Patrick Cowley and Wong Wing Sze Tiffany (Joint and Several Trustees in Bankruptcy of the Property of Lau Yu also known as Jaffe Lau v. All Powerful Holding Ltd and Another

HCA 2289/2018

[2025] HKCFI 5223

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2289 OF 2018

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JUDGMENT

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INTRODUCTION

1.This is the trial of the action brought by the joint and several trustees in bankruptcy of the estate of Mr Lau Yu under section 49 of the Bankruptcy Ordinance, Cap 6.  Lau was adjudged bankrupt by an order made on 5 September 2017.  I shall call him “the bankrupt” below.  The plaintiff applies to set aside the transfer by the bankrupt to the 1^st defendant, All Powerful Holding Ltd, the one share representing the entire issued share capital of the 2^nd defendant, All Powerful Investment Ltd (“APIL”), at a consideration of HK$1 on 20 January 2015.  I shall use the terms “the Share”, “the Transfer”, and “the Transfer Date” correspondingly below.

2.APIL was incorporated in Hong Kong in 2009. From its incorporation, the bankrupt had been its sole director until he resigned on 4 September 2017, that is one day before the bankruptcy order was made against him.  His wife, Ms Terri Tsang, was appointed as director in 2021.

3.The 1^st defendant was incorporated in the BVI in December 2014.  Tsang was at all times and is still its sole director.  The entire share capital of the 1^st defendant has been held at all times under a family trust established by the bankrupt as settlor, with the beneficiaries being Tsang and their three children.

A brief introduction of the parties’ cases

4.The Transfer took place within two years before the presentation of the bankruptcy petition.  The plaintiff’s case is that APIL was a company of substantial net asset value, and that the Transfer was therefore a transaction at an undervalue within the meaning of section 49 and should be set aside such that the Share should be vested in the plaintiff and deemed to be part of the bankrupt’s estate from the date of the bankruptcy order pursuant to section 58.

5.I should record here that the plaintiff originally also contended that the Transfer was a disposition with intent to defraud creditors within the meaning of section 60 of the Conveyancing and Property Ordinance, Cap 219, and should be held voidable.  In opening submissions, the plaintiff confirmed that they would no longer pursue the claim under that section.  For that reason, I shall not recount the evidence led by the parties on this below.

6.According to the plaintiff’s expert, as of the Transfer Date, the fair market value of APIL was between HK$864 million to HK$874 million, or, on their alternative case, HK$312 million to HK$322 million.

7.On the other hand, the defendants’ case is that APIL had a negative net worth as of the Transfer Date, and therefore the transfer of the one share in it at HK$1 was not a transaction conducted at an undervalue.  According to the defendants’ expert, as of the Transfer Date, the fair market value of APIL was nil as it had a negative net worth between -HK$66 million to -HK$52 million[1].

8.The core issue in this action therefore turns on the valuation of APIL as of the Transfer Date. 

9.The company had an operating business in the iron ore and coking coal industry.  It also held interests in subsidiaries and associates unrelated to its operating business.  In their reports, the experts cover all aspects of the company’s assets and liabilities in arriving at their valuations.  They disagree on a number of matters.  However, what has divided them most and consequently given rise to the huge difference between their valuations are two issues:

(1)  First, the valuation of a real estate project in Mainland China.  It was a residential project located in Luoyang in the province of Henan.  The project was owned by a local company called 洛陽耀辰置業有限公司, which in turn was indirectly and wholly held by Sure Vantage Ltd, a BVI company 90% owned by APIL.  I shall call the Mainland company and the project “the Luoyang Company” and “the Luoyang Project”, respectively.  As regards the valuation of the Luoyang Project, the rival figures put forward by the plaintiff and the defendants are HK$683 million and RMB113 million respectively.

(2)  Second, an item which has been referred to as “Other loans” in this action.  The issue is whether an amount of HK$552 million should be deducted from the valuation.

10.In closing submissions, the parties agreed that the court needs only to resolve the above two issues, and that would be determinative of the outcome of this action.  If the court finds in favour of the plaintiff’s case on these issues, it may then accept the valuation of HK$864 million as put forward by the plaintiff for APIL.  If, on the other hand, the court finds for the defendants on the two issues, it may proceed to accept their case that APIL was of negative value.

11.Therefore, it is unnecessary for me to recite the disagreement between the experts on the other areas.  Nor is it necessary to spell out how the experts have arrived at their ultimate figures for APIL.

The witnesses and the documentary evidence

12.The plaintiff is not privy to the Transfer and has no first-hand knowledge about the transaction.  Their case is built on contemporaneous documents obtained after the bankruptcy order was made.  Mr Patrick Cowley, one of the trustees in bankruptcy, testified at the trial.  In his witness statement, he gave a narrative of the investigation conducted by the plaintiff into the bankrupt’s affairs.  He described the bankrupt as demonstrating “a complete unwillingness to cooperate with and disregard for the Trustees’ investigations”.  He also recounted facts which, the plaintiff say, show the bankrupt’s intent to defraud creditors.  However, the core issue of valuation does not turn on these factual matters.  There is therefore no need to resolve the disputes between the parties over them.  Leaving aside these matters, Cowley’s evidence is on the whole uncontroversial and the outcome of this action does not turn on his credibility as a witness.

13.The plaintiff’s valuation expert is Mr Neill Poole.  He qualified as a chartered accountant and is a member of the Institute of Chartered Accountants in England & Wales, a fellow of the Hong Kong Institute of Certified Public Accountants and a Certified Fraud Examiner.

14.The key documents relied upon by the plaintiff are:

(1)  the audited non-consolidated financial statements of APIL for the year ended 31 March 2014;

(2)  the audited consolidated financial statements of APIL for the year ended 31 March 2014;

(3)  the audited non-consolidated financial statements of APIL for the year ended 31 March 2015; and

(4)  the audited consolidated financial statements of Sure Vantage for the year ended 31 March 2014.

15.The defendants called Tsang as their sole factual witness.  While the bankrupt was the sole director of APIL as of the Transfer Date, he was not called by the defendants to testify.  It is worth pointing out at the outset that the defendants acknowledge that Tsang only had limited knowledge of the company’s operations prior to her becoming a director in 2021. 

16.The key part of Tsang’s evidence is that the planned completion date of the Luoyang Project was December 2014 but, as a result of changes in local regulations and government policy, substantial difficulties were encountered in implementing the project, and as there was no prospect of completion, the value of the project was substantially impaired.

17.The defendants’ valuation expert is Ms Edwina Tam.  She is a member of the Chartered Professional Accountants in Canada, a member of the Canadian Institute of Chartered Business Valuators and a member of the American Society of Appraisers.

18.The key documents relied upon by the defendants are:

(1)  an undated draft of the consolidated financial statements of Sure Vantage as at 31 March 2015; and

(2)  a valuation report entitled “房地产抵押预估报告” dated 25 December 2015 in respect of the Luoyang Project (“the December 2015 report”).

19.The issue of valuation will turn on the credibility of Tsang’s evidence, an assessment of the reliability of the documents put forward by the parties, and an evaluation of the soundness of the opinions of the experts.  

20.The plaintiff is represented by Mr Richard Leung and Mr Michael Lo.  The defendants are represented by Mr Hylas Chung, Mr Ubaid-Ur Rehman and Mr Tom Cheung.

THE PLAINTIFF’ S CASE

21.As remarked above, the plaintiff’s case is primarily built on the contemporaneous documents which were gathered during their investigation into the bankrupt’s affairs. 

The background leading to the bankruptcy

22.The bankrupt was a director of General Nice Resources (Hong Kong) Ltd, a Hong Kong company whose principal activities included trading of iron ore and coking coal in Mainland China.  In June 2011, he together with others provided an unlimited joint and several guarantee in favour of HSBC for monies owed by the company. In about March 2016, a settlement agreement was reached between HSBC and the guarantors in respect of disputes which had arisen when HSBC made demands against, among others, the guarantors.  In January 2017, HSBC presented a bankruptcy petition against the bankrupt based on a statutory demand dated 21 November 2016.  The amount claimed to be due was about US$44.9 million.  The bankruptcy order was made on 5 September 2017.

The financial documents of APIL

23.The financial year end for APIL is 31 March. The Transfer Date is 20 January 2015. 

24.For the year ended 31 March 2014, there are two sets of audited financial statements: 

(1)  the non-consolidated statements covering APIL as a standalone company, which were signed off by the bankrupt as director on 30 January 2015; and

(2)  the consolidated statements covering APIL and its group of companies, which were signed off by the bankrupt on 23 October 2015.

25.For the year ended 31 March 2015, there is only one set of audited financial statements, which were prepared on a non-consolidated basis and signed off on 25 January 2016, also by the bankrupt as sole director.

26.No monthly management accounts have been made available by either APIL or the bankrupt.

27.It is Mr Poole’s view that although the two sets of 2014 statements were not signed off by the Transfer Date, the contents of the non-consolidated statements would likely have been in a near final draft form by the Transfer Date.  Hence he assumes that the information contained in the statements was known on the Transfer Date.  He also assumes that the information contained in the consolidated statements was knowable on the Transfer Date.

28.Mr Poole considers that only information which was known or knowable at the Transfer Date and relevant market expectations at the Transfer Date should be taken into account in the valuation of the Share as this is the information which would have been available to a valuer if a valuation had been prepared contemporaneously.  In this case, in light of the limited contemporaneous financial documents made available, Mr Poole has based his analysis predominantly on the 2014 audited consolidated statements as he considers that their content was known or knowable at the Transfer Date and the information contained should have been the most relevant and reliable contemporaneously available financial information at the Transfer Date.

The Luoyang Project

29.The value of the Luoyang Project was reported in the 2014 audited consolidated statements of Sure Vantage as “Non-current assets – Investment properties under development”. 

30.In Note 19, the item was disclosed in the amounts of HK$682,737,500 and HK$528,875,000 as of 31 March 2014 and 31 March 2013 respectively.  The note continued to state:

“The investment properties at 31 March 2014 and 31 March 2013 were respectively revalued by 北京天通資產評估有限責任公司, independent professional qualified valuers in the Mainland China, on the open market value basis using direct capitalization method and direct comparison method.”

31.The figure of HK$682,737,500 was disclosed in APIL’s 2014 audited consolidated statements under “Current assets – Inventories – Properties under construction”: see Note 19.

32.No audited financial statements for Sure Vantage have been disclosed for the year ended 31 March 2015. 

33.No consolidated financial statements have been disclosed for APIL for the same year.  However, the 2015 audited non-consolidated statements for APIL included the carrying values of its investment in Sure Vantage, expressed in “Investment in subsidiaries” and “Amounts due from subsidiaries”.  Mr Poole points out that the carrying values do not indicate that either the bankrupt or the independent auditor considered any impairment of the value of APIL’s investment in Sure Vantage had occurred at 31 March 2015: see Note 12. 

34.Consequently, Mr Poole is of the view that the figure of HK$682,737,500, which was reported as the amount of the property under development by Sure Vantage and its group companies disclosed in Sure Vantage’s 2014 consolidated statements (ie the Luoyang Project), can be taken as the fair market value of the property as at 31 March 2014 for the purpose of the valuation.

35.Mr Poole is of the further opinion that if during the period between (1) the financial year end of 31 March 2014 and (2) the date when the financial statements were signed off (which in the case of the non-consolidated statements was 30 January 2015 and in the case of the consolidated statements was 23 October 2015), there had been some material changes in the value of APIL’s subsidiaries, there should, at the least, have been a note to the accounts to describe the post balance sheet event which had materially impacted on the business in the intervening period.  There was no such disclosure in the two sets of 2014 statements.  That, the plaintiff contend, indicates that at the time when the accounts were signed off, the bankrupt had not formed the view that there were any issues impacting the Luoyang Project arising since 31 March 2014, which were sufficiently material to APIL.

36.Accordingly, Mr Poole adopts the figure of HK$682,737,500 as the fair market value of the Luoyang Project as at the Transfer Date.

“Other loans”

37.In the statement of financial position in APIL’s 2014 audited consolidated statements, the item “Other loans” in the amount of HK$561,759,255 was reported under “Non-current liabilities”.  Note 23 contained this description:

“The balance was non-interest bearing, unsecured and not being called within the next 12 months, except for the promissory note of US$1.2 million (non-current portion) with 4% interest bearing as at 31 March 2013.”

38.Mr Poole takes the view that the promissory note referred to in the note appears to be related to an acquisition referred to in Note 26(a) of the accounts.  However, as to the balance of the amount under “Other loans” (which I shall refer to as “the balance of “Other loans” ” below), no details can be found as to to whom it was payable.

39.Mr Poole’s comment is that ordinarily, only financial debt of a company, that is money lent to the company to earn a return (such as interest), is deducted from the enterprise value of the company and that operating debt, which typically includes accounts payable, accrued expenses etc, is not.  In the absence of further information, for the purpose of the valuation, Mr Poole has deducted the amount of the promissory note of around HK$9.4 million from his estimate.  As to the balance of “Other loans”, he states this:

“142. … If some or all of the Other Loans balance, after taking account of the promissory note portion, should be treated as a financial debt, that would reduce the amount of value I have attributed to the value of the Share. …

…

146. As I note in paragraph 142, I have very little information about the nature of “Other Loans” which, other than approximately HK$9.4 million relating to a promissory note, were stated in [the 2014 audited consolidated statements] to be non-interest bearing and unsecured with no fixed repayment terms. With the exception of the promissory note portion, I have therefore treated these Other Loans as operating debt rather than financial debt and have not deducted the balance from Enterprise value. Should some or all of the balance of the Other Loans (after taking account of the promissory note) be treated as financial debt, that will reduce the value I have attributed to the Share.” (underline added)

40.In closing submissions, the position taken by the plaintiff is that APIL’s accounts indicate that the amounts advanced under the “Other loans” arrangement were provided to support its trading business, and were therefore more likely to have been working capital, and should therefore not be deducted from the valuation.  The plaintiff point out that the absence of testimony from the bankrupt has impeded the determination of this issue.

Valuation of APIL

41.Based on the above, the plaintiff contends that the fair value of APIL as of the Transfer Date was HK$864 million. Alternatively, if the balance of “Other loans” is to be regarded as financial debt and hence should be deducted from the valuation, the fair value would be reduced to HK$312 million.  In either case, APIL was a company of substantial net worth.

42.The plaintiff further relies on the fact that ad valorem stamp duty in the amount of HK$87,736 was charged on the bought and sold notes for the Transfer.  Dividing that by the ad valorem stamp duty rate at 0.2%, the value of the one share in APIL was taken to be HK$43,868,000 for stamping purpose.  This figure is very close to the figure of HK$43,561,448, which is the amount reported as the net asset value of APIL as of 31 March 2014 in the 2014 audited non-consolidated statements.  This also shows that the bankrupt and the 1^st defendant considered that APIL was at least worth that amount when the Transfer took place.

THE DEFENDANTS’ CASE

43.The defendants’ case is that as of the Transfer Date, the fair market value of APIL was in the negative.  As regards the Luoyang Project, the value reported in the 2014 audited consolidated statements, namely HK$683 million, was overstated.  According to Ms Tam’s opinion, as of the Transfer Date, the project was worth around RMB113 million. On the issue of “Other loans”, Ms Tam’s opinion is that the balance of “Other loans” should be regarded as financial debt, and therefore should be deducted from the valuation of APIL.

44.Tsang is the sole factual witness for the defendants.  She holds an undergraduate degree in business administration and a master’s degree in corporate governance.  In cross-examination, she confirmed that since her first child was born in 2008, she has been a housewife looking after the family.  She said that she does not understand the business of APIL completely.  She knows that it holds real estate but when it comes to details, she would not have any idea.  She may not have a complete involvement in all business activities but she listens to reports by her colleagues.  When pointed out that she is the sole director of the company, Tsang said that one can retain someone else to deal with company matters.

45.In this action, Tsang made one short witness statement comprising six pages. 

The Luoyang Project

46.Tsang’s evidence on the Luoyang Project is very brief.  Below is an extract of the relevant paragraphs from her witness statement:

“21. On 20^th January 2015, I became aware that APIL’s value was actually negative. This was because APIL heavily invested in a real estate project in Luoyang, PRC through one of its subsidiaries Sure Vantage, with a planned completion date of December 2014. In order to facilitate the project, APIL invested by way of loans to Sure Vantage which far exceeded the net asset value of APIL.

22. However, as a result of changes in environmental protection regulations, APIL encountered substantial technical difficulties in implementing its original design for the said project.

23. In addition, the PRC Government implemented and made subsequent adjustments to its “Macro-control” policy in an attempt to control the real estate market. As a consequence, APIL and Jaffe [ie the bankrupt] encountered difficulties in securing loans from banks to fund the project.

24. Given the above changes to PRC Government’s regulations and policies, the project had no prospect of completion and therefore the value of the land ownership rights pertaining to the project were substantially impaired.

25. As far as I know, on or about 20^th January 2015, Sure Vantage was insolvent to the extent of HK$81,877,660.45.” 

47.While Tsang referred to the financial position of Sure Vantage, she did not make reference to any financial statements of the company.  Nor did she state the source of her knowledge about the figure of HK$81,877,660.45.  But, as we shall see below, that figure appears in the draft 2015 consolidated statements of Sure Vantage and is reported as the value of its net assets as at 31 March 2015.

48.In cross-examination, Tsang was asked if APIL was negative in value as of the Transfer Date, why stamp duty in the sum of HK$87,736 was charged in respect of the Transfer.  Her answer was that she was told at some point by the accountants that the documents needed to be stamped within a deadline, or else there would be a penalty.  At that time, the staff had not yet prepared updated management accounts for stamping duty purposes, as that would need time, at least half the year, and that was why the stamp duty was paid first.

The financial information of APIL

49.I first set out the basis on which Ms Tam relies on the financial documents of APIL. 

50.First, it is her opinion that information closest to the Transfer Date would be more reflective of APIL’s position as of that date to the extent that the information can be used to confirm her assumptions as at the Transfer Date. 

51.Second, it is her opinion that by the Transfer Date (20 January 2015), the management of APIL would be able to gauge its financial performance for the entire financial year (which ended on 31 March 2015). 

52.Third, based on her instructions, she considers that the financial information of APIL as of 31 March 2015 to be representative of the company’s financial position as of the Transfer Date.  The joint expert report records as follows:

“Based on discussion with the Lawyers, there were no material changes to APIL’s operations between 20 January 2015 and 31 March 2015, as such, [Ms Tam] considers the March 2015 financial results to be representative of the financial position as at the Valuation Date.”

53.Fourth, as there was no consolidated statement for the financial year ended 31March 2015, Ms Tam relies on the 2015 audited non-consolidated statements of APIL as the starting point of her analysis.

54.For the Luoyang Project, it is the plaintiff’s case that it was worth HK$683 million as of the Transfer Date.  Ms Tam comes to a different conclusion and says that the project was worth about RMB113 million.  Here is how she arrives at her valuation.

55.First, the amount of HK$683 million reported as “Non-current assets – Investment properties under development” in Sure Vantage’s 2014 audited consolidated statements is overstated, based on (again) instructions.  The joint expert report records:

“Ms Tam is advised by KY Woo that the property value presented in the audited statements is the value of the property on a completed basis, without taking into consideration construction costs required to complete the development. However, as the property is still under construction, a significant amount of construction remained. The HK$682.7 million value is therefore overstated.”

56.Second, Ms Tam relies on the December 2015 report, which valued the project at RMB113 million as of 25 December 2015. That was just over 11 months after the Transfer Date.

57.Third, Ms Tam relies on the draft 2015 consolidated statements of Sure Vantage.  In her report, she refers to the statements as “the management accounts as at 31 March 2015”.  These accounts show that Sure Vantage had a net liability of HK$81,877,660 as of 31 March 2015.  This is the same figure referred to by Tsang in her witness statement. 

58.The management accounts included an amount of RMB101.2 million as inventories.  It is Ms Tam’s understanding that this carrying value represents the capitalised cost spent by Sure Vantage in the acquisition and construction of the Luoyang Project.  She notes there is a difference of RMB11.6 million between this figure and the figure appearing in the December 2015 report. 

59.She writes in her report:

“Of the PRC Subsidiaries, the bulk of the assets were held by洛陽耀辰置業有限公司.  I understand from the Lawyers that洛陽耀辰置業有限公司was previously engaged in the development of a residential project in China (“PRC Project”) which started in 2010/2011, but which was subsequently terminated due to a shortage of funds. As a result, the businesses continued to incur expenses but without any corresponding income.  I note that 洛陽耀辰置業有限公司was in a net liability position as at 31 March 2015.  Per the management accounts as at 31 March 2015, the total value for the PRC Project was RMB101 million, or approximately HK$126 million.  I note a third party valuation was conducted as at 25 December 2015, subsequent to the Valuation Date, for the PRC Project which determined its fair market value to be approximately RMB113 million.”

60.Fourth, in the 2014 audited consolidated statements of APIL, it was recorded that APIL acquired the 90% interest in Sure Vantage on 31 March 2024 from a director (as to 40%) and an independent third party (as the 50%) at a total consideration of HK$67.5 million.  That represents a very substantial discount to the fair value of Sure Vantage.  In cross-examination (but not in her report or the joint expert report), Ms Tam identified this discrepancy as a significant red flag regarding the valuation of the Luoyang Project in Sure Vantage’s 2014 audited consolidated statements [2].

“Other loans”

61.On the issue of “Other loans”, Ms Tam was advised by the lawyers that the amount was provided by a third party.  Her opinion is that as long as the amount is expected to be repaid by APIL to the lender, the amount should form part of debt, irrespective of its interest level or purpose. 

62.The defendants’ position is therefore that that the balance of “Other loans” is financial debt and should be deducted from the valuation. 

Valuation of APIL

63.Based on the above valuation of the Luoyang Project and the treatment of the balance of “Other loans”, the defendants contend that the fair market value of APIL as of the Transfer Date was -HK$66 million, and was therefore nil.

LEGAL PRINCIPLES

64.The legal principles governing section 49 of the Bankruptcy Ordinance are not in dispute. 

65.As one can see above, the difference between the parties on the issue of valuation is stark.  According to the plaintiff, APIL was a company worth hundreds of millions of dollars as of the Transfer Date. On the other hand, the defendants say it had a negative net worth.  The resolution of this action turns entirely on the valuation, and not on any legal point.  It is therefore unnecessary to spell out the principles cited by the parties.

66.As to the assessment of a witness’s credibility, I shall apply the well-established approach.  The crucial considerations for the court include whether the party’s case is inherently plausible and probable, whether the party’s case is, in a material way, contradicted by other evidence which is undisputed or indisputable, and the demeanour of the witness.

DISCUSSION

67.In order to arrive at the fair market value of APIL as of the Transfer Date, I shall first consider the credibility of Tsang’s evidence on the failure or abortion of the Luoyang Project by the end of 2014, and then I shall proceed to evaluate which of the two experts’ valuations is more plausible. 

Tsang’s credibility

68.The key evidence of Tsang is that by the Transfer Date, as a result of changes in government regulations and policies, the Luoyang Project had no prospect of completion and its value was substantially impaired.

69.As highlighted by Mr Leung, what is notable about the defendants’ evidence is that the bankrupt was not called to give evidence on behalf of the defendants.  He would be the person with the utmost knowledge of APIL, Sure Vantage and the Luoyang Project as he signed off on the audited accounts of APIL and Sure Vantage.  Instead, Tsang, who on her own admission does not know the details of the business operations of APIL, testified.  As amply demonstrated in her cross-examination, she has very limited knowledge about APIL and its business activities.

70.In these circumstances, I am unable to give any weight to the bare assertions which she made about the Luoyang Project.  I have reproduced her written evidence in para 46 above.  It contains only five short paragraphs.  It is now clear that she herself would not know much about the project.  However, she made no attempt at all to state the sources of her knowledge about the project in the witness statement. 

71.Neither she nor the defendants have produced any documentary evidence in support of the allegations made there.  The Luoyang Project was plainly a substantial project.  One would expect that there would be documents in existence in relation to, for instance, the alleged planned completion date of December 2014, the alleged changes in the government regulations, the alleged technical and funding difficulties encountered by APIL. There is simply no document produced before the court to support these allegations.

72.In para 21 of her witness statement, Tsang said that on the Transfer Date, she became aware that APIL’s value was actually negative.  This allegation is plainly inconsistent with the fact that stamp duty of HK$87,736 was charged in respect of the Transfer.  Her explanation given in cross-examination is not convincing.

73.Tsang’s evidence that the project had no prospect of completion is also contradicted by the fact that the amounts due from Sure Vantage to APIL as of 31 March 2015 (about HK$107 million) increased substantially from 31 March 2014 (about HK$58 million): see Note 12 to the 2015 audited non-consolidated statements of APIL.  This shows that more sums were invested by APIL in the project in the course of 2014 and early 2015.  Furthermore, according to the audited non-consolidated statements of APIL for the year ended 31 March 2016, the amounts due from Sure Vantage to APIL was further increased to about HK$141 million as of the financial year end.

74.When asked why the management of APIL was still pumping money into the project in those following years even after its failure or abortion in cross-examination, Tsang replied that the project had been halted and the money sent to the project was to try to salvage it.

75.Again, I do not find the explanation convincing or satisfactory.  It is not known why Tsang, who admits to have no knowledge of the details of APIL’s business operations, would know about it.

76.In conclusion, the factual case now put forward by the defendants that by the Transfer Date, the Luoyang Project had no prospect of completion and its value was therefore substantially impaired is unsupported by any documentary evidence and is contradicted by the objective facts of (1) the charging of stamp duty and (2) the continuing increase in APIL’s investments in the project.  I therefore reject that factual case.

The plaintiff’s case

77.Mr Leung submits that the audited statements of APIL (2014 and 2015) and Sure Vantage (2014) relied on by the plaintiff are the most credible sources of contemporaneous and independently scrutinised information and that these documents will show what the bankrupt, who signed off on these accounts, knew or understood to be the position as at the Transfer Date.

78.I accept that submission.  The above statements are audited by independent professional accountants.  Unless shown otherwise, the court is prepared to take the financial information contained in those statements as reflecting the true and fair view of APIL’s position at the relevant time.  More specifically:

(1)  I agree that reliance can properly be placed on the two valuations of the Luoyang Project referred to in Sure Vantage’s 2014 audited consolidated accounts: see para 30 above.  It was stated that the valuations were undertaken by “independent professional qualified valuers in the Mainland China”.  The material valuation was the one as of 31 March 2024 in the amount of HK$682,737,500.

(2)  That figure was then included in APIL’s 2014 audited consolidated statements at Note 19 as part of the company’s current assets (“Current assets – Inventories – Properties under construction”). 

(3)  I agree with Mr Poole’s opinion regarding the absence of disclosure of any post balance sheet event in the two sets of 2014 statements of APIL: see para 35 above.  When cross-examined on this point, Ms Tam said that she is not familiar with the criteria which an auditor would apply in order to determine what to do with a post balance sheet event, as she had not been auditing for over 15 years, and she is not sure about this point. 

(4)  I therefore find that since both 2014 statements do not refer to any event taking place after the financial year end which would have a material impact on the business, the bankrupt did not, at the time of signing off the accounts, formed the view that there were any issues negatively and materially impacting on the value of the Luoyang Project.

(5)  Accordingly, those two sets of statements can properly be relied on. 

79.I generally find Mr Poole’s opinion in relation to the Luoyang Project to be plausible and sound.

80.As regards the red flag raised by Ms Tam, my first observation is that the point was not made at all in the written reports.  It was only raised in cross-examination.  There is therefore doubt in my mind as to how strongly or seriously Ms Tam is taking this point.  In any event, Mr Leung submits, and I agree, that when one looks at the independent valuation of the Luoyang Project as of 31 March 2023, Ms Tam’s point is much undermined.  That valuation stood at HK$528,875,000, which was then increased to HK$682,737,500 as of 31 March 2014.  Therefore we are looking at two consistent valuations over two years made by independent valuers.  And such information would have been looked at by the independent auditors when auditing the accounts of APIL and Sure Vantage. 

81.I therefore do not agree with Ms Tam’s point that the quantum of the acquisition price of the 90% interest in Sure Vantage casts doubt on the valuation of the Luoyang Project as stated in the audited accounts.

The defendants’ case 

82.I have already rejected Tsang’s factual evidence on the Luoyang Project.

83.I am similarly unable to accept Ms Tam’s valuation for the following reasons.

84.Ms Tam’s approach is to place reliance on the financial results of APIL as at 31 March 2015 as she takes the view that they contain information on a date closest to the Transfer Date (20 January 2015), and would therefore be most reflective of the company’s position as of the Transfer Date.  I do not take issue with that approach.  I think that it is sound as a matter of logic.

85.The difficulty I have with Ms Tam’s valuation is not about her analysis, but about the sources of information which form the factual basis of her analysis.

86.Specifically, she recounts the following factual matters based on information from, or discussion with, the lawyers:

(1)  There were no material changes to APIL’s operations between 20 January and 31 March 2015: see para 52 above.

(2)  The amount of HK$683 million reported as “Non-current assets – Investment properties under development” in Sure Vantage’s 2014 audited consolidated statements is the value of the property on a completed basis without taking into account construction costs: see para 55 above.

87.She also relies on financial documents which were apparently prepared by the defendants but which have not been audited or in any way verified by independent professional parties.  Materially, she makes use of the draft 2015 consolidated statements of Sure Vantage.  Specifically, she relies on the figure of RMB101.2 million included in the draft as the carrying value of the Luoyang Project in her valuation.  See para 58 above.

88.Tsang, who is the sole factual witness for the defendants in this action, has not put forward these factual information at all in her testimony.  In fact, on her own admission, she would not be able to do so as she is not familiar with the details of APIL’s business.  As to the draft 2015 consolidated statements of Sure Vantage, how they came about is a mystery.  Tsang has not even referred to them in her evidence.  In the circumstances, the court simply cannot take such factual information as part of the evidence in this trial.  Even if it can, it should not give such information any weight.

89.As the major factual planks which form the basis of Ms Tam’s opinion cannot stand, it follows that her opinion cannot stand either.

90.As regards the December 2015 report relied on by Ms Tam, there is a dispute between the experts as to the basis of the valuation adopted by the valuer in that report.  Mr Poole is of the view that the valuation was done on a costs basis (which explains the low valuation of RMB113 million) and therefore cannot be used in arriving at the fair market value of the project.  He points to the methodology expressly stated in the report: “成本法、假设开发法”.  On the other hand, Ms Tam takes the view that the valuation was done on an open market value basis.  She points to the valuation definition expressly stated in the report: “房地产公开市场价值”.

91.It is not possible to resolve the dispute over this Chinese report. Neither Mr Poole nor Ms Tam has suggested that they have expertise in interpreting the terminology used in this type of report compiled in Mainland China.  They did not discuss this report in any detail in their respective reports or the joint expert report.  I do not think I am in a position to find in favour of the opinion of either one of the experts.  I therefore do not think reliance can be placed on this report as suggested by Ms Tam.

Valuation of the Luoyang Project

92.For the reasons stated above, I accept the plaintiff’s valuation of the Luoyang Project.  I therefore find that, as of the Transfer Date, the Luoyang Project was worth about HK$683 million.  I reject the defendants’ valuation in the amount of RMB113 million.

“Other loans”

93.On the issue of whether the balance of “Other loans” should be treated as financial debt or operating debt, I have to say that there is no sufficient information before me to support the plaintiff’s view.  In fact, as can be seen from the extracts reproduced in para 39 above, Mr Poole does not seem to hold a definitive view on the issue: see the underlined words.   

94.The item “Other loans” was included in the accounts as non-current liabilities.  I am not satisfied that the balance of “Other loans” should be treated as operating debt.  Hence, deduction in that amount should be made from the valuation.

95.Notwithstanding that, APIL was still a company of substantial worth and had a fair market value of HK$312 million as of the Transfer Date.  The transfer at the consideration of HK$1 on that day was a transaction at an undervalue within the meaning of section 49 of the Bankruptcy Ordinance.  It should therefore be set aside.

CONCLUSION

96.The plaintiff has proposed a series of orders in the event that the court finds in their favour.  In closing submissions, Mr Chung agreed to the proposed wording in that event. 

97.I adopt the proposal and make the following orders:

(1)  There be a declaration that the Transfer constitutes a transaction at an undervalue under section 49 of the Bankruptcy Ordinance.

(2)  The Transfer be set aside and the Share be vested in the plaintiff and deemed to be part of the bankrupt’s estate as from 5 September 2017.

(3)  Incidental to (2), the register of members of APIL be rectified by its current director to show that the plaintiff have become the sole shareholder of APIL as from the date of the bankruptcy order.

(4)  The current director of APIL do procure it to hand over all book sand accounts, records, documents and papers related to APIL and its subsidiaries to the plaintiff forthwith.

(5)  The injunction granted by Deputy High Court Judge Saunders against the defendants dated 1 August 2018 be continued until the completion of (2) and (3) above, and until the director of APIL be changed to person(s) nominated by the plaintiff and the authorised signatories of the bank accounts of APIL and its subsidiaries be changed to person(s) nominated by the plaintiff.

(6)  The 1^st defendant do account to the plaintiff for all the benefits, money, property and dividend received directly or indirectly (a) from APIL and its subsidiaries, or (b) in consequence of or in connection with the Transfer, to be verified by an affidavit within 14 days of the handing down of this judgment, and do pay such sums found to be due from the account to the plaintiff.

(7)  APIL do provide to the plaintiff an account of all asset disposals by APIL and its subsidiaries in the period since 20 January 2015 up to now within 14 days of the handing down of this judgment.

98.I make a costs order nisi that the plaintiff do have costs of the action, including all reserved costs, to be taxed if not agreed, with a certificate for two counsel.