A previous update discussed the circumstances in which the courts in Hong Kong can extend Mareva relief against a defendant to third parties under the so-called 'Chabra' jurisdiction (for further details please see "Mareva relief and third parties"). In the recent case of Joint and Several Trustees in Bankruptcy of the Property of the Bankrupt v All Powerful Holding Ltd,(1) the assets which the trustees sought to locate were not directly held by the bankrupt, but appear to have been indirectly held through a family trust and related companies. As before, the court demonstrated its willingness to extend Mareva relief under the Chabra jurisdiction in deserving cases.
The case is another example of the courts being asked to extend Mareva relief to third parties against whom the applicant may not have claims, but who are believed to hold assets of another party against whom the applicant does have substantive claims.
The principal individual in the proceedings appears to have been adjudged bankrupt in September 2017 (subject to an ongoing appeal process). Although matters had not been formally adjudicated at a final hearing, following investigations carried out by the trustees in bankruptcy, it appears that the individual set up a family trust and injected substantial assets into the trust. For example:
- on 19 December 2014 the individual established the family trust and appointed a BVI company as the trustee;
- the family trust was the sole shareholder in another BVI company which was also incorporated on 19 December 2014; and
- on 20 January 2015 the individual allegedly transferred 100% of the shares in a Hong Kong company that he controlled to one of the BVI companies at a consideration of HK$1.
Based on their investigations, the trustees applied to the court for:
- a declaration that the transfer of the shares in the Hong Kong company to the BVI company was void on the basis that it was a transaction at an undervalue and allegedly a disposition of property made with an intent to defraud creditors; and
- injunctive relief pursuant to the Chabra jurisdiction against the Hong Kong company and one of the BVI companies.
The court granted Chabra relief against the two companies. According to the established Chabra principles, so long as it could be shown that the individual exercised substantive control over the assets of the two respondent companies, it was not necessary to establish beneficial ownership in a strict legal sense. The court found that there was a good argument that the individual had, in reality, control over the two respondent companies and the trust arrangements. The court rejected the argument that granting Chabra relief in the circumstances amounted to piercing the corporate veil.
The court was also of the view that the balance of convenience lay in favour of granting the trustees relief. Interestingly, the trustees were required to give a cross-undertaking as to damages limited to HK$40 million (ie, the amount of an indemnity that they were able to obtain from a bank). The trustees also obtained orders for the disclosure of documents concerning the Hong Kong company – for example, certain financial records and details of transactions through which any of its assets were disposed.
The case demonstrates the courts' willingness to grant Chabra relief in deserving cases. The court appears to have been of the view that the family trust structure was an attempt to put assets beyond the reach of the individual bankrupt's creditors.
The case illustrates the usefulness of the Chabra jurisdiction where the assets of a defendant or debtor are hidden beneath complicated corporate structures. The exercise of the Chabra jurisdiction does not normally require the applicant to establish the beneficial ownership of the assets in dispute. The test to apply usually is whether there is good reason to suppose that the assets held by the third party are amenable to the execution of a judgment obtained by the plaintiff against the defendant. A party's substantive control over the asset held by a third-party entity can be sufficient to invoke the court's Chabra jurisdiction.
For further information on this topic please contact Tina Wong or Gary Yin at RPC by telephone (+852 2216 7000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
Endnotes
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