In a decision handed down by Wilson Chan J on 12 March 2024 in HG Property Investment HK Limited v Cheng Mei Holdings Limited & Ors [2024] HKCFI 750, the Court dismissed the plaintiff’s application for amendment of pleadings and joinder of the intended 4th defendant for a fraudulent conveyance claim.
In short, the plaintiff executed an agreement to purchase, from the 1st and 2nd defendants shareholders, their shares in the 3rd defendant company which owned a commercial building. The plaintiff sued them for breach of agreement and equitable lien, but the 3rd defendant company later sold the building to the 4th intended defendant being a third party purchaser. Whilst the plaintiff seeks specific performance, counsel for the plaintiff expressly abandoned reliance on this as a basis for joinder. Instead, the plaintiff seeks leave to amend to introduce a new claim of fraudulent conveyance under section 60 of the Conveyancing and Property Ordinance (“CPO”), and joinder of the third party purchaser on such basis.
Importantly, whilst acknowledging that the test is whether there is a bona fide claim and a proper question to be tried as between the plaintiff and the intended defendant that is necessary or just and convenient for resolution between them as well as between the plaintiff and the defendants in the present proceedings, Wilson Chan J emphasized that joinder ought to be disallowed if the parties opposing establish that it is plain and obvious that the plaintiff has no case against the proposed defendant. He observed that, likewise, if the proposed amendments are bound to fail, no leave to amend should be granted.
Having considered the proposed amendments, Wilson Chan J refused to grant leave to amend or joinder. Importantly, he held that for the purpose of a fraudulent conveyance claim under section 60 of the CPO, fraud or dishonesty must be “distinctly alleged” and “distinctly proved”, and it must be “sufficiently particularised”. Particulars of facts which are consistent with honesty are not sufficient. It is not open to the court to infer dishonesty (i) from facts which have not been pleaded or (ii) from facts which have been pleaded but are consistent with honesty.
Among others, the plaintiff pleaded that the consideration of sale to the third party purchaser was 16% lower as compared with the consideration of the previous share sale. The Court held that it is a quantum leap to equate the price drop (16%) with a substantial undervalue given that there was a time lapse of over 2 months, not to mention the different stamp duty in sale of property and shares. More importantly, the plea of alleged undervalue is consistent with honesty. For instance, any alleged undervalue might be the result of the market conditions at the time, the increase in interest rates, the lack of interested buyers, the fact that it was a forced sale to enforce a security, etc. As a matter of law, it is simply not open to the court to infer dishonesty from such pleaded fact which is consistent with honesty. The Court found further support from the circumstances of the case, where the property was sold via the receivers to generate proceeds of sale to repay the secured creditors, and the transaction was supported by the secured creditors. In the light of a genuine commercial rationale of this nature, it would require something more to suggest an intent to defraud creditors.
The Court also considered a host of other factors, one of them being that the third party purchaser has charged and assigned the property to a bank to secure term loan facilities. The Court held that, since the plaintiff has not sought to join the bank as an additional defendant in this action; nor does the plaintiff allege that the bank had notice of the alleged intent to defraud, the plaintiff cannot proceed with its claim on section 60 of the CPO anyway in the absence of an application for joinder of the bank.
All in all, it is important to note that the Court could refuse joinder where the intended claim relied upon discloses no reasonable cause of action against the intended defendant.
Jenkin Suen SC instructed by Deacons, acted for the Intended 4th Defendant.
The full judgment of the Court of First Instance is accessible here: https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=158701&QS=%2B%7C%28HCA%2C1469%2F2022%29&TP=JU
