit Shares from CSL at the time.

…

14. The contents of the Offending Letter were false and were published by the Defendant maliciously, disparaging Best Year’s and Enhance Pacific’s title and ownership of the First Credit Shares.” (Emphasis added.)

54.Mr Ho for the Liquidators correctly pointed out that Mr Sin has not suggested in the Statement of Claim that he was assigned security of the First Credit Shares. Further, Mr Sin has never commenced legal proceedings against CSL to demand CSL to assign security of the First Credit Shares to him.

55.I agree that had the Oral Agreement and the Revised Agreement exist, there is no fathomable reason why Mr Sin did not assert his right as a secured creditor in the above statement of claim.

56.Mr Lee submitted that the Oral Agreement and the subsequent change of the identity of the secured creditor from CSL to Mr Sin is not a material fact for the claim for malicious falsehood and/or slander of title. That may be true. But it is inherently improbable that such an important Oral Agreement would have been missed. In fact, Mr Sin stated that it was a mistake by his lawyers.

57.On 31 July 2018, Mr Sin, EPL, the Company, CCL, and CSL entered into a Settlement Deed (“the Settlement Deed”) to settle their disputes. The material settlement terms in clause 4 of the Settlement Deed include the repayment of Mr Sin’s personal loan to CCL. Clause 4 did not provide that Mr Sin had been assigned or would be assigned any security of the First Credit Shares. Clause 6 of the Settlement Deed provided that Mr Sin would forgo all his claims against the Convoy Group, CCL, CSL, and their respective former or current directors, officers, employees and/or agents. Clause 15 of the Settlement Deed provides that:

“This Deed represents the whole agreement as made between the Parties, and supersedes any prior representations made by or on behalf of each of the Parties in respect of the subject matters contemplated under this Deed.”

58.I agree that if the Oral Agreement and the Revised Agreement exist, more likely than not, the same would have been reflected in the Settlement Deed.

59.The Company was wound up on 24 June 2019. Mr Sin’s former solicitors served Mr Sin’s Proof of Debt on 2 September 2019. It was stated in the Proof of Debt that the Company owed Mr Sin about HK$19,000,000 under Mr Sin’s Loan Agreement, and the loan was not secured.

60.By letter dated 3 April 2020, the Liquidators demanded Mr Sin to repay the Subject Payments. Mr Sin’s former solicitors provided a substantive reply on 17 June 2020, and the only ground raised in opposition was the “running account operations between Mr Sin and the Company”. There is no allegation that pursuant to the Oral Agreement and the Revised Agreement, Mr Sin is a secured creditor.

61.Mr Sin’s former solicitors served Mr Sin’s second Proof of Debt on 3 August 2020. It was stated in the second Proof of Debt that the Company owed Mr Sin HK$133,517,591 under Mr Sin’s Loan Agreement, and item 7 of the second Proof of Debt (Particulars of any security held, the value of the security, and the date it was given) was left blank.

62.The Oral Agreement and the Revised Agreement were first raised in Mr Sin’s first witness statement, some 5.5 years and 4.5 years after the Oral Agreement and the Revised Agreement were made respectively.

63.When being cross-examined, Mr Sin failed to adduce any credible evidence to substantiate the existence of the Oral Agreement and the Revised Agreement. He only asserted that the Oral Agreement and the Revised Agreement existed, otherwise the First Credit Shares would not be released by CSL. As the Company has fully repaid the loan to CSL, CSL of course would release the First Credit Shares to the Company.

64.Mr Lee for Mr Sin submitted that it is evident from Mr Sin’s uncontradicted viva voce evidence that 2020 was essentially his “annus horribilis” – he was still suffering from the lingering effects of a serious infection and was also busy sorting out his divorce. It is understandable that he did not prioritize this episode, leading to impeded communications between Mr Sin and his lawyers. I do not accept this submission. Mr Sin is an experienced commercial man. He knew the important of court documents. The persistent absence of any mention of the Oral Agreement and the Revised Agreement is only consistent with their non-existence.

65.However, I do accept that when the Proofs of Debt were submitted in 2019 and 2020, Mr Sin was not a secured creditor, having sold all his shares in the Company and the Company had in turn sold its First Credit shares. The information in the Proofs of Debt was therefore accurately stated.

66.Fourthly, I agree that if the Oral Agreement and Revised Agreement existed:

(1) It would be wrong for Mr Sin to plead in §10 of the Statement of Claim of HCA 258/2018 that the Company was entitled to withdraw the First Credit Shares, as only Mr Sin was entitled to withdraw the First Credit Shares.

(2) It would be wrong for Mr Sin to plead in §11 of the Statement of Claim of HCA 258/2018 that Messrs. WT Law Offices requested the release of the First Credit Shares as solicitors for the Company, as only Mr Sin was entitled to request the release of the First Credit Shares.

(3) Mr Sin should have pleaded in §14 of the Statement of Claim of HCA 258/2018 that his title and ownership of the First Credit Shares was disparaged.

(4) Mr Sin should have demanded CSL to assign security of the First Credit Shares to him, failing which he should have commenced legal proceedings against CSL.

(5) Mr Sin must have insisted that the Oral Agreement and the Revised Agreement be mentioned in the Settlement Deed (otherwise any purported security would not be recognized by the parties), the letter from Messrs. Jones Day of 17 June 2020.

67.Fifthly, when being asked why the Oral Agreement and the Revised Agreement were not mentioned in the aforesaid documents, Mr Sin repeatedly blamed his former solicitors for errors in the aforesaid documents. The Statement of Claim of HCA 258/2018 was settled by Counsel. The Settlement Deed was witnessed by Mr. Michael Titus of Messrs. Titus, who represented Mr Sin. I accept that it is inherently improbable for a line of experienced lawyers to be consistently mistaken in taking and confirming Mr Sin’s instructions. I do not find Mr Sin’s evidence on this issue credible.

68.Finally, Mr Sin said the Revised Agreement was reached in July 2018. I agree that if there was a need to make the Revised Agreement in July 2018, that would mean CSL still had security over the First Credit Shares. Yet, the Company transferred the First Credit Shares to EPL on 9 February 2018. Mr Sin transferred shares of EPL to Mai Shao Hang on 2 March 2018. On 8 and 12 March 2018, EPL purportedly sold 145,160,000 and 129,840,000 shares of First Credit to third parties. That can only mean the Company and EPL had power to dispose of the First Credit Shares in February and March 2018, which means there was no point for Mr Sin to reach the Revised Agreement in July 2018.

69.For the above reasons, I find that Mr Sin fails to prove the existence of the Oral Agreement and the Revised Agreement. This also shows that Mr Sin’s evidence is not credible.

(C) Subrogation of the Security of First Credit Shares

70.It is further submitted that even without the Oral Agreement, having discharged HK$49 million worth of the Company’s debts to CSL by 18 October 2017, Mr Sin would have stepped into CSL’s shoes and become entitled to be repaid up to the same amount by the Company in priority to other unsecured creditors by way of the doctrine of subrogation, which, at its core, means that “where A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor”: Kingsway Finance Ltd v Wang Qingyi Anor [2015] 1 HKLRD 260 at §§17-18 per Cheung CJHC (as he then was).

71.The fallacy of the above submission is that Mr Sin did not personally paid CSL to discharge the Company’s debts to obtain a bargained-for security interest. At best, he paid or advanced loans to the Company so that the Company was put in a position to pay off its debts due to CSL. That should be the end of analysis. Mr Lee submitted that the third-party payors identified in his proof of debts were acting as his agents. I am not convinced that this is the correct analysis or the right factual basis. I am inclined to accept that Mr Sin procured the third parties to simply advance loans to the Company. However, as Mr Lee sought to persuade this Court, there is nothing to pierce the corporate veil in the present case. The loans were advanced by these third parties to the Company as unsecured creditors in their own right.

72.Even if the subject loans were advanced to Mr Sin by the third parties as his agents, so the relevant loans should be treated as loans from Mr Sin, the fact remains that loans were first paid to the Company. It was the Company who discharged the loans vis-à-vis CSL and obtained back the First Credit Shares.

73.Hence, there could not be any equitable assignment or subrogation of the security interest of CSL in the present case. At the end of the day, unless one is to collapse all corporate entities as independent legal entities, it is the Company which repaid its loans and in fact redeemed the relevant First Credit Shares. Mr Sin and his third-party payors or agents did not directly pay CSL, and they did not acquire any legal rights vis-à-vis CSL and the relevant First Credit Shares. They acquired as right as creditors vis-à-vis the Company.

74.Similarly, before 18 October 2017, Create Profit, Gold Medal, China Asset, and Blackmarble advanced loans to enable the Company to repay its loan to CSL. It could not possibly follow that therefore they also acquired a security via subrogation. The proofs of debt submitted by these four companies rightly do not suggest that their loans were secured.

75.All of Mr Lee’s submissions are premised upon Mr Sin’s expectation to obtain a security interest. However, on the facts of the present case, I find that Mr Sin could not have entertained such an expectation. He is a seasoned businessman, had he ever entertained such an expectation, I have no doubt that the same would be documented in one way or another. I note that this assertion of a security interest was not even mentioned in his solicitors’ letter dated 17 June 2020.

76.Finally, I also accept Mr Ho’s submission that on Mr Sin’s case, funds were advanced by Mr Sin to the Company pursuant to Mr Sin’s Loan Agreement. Mr Sin admitted under cross-examination that Mr Sin’s Loan Agreement was executed before the CSL Margin Agreement. There was no provision in Mr Sin’s Loan Agreement for any asset of the Company to be provided as collateral, nor was there any provision that the purpose of Mr Sin’s Loan Agreement was to repay loan under the CSL Margin Agreement. The Company could have applied the Third-Party Payments on other matters. Mr Sin agreed that when Mr Sin’s Loan Agreement was made, it was not contemplated that Mr Sin’s Loan Agreement was to repay the loan under the CSL Margin Agreement. As held by Lord Diplock in Orakpo v Manson Investments [1978] AC 95, at 105A:

“The mere fact that money lent has been expended upon discharging a secured liability of the borrower does not given rise to any implication of subrogation unless the contract under which the money was borrowed provides that the money is to be applied for this purpose…”

77.Mr Ho is right that the Court cannot rewrite the contract for the parties.

(D) “Running Account” Principle

78.Further or alternatively, Mr Sin submitted that at the material time of the Subject Payments, there were running account operations between Mr Sin and the Company, which would have provided a valid justification for the Subject Payments.

79.The running account principle is well-established in Australia and had been imported into Hong Kong by Le Pichon J (as she then was) in Re Wing Hong Woo Co Ltd [2000] 4 HKC 186 at 193-194. The judgment was in turn upheld by the Court of Appeal in [2001] 4 HKC 99. The relevant principles may be summarised as follows:

(1) When a payment is part of a broader transaction or linked to other items in an ongoing account, the entire transaction and all related items must be considered.

(2) In deciding whether payments are so integrally connected with counter payments that the ultimate effect of the course of dealings has to be considered to determine whether the payments are preferences, it is necessary to look at their business purpose or business character.

(3) It is not necessary that a payment should have been made under express arrangements for the continuation of the relationship reflected in the running account e.g., continuance of supply. It is enough if implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relation of debtor and creditor in the running account.

80.Mr Lee fairly acknowledges that the principle was considered in the context of “fraudulent preferences” under the old legislation, which has since been superseded by Section 266 of the Ordinance. Mr Lee submitted that this Court should consider the question of whether this principle remained applicable under the present legislation.

81.In short, the discussion on the running account principle in Re Wing Hong Woo related primarily to whether a payment had the effect of preferring a creditor, which remains an integral element of “unfair preference” under the present regime. It is therefore submitted that there is no reason why the principle would not continue to apply simply because the requisite mental element has been changed from intention to prefer to desire to prefer.

82.Alternatively, it can be seen as a way of disproving the existence of a desire to prefer and/or influence by a desire to prefer:

(1) Although no express reference was made to the principle by G Lam J (as he then was) in Re Cheung Siu Kin [2015] 5 HKLRD 923, the learned judge appeared to have accepted the submission that the existence of running accounts between the bankrupt and the creditor could be sufficient to negative a desire to prefer or influence by such desire. At §129, his Lordship observed on the facts that “the payments to Dickson were nothing out of the ordinary when seen in the context of the entire history of the financial dealings between the brothers. There was a continuous pattern of dealing involving payments both ways from time to time. The payments now under attack form part of that overall picture which is simply a continuation of the pattern”.

(2) Clearer support may be found in the judgment of the Singapore High Court in Re Living the Link Pte Ltd (in creditors’ voluntary liquidation) [2016] SGHC 67 at §§47-55, in which Steven Chong J provided a useful summary on the relevant Singaporean case law before concluding that the running account principle is relevant when the impugned payment was made “with the intention of obtaining new value to keep the business going” as it “goes to proving that the insolvent company was acting solely by reference to proper commercial considerations in making the payment and was not influenced at all by a desire to prefer the creditor” (at §55).

83.As a matter of law, I am persuaded that Mr Lee is correct. I agree that the fact that the new legislation i.e. section 266D of the Ordinance preserved the need to show that the Company did anything or suffer anything to be done which has “the effect” of putting the creditor into a better position is strong indication that the legislature did not intend the case law developed in relation to that element to be superseded. This is consistent with the principle of legal policy that law should be altered deliberately rather than casually, and that the legislature does not change either common law or statute law by a sidewind, but only by measured and considered provisions: Ge Qingfu Anors v L&A International Holdings Ltd [2020] 4 HKLRD 544 at §78.

84.I therefore agree that notwithstanding the change in statutory regime, the running account principle remains good law.

85.However, the facts of the present case do not support the application of the running account principle.

86.I accept that starting from 7 August 2017, there were 52 deposits to the Company from third parties, which were allegedly made on behalf of Mr Sin under Mr Sin’s Loan Agreement (“Third-Party Payments”).

87.From 8 August 2017 to 4 January 2018, the Company made 18 payments to CSL to repay the Company’s loan under CSL Margin Loan Agreement. The following points were noted from the Third-Party Payments and the payments to CSL:

(1) The first of the Third-Party Payments was a sum of HK$1,000,000 on 7 August 2017. The first repayment to CSL was a sum of HK$1,000,000 on 8 August 2017.

(2) The last of the Third-Party Payments was a sum of HK$2,000,000 on 4 January 2018. The last repayment to CSL was a sum of HK$3,769,559.42 on 10 January 2018.

(3) On Mr Sin’s case, the total sum of the Third-Party Payments was HK$92,999,660.25 (including the three returned cheques of HK$11,800,000. Thus, the net amount of the Third-Party Payments was HK$81,199,660.25. None of the Third-Party Payments was applied to repay the Company’s loan to Jun Yang.

88.In addition to the Third-Party Payments, the following deposits totalling HK$47,000,000 were made to the Company in September and October 2017:

(1) HK$5,000,000 from Mr Lam on 11 September 2017.

(2) HK$5,000,000 from Create Profit on 18 September 2017.

(3) HK$14,000,000 from Lerado Financial Group Company Limited on behalf of Blackmarble on 18 September 2017.

(4) HK$11,000,000 from Upright Victory Ltd and Gold Medal on behalf of Gold Medal on 18 September 2017.

(5) HK$12,000,000 from Laberie Holdings Limited on behalf of China Asset on 6 October 2017.

89.The total of the Third-Party Payments and funds advanced by Lam, Create Profit, Blackmarble, Gold Medal, and China Asset from 8 August 2017 to 4 January 2018 was HK$128,199,660.25, which was about 99.21% of the amount ultimately paid by the Company to CSL (HK$129,221,532.27) during the same period. I agree with this shows that the sole purpose of the Third-Party Payments was to enable the Company to repay CSL.

90.Under cross-examination, Mr Sin admitted that he would procure the Third-Party Payments to be deposited to the Company whether the Company made the Subject Payments to him and EPL.

91.I am of the view that the Subject Payments and the Third-Party Payments were not connected. The Subject Payments were the only payments received by Mr Sin and EPL during the relevant period. After 4 January 2018, Mr Sin did not advance any further fund to the Company even if the Company still owed Jun Yang around HK$30 million, and Jun Yang had commenced legal proceedings against the Company.

92.I am of the view that the purpose of the Third-Party Payments was to enable the Company to repay its loan to CSL. There was no ongoing business operation for the Company to maintain a running account with Mr Sin. The Third-Party Payments were not deposited to the Company to sustain the existence of the Company or to enable the Company to carry on normal business operation. The present case is materially different from the situation in Re Wing Hong Woo, whereby the payments made to the bank were to enable the company to carry on trading within the limit of the bill facilities.

93.I am not persuaded that a continuing relationship existed between Mr Sin as creditor (with EPL as his corporate vehicle) and the Company as debtor, involving an expectation that there would be ongoing dealings or a series of continuous transactions which are not terminated by any specific dealing.

94.The facts are clear to this Court. After the Company paid off its loans to CSL, in face of outstanding claims from Jun Yang, Mr Sin caused payments to be made to himself and then allowed the Company to be wound up. The Subject Payments were not part of a continuous or running dealing between the Company and Mr Sin (and EPL).

95.Further, factually, neither Mr Sin nor EPL had personally made any payments into the Company between August 2017 and January 2018. Mr Lee relied on the third-party payors identified in Mr Sin’s proof of debts as his agents such that their payments can properly be regarded as his payments. It follows that Mr Sin should be seen as having injected significant amounts of money into the Company. I do not accept this submission. From the Company’s perspective, loans were received from the third parties and there is no documentation to show that they paid as Mr Sin’s agent. It is neither here nor there that Mr Sin’s proof of debt claims that those were payments made by his agents. Mr Ho is correct that there is no evidence on that apart from Mr Sin’s own allegation.

96.Mr Ling who attended the trial confirmed that he did not personally make any of the Third-Party Payments to the Company. He was also unable to recall which Third-Party Payments were procured by him. He could not recall any payments made by him by reference to the deposits paid into the Company’s account. Nonetheless, he maintained his bare allegation that he procured several millions to be paid into the Company.

97.I am of the view that one cannot simply conclude that because Mr Sin procured some third parties to advance loans to the Company, they necessarily, without more, became his agents, or advanced the said loans as agents of Mr Sin. There is no cogent evidence to support such a case. Prima facie, those third parties were and/or are creditors of the Company.

(E) NO DESIRE TO PREFER

98.Further yet or alternatively, Mr Sin submits that the Company was not influenced by a desire to prefer Mr Sin and EPL as a creditor within the meaning of the statute when making the Subject Payments.

99.Mr Lee fairly does not dispute that Mr Sin and EPL were both persons connected with the Company such that the statutory presumption under Section 266(5) of the Ordinance that they were influenced by the desire to prefer in deciding to make the Subject Payments would apply. However, it is submitted that the rebuttable presumption only goes to the influence by the desire but not the existence of the desire: Joint and Several Trustees of the Property of Hau Po Man Stanley (in bankruptcy) v Hau Po Fun Ivy [2005] 2 HKLRD 262 at §16 per Le Pichon JA. It follows that it remains necessary for the Company to prove the existence of the desire.

100.As to the requisite mental elements, this Court has observed in Re Auragem Company [2019] HKCFI 2914 at §73 as follows:

“A desire of improving the creditor’s position in an insolvent liquidation is a subjective state of mind. Desire is different from intention. Whereas intention is objective in that a person is taken to intend the necessary consequences of his actions, a person is not to be taken as desiring all the necessary consequences of his actions and one can choose the lesser of two evils without desiring either.”

101.Further, the Court of Appeal has clarified that “desire” goes beyond simply an intention to produce the effect of putting the subject creditor in the better position. Nor can such a desire be proved by only showing that such an improvement in position must have followed from the payment. Desire means the company positively wished to improve the subject creditor’s position: Re Kam Toys & Novelty Manufacturing Limited (Unreported, CACV 67/2017, 13 November 2017) at §§34-35.

102.Mr Sin’s case is that the requisite mental element has not been satisfied because of three main reasons.

103.First, even if the Court finds that no Oral Agreement or Revised Agreement existed, Mr Sin had a genuinely held belief that he was a secured creditor holding security which exceeded the value of the Subject Payments at the time of payment:

(1) In Re MC Bacon Ltd [1990] BCLC 324, the controlling mind of the company held the incorrect belief that if the company granted a debenture to the bank (which was the challenged transaction in that case) then the bank would have to continue to support the company for a further six months of trading. Yet, Millett J (as he then was) considered this to be one of the factors which indicated a desire to trade on and pointed away from a desire to improve the bank's position on insolvency (at 334, 337).

(2) More recently, in Re De Weyer Ltd [2022] BCC 1201, the sole director of the company that made the impugned transaction believed (wrongly) that the (ultimate) recipients were secured creditors over the company's premises such that when the premises were sold, they were entitled to be paid in priority to unsecured creditors of the company and no desire to prefer was present (at §§70-72, 116).

(3) The Deputy ICC Judge first observed that “if the debtor can be shown to have held a belief that flatly contradicts the possible influence of the statutory desire, then that is likely to go a long way towards showing that the statutory desire was absent” (at §118).

(4) More importantly, his Lordship concluded (albeit obiter) that (at §120):

“Accordingly, it would seem that an incorrect, but nonetheless Mr Sincerely held, belief that a particular creditor held registered security and would be paid first on an insolvent liquidation in any event would appear to exclude the presence of any desire to produce the effect in s.239(4)(b).”

(5) It is submitted that this is sound in principle and consonant with common sense: see also Totty, Moss & Segal: Insolvency (Vol 2) at [F2-07(e)]; Re Living the Link at §35 (“A genuine belief in the existence of a proper commercial consideration may be sufficient even if, objectively, such a belief might not be sustainable”).

(6) Even if Mr Sin was incorrect in believing that he was a secured creditor of the Company (which is denied), the fact that he held belief to that effect ought to exclude the presence of any desire to prefer. From the Company’s perspective, the Subject Payments simply would not have improved Mr Sin and/or EPL positions in an insolvent liquidation.

104.However, I do not find as a matter of fact that Mr Sin, as a very seasoned businessman could have honestly held or did hold the belief that he, without any agreement, whether oral or otherwise, was a secured creditor or was subrogated into the rights of the Company when the loans from CSL were repaid.

105.I am of the firm view that Mr Sin did not tell the truth to the Court. I find that he had not entertained any belief that he somehow was a secured creditor vis-à-vis the Company and/or had a secured interest over the First Credit Shares held by CSL. Had he done so, the Statement of Claim in HCA 258/2018 would have been pleaded differently. As I said earlier, I do not accept Mr Sin’s explanation that there was an unratified mistake on the part of his lawyers.

106.Secondly, I reject the submission that the Company was actuated only by proper commercial considerations when making the Subject Payments to Mr Sin and EPL, namely, to sustain the Company’s existence by continuing the Company’s running account operations.

107.As stated above, I do not accept that there were running account operations between Mr Sin and the Company. It is not right that there would always be a running account operation between a company and its sole shareholder and director.

108.I also find that the Subject Payments were made when the Company had a substantial outstanding liability to Jun Yang. The Subject Payments could not have been made to sustain the Company’s existence. They were clearly paid to favour and prefer Mr Sin (and EPL).

109.I find that Mr Sin positively desired to prefer himself to Jun Yang after, on his case, he failed to negotiate a settlement with Jun Yang. The making of the Subject Payments to Mr Sin and EPL is the opposite of assisting the Company to survive in face of an indefensible claim from Jun Yang.

110.I also find that Mr Sin knew exactly what he was doing at the material time. By making the Subject Payments to himself, he made sure that the Company could not survive. It did not matter to him as the Company was only a corporate vehicle to hold the shares of First Credit.

111.In fact, Mr Sin had explained in cross-examination that when Jun Yang started chasing for payments in September 2017, he had offered to pay Jun Yang $10 million each week until full repayment. There is a dispute about whether this happened. But the key point is that the Subject Payments were effected after Jun Yang refused and proceeded to liquidate the collaterals in a falling market. The first payment was paid on 18 October 2017. Mr Sin admitted that after repaying CSL and gaining control of the First Credit Shares in early 2018, the Company had no value and was only a shell company.

112.I find as a matter of fact as Mr Sin knew that the Company was destined to be wound up, and it chose to repay Mr Sin but Jun Yang. The irresistible inference is that Mr Sin (as the sole director of the Company) and the Company desired that Mr Sin should receive whatever assets that were left in the Company, so that Jun Yang and other unsecured creditor(s) would recover nothing from a shell company.

DISPOSITION

113.For all the reasons stated above, I make the following orders:

(1) The bank transfer from the Plaintiff to the 1^st Defendant on 3 November 2017 in the sum of HK$5,000,000 be set aside as an unfair preference within the meaning of section 266 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32);

(2) The bank transfer from the Plaintiff to the 2^nd Defendant on 18 October 2017 and 10 January 2018 in the sum of HK$7,000,000 and HK$2,300,000 respectively be set aside as an unfair preference within the meaning of section 266 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32);

(3) The 1^st Defendant do repay the said sum of HK$14,300,000 to the Plaintiff.

114.As far as costs is concerned, as the Liquidators dropped their claim on transaction at undervalue, I make a cost order nisi, that the 1^st Defendant is to pay 80% of the Plaintiff's costs, to be taxed on party to party basis, if not agreed. The costs order nisi will be made absolute within 14 days from the day of this judgment unless an application is taken out to vary the same within the 14-day period.

115.Finally, it remains for this Court to thank Mr Ho for the Plaintiff and Mr Lee for the 1^st Defendant for their helpful assistance.

Mr Leon Ho, instructed by Lee, Wong & Lam for the Plaintiff

Mr Jonathan Lee, instructed by David Fenn & Co, for the 1^st Defendant

The 2^nd Defendant was not represented and did not appear