A disposition of property can be set aside under section 60 of the Conveyancing and Property Ordinance (Cap 219) if the transferor had intent to defraud creditors by transferring the property to a transferee and the transferee had not paid valuable consideration in good faith without notice of such intent.

Case analysis
In the recent Court of First Instance case, Cheung Ying Lun and Another v Legal Way Limited and Another [2013] HKCU 2651, the plaintiffs as the creditors of one of the two defendants successfully obtained an order against the defendants setting aside the sale of the property made between the defendants.  

The plaintiffs in Cheung Ying Lun case once commenced another action against certain defendants (“Previous Action”) in which one of the defendants was also the 1st Defendant in Cheung Ying Lun case (“D1”).  In the Previous Action, the plaintiffs successfully obtained a judgment against D1 on 23 May 2012 and were awarded damages and costs for conspiracy to defraud/injure from D1 (“Judgment”) and thus became the creditors of D1.

Seven days after the Judgment was given (i.e. on 30 May 2012), D1 entered into a sale and purchaser agreement (“Agreement”) with the other defendant in Cheung Ying Lun case (“D2”) to sell the property to D2 for HK$2,000,000. On 22 June 2012, D1 executed an assignment (“Assignment”) transferring legal title over the Property to D2. The Agreement and the Assignment were delivered to the Land Registry for registration on 26 June 2012 and 27 June 2012, respectively. On 30 August 2012, a generally indorsed writ was issued by the plaintiffs against D1 and D2 to set aside the sale of the property by D1 to D2. The principal issue was whether the transfer of the Property by D1 to D2 was done with intent to defraud creditors (i.e. the plaintiffs). 

Applicable Rules and Regulations
The relevant statutory provision in relation to setting aside a sale of property is section 60 of the Conveyancing and Property Ordinance (Cap 219) (“CPO”) which provides that “subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.”[1]consideration in good faith was given and it had no notice of the transferor’s intent to defraud creditors.

In Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417creditors (including his future creditors) are clearly subjected at least to a significant risk of being unable to recover their debts in full, such facts ought in virtually every case to be sufficient to justify the inference of an intent to defraud creditors on the disponor’s part”.[2]

In Cheung Ying Lun case, D2 paid the consideration in the amount of HK$2,000,000 for the transfer of the property which made the rule not applicable.  As such, it is for the plaintiffs to persuade the judge that D1 had an actual intent to defraud the plaintiffs as its creditors as inferred from the facts.

The judge finally drew the inference that D1 had transferred the property to D2 with intent to defraud D1’s creditors, in particular the plaintiffs, after considering the following circumstances and found in favour of the plaintiffs:

1.         The price for the sale of the property (i.e. HK$2,000,000) was at a substantial undervalue, compared with the then market value of the property in May 2012 (approximately in the region of HK$4,200,000). No explanation was given from D1 as to the alleged undervalue, which strongly suggests that the sale was not a genuine arm’s length transaction; 

2.         The same solicitors firm acted for both the vendor and purchaser in respect of the Agreement, which was apparently in violation of rule 5C(1) of the Solicitors’ Practice Rules;[4]

3.         The Agreement was entered into seven days after judgment was entered by the plaintiffs against D1 in the Previous Action. The proximity in time between the Judgment and the Agreement supports an inference that the sale was influenced by an intention on the part of D1 to defeat any enforcement measures; and

4.         The Assignment was entered into on 22 June 2012, before the Agreement was delivered to the Land Registry on 26 June 2012 for registration. The Agreement was only stamped on 22 June 2012. It is unusual for a purchaser to have an agreement stamped so late and registered so late, even though it was within the one month period prescribed by section 5 of the Land Registration Ordinance (Cap 128), for this could prejudice the purchaser, for example, by allowing earlier transactions to be completed in the intervening period without notice of his agreement.

Points to note
It should be noted that this kind of cases are fact sensitive. If the rule formulated by Ribeiro PJ in Tradepower (Holdings) Ltd case applies, then probably the disposition of property will be set aside due to the transferor’s intent to defraud creditors. For cases falling outside the rule, it is necessary for the creditors to prove that the transferor had an actual intent to defraud creditors by drawing inference from the facts and the evidence. Nevertheless, if the transferee can establish that the transfer of the property was conducted in good faith and the transferee (i) had paid valuable consideration and (ii) had no notice of the transferor’s intent to defraud creditors, then the disposition of property may not be set aside pursuant to section 60 of CPO.

[1]     Sections 60(2) & (3) states that “this section (i.e. section 60) does not affect the law of bankruptcy for the time being in force; and (3) this section (i.e. section 60) does not extend to any estate or interest in property disposed of for valuable consideration andin good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.” [2]     Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417, para.88. [3]     ibid. [4]     Rule 5C(1) of the Solicitors’ Practice Rules provides that “subject to sub-rules (2), (3), (4) and (5), a solicitor, or 2 or more solicitors practising in partnership or association, shall not act for both the vendor and the purchaser on a sale or other disposition of land for value.”

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.