Introduction

In the recent case of Ho Man Kit v Sure Lead Ltd [2019] HKCFI 2914, the Court dismissed the liquidators’ claim for transaction at undervalue, as the liquidators failed to prove the requisite intention to gift when the gift limb of section 265E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) (the “Ordinance”) was the only ground relied upon by the liquidators.

Facts

On 3 May 2018, Mr Sonu Shailesh Mehta (“Mr Sonu”), the sole shareholder and director of Auragem Company Limited (“Auragem”), executed a written record of sole director to call an extraordinary general meeting to have Auragem wound up voluntarily. On 24 May 2018, Auragem was voluntarily wound-up pursuant to a special resolution passed by Mr Sonu and the First Creditors' Meeting. Ho Man Kit and Kong Sze Man Simone were appointed the joint and several liquidators of Auragem (the “JSL”).

An examination of the bank statements and transfer advices of Auragem revealed that five days after the written record of sole director was executed, two transfers in the total sum of US$180,400 (the “Money Transfers”) were paid to Sure Lead Limited (“Sure Lead”) from Auragem’s bank account.

Upon enquiry made by the JSL, Sure Lead provided an invoice and claimed that the Money Transfers were made to settle payments due to Sure Lead for the liquidation consulting services it had provided to Auragem (the “Alleged Service”). However, Sure Lead was not on the list of sundry creditors in the balance sheet provided by Mr Sonu and no record showed Auragem was indebted to Sure Lead at any material time.

The JSL thus took out an application, by way of originating summons, seeking a declaration that the Money Transfers constitute transactions at an undervalue within the meaning of sections 265D and 266B of the Ordinance on the basis that the Alleged Service provided by Sure Lead did not exist and the Money Transfers should be considered as gifts from Auragem to Sure Lead. Alternatively, the JSL contended that as Auragem was insolvent at the material time, the Money Transfers were unfair preference given by Auragem to Sure Lead within the meaning of sections 266 and 266B of the Ordinance.

The legal principles

Transaction at undervalue

Pursuant to sections 265D and 265E of the Ordinance, if an insolvent company makes a gift or enters into a transaction for a consideration significantly less than the value, the transaction will be voidable if it was entered into within five years prior to the commencement of winding-up. The liquidators may then apply to the court for an order to restore the company’s position to what it would have been if the company had not entered into that transaction.

Unfair preferences

Pursuant to sections 266 and 266A of the Ordinance, where a company transfers assets or pays a debt to a creditor less than six months prior to the commencement of winding-up, that payment or transfer can be set aside on the application of the liquidator as an unfair preference. The Court may then make an order to restore the company’s position to what it would have been if the company had not given that unfair preference.

Decision of the Court

Transaction at undervalue

Insofar as the transaction at undervalue claim is concerned, the JSL relied solely on the gift limb of section 265E of the Ordinance, i.e. that the Money Transfers were gift to Sure Lead. The Judge held that where it is asserted that the transaction in question is a gift, it must be shown that the debtor intended to make a gift and, in the absence of such intention, it does not suffice that no consideration was received such that the transaction was effectively a gift: Re Hampton Capital Ltd [2016] 1 BCLC 374.

In order to constitute a gift, there must have been an intention by the donor to make an immediate present gift; and the gift must be perfected either by delivery of possession or by deed. It must be shown that the donor intends there and then to give the property to the donee: Young Tin Kin Kenneth v Lau Lan Fong Nancy (HCA 1545/2004, unreported, 6 September 2006). The JSL, however, did not seek to prove the requisite intention to gift. Thus, the Court held, the JSL’s claim on transaction at an undervalue should be dismissed.

Nevertheless, the Court went on to consider whether the JSL could rely on the limb of a transaction on terms that provide for the company to receive no consideration. The Court accepted that there are sufficient materials for the Court to cast doubt on the genuineness of the services allegedly provided by Sure Lead to Auragem. However, without proper pleadings and cross-examination, the Court would not be able to determine the issue of fraud and/or sham transactions made for no consideration on paper. JSL’s submission that the Money Transfers were a sham was therefore unsuccessful.

Unfair preferences

The Court accepted that as a matter of fact, the settlement of the invoices through Money Transfers when Auragem was in fact insolvent means that assets of Auragem have been distributed to Sure Lead prior to Auragem’s secured and other unsecured creditors, not in pari passu as would have been the case in the usual liquidation process. The Money Transfers hence had the effect of putting Sure Lead in a better position than it would have been in, had the Money Transfers not been made and Sure Lead had been paid in accordance with the statutory fixed priority during the liquidation process.

As to the requisite mental element, i.e. the desire to prefer, the Court found that other than the invoices, Sure Lead did not apply any pressure to secure a payment. In the absence of any credible explanations, the Court agreed that other than a desire to prefer, there is no other plausible explanation as to why only Sure Lead was paid in full and not any other creditors. The Court was satisfied that the Money Transfers were unfair preference and should be paid back to Auragem.

Conclusion

It is worth noting that with regard to JSL’s claim that the invoices produced were fake and were a sham, the Court commented that the JSL should have applied to continue the proceedings as if begun by writ and for cross-examination, because the Court cannot and should not be expected to resolve serious factual disputes under the originating summons procedure.  Practitioners are reminded to give due consideration to the proper procedure to be adopted, especially where contention of fraud is involved.