Re Chau Sai Man

HCB000006/1978

IN BANKRUPTCY

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Coram: The Honourable Mr. Justice Jones in Court.

Dates of hearing: 30 January and 14, 15, 16 & 19 March 1984

Date of delivery of judgment: 30 March 1984

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JUDGMENT

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1. A bankruptcy petition was presented against Chau Sai Man (the bankrupt) on the 17th January 1978 on the grounds that execution had been levied under Section 3(1)(e) of the Bankruptcy Ordinance Cap. 6. A receiving order was made on the 27th February 1978 when the Official Receiver was appointed to be the trustee in bankruptcy. An adjudication order was made on the 10th April 1978.

2. By the notice of motion that is before me the Official Receiver seeks a declaration that an agreement for sale by the bankrupt to Law Chiu dated the 23rd November 1977 which was registered in the Land Office on the 26th November 1977 in respect of Shop 6 ground floor, 333 King's Road, North Point and an assignment of this property by Law Chiu to the Asia Photo Supply Limited (the Company) on the 27th January 1978 are fraudulent preferences under Section 49 of the Bankruptcy Ordinance and acts of bankruptcy under Section 3(1) and are void against the Official Receiver as trustee. In the alternative the Official Receiver applies for a declaration that the company holds the property on trust for the Official Receiver and an order that the company vests the legal estate in the Official Receiver. Reliance is also placed on the provisions of Statute 13 Elisabeth I C5 of 1571 that the transactions are void or voidable, but this ground did not add anything to the application.

Facts

3. It is common ground that for a long period prior to November 1977 Law Chiu and the bankrupt were engaged in business dealings with each other in the jewellery trade. Law Chiu sold jewellery to the bankrupt on a consignment basis and allowed sixty days credit. Payment was made by post-dated cheques. In September 1977 the bankrupt encountered financial difficulties which subsequently resulted in the bankrupt being unable to pay his debts as they became due in November 1977. It is not in dispute that the assignment to the company on the 27th January 1978 was bona fide for valuable consideration.

Evidence of the bankrupt

4. By his affirmation of the 2nd November 1983 the bankrupt admitted that his indebtedness to Law Chiu in November 1977 was $1,523,540.

5. On the 22nd November 1977 the bankrupt received a visit from a Mr. Kam, who was a stranger, about a dishonoured cheque for $150,000 signed by the bankrupt. Mr. Kam threatened to assault the bankrupt if he did not pay the amount due on the following day. As a result the bankrupt left his home the next morning the 23rd November 1977 and sought sanctuary with Law Chiu at his flat where he was allowed to stay, and where he remained for about one month. On the same day the bankrupt agreed at the suggestion of Law Chiu to transfer four properties including the suit premises in order to settle his indebtedness. An agreement in Chinese exhibit P1 was written by the bankrupt at the dictation of Law Chiu. The agreement reads:-

"          CHAU Sai-man owes to Law Chiu all the prices of goods of HK$1,523,540. There are some uncashed withdrawn cheques which were due at the end of October, altogether HK$74,501. How Chau Sai-man is unable to pay back the prices of goods to Law Chiu and he secured the agreement of Law Chiu that within six months, Law Chiu will not apply to the Court to sue him. Therefore, Chau Sai-man now transfers the following properties to Law Chiu so as to settle part of the price of goods :

After settling the debts with the banks, all the balance of the above will be used to pay back to Law Chiu. Chau Sai-man has agreed to this. It is afraid that verbal agreement cannot be taken as evidence, therefore, the agreement is now made by both parties as evidence. It is also decided that we would go to the solicitor's firm for the necessary procedures within two weeks time.

6. This agreement was made on the 10th day of November 1977."

The bankrupt said that the agreement was back dated to the 10th November 1977 at the request of Law Chiu. Later the same day the bankrupt executed sale and purchase agreements at the offices of Yung, Yu, Yuen & Co. solicitors. However, in his affirmation the bankrupt said that he entered into the agreement to transfer the properties between the 10th and the 22nd November 1977. At the time of the agreement the bankrupt said that he hoped to continue his jewellery business, but this forlorn hope was not fulfilled. The business ceased to operate about the 26th November 1977. The bankrupt claimed that he transferred the properties voluntarily because Law Chiu had been his best friend for over ten years. According to the bankrupt Law Chiu had not threatened previously to institute proceedings against him nor did he believe that he intended to do so. The bankrupt signed the assignment to the company on the 27th January 1978 as vendor whilst Law Chiu signed as confirmor. In cross-examination the bankrupt was particularly evasive when he was asked why he had not transferred one of his properties to Mr. Kam to settle his debt which was for a much lower amount than the sum owed to Law Chiu.

Evidence of Law Chiu

7. Law Chiu testified that when some of the bankrupt's cheques were dishonoured in September 1977 he was told that it was due to the expense incurred by the bankrupt in opening a new shop. As Law Chiu was being pressed by his own creditors he in turn pressed the bankrupt for payment. The bankrupt replied that he would pay gradually after his business began to prosper. However, Lam Chiu later experienced difficulty in locating the bankrupt with the result that on the 2nd November 1977 he left a note with some of the bankrupt's employees asking the bankrupt to contact him. A copy of the note which was kept by Law Chiu exhibit P2 reads:-

"Dear CHOW Sai-man,

You own me an enormous sum of money and the cheque(s) that you have issued are dishonoured. I am now in need of money to pay to the stone/gem company. Anyway, please try your best to pay part of the money owed within 7 days. Please contact me, or else I shall take legal action to settle the matter.

Yours sincerely,

(LAW Chiu)

2-11-1977."

A few days after leaving the note the bankrupt arranged to meet Law Chiu at a petrol station in Tokwawan. At the meeting Law Chiu said he would have to sue if the debt was not settled, whereupon the bankrupt suggested that he would transfer some of his properties to him in part payment of the debt. It appears that Law Chiu and the bankrupt went to K.Y. Woo & Co. solicitors on the 10th November 1977 where Law Chiu made a statement. The statement was not produced in evidence, but reference was made to paragraph 3 which is as follows:-

"After the above had been discussed I and Mr. Chau signed a Chinese agreement on 10th November 1977 and later on the 23rd November 1977 went to Messrs. Yung, Yu, Yuen & Co. solicitors where a formal purchase and sale agreement was signed re the 4 properties I had paid a deposit of $770,000 to the solicitors firm and transaction date was 23rd December 1977 and that transaction could take place before this date."

The reasons for this visit were not satisfactorily explained. Following the visit to K.Y. Woo & Co. the agreement exhibit P1 was written out on the evening of the 10th November 1977 at Law Chiu's flat. A few days before the 23rd November 1977 Law Chiu and the bankrupt went to Yung, Yu, Yuen & Co. to give instructions for the preparation of the sale and purchase agreements which were executed on the 23rd November 1977. Law Chiu allowed the bankrupt to live with him because they were very good friends. However he said that the bankrupt gave no reason for his request.

8. I accept the evidence of Lo King Sheung, the clerk of Yung, Yu, Yuen & Co. who prepared the sale and purchase agreements that he received instructions two or three days before the 23rd November 1977.

LAW

9. Section 49 of the Bankruptcy Ordinance provides:

"          (1) Every conveyance or transfer of property, or charge thereon made, every payment made, every obligation incurred and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor or of any person in trust for any creditor, with a view to giving such creditor, or any surety or guarantor for the debt due to such creditor, a preference over the other creditors, shall, if the person making, taking, paying or suffering the same is adjudged bankrupt on a bankruptcy petition presented within 3 months after the date of making, taking, paying or suffering the same, be deemed fraudulent and void as against the trustee in the bankruptcy.

(2) This section shall not affect the rights of any person making title in good faith and for valuable consideration through or under a creditor of the bankrupt.".

The law on fraudulent preference was expressed by Lord Tomlin in Peat v. Gresham Trust, Ltd. (1934) A.C. 252 at p. 262:-

"In my opinion in these cases the onus is on those who claim to avoid the transaction to establish what the debtor really intended, and that the real intention was to prefer. The onus is only discharged when the court upon a review of all the circumstances is satisfied that the dominant intent to prefer was present. That may be a matter of direct evidence or of inference, but where there is not direct evidence and there is room for more than one explanation it is not enough to say there being no direct evidence the intent to prefer must be inferred.".

10. The matter of pressure was adverted to by Jenkins, L.J. in Re T.W. Cutts (a bankrupt), Ex parte Bognor Mutual Building Society v. Trustee in Bankruptcy (1956) 2 All E.R. 537 at p. 546:-

"Lastly, it is clearly established by the authorities that inasmuch as preference implies selection, and selection implies freedom of choice, a payment must in order to constitute a preference be voluntarily made, and that a payment made under pressure, e.g., in the shape of proceedings actual or threatened by the creditor concerned, or fear of such proceedings, is not for this purpose a voluntary payment: see, e.g., Ex p. Taylor, Sharp v. Jackson and the same case in this court sub nom. New, Prance & Garrard's Trustee v. Hunting ([1897] 2 Q.B.19).

In the present case, therefore, it was incumbent on the trustee to establish either by direct evidence of the bankrupt's intention or by circumstantial evidence affording the degree of proof held to be requisite in Re M. Kushler, Ltd. that the bankrupt paid the £3,303 7s. 9d. to the Society voluntarily and with the dominant or substantial intention of giving the Society a preference over his other creditors.".

In considering the question of intent Phillimore J. had this to say in In re Ramsay Ex parte Deacon [1913] 2 K.B. 80 at p. 87:-

"I think that, when one has to look into the mind of the bankrupt, any act of his at the time or about the time, any matters in pari materia, may be looked into to see what was passing in his mind; .......".

Findings of Fact

11. Neither the bankrupt nor Law Chiu were satisfactory witnesses. At times they were evasive, and on many occasions showed great reluctance to answer perfectly simple questions. However, where the evidence is in direct conflict I prefer that given by Law Chiu for it was far more logical, and had the ring of truth. If the bankrupt's oral evidence is to be believed all the material events that led up to the execution of the sale and purchase agreements took place on the 23rd November 1977. Quite clearly that is not right. I therefore reject his evidence to this effect.

12. In my judgment Law Chiu was anxious to obtain payment from the bankrupt so that he could settle his own debts. The bankrupt became elusive until he received the note from Law Chiu. The bankrupt agreed to transfer the properties at the behest of Law Chiu and subsequently signed the Chinese agreement on the 10th November 1977. I consider that the bankrupt's evidence in his affirmation with regard to the date of the agreements was more reliable than the evidence that he gave in the witness box so I do not accept his evidence that the agreement was back dated to the 10th November 1977. Accordingly, I find that an oral agreement to transfer the properties was made on the 10th November 1977 which was superseded by the written Chinese agreement on the same day. The arrangements for the execution of formal sale and purchase agreements were undoubtedly made by Law Chiu. Again although I accept that there was a history of a long business relationship between the bankrupt and Law Chiu I am by no means certain that they were the best of friends as they alleged. I am satisfied that the bankrupt was in debt to Law Chiu for a very large sum. Whether he owed money to other creditors was not satisfactorily established. In his affirmation the bankrupt said that he left his flat because he feared the threat of physical violence and to avoid his other creditors. Apart from Mr. Kam he made no specific reference to these other creditors apart from a bare assertion that a few million dollars were owed. If he did owe such large sums of money it is somewhat surprising to observe that the petition was based upon a claim for only $42,855 whilst there was no evidence that any proceedings had been instituted against him to recover the other debts. In any event in cross-examination the bankrupt agreed that the main reason for leaving his home was the threat made by Mr. Kam. On the other hand Law Chiu said that the bankrupt made no reference to this incident. The evidence relating to the lankrupt's abrupt departure was not convincing.

13. In considering the standard of proof with regard to intent in order to establish that a debtor left home with intent to defeat or delay his creditors Jenkins L.J. in Re A Debtor (360 of 1951) (1952) 1 All E.R. 519 said at page 521:-

"The proper standard of proof, of the fact of such intent was no less and no more than the common standard of proof, which demanded at least that the court should be satisfied that in all the circumstances of the case the presence of the intent was so much the most probable explanation of the debtor's conduct as to make it in effect the only probable one.".

Although I have been asked to draw the inference that the bankrupt left home with intent to avoid his creditors I am of opinion that the most probable explanation was his fear of Mr. Kam. Nevertheless if I am wrong I do not find upon the evidence adduced that the bankrupt left home with the intention of defeating or delaying his creditors on the assumption that there were other creditors. Although it was contended on behalf of the Official Receiver that the transfer of the properties was made voluntarily I am not persuaded that this was the true explanation. I find that Law Chiu had threatened to institute proceedings which the bankrupt believed to be a genuine threat. By Law Chiu's subsequent actions and from all the circumstances I am satisfied that he imposed pressure on the bankrupt to transfer his property. Law Chiu allowed the bankrupt to stay with him so that he could keep an eye on him until the legal procedures had been completed. Whether or not there were other creditors I am satisfied that the dominant or real intention of the bankrupt was not to prefer Law Chiu. Accordingly the onus of proof that the transactions amounted to fraudulent preferences has not been discharged by the Official Receiver. The motion is dismissed with costs.

Representation:

Mr. Leo Remedios for Official Receiver.

Mr. Benjamin Chain (T.S. Tong & Co.) for 5th Respondent.