Final Appeal No 5-2009 (Civil) Iinternational Cases [2010] Part 12 Case 4 [CFA]



Tradepower (HK) Ltd

- vs -

Tradepower (Holdings) Ltd

(in liquidation)






30 NOVEMBER 2009


Justice Bokhary PJ

  1. I agree with the judgment of Mr Justice Ribeiro PJ.

    Justice Chan PJ

  2. I agree with the judgment of Mr Justice Ribeiro PJ.

    Justice Ribeiro PJ

  3. This appeal is concerned with proceedings brought by the liquidators of the respondent company pursuant to section 60 of the Conveyancing and Property Ordinance (Cap 219) (“section 60”) to set aside a disposition of the respondent’s main asset as a disposition made with intent to defraud creditors. The liquidators also claim relief against the respondent’s former directors personally for misfeasance in connection with that transaction.

  4. Section 60 provides as follows:


    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.


    This section does not affect the law of bankruptcy for the time being in force.


    This section does not extend to any estate or interest in property disposed of for valuable consideration and in 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.

  5. The action was tried by Mr Recorder Jat Sew-tong SC who, at the conclusion of the trial, dismissed the action with costs, expressing the view that the liquidators had failed to establish the necessary intent to defraud: HCA 1796 of 2005 (Reasons, 12 March 2008). Reasons for his decision were delivered on 12 March 2008. As it had been conceded by counsel instructed for the liquidators at the trial (not any of the counsel appearing on this appeal) that the misfeasance claim stood or fell with the section 60 claim, the Recorder did not address the misfeasance claim in his judgment.

  6. The Court of Appeal (CACV 101 of 2008 (Rogers VP, Le Pichon JA and Chung J, 5 Nov 2008)) allowed the liquidators’ appeal, holding that on the evidence viewed objectively, the inference that the directors had acted with intent to defraud creditors was irresistible. The directors were also held liable for misfeasance on the basis that the transaction constituted an unauthorised return of capital. The Court set aside the relevant disposition and declared the 4 th and 5 th defendants guilty of misfeasance, making orders consequential on those findings. The present appeal is brought by leave of the Appeal Committee granted on 30 March 2009:  FAMV 11 of 2009.


  7. The three companies involved in the action, namely, the respondent Tradepower (Holdings) Limited (“Holdings”), the 1 st appellant Tradepower (Hong Kong) Limited (“THK”) and the 2 nd appellant Girvan Limited (“Girvan”) are all Hong Kong companies. They were also, in September 1999, all beneficially owned and controlled by the 4 th appellant, Mr David A Sonnenberg (“Mr Sonnenberg”) and the 5 th appellant, Mr Harold S Divine (“Mr Divine”).   Mr Sonnenberg and Mr Divine were the only shareholders of Holdings and Girvan and were also the only directors of all three companies. 

  8. Prior to the disposition complained of, Holdings’ main asset consisted of 3,749 of the 3,750 issued and paid up “A” shares in THK. The remaining paid up “A” share was held on trust for Girvan by the 3 rd appellant, Rebecca Chan Ho Yun Ping (“Madam Ho”), who acted as company secretary for all three companies. The transaction complained of involved a “reclassification” of Holdings’ 3,749 THK “A” shares, discussed below.

  9. THK’s principal asset consists of three units in a commercial building known as Peninsula Square in Hunghom (“the properties”).  It had purchased them in 1994 for about HK$23 million on a ten-year US$2 million mortgage with Belgian Bank, later renamed Fortis Bank  (“the bank”).

  10. Girvan’s principal activities were stated to be “property investment and investment holding”.  Mr Sonnenberg gave evidence that it owned a number of properties in Hong Kong and certain commercial premises in Thailand.


  11. Mr Sonnenberg was resident in Hong Kong from 1973 to 1983, after which he returned to the United States.  While in Hong Kong, he established a group of trading companies including Holdings and THK, as well as companies in Thailand and Taiwan (“the group”).  Mr Divine was resident in the United States and was not active in the group’s management. At the date of the trial, he was 86 years of age. 

  12. The group traded profitably until the early 1990s. However, when its major customer failed financially, its fortunes declined and Mr Sonnenberg and Mr Divine decided to terminate the group’s trading activities. Nevertheless, in 1994 THK acquired the properties which were then let out to tenants.

  13. The trading companies were sold off to a company referred to by the Recorder as “Grandlink”, the sale having been agreed in principle in 1996 and completed in September 1998.  However, Messrs Sonnenberg and Divine retained ownership and control of the three companies mentioned above and Madam Ho continued to provide them with company secretarial services.

  14. The rental income produced by the properties proved insufficient to cover payments of interest and repayments of principal under the mortgage and, in August 1996, Girvan began to make contributions to cover the shortfall. 

  15. In the same month, August 1996, problems emerged regarding a contract between Holdings and a Swiss customer called Elimor Finance Limited (“Elimor”). Holdings had sold to Elimor a large consignment of umbrellas which were on-sold to Russian sub-buyers. Elimor claimed that a very high percentage of the umbrellas were unmerchantable.   It commenced an action against Holdings in Hong Kong on 5 May 1997, claiming more than US$900,000 in damages. On 28 September 1998, the Master awarded Elimor summary judgment for damages to be assessed and Holdings’ appeal was dismissed by Sakhrani J on 7 January 1999: HCA 4675 of 1997. As various costs orders had by then been made against Holdings, Elimor obtained an appointment for their taxation which took place on 6 October 1999. Taxed costs were allowed in the sum of HK$525,030.50.

  16. Meanwhile, on 9 December 1998, Mr Sonnenberg and Mr Divine, acting as Holdings’ directors, resolved that the company should become dormant and that its shares in THK should be sold. As at August 1999, no buyers had been found. Believing (so the Recorder found) that Girvan had “acquired a beneficial interest in the properties” by making contributions towards the mortgage payments and that such contributions would continue, Mr Sonnenberg asked Madam Ho to seek advice from Holdings’ auditors “to see what could be done to regularise the position”. The auditors dealt with her through their company called Express Consultants Services Limited (“Express”) and, after discussion, Express provided a letter dated 20 August 1999 addressed to Mr Sonnenberg referring to a scheme for altering the shareholdings in THK. 

  17. Mr Sonnenberg and Mr Divine acting as directors of Holdings passed a resolution dated 23 August 1999 for the proposed scheme to be carried out. That was followed by a special resolution of all the members of THK (that is, of its shareholders Holdings, Girvan – with Mr Sonnenberg signing for both companies – and Madam Ho) dated 17 September 1999 for Holdings’ 3,749 issued and paid up “A” shares in THK to be converted or “reclassified” into “class ‘B’ non-voting deferred shares” which would have the rights and restrictions attached to such shares set out in the Articles as amended by an accompanying special resolution. 

  18. Those new “B” shares in reality carried no rights at all. They did not entitle Holdings to receive notice of, to attend or to vote at any general meeting of THK. As a holder of “B” shares, Holdings would partake of income or a return of capital only after holders of “A” shares had had distributed to them “the first HK$1,000,000,000,000,000.00” of such income or capital. The new “B” shares were obviously worthless.

  19. Girvan effectively became the only shareholder of THK in place of Holdings since it was issued 9 class “A” voting ordinary shares (with Madam Ho holding the remaining tenth “A” share in trust for Girvan) and enjoyed the only voting and other genuine shareholder rights in THK. The transaction therefore resulted in the whole of Holdings’ interest in THK effectively being transferred to Girvan.  While the point had been in issue at trial, it is no longer in dispute that the transaction constituted a “disposition” of Holdings’ property for the purposes of section 60. I will call the restructuring of the shareholdings “the scheme” and the transaction as a whole “the disposition”.  Whether the disposition was lawful is the question arising on this appeal.

  20. Armed with an allocatur for taxed costs in the sum of HK$525,030.50, Elimor presented a petition on 28 February 2000 for Holdings to be wound up. A winding-up order was in due course made on 19 April 2000, about seven months after the disposition. 

  21. Elimor’s claim proceeded to an assessment of damages and final judgment in the sum of US$977,654.35 was entered against Holdings on 20 December 2002. That represented the full amount of Elimor’s claim, no resistance having been offered on Holdings’ behalf.

  22. After correspondence with Mr Sonnenberg and Madam Ho raising questions about the disposition, the liquidators of Holdings instituted the present proceedings by writ issued on 14 September 2005.


  23. Three witnesses gave evidence. Mr Kenny Tam (“Mr Tam”), one of the joint liquidators, testified for the plaintiff company in liquidation.  Regrettably, he displayed an extraordinary lack of knowledge of any of the details of the liquidation and it is unsurprising that the Recorder attached no weight to his testimony.

  24. The other two witnesses, testifying on behalf of the defendants (the present appellants), were Mr Sonnenberg and Madam Ho. The Recorder found them both to be credible witnesses. He concluded (Recorder §16):

    .... I am satisfied that I should accept their evidence unless any particular aspect of their evidence is shown to be wrong by undisputed contemporaneous documents or other incontrovertible evidence.

    I would comment in passing that this is an unusual and somewhat unsatisfactory approach. Inconsistencies between the testimony of a witness and other items of evidence have to be evaluated as part of the overall process of assessing credibility. It is not satisfactory first to form the view that the witness is generally credible and then to carve out exceptions in areas where inconsistencies with other evidence are found. Such an approach casts doubt on the initial assessment of credibility.

  25. The Recorder’s legal approach to the section 60 claim (Recorder §§46-51) was based on Lloyds Bank Ltd v Marcan [1973] 1 WLR 1387, Skink Ltd v Comtowell Ltd [1994] 2 HKC 286, and Cannane v J Cannane Pty Ltd (1998) 192 CLR 557. Those are cases (examined below) in which proof of an actual subjective intent to defraud creditors on the disponor’s part was held to be necessary for establishing the requisite statutory intent. Adopting that approach, the Recorder concluded that an intent to defraud had not been established against Mr Sonnenberg and Madam Ho. 

  26. Two major findings led to that conclusion:

    1. that Mr Sonnenberg in fact believed that the scheme and the disposition were carried out for a good and valid reason and not with intent to defraud creditors (“the good reason finding”); and

    2. that he believed in September 1999, that Elimor was the only creditor of Holdings and that Holdings had sufficient funds to meet Elimor’s claim even after disposing of the properties (“the sufficient funds finding”).

    A subsidiary finding was that the timing of the disposition supported the view that no intent to defraud was involved.

  27. In arriving at the good reason finding, the Recorder accepted that Mr Sonnenberg believed

    1. that since THK was unable fully to meet the mortgage payments out of rental receipts, funding had to be provided to prevent the bank taking over the properties and selling them in a depressed market (Recorder §22);

    2. that Girvan had provided (and would continue to provide) such funding and had thereby acquired a beneficial interest in the properties (Recorder §§25 and 34);

    3. that it was unacceptable that Girvan’s interest was not properly catered for, a situation which needed to be “regularised” (Recorder §§60 and 73); and

    4. that on the basis of professional advice received from Express, the scheme and the disposition were executed as a proper way “to ‘align’ the beneficial ownership of THK (and indirectly the properties) with Girvan” (Recorder §§36, 72 and 73).

  28. The Recorder felt fortified in his conclusion by the fact that counsel appearing for the plaintiff at the trial had conceded that Mr Sonnenberg genuinely believed that Girvan had acquired a beneficial interest in the properties (Recorder §25). 

  29. The sufficient funds finding rests on the Recorder accepting

    1. that Mr Sonnenberg knew of Elimor’s interlocutory judgment and of the failed appeal to Sakhrani J, but that he believed Elimor’s claim to have been grossly exaggerated and that it would be susceptible to being greatly reduced or extinguished when damages came to be assessed; and

    2. that Mr Sonnenberg believed that in September 1999, Holdings had about US$287,000 or US$297,000, roughly equivalent to HK$2 million, in cash and that this would be sufficient to meet Elimor’s claim even after the properties had been disposed of.

  30. The Recorder placed considerable reliance on the fact that the scheme was not executed until some seven months after dismissal of the appeal, commenting that such lack of urgency suggested the absence of any dishonest intention (Recorder §§59 and 65). It was, however, not drawn to the Recorder’s attention that the court record shows (as noted above) that between the date of Sakhrani J’s dismissal of the appeal and the disposition, Elimor had obtained an appointment for a costs taxation hearing on 6 October 1999 which resulted in costs being assessed in the sum of HK$525,030.50, providing the basis for the winding-up of Holdings. If the Recorder had realised that the scheme was executed about three weeks prior to that taxation hearing, he may not have regarded the timing of the scheme in such a positive light.

  31. In the event, his Lordship summarised his overall assessment in the following terms(Recorder §84)[1]:

    Looking at all the evidence in the round, and having carefully considered counsel’s persuasive submissions, I am not satisfied that Mr Sonnenberg and Mr Divine, or for that matter Madam Ho, effected the Scheme with a dishonest intention to defraud the creditors of Holdings. It seems to me that, objectively viewed, their intention was to regularise what was reasonably considered to be an unacceptable situation created by the mismatch between the beneficial ownership of the Properties with the party which had been providing a substantial part of the funds needed for acquiring the properties and which would have to continue to provide such funding. And they did so many months after the dismissal of the appeal against the interlocutory judgment, when they believed that the liability to Elimor had yet to crystallise, and when they did not have any positive belief that the assets of Holdings would not have been able to meet that liability if and when ascertained.


  32. A considerable part of the Court of Appeal’s judgment was devoted to demonstrating that the Recorder’s good reason finding was flawed (Court of Appeal §§16-24), however, it is unnecessary at this stage to examine the correctness of its view. The crucial basis upon which the Court of Appeal overturned the Recorder’s decision was its adoption of a different approach to the meaning of “intent to defraud” in section 60 as a matter of law, leading it to the conclusion that on the evidence, the inference that the disposition had been made with intent to defraud creditors was irresistible (Court of Appeal §28).

  33. The Court of Appeal sought to distinguish the cases relied on by the Recorder and held that in the present circumstances, he ought to have applied the approach adopted in Freeman v Pope (1870) 5 Ch App 538. That approach, as developed in later cases, mandates or facilitates the drawing of inferences of an intent to defraud in cases involving voluntary dispositions made by insolvent persons, as further discussed below. If applicable in the present case, such an approach is capable of rendering irrelevant the professed beliefs of Mr Sonnenberg and may justify reversal of the judgment at first instance. However, if that approach is inapplicable, either as a matter of law or on the facts, then the question arises as to whether the Recorder’s findings regarding Mr Sonnenberg’s subjective beliefs can properly be challenged.

  34. Accordingly, the following questions fall to be determined on this appeal:-

    1. As a matter of Hong Kong law, should section 60 be construed in line with the approach adopted in Freeman v Pope in cases concerning a disposition made without consideration by a person who is insolvent, thereby depleting that person’s assets which might otherwise be available to creditors?

    2. If the answer is “Yes”, does the disposition in the present case come factually within the rule?

    3. If the answer is “No” to either of the foregoing questions, is the Recorder’s finding that an intent to defraud had not been established against the appellants susceptible to challenge?

  35. The Court must also consider whether the directors, Mr Sonnenberg and Mr Divine have properly been found by the Court of Appeal to be personally liable for misfeasance.


    E.1 The relevance of the statute of Elizabeth

  36. The provisions of section 60 have been set out at the start of this judgment. It is based on section 172 of the English Law of Property Act 1925 (“section 172”).[2]  Both of these sections have as their statutory predecessor, the statute 13 Eliz I, c 5 (“the statute of Elizabeth” enacted in 1571) which was made applicable in Hong Kong by the Application of English Law Ordinance (Cap 88, section 4 and Schedule, para10). Section 60 replaced the statute of Elizabeth in Hong Kong on 1 November 1984 and presently remains in force.[3]

  37. The long title of the statute of Elizabeth relevantly provided that it was an Act:

    For the avoiding and abolishing of feigned, covinous and fraudulent feoffments, gifts, grants, alienations, conveyances, [etc] .... as well of lands and tenements, as of goods and chattels, more commonly used and practised in these days than hath been seen or heard of heretofore: which feoffments, gifts, grants, alienations, conveyances, [etc] .... have been and are devised and contrived of malice, fraud, covin, collusion or guile, to the end, purpose and intent, to delay, hinder, or defraud creditors and others of their just and lawful actions, suits, debts, accounts, [etc] ....

    I have italicised the words of particular relevance to this case. The statute went on to provide that all fraudulent conveyances devised to the intent mentioned in the long title were deemed as against the defrauded person to be “clearly and utterly void, frustrate, and of none effect”.[4]

  38. It is relevant to note section 60’s statutory ancestry since the case-law on the meaning of the statute of Elizabeth has continued to exert an important influence on the construction and application of the succeeding legislation.

    E.2 The rule in Freeman v Pope

  39. As appears from its text, the purpose of the statute of Elizabeth was to protect creditors from fraudulent conveyances of property intended to defraud them of their lawful debts, actions and so forth. Such fraudulent practices were stated to be “more commonly used and practised in these days than hath been seen or heard of heretofore”.

  40. To give effect to that legislative purpose, the courts gave the words of the statute a wide construction. Thus, 30 years after its enactment, the Star Chamber in Twyne’s Case (1601) 3 Co Rep 80b, was reported to have resolved as follows:

    And because fraud and deceit abound in these days more than in former times, it was resolved in this case by the whole Court, that all statutes made against fraud should be liberally and beneficially expounded to suppress fraud.

  41. This was reiterated over 170 years later by Lord Mansfield CJ in Cadogan v Kennett (1776) 2 Cowp 432 stating:

    The principles and rules of the common law, as now universally known and understood, are so strong against fraud in every shape, that the common law would have attained every end proposed by the statutes 13 El c 5 and 27 El c 4. The former of these statutes relates to creditors only; the latter to purchasers. These statutes cannot receive too liberal a construction, or be too much extended in suppression of fraud.

  42. An important area in which the statute was applied concerned debtors making voluntary dispositions.  In Cadogan v Kennett, ibid at 435, Lord Mansfield CJ stated:

    The circumstance of a man being indebted at the time of making a voluntary conveyance is an argument of fraud. The question .... in every case is, whether the act done is a bonâ fide transaction, or whether it is a trick and contrivance to defeat creditors.

  43. The indebted man making the voluntary conveyance referred to by Lord Mansfield CJ was not necessarily insolvent. But there developed a strong line of authority for the proposition that where a disposition was made without consideration by an insolvent debtor so that his creditors were thereby defeated or delayed, the combination of insolvency and voluntariness was sufficient to bring the case within the statute and to justify setting the disposition aside. 

  44. Thus, in Jenkyn v Vaughan (1856) 3 Drewry 419, dealing with the statute of Elizabeth, Sir Richard Kindersley VC stated:

    .... with regard to creditors being so at the time, it is established that it is not necessary to shew from anything actually said or done by the party that he had the express design by the deed to defeat creditors; but if he includes in it property to such an amount that, having regard to the state of his property, and to the amount of his liabilities, its effect might probably be to delay or defeat creditors, if the Court is satisfied of that, the deed is within the meaning of the statute.

  45. The most well-known authority for the aforesaid proposition is Freeman v Pope (1870) 5 Ch App 538, relied on by the Court of Appeal in the present case. 

    1. Lord Hatherley LC began his judgment by stating (at 540):

      The principle on which the statute of 13 Eliz c 5 proceeds is this, that persons must be just before they are generous, and that debts must be paid before gifts can be made.[5]

    2. He went on to hold that (at 541):

      .... it is established by the authorities that in the absence of any such direct proof of intention, if a person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of the settlement (supposing it effectual) that some creditors must remain unpaid, it would be the duty of the Judge to direct the jury that they must infer the intent of the settlor to have been to defeat or delay his creditors, and that the case is within the statute.

    3. Freeman v Pope was a case involving a voluntary settlement where the settlor “was clearly and completely insolvent the moment he had executed the settlement” (at 542) so that (at 543):

      The case .... is one of those where an intention to delay creditors is to be assumed from the act.

    4. That the settlor may have been motivated by other concerns and given no thought to his creditors in making the disposition was not relevant, ibid:

      It seems to me that the difficulty felt by the Vice-Chancellor arose from his thinking that it was necessary to prove an actual intention to delay creditors, where the facts are such as to shew that the necessary consequence of what was done was to delay them. If we had to decide the question of actual intention, probably we might conclude that the settlor, when he made the settlement, was not thinking about his creditors at all, but was only thinking of the lady whom he wished to benefit; and that his whole mind being given up to considerations of generosity and kindness towards her, he forgot that his creditors had higher claims upon him, and he provided for her without providing for them.

    5. His Lordship concluded (at 544):

      I am quite willing to believe that he had no deliberate intention of depriving his creditors of a fund to which they were entitled, but he did an act which, in point of fact, withdrew that fund from them, and dealt with it by way of bounty. That being so, I come to the conclusion that the decree of the learned Vice-Chancellor [setting aside the settlement] is right.

    6. Sir G M Giffard LJ acknowledged that “an actual and express intent is necessary to be proved” in cases where valuable consideration is given for the property disposed of, and continued (at 545):

      .... but where the settlement is voluntary, then the intent may be inferred in a variety of ways. For instance, if after deducting the property which is the subject of the voluntary settlement, sufficient available assets are not left for the payment of the settlor’s debts, then the law infers intent, and it would be the duty of a Judge, in leaving the case to the jury, to tell the jury that they must presume that that was the intent. Again, if at the date of the settlement the person making the settlement was not in a position actually to pay his creditors, the law would infer that he intended, by making the voluntary settlement, to defeat and delay them.

  46. By the time of Freeman v Pope, the rule was considered well-settled. As Sir Richard Malins VC stated in Mackay v Douglas (1872) 14 LR Eq 106 at 120:

    It is not at all necessary to shew that a man had any fraudulent intent in making a settlement as the law is now settled. It is very true that some of the old authorities cited by Mr. Fischer, particularly Stileman v Ashdown 2 Atk 477, and many of the decisions long after that, proceeded upon the assumption that the settlement could not be set aside unless there was an intention to defraud, because the words of the statute are, ‘with intent to defraud, defeat, or delay creditors.’ But that has been long got rid of, and it is not necessary now to shew that. The statute speaks of cases where the creditors ‘are, shall, or might be in any wise disturbed, hindered, delayed, or defrauded,’ and it is not necessary to shew an intention to do that, because if the settlement must have that effect the Court presumes the intention and will attribute it to the settlor.

  47. The cases show that it had become the practice for solicitors to advise clients intending to make voluntary settlements that such settlements were valueless unless the clients were solvent.[6] 

  48. This approach to the construction of the statute of Elizabeth is sometimes called “the rule in Freeman v Pope”: proof that a voluntary disposition was made by a person while insolvent or resulting in his insolvency so as to deplete the fund from which his creditors’ claims might be satisfied, was sufficient proof of an intent to defraud creditors within the meaning of the Act. It was unnecessary to explore the actual intent, still less the motives, of the disponor in such cases.

    E.3 The rule in Freeman v Pope developed

  49. The rule in Freeman v Pope was developed in certain important respects. One such development concerned the burden of proving insolvency. It was often not apparent whether the disponor was insolvent at the time of making the voluntary disposition. It may have been clear that he had debts, but insolvency might have been difficult to establish. Where the disponor’s insolvency emerged a relatively short time after the challenged disposition, the authorities cast upon him the burden of showing that he had been solvent at the time of alienating his property. 

  50. Thus, in Crossley v Elworthy (1871) 12 LR Eq 158 at 164, where insolvency followed nine months after the voluntary settlement, Malins VC stated:

    Now, considering that he had made a settlement only nine months previously, I think that state of things is sufficient to relieve those who desire to impeach the settlement from proving insolvency, and to throw upon Mr Elworthy the burden of proving that he was in a position to make the settlement. The general policy of the Act of 13 Eliz c 5, is, that those who are engaged in the transactions of life, buying or selling, or otherwise indebted, are not, by means of a voluntary settlement, to take their property out of the reach of their creditors. If a man does under such circumstances make a settlement, it seems to me in the highest degree reasonable that upon him should be thrown the burden of proving that he was in a condition to make it when it was executed.

    His Lordship pointed out (at 167) that the burden might be discharged, for instance, by showing that he was “perfectly solvent one year and insolvent the next” because of “some unexpected loss, or something which could not have been reasonably reckoned upon when the settlement was executed”.

  51. When Malins VC decided Mackay v Douglas (1872) 14 LR Eq 106 in the following year, he went somewhat further.  That was a case where the debtor’s insolvency followed seven months after the voluntary settlement was made. After reiterating what he had said about the burden of proving solvency (at 119), Malins VC explained (ibid) that when he stated that the person concerned had the “burden of proving that he was in a condition to make” the settlement he had meant that even proving solvency at the time of the disposition might, in certain circumstances, not be sufficient to take the case out of the statute of Elizabeth. Thus, although the debtor in Mackay v Douglas, was able to show that he was not insolvent at the time of settling his property on his wife and children, Malins VC found that he had done so “with the view that he was going into partnership in which he might become bankrupt or insolvent and utterly ruined; and therefore he did it with the view that he might be indebted” and accordingly set aside the settlement (at 122). His Lordship posed and answered a rhetorical question as follows (at 118-119):

    .... is the statute of Elizabeth so very short in its effect that it will not cover a case where a man on the very eve of entering into trade takes the bulk of his property and puts it into a voluntary settlement and becomes insolvent a few months afterwards? Is it to be said that such a settlement cannot be reached by any principle of law? I think not.

  52. An important facet of Mackay v Douglas, supported by the Court of Appeal in Ex parte Russell (1882) 19 ChD 588,[7] was that it construed the statute of Elizabeth as extending to future creditors.  Ex parte Russell was another case of a debtor settling his property on his family before entering into a risky business venture. Jessel MR stated (at 598-599):

    The object of the settlor was to put his property out of the reach of his future creditors. He contemplated engaging in this new trade and he wanted to preserve his property from his future creditors. That cannot be done by a voluntary settlement. That is, to my mind, a clear and satisfactory principle.

    E.4 Cases falling outside the rule in Freeman v Pope

  53. I have referred to Crossley v Elworthy, Mackay v Douglas and Ex parte Russell as cases developing the rule in Freeman v Pope because of their exposition of the burden of proving insolvency and of the applicability of the statute where future creditors are prejudiced by the disposition. However, on their facts, those decisions are better viewed as cases falling outside the rule.  In each of them, the debtor was not insolvent at the time of the disposition.  But in each case the court found that the conveyance had been made with intent to defeat or delay creditors as an inference of fact based on the evidence.  Each settlor’s intention had been to enter into a hazardous venture at the time of making the settlement, from which the court inferred that he had alienated his property in anticipation of potential insolvency and thus with an actual intent to defraud future creditors.

  54. Plainly, where the case fell outside the rule in Freeman v Pope, it was necessary to infer from the evidence an actual intent to defraud on the disponor’s part. If the disposition was made for valuable consideration or if it was made when the debtor was perfectly solvent, the logic of that rule does not run. The disponor’s creditors are not necessarily prejudiced and it cannot be said, to use the words of Lord Hatherley LC, that the case is one “where an intention to delay creditors is to be assumed from the act.”  Some additional fact must be established to show the statutory intent.

  55. When consulting the authorities, it is essential to keep in mind the two different approaches to establishing an intent to defraud: the approach in cases falling within, and that in cases outside of, the rule in Freeman v Pope

  56. Mr Mark Strachan[8] sought to argue on behalf of the appellants that the rule in Freeman v Pope was undermined by the Court of Appeal’s decision in Ex parte Mercer, In re Wise (1886) 17 QBD 290. I do not agree. That was a case which plainly fell outside the rule so that the Court of Appeal disposed of the matter on the basis that no actual intent to defraud could be inferred on the settlor’s part.  It was made clear by their Lordships that they were not concerned with the rule in Freeman v Pope.

    1. The settlor was a master mariner who had been engaged to a woman in England but then married another woman on one of his voyages. His former fiancée sued him for breach of promise of marriage and, some nine days after he was served with the writ, he executed a voluntary settlement in favour of his wife of a legacy of £500 which he had received under his stepfather’s will. It later turned out that the jury awarded the plaintiff £500 and she sought to impeach the settlement under the statute of Elizabeth.

    2. As Lindley LJ noted (at 301): “Unexplained, the circumstances had a very suspicious appearance.”  But evidence accepted by the Divisional Court and the Court of Appeal showed that at the time of the settlement, the settlor “did not owe a shilling in the world” (at 299) and that he thought the action against him would come to nothing. Lord Esher MR accepted that the verdict of the jury was “startling” and one which he “certainly should not have anticipated”. Moreover, the master’s wages were thought likely to have been sufficient to meet any award within the ordinary run of awards (at 300-301).

    3. The master had therefore shown that he was solvent at the time of the settlement so that this was a case outside the rule in Freeman v Pope.  It was in this context that the court emphasised that proof of an actual intent to defraud was needed. Lord Esher MR stated, ibid:

      In order to make this deed void under the Statute of Elizabeth (however far that statute may be stretched), we are bound in the present case to find that there was an actual intent in the bankrupt's mind to defeat or delay his creditors, and there is no evidence of such an intent.

      [emphasis supplied]

      And Lopes LJ put it thus (at 302):

      The question which I should have left to the jury is this - Whether, having regard to all the circumstances, the settlor intended to defeat or hinder his creditors? That is a question of fact which can only be determined by the evidence.

    4. Lord Esher MR, in an obvious reference to the rule in Freeman v Pope, was careful to state (at 299):

      Whether the fact that the necessary effect of a voluntary deed is to defeat or delay the creditors of the grantor will make the deed void under the statute of Elizabeth, although there was no such intent in his mind at the time when he executed it, is a question which we are not now called upon to decide.

    5. Lindley LJ similarly acknowledged that (at 301):

      It is true that voluntary settlements have been set aside under the statute, as it has been construed for a great number of years, in cases in which there was no actual intention to defraud. It has been held to be sufficient if, when the settlement is executed, the circumstances are such that it must have that effect.

      After cautioning against being misled by language which may confuse the boundary between law and fact, his Lordship continued:

      But although I am not prepared to say that a voluntary settlement can never be set aside under the statute of Elizabeth, as it has been construed, unless there has been in fact an intention to defraud, I am not aware of any decision which goes the length of upsetting the present deed under the circumstances with which we have to deal.

    6. Lopes LJ made it plain that the court was not concerned with the rule (at 302):

      We need only consider the law so far as it applies to the facts of the present case. It has been argued that, if the necessary effect of a voluntary settlement is to defeat or hinder creditors, the Court is bound to infer such an intent, whether it did or did not in fact exist. I will express no opinion upon that matter, because it is not necessary for the purpose of deciding the present case. It cannot, according to my view, be said that it was the necessary consequence of this voluntary settlement to defeat or hinder the settlor's creditors.

  57. Many instances of cases can be found which do not come within the rule in Freeman v Pope on their facts, but where the courts have acknowledged the existence of the rule.  To take one such example, in Gregg v Holland [1902] 2 Ch 360 at 372, dealing with a voluntary family settlement by a husband, Vaughan Williams LJ stated:

    .... the settlement which he in fact did make seems to me to have been a right and proper settlement for the husband to make of property coming to him in the right of his wife, provided only he was not, at the time of the execution of the settlement, unable to pay his creditors, or contemplating entering upon or continuing in a business of such a speculative nature as to be likely to land him in financial embarrassments.

    [emphasis supplied]

    E.5 Continuing relevance of the authorities

  58. It has generally been accepted that the authorities on the statute of Elizabeth continue to provide guidance for the interpretation of succeeding statutory provisions. The policy of protecting creditors from fraudulent dispositions intended to defeat their lawful claims has certainly not changed.

  59. This has been accepted in connection with section172 of the Law of Property Act 1925 in the United Kingdom. In Lloyds Bank Ltd v Marcan [1973] 1 WLR 339 at 344 at first instance, Pennycuick VC stated (in relation to section 172(1)):

    I think it is fairly clear that the word ‘defraud’ in this subsection is designed to reproduce the expression ‘hinder, delay or defraud’ in the Statute of Elizabeth, and is not intended to be confined to cases of fraud in the ordinary modern sense of that word, ie as involving actual deceit or dishonesty. It is quite inconceivable that if Parliament had intended to circumscribe the effect of the old provision it would not have done so in clear terms. The word ‘defraud’ in the context of section 172, and having regard to the history of its statutory predecessor, must, I think, carry the meaning of depriving creditors of timely recourse to property which would otherwise be applicable for their benefit.

  60. The Vice-Chancellor was upheld in the Court of Appeal where Russell LJ commented that the transaction in that case was “made with intent to defraud the bank within section 172, and would have been within the Statute 13 Eliz I, c 5.” (Lloyds Bank v Marcan [1973] 1 WLR 1387 at 1391.) While it is true  that Cairns LJ disagreed with Pennycuick VC as to the meaning of “intent to defraud” under section 172 (a matter discussed further below), it is clear from Cairns LJ’s citation of authority that he too considered the earlier cases applicable to the section.

  61. Similarly, in Australia, section 121 of the Bankruptcy Act 1966 (Cth) shares the same pedigree[9] (as do similar provisions in State legislation).  In PT Garuda Indonesia Ltd v Grellman (1992) 107 ALR 199 Wilcox, Gummow and von Doussa JJ noted in their joint judgment in the Federal Court that (at 205):

    The Elizabethan statute has been replaced in England by the Law of Property Act 1925 (UK) s 172. This has been said not to relevantly alter the law as established by the decisions upon the earlier statute: Re Kelly; Ex parte Young (1932) 4 ABC 258  at 261.

    Their Honours added:

    Whilst the terms in which s 121 is expressed are strongly reminiscent of those of the earlier statutes, and whilst guidance may be obtained from the earlier law, the present statute must, in the end, be given effect according to its terms. In particular, effect must be given to s 6 [of the Act].

    Section 6 of the Commonwealth statute does not detract from the potential applicability of the rule in Freeman v Pope in construing the provisions of section 121.[10] 

  62. In the New Zealand Supreme Court’s recent decision in Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 at 442, §4, Elias CJ noted that:

    The cases decided under 13 Eliz c 5 have been held to apply to the modern re-enactments in New Zealand and in the United Kingdom and Australia.

  63. And in our Court of Appeal, Godfrey JA stated in Skink Ltd v Comtowell Ltd [1994] 2 HKC 286 at 291:

    These proceedings are brought pursuant to s 60 of the Conveyancing and Property Ordinance. This is the Hong Kong equivalent of the provision first found in the Statute of Elizabeth (13 Eliz Cap 5) which makes void as against creditors [of] deeds made ‘to the end, purpose and intent to delay, hinder or defraud creditors and others ....’ Section 60, like its present English equivalent (s 172 of the Law of Property Act 1925), shortens this to ‘intent to defraud creditors’. This contraction does not, in my judgment, make any difference.

    E.6 The rule in Freeman v Pope and section 60

  64. To what extent is the rule in Freeman v Pope, developed under the statute of Elizabeth, applicable in the construction of section 60?  Is the fact that someone depletes his assets by a disposition of his property without consideration when insolvent sufficient to justify a finding of an intent to defraud creditors under section 60?

    E.6a The English authorities

  65. As previously noted, our section 60 is equivalent to section 172 of the Law of Property Act 1925 in England.[11]   The English authorities on that section are sparse but, in my view, they clearly indicate that the rule in Freeman v Pope, or a closely analogous rule, is applicable as a rule of construction where voluntary dispositions are made by an insolvent disponor.

  66. This was clearly the view of Harman J in In re Eichholz deceased [1959] 1 Ch 708, a case of a solicitor who, having misappropriated clients’ funds, made valuable gifts to his second wife while hopelessly insolvent. After citing Freeman v Pope at length, his Lordship held that “all this continues to be good law under section 172 of the Law of Property Act, 1925” and set aside the gifts. 

  67. Although Pennycuick VC in Lloyds Bank v Marcan [1973] 1 WLR 339 pointed out that the judgment in In re Eichholz was vitiated by Harman J’s erroneous belief that the Law of Property Act 1925 was an Act consolidating the statute of Elizabeth, Pennycuick VC in fact took the same view regarding the applicability of the rule in Freeman v Pope in the construction of section 172. Thus, as we have seen, his Lordship thought it “fairly clear that the word ‘defraud’ in this subsection is designed to reproduce the expression ‘hinder, delay or defraud’ in the Statute of Elizabeth” and that while “a man’s intention is a question of fact”, such intent “may also be imputed on the basis that a man must be presumed to intend the natural consequences of his own act” (citing Freeman v Pope) (at 344).

  68. The influential decision of the English Court of Appeal in Lloyds Bank v Marcan [1973] 1 WLR 1387, is sometimes (in my view incorrectly) thought to be authority against the continued applicability of the rule in Freeman v Pope

    1. In that case, a husband had given a bank a guarantee secured on his property and, when faced with proceedings by the bank for vacant possession, granted to his wife a 20 year lease over that property at a rent to be fixed by a person nominated by the president of the Royal Institution of Chartered Surveyors. The wife therefore gave full consideration for the lease, taking the case outside the rule in Freeman v Pope.

    2. When the bank moved to set aside the lease under section 172, it therefore had to show that in granting his wife the lease, the husband had an actual intent to defraud his creditor the bank. The court held that an inference of such intent was clearly to be drawn since, as Russell LJ put it (at 1391), the lease was “.... designed expressly to deprive the bank of the ability to obtain the vacant possession to which the bank plainly attributed value, and to diminish to that extent the strength of the bank's position as creditor ....”, adding that taking such action at that juncture “was, in the context of relationship of debtor and creditor, less than honest.”

    3. In so holding, Russell LJ was not casting doubt on the rule in Freeman v Pope. On the contrary, he acknowledged its existence, using the language of inference (at 1390):

      If he disposes of an asset which would be available to his creditors with the intention of prejudicing them by putting it, or its worth, beyond their reach, he is in the ordinary case acting in a fashion not honest in the context of the relationship of debtor and creditor. And in cases of voluntary disposition that intention may be inferred.

    4. The following passage in Cairns LJ’s judgment has most often been relied on (and was relied on by the present appellants) as purportedly destructive of the rule (at 1392):

      Both under the Statute of Elizabeth I and under section 172 of the Law of Property Act 1925 it is clear from the words of the enactment that fraud has to be established before a transaction can be avoided. In my opinion, fraud involves dishonesty and I cannot go with Pennycuick VC in his observation [1973] 1 WLR 339, 344 that the word ‘defraud’ in section 172 ‘is not intended to be confined to cases of fraud in the ordinary modern sense of that word, ie, as involving actual deceit or dishonesty.’ It is clear enough that deceit is not a necessary element, but in my view dishonest intention is, at any rate when the conveyance is for consideration.

    5. The qualification in the final words of that paragraph – “at any rate when the conveyance is for consideration” – is noteworthy.  The significance of those words is made plain by what Cairns LJ stated in the paragraph which immediately followed, ibid:

      Other cases make it clear that if the conveyance is voluntary it is easier to infer a dishonest intention than when it is made for consideration or even that no dishonest intention need then be established: see Freeman v Pope (1870) 5 Ch App 538, Ideal Bedding Co Ltd v Holland [1907] 2 Ch 157, In re Eichholz, decd [1959] 1 Ch 708.

    6. Reading both paragraphs together, it is in my view clear that Cairns LJ was insisting on dishonesty as an ingredient of the actual intent to defraud only when proof of such an actual intent was necessary, that is, where consideration is given and the case falls outside the rule. At the same time his Lordship recognized that other cases made it clear that where there was a voluntary conveyance – in circumstances falling within the rule – no dishonest intention might need to be shown, expressly citing Freeman v Pope and In re Eichholz in support. Those cases have already been discussed. Ideal Bedding Co Ltd v Holland [1907] 2 Ch 157, is similarly a case in which the rule finds support. Kekewich J there held that a voluntary settlement on a wife and child made by an insolvent settlor was “obnoxious to” the statute of Elizabeth (at 165).

  69. As section 172 has given way to section 423 of the United Kingdom’s Insolvency Act 1986, more recent authorities on the former provision cannot be found. However, in Giles v Rhind (No 2) [2008] 3 WLR 1233, Arden LJ (Sedley and Buxton LJJ concurring) noted that section 423 derived from the statute of Elizabeth and commented that under the considerable case law that had built up (at 1240, §15):

    Intent to defraud could be inferred from the making of a conveyance that would leave creditors unpaid: Freeman v Pope (1870) LR 5 Ch App 538. As Lord Hatherley LC so pithily put it in that case, at p 540, ‘persons must be just before they are generous’.

    E.6b The Australian authorities

  70. The first major Australian decision on legislation succeeding the statute of Elizabeth[12] was that of the High Court of Australia in Williams v Lloyd, Re Williams (1934) 50 CLR 341. It was a case where the court declined to infer an intent to defraud. As Dixon J pointed out (at 371-372):

    Once it is acknowledged, as upon the evidence I think it must be, that in 1926 the bankrupt was in a perfectly sound financial position and had nothing to fear, subsequent conduct and events form an insufficient basis for a finding that the documents were shams, or that he had an intent to defraud his creditors ....

  71. It was accordingly a case about a solvent alienor and fell outside the rule in Freeman v Pope.  It was in that context that Dixon J stated:

    A real intent to defeat or delay creditors must exist, and the question always is whether, upon all the circumstances of the transaction, the transfer or other disposition was in fact made with that intent.

  72. In Noakes v Harvy Holmes & Son (1979) 26 ALR 297, a case involving a voluntary transfer of shares by Mr Noakes to his wife while he was insolvent (and therefore a case within the rule), Brennan J (Deane and Fisher JJ concurring) distinguished Williams v Lloyd on the basis that it was addressing a situation outside the rule. His Honour stated:

    We were pressed with some observations in Williams v Lloyd; Re Williams (1943) 50 CLR 341, where the court affirmed that the burden of proof that a transfer was made with a real intent to defeat or delay creditors is upon the party who so alleges. But that was a case where, at the time of the challenged disposition of property by a husband to his wife, he was in a sound financial position, and it was held that subsequent conduct and events were insufficient to show that the husband had at that time an intent to defraud creditors (see the judgment of Dixon J at 372). In the present case, the inevitable result of the transfer of shares on 13 December 1976 was to defeat or delay any attempt to execute the judgment in Norfolk Island. The case falls squarely within the line of authorities of which Freeman v Pope (1870) 5 Ch App 538 is the leading example ....

  73. It is true that in Noakes, the Court was concerned with the statute of Elizabeth which was then still in force on Norfolk Island. However, it is evident that Brennan J was not distinguishing Williams v Lloyd on that basis. His Honour was assuming that the rule in Freeman v Pope was applicable to the construction of both statutory provisions and distinguishing the High Court’s decision on the basis that that Court was dealing with a solvent alienor.

  74. Support for the applicability of the rule can also be found in the joint judgment of Wilcox, Gummow and von Doussa JJ in PT Garuda Indonesia Ltd v Grellman (1992) 107 ALR 199 which was concerned with section 121 of the Bankruptcy Act 1966 (Cth).[13]  The Court cited with approval a passage from a textbook by A N Lewis (Australian Bankruptcy Law, 4th ed, 1955, pp 45-6) which effectively stated the rule in Freeman v Pope and the Court continued as follows:

    There is a substantial body of authority in decisions upon the Elizabethan statute and its modern representatives which supports the statement by Clyne J in Re Trautwein [(1944) 14 ABC 61 at 75]: ‘With regard to the applicant's claim under s 37A of the Conveyancing Act, it is, I think, clearly established that in determining whether or not an alienation has been made with intent to defraud creditors, a court must look at all the circumstances surrounding the alienation to ascertain if there were any such intent. It is not necessary to bring actual proof that the alienor had in his mind an intention to defraud creditors: for if it appears from the evidence that the effect might be expected to be and has in fact been to do so, the court will attribute the fraudulent intention to the alienor.’

    The Court concluded that in construing section 121(1), the approach to drawing the inference described by Brennan J in Noakes v Harvy Holmes & Son (1992) 107 ALR 199 at 210 ought to be adopted (supra).

  75. However, some six years after P T Garuda, the decision of the High Court in Cannane v J Cannane Pty Ltd (1998) 192 CLR 557 (with Kirby J dissenting) made the rule’s application in Australia questionable.

    1. Mr Cannane and his companies (which he had guaranteed) were in serious financial difficulties and receivers had been put in by his bankers. A proposal which was explored by the receivers involved the acquisition of another company in order to obtain a “back door” listing. That came to nothing as the receivers’ offer was rejected by that other company.  Thereafter, Mr Cannane and his family company transferred two $1 shares in a shelf company called Wisbeck Pty Ltd to his wife and one of his sons for a consideration of $1 for each share. The Cannanes hoped that Wisbeck would be able to raise finance and would succeed in making the acquisition where the receivers had failed. That was in fact subsequently achieved, profitably for Wisbeck. Mr Cannane was made bankrupt and the trustee in bankruptcy sought to set aside the transfer of his share in Wisbeck. The courts below found that at the time of the transfer, the shares had had a value of no more than $1 each.

    2. The analysis of “intent” in Cannane centres on the financially neutral effect of the transfer. As Gummow J pointed out (at 578-579), the full present value of the two shares ($2) was received and the later increase in their value in the hands of the transferees was the result of other activities. The transfer of the shares for their full present value therefore did not deplete the debtor’s assets or prejudice the creditors in any way (a fact which takes the case outside the rule in Freeman v Pope). Such a disposition therefore could not be said to have been accompanied by an intent to defraud creditors.[14] 

    3. It was therefore not a case involving the rule in Freeman v Pope.  Nevertheless, dicta placing significant qualifications on the rule are found in some of the judgments. Thus, in their joint judgment, Brennan CJ and McHugh J stated (at 565-566):

      Provisions of this kind, based on 13 Eliz I c 5, have been considered by courts in various jurisdictions and it is clearly established that the party seeking to avoid a disposition of property has the onus of proving an actual intent by the disponor at the time of the disposition to defraud creditors ....[15]

    4. Citing Freeman v Pope and Noakes v Harvy Holmes & Son their Honours (without disapproving either authority) go on to say that such actual intent (at 566-567):

      .... may be inferred from the making of a disposition which, to adopt the words of Lord Hatherley LC in Freeman v Pope, ‘subtracts from the property which is the proper fund for the payment of [the] debts, an amount without which the debts cannot be paid’ .... a subtraction of assets which, but for the impugned disposition, would be available to meet the claims of present and future creditors is material from which an inference of intent to defraud those creditors might be drawn. Whether that inference should be drawn depends upon all the circumstances of the case.

      They added (at 567):

      Section 121 is not enlivened merely by showing that the disposition has reduced the assets available to the creditors when the disponor is adjudicated bankrupt. It is the disponor's intent to deprive creditors of assets against which (or against the proceeds of which) they would otherwise be entitled to prove their debts that enlivens the operation of s 121.

    5. Gaudron J’s judgment was to like effect, stressing the need for “a real intent” to be shown, although she added (at 572):

      That is not to deny that it may take very little to justify a finding of fraud or intent to defraud for the purposes of s 121(1) of the Act if the person or company concerned disposes of assets when facing financial difficulties. Even so, the real intent must be ascertained.

    6. Kirby J dissented. Having recognized a divergence of judicial opinion on the question, his Honour’s view was that (at 594):

      The broad approach to the ascertainment of an ‘intent to defraud creditors’, favoured by the Full Court in this case and in the earlier decision in Garuda, is correct. The narrower approach requiring proof of an intention to ‘swindle’ creditors of their entitlements is not appropriate to s 121. Adopting such an approach would seriously undermine the section's effectiveness.

    7. His Honour observed that strong practical reasons exist in support of that view (at 592):

      Even when the distinction between intention and motive is kept in mind, knowledge of subjective intention will ordinarily, or often, be reserved to the person whose interests may be so affected that an assertion, one way or the other, cannot necessarily be accepted at face value. That is why, at least in a provision such as s 121, it is not necessary to establish that the transferor of the property in question actually had in mind an intention to defraud creditors if the effect of what that person did would reasonably be expected to have such a consequence. Courts will therefore infer the intention in issue, deciding it as a question of fact. This does not mean that the intention so derived is one imputed by the law. It is not a fiction. It is the real intention of the transferor decided objectively rather than upon protestations of innocence on the part of the debtor or outraged accusations on the part of suspicious creditors.

  76. The majority of their Honours therefore appear, obiter, to have relegated the depletion of a fund as a result of a voluntary disposition by an insolvent debtor with the probable or inevitable consequence of defeating or delaying creditors into “material from which an inference of intent to defraud .... might be drawn”.  That is a considerable distance away from the line of cases which regarded such facts as giving rise either to an irrebuttable presumption or to an irresistible or near irresistible inference of an intent to defraud.

    E.6c The New Zealand authorities

  77. In New Zealand, the successor to the statute of Elizabeth was section 60 of the Law of Property Act 1952, which is materially the same as the other successor provisions already mentioned. After its enactment, the courts proceeded on the basis that the alienation of property had to be shown to have been made “with intent to defraud creditors” as “a question of fact to be decided by a consideration of the alienation in the light of all the circumstances”, but also noted “the possible exception of a voluntary alienation made by an insolvent debtor” citing Freeman v Pope.[16] 

  78. It is unnecessary to explore the earlier decisions further as we now have the benefit of the New Zealand Supreme Court’s decision in Regal Castings Ltd v Lightbody [2009] 2 NZLR 433.

    1. The respondent had a jewellery business operated through a company which was incurring large debts to the appellant, its main supplier. The respondent had guaranteed those debts.

    2. The respondent caused his home to be transferred to a trust ostensibly in consideration of a debt repayable seven years later. However, the debt was progressively forgiven or reduced by sums gifted to the trust by the respondent so that four years later, it had been extinguished. It was therefore probably within the rule in Freeman v Pope since the respondent was evidently insolvent and the purported consideration was illusory.

    3. All of the judges held that on the evidence, an actual intent to defraud could be inferred. They differed, however, on the extent to which the rule in Freeman v Pope, was applicable in inferring the intent.

    4. While Elias CJ expressed herself to be in agreement with the analysis and conclusions in the joint reasons of Blanchard and Wilson JJ’s (at 441, §2), her approach appears closely aligned to that in the joint judgment of Brennan CJ and McHugh J in Cannane v J Cannane Pty Ltd (1998) 192 CLR 557 mentioned above. She rejected the stricter approach whereby the intent might be imputed as a matter of law, favoured by Tipping J (discussed below) and stated (at 443, §5):

      If an alienation is voluntary (that is to say, not for valuable consideration) or is at a clear undervalue, so that the fund available to creditors is depleted, it may be easy to infer an intent to defraud. Some cases go further, suggesting that in the case of a voluntary alienation by an insolvent debtor it is not necessary for a creditor prejudiced to establish fraudulent intent and that such intent will be presumed as a matter of law, either rebuttably (through transfer of the onus of proof to the defendant) or conclusively (through imputing intent in such circumstances as a matter of law). As indicated at para [9], I think the better view is that the question of intent remains one of fact on the evidence and that such intent is not properly imputed as a matter of law.

    5. At the para [9] referred to (at 444), Elias CJ held that any rule which would impute an intent to defraud was “not sufficiently supported by the authorities and runs counter to modern authority”.

    6. At the other end of the spectrum was Tipping J who took Freeman v Pope to be authority “for the proposition that there is an irrebuttable presumption of intent to defraud in the relevant circumstances” (at 467, §91). His Honour supported the logic of that approach (at 471, §104):

      I do not regard the rule in Freeman v Pope as anomalous. It reflects the fact that there is a crucial difference in present circumstances between intent and motive. The motive of the alienor in Freeman v Pope may well have been to benefit the alienee without any conscious wish or intent to harm his own creditors. But his intent, he being insolvent, was taken to have been to defraud the creditor concerned as that was the likely consequence of what he was doing. The policy behind this application of the legislation is simple. Insolvent debtors are not allowed to make gifts which prejudice the interests of creditors. That seems to me to be a very salutary rule which should be maintained in the form of the irrebuttable presumption for which Freeman v Pope stands.

      He pointed out that:

      The practical basis for the rule in Freeman v Pope was the difficulty of contemplating circumstances in which an inference of intent to defraud should not be drawn when an insolvent debtor gives away property.

    7. The joint judgment of Blanchard and Wilson JJ with which McGrath J agreed may be regarded as the majority opinion on this point. While their Honours did not adopt the language of “irrebuttable presumption” favoured by Tipping J, their approach to cases within the rule in Freeman v Pope was similarly strict. They held in effect that where an insolvent disponor makes a voluntary disposition of his property with the necessary or probable result that his creditors are put at significant risk of not recovering their debts, an intent to defraud is irresistibly to be inferred. 

    8. In reaching this conclusion, their Honours began by holding that the phrase “intent to defraud” should be regarded as “shorthand for intent to hinder, delay or defeat a creditor in the exercise of any right of recourse of the creditor in respect of property of the debtor” which corresponds with the approach adopted in later New Zealand legislation (s 345(1)(a) of the Property Law Act 2007). They accepted that this involved showing a dishonest intent on the debtor’s part and that this was a question of fact (at 456, §52). However, they emphasised that “it is essential to distinguish between the debtor's purpose and his or her intention”, stating (at 456-457, §53):

      It is not necessary to show that the debtor wanted creditors to suffer a loss, or that it was his purpose to cause loss. It is, however, necessary to show the existence of an intention to hinder, delay or defeat them and that the debtor has accordingly acted dishonestly.

    9. It is irrelevant that the debtor may not have desired to cause loss or may not have given his creditors any thought (at 457, §54):

      Whenever the circumstances are such that the debtor must have known that in alienating property, and thereby hindering, delaying or defeating creditors' recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amounts owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor's wish to cause them loss.

    10. Addressing a Freeman v Pope type of case, their Honours stated (at 457-458, §55):

      The most simple case is one in which an insolvent debtor has gifted a substantial asset to a relative or friend or to trustees of a family trust, thereby subtracting from an already insufficient quantum of assets .... The consequence for the creditors is so obvious that it is really beyond argument that the debtor must be taken to have intended it. Someone who claims that he or she gave no thought to the position of creditors when making a gift in circumstances of insolvency is unlikely to be believed. There has always been found to be the requisite dishonest intent where the debtor was insolvent and gifted away his or her property.

    11. Their Honours recognized that their position was in practice little different from Tipping J’s approach (at 457, §55):

      There may be room for argument over whether in that circumstance there is or is not a presumption, perhaps irrebuttable, of an intent to defraud. It would be a rare case in which a difference of view on that question would affect the outcome.

    E.6d Cases on fraudulent trading

  79. Before leaving the analysis of the applicable case-law, I ought to mention the reliance placed by the appellants (and in some of the reported cases) on decisions concerning the concept of an intent to defraud creditors as used in legislation on fraudulent trading. Reliance was placed by the appellants in particular on the judgment of Lord Hoffmann NPJ in this Court in Aktieselskabet Dansk Skibsfinansiering v Brothers (2000) 3 HKCFAR 70. That was a case in which a creditor sought to impose personal liability on the directors of a borrower company pursuant to section 275(1) of the Companies Ordinance (Cap 32) which provides as follows:

    If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of the Official Receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.

  80. It was in applying that section that Lord Hoffmann NPJ stressed “that the question of whether the person carrying on the business was fraudulent was subjective in the sense that he personally must have been dishonest.” (2000) 3 HKCFAR 70 at 79. And it was for the purposes of that section that his Lordship (at 81), citing Menzies J in Hardie v Hanson (1960) 105 CLR 451,[17] stated that “in cases in which fraud is inferred, there is always .... ‘something else’: a misrepresentation to creditors of the company's position or their prospects of payment or a dishonest intent to gain some personal advantage.”

  81. Both Menzies J and Lord Hoffmann NPJ were considering whether a person should be found to be trading fraudulently if he continues to carry on business, obtaining credit from his suppliers, while genuinely believing that things will improve and that he will be able to repay his creditors even though, viewed objectively, his belief is wholly unrealistic and unreasonable. It was in such cases that the “something else” – something beyond the objective unreasonableness of his beliefs – was held to be required to brand him dishonest.

  82. Fraudulent trading provisions like section 275 address the broad and fluid situation of someone “carrying on the business of the company” and require the courts to grapple with the question of when that activity ceases to involve merely misguided optimism and becomes cheating one’s creditors. It is not surprising that they have espoused a requirement of subjective dishonesty as the basis for drawing that line, and in doing so, have stressed that it is not enough to show objective unreasonableness in continuing with a doomed business and required “something else” to make that conduct fraudulent.

  83. On the other hand, provisions like section 60 focus on the quality and impact upon creditors of specific dispositions of property in the light of the disponor’s financial condition at the time each disposition was made – a far more limited and well-defined inquiry. While the confined scope of section 60 permits the development of a rule based on inescapable inferences such as the rule in Freeman v Pope, the ground covered by section 275 is far too wide and amorphous to allow this. The two exercises are qualitatively different and I therefore do not consider the approach of the courts to dishonest intent in the fraudulent trading cases to be of any assistance in our present context.

  84. I would add that the courts will naturally be slow to impose personal liability on directors who understandably consider themselves within the protection of the limited liability afforded to the company through which they are trading and will do so only if personal dishonesty on their part can be established. The courts can feel much less constrained in a Freeman v Pope situation where they are being asked merely to set aside a disposition made by an insolvent debtor to a person who gave no consideration for the property received. They are merely being asked to ensure that the debtor is just before he is generous, and that he pays his debts before making gifts. 

    E.7 Establishing  an “intent to defraud creditors” under section 60

  85. Three alternative approaches to establishing the necessary intent to defraud creditors emerge from the cases discussed. 

    • First, there is the approach which essentially denies the applicability of the rule in Freeman v Pope, requiring an actual dishonest intent to defraud creditors to be established as a matter of fact on the whole of the evidence in every case, and treating the combination of insolvency and a voluntary disposition merely as material from which an inference of the necessary intent may be drawn (with those features making it perhaps easier to draw the inference).[18]

    • Secondly, there is the approach which favours applying the rule in Freeman v Pope as an irrebuttable presumption of law, so that proof that a disposition was made by an insolvent disponor thereby putting the creditors at risk of being unable to recover their debts constitutes in law the statutory intent.[19]

    • Thirdly, there is the approach which treats the requisite intent to defraud as a matter of fact to be inferred from the evidence as a whole but recognizes that the circumstances in Freeman v Pope type cases are sufficient in themselves to justify drawing that inference without more, whether or not the disponor actually had his creditors in mind when making the disposition and ignoring any assertions that he acted for motives other than an intention to defraud his creditors.[20]

  86. With both the second and third alternatives, it is accepted that where a case does not factually fall within the rule in Freeman v Pope, section 60 is not engaged unless the evidence justifies inferring an actual intent to defraud on the disponor’s part.

  87. In my opinion, the policy of section 60, the overall balance of persuasive authority and the compelling logic of the rule in Freeman v Pope favour the adoption of either the second or third alternatives, which, as Blanchard J noted,[21] are likely to differ little from one another in practice. Having to choose between them, I favour the third alternative (with a minor qualification mentioned below) since, to modern ears, the phrase “intent to defraud creditors” is more naturally suited to the language of inference rather than the language of irrebuttable presumptions. One would expect such an intent to be inferred as a state of mind possessed by the disponor rather than something attributed to him by imputation of law.

  88. I would formulate the applicable rule for cases like Freeman v Pope as follows. Where it is objectively shown that a disposition of property unsupported by consideration is made by a disponor when insolvent (or who thereby renders himself insolvent) with the result that his creditors (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. In cases falling outside the rule, that is, in cases where the disposition is made for valuable consideration, or where the disponor is not insolvent or where the disposition does not deplete the fund potentially available to the creditors, an actual intent to defraud creditors must be shown as an inference properly to be drawn on the available evidence before section 60 is engaged.

  89. A disposition made where the rule applies is, to paraphrase Russell LJ, less than honest in the context of the debtor and creditor relationship (Lloyds Bank v Marcan [1973] 1 WLR 1387 at 1391). I find it difficult to envisage why such facts should only be regarded as material “making it easier to draw the inference” since I find it hard to see why any other ingredients should be needed to justify drawing the inference. As Tipping J pointed out, the practical basis for the rule in Freeman v Pope is the difficulty of contemplating circumstances in which an inference of intent to defraud should not be drawn when an insolvent debtor gives away property.[22]

  90. In my formulation of the rule above, I state that such facts ought “in virtually every case” to be sufficient. I have added that minor qualification to guard against the possibility that some wholly exceptional (presently unforeseen) circumstance might compel the conclusion that the inference should not be drawn, notwithstanding that the case comes within the rule in Freeman v Pope. It is a qualification I have added on the basis that, as Lord Nicholls of Birkenhead said in a different context, “‘Never say never’ is a wise judicial precept” (In re Spectrum Plus Ltd (in liquidation) [2005] 2 AC 680 at 699, §41). Like Blanchard and Wilson JJ, I consider it likely that the inference will as a rule prove irresistible in cases within the rule in Freeman v Pope.

  91. This permits me now to address the first of the questions posed at the end of Section D of this judgment. In my view, as a matter of Hong Kong law, section 60 is be construed in accordance with the rule in Freeman v Pope as formulated above. Whether the disponor was insolvent at the material time and whether the disposition was made for consideration are questions of fact to be objectively determined. Where the insolvency of the disponor becomes clear a relatively short time – a matter of months – after he disposed of his property, the onus falls upon him to show that that he was not insolvent when or upon making the disposition. 


  92. This brings us to the second question posed at the end of Section D above: does the disposition by Holdings of its THK shares come within the rule in Freeman v Pope as formulated in the preceding Section?

  93. Mr Strachan conceded, correctly in my view, that there was no consideration for Holdings’ disposition of the THK shares to Girvan. The first condition of the rule is therefore met.

  94. The Recorder found that the THK shares had a net asset value in September 1999 of some HK$4 million to HK$5 million (Recorder §82). It is therefore clear that the disposition did deplete the fund consisting of Holdings’ assets to that extent. If the disposition was effectual, those assets would be taken out of the reach of Holdings’ creditors. 

    F.1  Was Holdings solvent in mid-September 1999?

  95. The only dispute in the present appeal regarding the applicability of the rule in Freeman v Pope concerns the question whether Holdings was insolvent when it made the disposition in mid-September 1999.

  96. In dealing with that issue, I take as my starting-point, the fact that Holdings was wound up as insolvent on 19 April 2000, about seven months after the disposition. The appellants therefore had the onus of showing that Holdings was actually solvent in September 1999, applying the principle as to burden laid down in authorities such as Crossley v Elworthy (1871) 12 LR Eq 158 at 164 and Mackay v Douglas (1872) 14 LR Eq 106. That they should bear such an onus is particularly appropriate in the present case. Mr Sonnenberg’s evidence was that Holdings had been dormant and without income from a time well before September 1999. Unless the appellants are able to show otherwise, the inference to be drawn from the winding-up order in April 2000 must be that nothing had changed and that Holdings had been insolvent since at least September 1999. Have the appellants discharged that onus?

  97. As noted in Section C above, the Recorder found that Mr Sonnenberg believed that Elimor was the only creditor and that he believedHoldings had sufficient funds to meet Elimor’s claim, which he discounted as insubstantial. Mr Strachan submitted that the Recorder must additionally be understood to have found that Holdings was then solvent as a matter of objective fact and that the burden of showing solvency had accordingly been discharged. 

  98. There are two components to the appellants’ argument in support of a finding that Holdings was solvent in mid-September 1999: (i) the allegedly insubstantial nature of Elimor’s claim and (ii) the availability to Holdings of about HK$2 million in cash to meet any anticipated claims. 

    F.1a Was Elimor’s claim substantial?

  99. It will be recalled that Elimor’s claim was for breach of a contract for the sale of a large consignment of umbrellas, most of which were alleged to have been unmerchantable. The pleaded claim was for damages which Elimor put at US$934,463.03.[23]  The master awarded judgment under Order 14 for damages to be assessed and Holdings’ appeal was dismissed by Sakhrani J.  At those hearings, Holdings was represented by counsel and solicitors.

  100. The Recorder did not make any finding as to whether Elimor’s claim, pending the assessment of damages, could in fact properly be regarded as insubstantial. He accepted that Mr Sonnenberg had not received legal advice as to the likely quantum of damages and limited his findings to what Mr Sonnenberg believed regarding the judgment. He found that Mr Sonnenberg believed that the judgment had been obtained on the basis of inaccurate (indeed, fraudulent) inspection certificates; and that he believed that the claim was grossly exaggerated and would be much diminished or even extinguished at the assessment stage (Recorder §§29, 58, 62, 63 and 84).

  101. The Recorder did not refer to the contents of Sakhrani J’s judgment. He decided that he should place no weight on it because Mr Sonnenberg had not been asked whether he had seen it or if he had been advised about its contents. I do not think that was the correct approach. It reflected a legal approach which failed to consider the applicability of the rule in Freeman v Pope and which, in the light of my foregoing conclusion, was erroneous. While the Recorder would have been right to disallow any purported reliance on Sakhrani J’s judgment as a basis for rejecting Mr Sonnenberg’s asserted beliefs on the ground that the judgment had not been put to him for the purpose of challenging those beliefs, the contents of the judgment bear directly on the question whether the claim was substantial and therefore on whether Holdings was objectively solvent at the material time. It is necessary to examine Sakhrani J’s judgment in that context. 

  102. In my view, on any sensible reading of his Lordship’s judgment, the claim had to be treated as substantial and no basis existed for thinking that it could significantly be reduced or extinguished at the assessment hearing. 

  103. Sakhrani J relied on survey reports based on several inspections of the goods attended by a Mr Vassiliadis, Holdings’ agent. He relied on the inspection certificates to decide two issues. First, he found that there was no triable issue as to short delivery and awarded final judgment for US$3,911.00 on that claim.  Secondly, since the contract allowed a tolerance of 2% of unmerchantable goods, he relied on the certificates in finding that such tolerance level had unquestionably been exceeded so that a breach of contract had been established.

  104. While Sakhrani J noted that it would be open to Holdings at the assessment hearing “to show .... that the number of defective umbrellas were less than .... as pleaded”, he also noted that the inspections conducted in Mr Vassiliadis’s presence indicated that “a very high percentage of defective goods was found”. Having referred to the particulars of Elimor’s claim (which quoted inspection reports recording that between 71.9% and 87% of the goods were rejects), Sakhrani J stated:

    It is plain on the evidence that certainly much more than 2% of the goods supplied under both contracts were defective rendering them unmerchantable and not fit for their purpose.

  105. Nowhere in Sakhrani J’s judgment is there mention of any suggestion that the certificates were inaccurate, much less fraudulent. If such a suggestion could credibly have been made, the Order 14 application plainly could not have succeeded. Far from denying the accuracy of the certificates, admissions as to the existence of defects had been made by Mr Vassiliadis. The defence sought to be run merely involved an attempt to suggest that Mr Vassiliadis had ceased to act as Holdings’ agent, but that was rejected by Sakhrani J on the evidence.

    F.1b Cash available to Holdings in mid-September 1999?

  106. The other half of the solvency equation involves the appellants’ contention that the Recorder found that in September 1999, Holdings had about HK$2 million in cash which would have been available to creditors even after the disposition. Mr Anderson Chow SC[24]  submitted that insofar as the Recorder had purported to make such a finding, he misapprehended the evidence since no basis for it exists.

  107. In §64 of his judgment, the Recorder stated as follows:

    On the other hand, it is accepted by Mr Tam that when Holdings went into liquidation, it had about HK$2 million in cash. Mr Sonnenberg’s evidence in re-examination is that in September 1999, Holdings should have around US$287,000 or US$297,000 in cash, mainly representing debts collected from one of Holdings’s agents in London. Those figures tally broadly with the HK$2 million given by Mr Tam and I accept that in September 1999, Holdings either had around HK$2 million or a real expectation of receiving this sum soon, which would have been made available to meet Elimor’s claim once assessed.

  108. It is clear from the transcript that the first sentence in §64 is incorrect. Mr Tam’s evidence did not address the amount of cash held at the date of the liquidation (April 2000), but at the date of the trial (February 2008). Mr Wright, then appearing for the appellants, put it to him that “the assets of the plaintiff company as at today’s date are in the region of HK$2 million” and the answer obtained was “Realised, I think it’s 2 million.”  Mr Tam was then asked, but was unable to say, whether that sum had been held by December 2002.

  109. It appears from the rest of §64 that the Recorder did not make a definitive finding, but accepted as one of two alternatives, the possibility that Holdings in fact had HK$2 million in cash in September 1999. The other was that Holdings had “a real expectation of receiving this sum soon” – a very different proposition in the context of trying to demonstrate Holdings’ solvency in September 1999.  But leaving aside the difficulties raised by the lack of a definitive finding, was there any basis for accepting the availability of HK$2 million cash as a possible alternative?

  110. The question of Holdings’ assets as at September 1999 was only broached with Mr Sonnenberg in re-examination:


    What was your understanding in September 99 about the assets which Tradepower (Holdings) owned?


    Well, I think they had some -- they had some cash in the bank. I can’t tell you how much. I think they were entitled to receive a debt that was payable by Mr Ralph Derman who was our agent in London at that time, selling agent. Ultimately those funds were collected and those funds were ultimately held by the official receiver and it was referred to, I believe, yesterday. The other asset, of course, was the ownership of Tradepower (Hong Kong) Limited. 


    Just focussing on the cash, you’ve heard the official receiver give evidence about the amount that the -- the amount that’s held in the bank account of Tradepower (Holdings), does that equate with your own recollection about the amount which Tradepower (Holdings) was entitled to receive?


    Yes. More or less. The amount that Mr Derman had paid in was, I think, something over US$200,000 and I would imagine there was some lower amount in the accounts of Tradepower (Holdings) as well, and that -- those two amounts comprise the amount that the official receiver was holding. And somehow the amount, the total amount of US$297,000 seems to stick in my mind. Maybe it was 287 or 297. I’m not certain now.

  111. It is clear that Mr Sonnenberg was not saying that Holdings had HK$2 million or the US$ equivalent in September 1999. He thought Holdings then had some cash in a bank but could not say how much. He referred to US$200,000 as a receivable which was ultimately collected and held by the Official Receiver, obviously at some time after the company was put into liquidation. That corresponds with Mr Tam’s evidence as to the amount realised as at the date of the trial.  Moreover, as Mr Chow SC pointed out, it is overwhelmingly unlikely that the money was in Holdings’ coffers at any time before the winding-up order since it was Holdings’ inability to pay the taxed costs debt of HK$525,030.50 – a fraction of the mooted HK$2 million – that resulted in its being wound up. 

    F.1c Holdings was insolvent

  112. In my view, the appellants plainly failed to discharge the burden of showing that Holdings was solvent at the date of or as a result of the disposition. Indeed, on the evidence, the inference that Holdings was insolvent appears to me to have been irresistible. Holdings faced a claim from Elimor particularised in an amount exceeding US$900,000, upon which Elimor had obtained summary judgment for damages to be assessed. Holdings’ appeal had failed and Sakhrani J, in dismissing the appeal, plainly regarded the evidence, based in part on admissions made by Holdings’ agent, as tending to prove that a large proportion of the goods in question were defective. On any view, Holdings faced a substantial claim. The evidence falls far short of establishing that Holdings had sufficient assets after the disposition to meet such a claim.  Indeed, Holdings was unable even to meet Elimor’s claim to be paid its taxed costs in the amount of HK$525,030.50. 

    F.2 Conclusion as to the section 60 claim

  113. It is accordingly my conclusion that the rule in Freeman v Pope as formulated in Section E.7 above applies on the facts of the present case. Mr Sonnenberg and Mr Divine caused Holdings to dispose of its principal asset, the THK shares, for no consideration at a time when Holdings was insolvent, thereby subjecting Holdings’ creditors at least to a very real risk of being unable to recover their debts in full. This provides a sufficient basis for inferring that the disposition was made with intent to defraud creditors and for it to be set aside by order of the Court pursuant to section 60. Accordingly, I would dismiss the appeal on the section 60 claim.

  114. In the light of my conclusion, the third question identified at the end of Section D above does not arise for decision. However, as considerable time was spent discussing it, I ought to express my views briefly on that question.

  115. Mr Chow SC made compelling arguments for concluding that on the evidence objectively viewed, there was little substance in the reasons put forward by Mr Sonnenberg to justify the scheme and the disposition. He submitted that it is impossible to see what depriving Holdings of its THK shares had to do with preventing foreclosure by the bank: Girvan had been topping up the payments and would have to continue to do so regardless of whether the “A” shares were “reclassified”. Since Mr Sonnenberg and Mr Divine owned both Holdings and Girvan, it could not have mattered to them whether Holdings or Girvan held the THK shares – save of course for the critical fact that Holdings had been sued to an interlocutory judgment for damages to be assessed. The suggestion that the scheme was “to regularise” the position rings hollow, especially when that fact is taken into account. It is in any event hard to see any justification for Girvan taking over the entirety of THK when it had contributed only a relatively small proportion of the cost of acquiring THK’s properties. The suggestion that all of this was done on the professional advice of Express is not borne out as the letter provided by Express did not in fact offer any advice and certainly did not address the merits or propriety of the scheme. Mr Chow also advanced arguments indicating how the suggestion that Holdings had sufficient funds to meet potential claims was untenable.  Most of those arguments have already been considered in the foregoing discussion of Holdings’ insolvency.

  116. The difficulty that the respondent faced in this context is that none of the aforesaid points were put to Mr Sonnenberg in cross-examination as a basis for challenging his asserted subjective beliefs (assuming for present purposes that such beliefs were relevant to establishing the necessary intent). Indeed, counsel at the trial conceded that Mr Sonnenberg honestly believed that Girvan had acquired a beneficial interest in THK’s properties, a fact which facilitated the Recorder’s finding that the requisite intent had not been established.  For these reasons, cogent though Mr Chow’s criticisms of the scheme may be, such criticisms cannot now be entertained as a basis for challenging the Recorder’s acceptance of Mr Sonnenberg’s professed beliefs. The respondent succeeds on the section 60 claim because the application of the rule in Freeman v Pope as formulated above renders those beliefs irrelevant, not because the Recorder’s findings as to those beliefs have been undermined.


  117. The concession made by counsel at the trial that the personal claims against Mr Sonnenberg and Mr Divine would stand or fall with the section 60 claim was wrongly made. It was based on an incorrect view of the law and the Court is, of course, not bound by concessions made on questions of law which it regards as erroneous.[25]

  118. If, as the Recorder had held, the disposition could not be set aside for want of an intent to defraud creditors, it fell to be determined whether the directors, in causing that disposition to be made had acted in breach of their fiduciary duties to Holdings. In the Court of Appeal, the question was also raised as to whether the disposition  – made, it must be remembered, to Girvan which was a company which the directors themselves owned and controlled – constituted an unratifiable return of capital to Holdings’ shareholders.  Le Pichon JA, with whom the other members of the Court of Appeal agreed, held that the directors were liable for misfeasance and that the disposition did amount to a return of capital.

  119. On the footing that the order setting the disposition aside is effective in restoring to Holdings its main asset so that it now forms part of the fund available to claimants in its liquidation, the personal claim against the directors becomes somewhat academic and can be briefly dealt with in this judgment.

  120. Mr Strachan rightly did not seek to suggest that the disposition was carried out in the best interests of Holdings or for purposes reasonably incidental to its business. He accepted, as we have seen, that Holdings received no consideration for the THK shares so that effectively, a gift of its main asset was made to Girvan, a company wholly owned by the Holdings directors who had resolved to make the gift. It was on its face a disposition made to advance the personal interests of Holdings’ directors at Holdings’ expense and prima facie a breach of the directors’ fiduciary duties. 

  121. The defence relied on by Mr Strachan was that the gift had been ratified by all of Holdings’ members, that is, by Mr Sonnenberg and Mr Divine, who were its only shareholders.  There had not been any resolution by Holdings in general meeting to that effect but the board resolution which they had signed for the scheme and the disposition to be carried out was relied on as constituting a sufficient informal ratification by the unanimous assent of all shareholders having a right to attend and vote at a general meeting.[26]

  122. Mr Chow submitted that there are two reasons why such ratification is ineffective in the circumstances of the present case:

    • first, because, as held by the Court of Appeal, the gift was an unauthorised return of capital (or a prohibited distribution); and

    • secondly, because, Holdings being then insolvent or in serious financial difficulty, the rights of creditors had to be taken into account and were capable of overriding those of its shareholders.

    The first of those arguments targets Mr Sonnenberg and Mr Divine as members of Holdings who have received (via Girvan) Holdings’ assets which were not lawfully distributable or who have unlawfully received a return of capital. The second argument targets them as directors guilty of misfeasance which cannot be excused on the basis of ratification by the company’s members. In my view, the respondent is entitled to succeed on both of those arguments.

    G.1 Unlawful distribution

  123. As I have already held, the inference that Holdings was insolvent at the time of or as a result of the disposition is irresistible. On that basis, the conclusion that the disposition was unlawful and incapable of being ratified by the company’s members can be arrived at by applying the Companies Ordinance or by applying the general law.

  124. Under section 79B(1) and (2) of the Companies Ordinance, a company may not make a distribution except out of profits available for the purpose, that is, out of its accumulated, realised profits less its accumulated, realised losses.[27]  Given Holdings’ financial condition, it must have been obvious to Mr Sonnenberg and Mr Divine, that the gift of the THK shares to Girvan could not have been a distribution made out of profits available for the purpose. Its effect was to render the company insolvent (even if it was not by then already insolvent) as demonstrated by the winding-up order made seven months later. The gift was therefore plainly made in contravention of section 79B. Since the directors clearly had reasonable grounds to believe that the distribution constituted such a contravention, they became liable under section 79M[28] to pay to Holdings a sum equal to the value of the THK shares transferred to Girvan. There can be no question of any contravention of those statutory provisions being legitimised by the company’s members ratifying the prohibited distribution.

  125. Section 79M(2) preserves the operation, alongside the provisions considered above, of other rules which impose liability on members to repay unlawful distributions.[29]  The position as a matter of general law is well-established. Given that Holdings was insolvent or became insolvent as a result of the disposition, the voluntary disposition in the present case must be regarded as an unauthorised return of capital to Holdings’ shareholders (via their company Girvan).  As such, it cannot stand. As Oliver J stated in Re Halt Garage Ltd [1982] 3 All ER 1016 at 1038,

    .... a gratuitous payment out of the company’s capital to a member, qua member, is unlawful and cannot stand, even if authorised by all the shareholders.

  126. And as Pennycuick J stated in Ridge Securities Ltd v Inland Revenue Commissioners [1964] 1 WLR 479 at 495:

    A company can only lawfully deal with its assets in furtherance of its objects. The corporators may take assets out of the company by way of dividend or, with leave of the court, by way of reduction of capital, or in a winding up. They may, of course, acquire them for full consideration. They cannot take assets out of the company by way of voluntary disposition, however described, and, if they attempt to do so, the disposition is ultra vires the company.

  127. And in Aveling Barford v Perion Ltd [1989] BCLC 626, Hoffmann J (as Lord Hoffmann then was) stated:

    The general rule is that any act which falls within the express or implied powers of a company conferred by its memorandum of association, whether or not a breach of duty on the part of the directors, will be binding upon the company if it is approved or subsequently ratified by the shareholders: see Rolled Steel Products (Holdings) Ltd v British Steel Corporation & Ors [1986] Ch 246; (1984) 1 BCC 99,158, at p 296; 99,194. But this rule is subject to exceptions created by the general law and one such exception is that a company cannot, without the leave of the court or the adoption of a special procedure, return its capital to its shareholders. It follows that a transaction which amounts to an unauthorised return of capital is ultra vires and cannot be validated by shareholder ratification or approval. Whether or not a transaction is a distribution to shareholders does not depend exclusively on what the parties choose to call it. The court looks at the substance rather than the outward appearance.

    G.2 The overriding interests of creditors

  128. The second reason for holding that ratification of the disposition is ineffective as a defence for the directors is again premised on Holdings being or becoming insolvent when or upon making the gift of the THK shares to Girvan. The overriding importance accorded by the modern law to creditors’ interests in such circumstances is now recognized. A ratifying resolution by a company’s members which would be capable of validating directors’ actions where the company remains perfectly solvent is ineffective where it is insolvent or in serious financial difficulties and where the effect of the directors’ action would be to prejudice its creditors. 

  129. The decision of Street CJ in Kinsela v Russell Kinsela Pty Ltd (in liquidation) [1986] 4 NSWLR 722, at 730, has been highly influential in this context. His Honour stated:

    In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.

  130. This principle was adopted by the English Court of Appeal in West Mercia Safetywear v Dodd [1988] BCLC 250 at 252-253 and by Sir Richard Scott VC (as Lord Scott of Foscote then was) in Facia Footwear Ltd v Hinchliffe [1998] 1 BCLC 218 at 228, where his Lordship noted developments of the law in this direction in the earlier Australian case of Walker v Wimborne (1976) 137 CLR 1, and in New Zealand in Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 at 249, where Cooke J (as he then was) stated:

    On the facts of particular cases this may require the directors to consider inter alia the interests of creditors. For instance creditors are entitled to consideration, in my opinion, if the company is insolvent, or near insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise its solvency.

  131. As Chadwick LJ pointed out in MacPherson v European Strategic Bureau [2000] 2 BCLC 683 at 701, §48, it is not open to the members and directors of a company in financial difficulties to distribute the company’s assets as if effecting an informal winding-up, to the prejudice of its creditors:

    In my view, to enter into an arrangement which seeks to achieve a distribution of assets, as if on a winding up, without making proper provision for creditors is, itself, a breach of the duties which directors owe to the company; alternatively, it is ultra vires the company. It is an attempt to circumvent the protection which the Companies Act 1985 aims to provide for those who give credit to a business carried on, with the benefit of limited liability, through the vehicle of a company incorporated under that Act.


  132. For the foregoing reasons, I would dismiss the appeal in relation to both the section 60 and personal liability claims. I would make an order nisi for the costs of this appeal to be paid by the appellants and direct that any submissions as to costs be lodged and served in writing within 14 days from the date of this judgment, with any submissions in reply to be lodged and served within 14 days thereafter; and, in default of such submissions, that the order nisi should stand as an order absolute without further order.

    Justice Litton NPJ

  133. At the heart of this case are the simple words “with intent to defraud creditors” as they appear in Section 60 of the Conveyancing and Property Ordinance, Cap.219. The same words appear in similar statutes in many other parts of the common law world. They all derive their origin from the statute 13 Eliz I c.5 aimed at “alienations, conveyances etc” which “have been and are devised and contrived of malice, fraud, covin, collusion or guile, to the end, purpose and intent to delay, hinder or defraud creditors…”. As can be seen, the language of the Elizabethan statute seems to have a wider scope than the bare words “with intent to defraud creditors” as they appear in the modern laws.  It is therefore not surprising that different courts in the common law world have given different shades of meaning to the same words.

  134. As a matter of commonsense, when a disponor is insolvent and gives away a valuable asset to an entity controlled by himself, or to a close associate or relative, the inference would seem irresistible that the intent was to put the asset out of the reach of his creditors. Protestations of benevolence would carry no weight.  This result is reached, not by applying any policy of the law, but by the use of simple commonsense. It may well be that, in some of the cases, too much weight has been given to the opening words in Lord Hatherley LC’s judgment in Freeman v Pope [1870] 5 Ch App 538 at 540 where he said:

    The principle on which the statute of 13 Eliz I c.5 proceeds is this, that persons must be just before they are generous, and that debts must be paid before gifts can be made.

    In one sense, this could be construed as laying down a proposition of law:  That the intent to defraud is established by “irrebuttable presumption” and not by an inference of fact: See for instance Tipping J in Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 at 469 §91 where he spoke of the policy behind the legislation:

    Insolvent debtors are not allowed to make gifts which prejudice the interests of creditors.

    But if one reads the judgment of Lord Hatherley LC in Freeman v Pope as a whole, one can see that he was not concerned with laying down a proposition of law, but was simply indicating how a trial judge should direct the jury: If the necessary effect of the transaction was to defeat, hinder or delay the creditors, “that necessary effect was to be considered [by the jury] as evidencing an intention to do so”: see p.540.

  135. Here, we are concerned with a disposition made by the Company in September 1999. A creditor’s petition for winding-up was presented less than six months later on account of the Company’s inability to pay taxed costs amounting to HK$525,030.50.  Nothing of relevance occurred between September 1999 and February 2000, when the petition was lodged, which affected the fortunes of the Company, except the taxing of the costs against the company by the Registrar; the certificate was issued on 30 November 1999. If the Company was insolvent in February 2000, as it undoubtedly was, then it was insolvent at the time when the disposition was made.

  136. The effect of the disposition was to transfer the Company’s only valuable asset – its shareholding in Tradepower HK – to Girvan, a company wholly-owned by the directors. 

  137. How, then, did the Recorder reach the conclusion that there was no intent to defraud?  It seems to me that he proceeded upon a fundamental misconception of his fact-finding function. In para. 16 of his judgment he said:

    Mr. Sonnenberg is, in my judgment, a credible witness. So is Mdm Ho. It is my distinct impression that both of them were obviously trying their best to tell the court what actually happened so many years ago and the reasons leading to the Scheme being implemented .... Having heard and observes them giving evidence .... I am satisfied that I should accept their evidence unless any particular aspect of their evidence is shown to be wrong by undisputed contemporaneous documents or other incontrovertible evidence.

  138. Starting from such a point of view it is no wonder that the Recorder accepted Mr Sonnenberg’s protestations of innocence. Take one aspect of the evidence : Mr Sonnenberg’s “belief” that Elimor’s claim was “grossly exaggerated”.  At the hearing of the appeal before Sakhrani J, the Company was represented by counsel and solicitors. In Sakhrani J’s judgment dated 7 January 1999 he had found that a high percentage of the goods supplied by the Company was “unmerchantable and not fit for their purpose”. The Recorder observed (para. 62) that Sakhrani J’s judgment, dismissing the appeal, was never put to Mr Sonnenberg in evidence and “he was not asked as to whether he had sight of or had been advised about its contents.”  Assuming that to be so and that Mr Sonnenberg did not know of Sakhrani’s J’s findings, he nevertheless knew that Master Chu’s judgment had been affirmed by the judge, with costs awarded against the Company. A fact-finding tribunal, approaching the issue of intent with an open mind, would not have simply accepted the party’s protestations of innocence. But, slanting the scales in favour of that party, judging from his demeanour that he was trying his best to tell the court what had happened, and requiring “undisputed contemporaneous documents or other incontrovertible evidence” to come from the other side before his “credibility” could be dented, it is no wonder that the finding of intent to defraud in this case was not made out.

  139. Take the question of Girvan’s contribution towards the purchase of the property since August 1996 : Mr Sonnenberg was asked in evidence about the discrepancies in his witness statements. At one point he said the amount was $2.297 million, at another point $4 million. When pressed upon this he said he did not know which was the correct amount. This was, he said, “a better question for Miss Ho”.  And, as Le Pichon JA has pointed out in her judgment in the Court of Appeal (para. 19), when Miss Ho was asked about this, it turned out that she was unable to answer the question either; her approach to the accounts was, as Le Pichon JA found, “unorthodox”. Far from Girvan being a creditor of either Tradepower HK or the Company, the position, as disclosed in Tradepower HK’s audited accounts for 1998, was that it was Girvan which was indebted to Tradepower HK to a considerable extent: But, said Miss Ho, these were just “all figures only”; certain figures had to be “flushed off” (whatever that meant). So, at the end of the day, it was unclear as to whether Girvan was a creditor or a debtor. There was no foundation at all for the proposition that Girvan’s status as a creditor had to be “regularized”, as Mr Sonnenberg had professed, by the transfer of the Company’s shareholding to Girvan : Such foundation did not exist in actual fact, and could not have existed in Mr Sonnenberg’s mind at the relevant time.

  140. Appellate courts have warned, repeatedly, against trial judges placing undue reliance upon demeanour and resolving factual issues by using the demeanour of witnesses isolated from the inherent probabilities of the case. It requires no repetition here.  The trial judge’s role is to try issues, not personalities. A broad statement “I find Mr X a credible witness” is, except in the simplest of cases, seldom helpful. When coupled with the stance “I accept everything he says unless the other side can demonstrate its untruth” the court is, in effect, slanting the scales unfairly against the other party.

  141. In my judgment the Recorder’s approach to the case was fundamentally flawed. The Court of Appeal was right to reject the Recorder’s findings.

  142. I have had the advantage of reading in draft of Mr Justice Ribeiro PJ’s judgment and agree with it.  I too would make the orders set out in para.132 of his judgment.

    Lord Walker of Gestingthorpe NPJ

  143. I agree with the judgment of Mr Justice Ribeiro PJ.

    Justice Bokhary PJ

  144. The Court unanimously dismisses the appeal and makes the order nisi as to costs set out in the concluding paragraph of Mr Justice Ribeiro PJ’s judgment.

[1] Abbreviations used by the Recorder have been replaced with the abbreviations used in this judgment.

[2] Which materially provides:


Save as provided in this section, every conveyance of property, made .... with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced ....


This section does not extend to any estate or interest in property conveyed for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the conveyance, notice of the intent to defraud creditors.

Save that our section 60 uses the word “disposition” instead of “conveyance” used in the English statute, there is no material difference between the two provisions.

[3] LPA s 172 has been replaced, principally by section 423 of the Insolvency Act 1986 in the United Kingdom.

[4] The text of the statute of Elizabeth is set out more fully in In re Eichholz deceased [1959] 1 Ch 708 at 722.

[5] In Copis v Middleton (1817) 2 Madd 410, Sir Thomas Plumer VC, discussing the statute of Elizabeth with which we are concerned and the statute 27 Eliz c 4, had pointed out that those were the words of a common proverb:

Under both statutes the owner of lands has a qualified, not an absolute right. He may sell, but he cannot give; he must, according to a common proverb, ‘be just before he is generous.’

[6] See Crossley v Elworthy (1871) 12 LR Eq 158 at 169; and Ex parte Russell (1882) 19 ChD 588 at 597.

[7] Where Lindley LJ (at 601) described it as “one of the most valuable decisions that we have on the statute of Elizabeth”.

[8] Appearing with Mr Colin Wright.

[9] It provides:


Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.


Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property.


In this section, ‘disposition of property’ includes a mortgage of property or a charge on or in respect of property.

[10] Section 6 provides:

A reference in this Act to an intent to defraud the creditors of a person or to defeat or delay the creditors of a person shall be read as including an intent to defraud, or to defeat or delay, any one or more of those creditors.

[11] Its terms are set out in Section E.1 above.

[12] In this case, section 37A of the Conveyancing Act 1919-1930, which was in materially the same terms as our section 60, save that it uses “alienation” instead of “disposition” of property.

[13] The terms of which are set out in Section E.5 above.

[14] See also Brennan CJ and McHugh J at 568, §16; and Gaudron J at 572, §§32-34.

[15] Citing cases including Williams v Lloyd and Ex parte Mercer, which have been discussed in Sections E.4 and E.6b above.

[16] Per Richmond J in Hale (a bankrupt) [1989] 2 NZLR 503n (CA) Decided 6 May 1975.   See also Julius Harper Ltd v F W Hagedon & Sons Ltd [1989] 2 NZLR 471.

[17] Also a fraudulent trading case, the relevant provision being section 281 of the Companies Act, 1943-1957 (WA) which was in materially the same terms as our section 275(1).

[18] As reflected in the joint judgment of Brennan CJ and McHugh J, the judgment of Gaudron J in Cannane; and, to some measure, in the judgment of  Elias CJ in Regal Castings, supra.

[19] As reflected in by Tipping J’s judgment in Regal Castings.

[20] As reflected in the joint reasons of Blanchard and Wilson JJ in Regal Castings and in the dissenting judgment of Kirby J in Cannane.

[21] See Section E.6 above.

[22] Cited in Section E.6(c) above.

[23] The amount was increased to US$976,223.03 in later amendments to the pleadings.

[24] Appearing with Mr Anson Wong and Mr Wilson Leung on the respondent’s behalf.

[25] Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1 at 18, §23; Paquito Lima Buton v Rainbow Joy Shipping Ltd Inc (2008) 11 HKCFAR 464 at 470, §11.

[26] See Re Duomatic Ltd [1969] 2 Ch 365 at 372-373; and Atlas Wright (Europe) Ltd v Wright [1999] 2 BCLC 301.

[27] They provide:


A company shall not make a distribution except out of profits available for the purpose.


For the purposes of this Part, a company's profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

[28] Which provides:


Where a distribution, or part of one, made by a company to one of its members is made in contravention of this Part and, at the time of the distribution, he knows or has reasonable grounds for believing that it is so made, he is liable to repay it (or that part of it, as the case may be) to the company or (in the case of a distribution made otherwise than in cash) to pay the company a sum equal to the value of the distribution (or part) at that time.

[29] It provides:


Subsection (1) [of section 79M] is without prejudice to any obligation imposed apart from this section on a member of a company to repay a distribution unlawfully made to him; but this section does not apply in relation to [cases not presently relevant].


Mark Strachan and Colin Wright (instructed by Messrs Stephenson Harwood & Lo) for the appellants

Anderson Chow SC, Anson Wong and Wilson Leung (instructed by Messrs ONC Lawyers) for the respondent.

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