Chabra injunction in bankruptcy proceedings

Date published




Patrick Cowley and Anor (The Joint and Several Trustees in Bankruptcy of the Property of the Bankrupt) v All Powerful Holding Ltd and Anor HCB 104/2017 (1 August 2018)

In Hong Kong, a court may grant an injunction order freezing the assets of a party against whom the plaintiff does not have a substantive cause of action provided that the injunction is ancillary and incidental to a good arguable claim against the defendant. This is known as the Chabra Injunction named after the landmark case of TSB Private Bank International SA v Chabra [1992] 1 WLR 231. In Patrick Cowley and Anor (The Joint and Several Trustees in Bankruptcy of the Property of the Bankrupt) v All Powerful Holding Ltd and Anor HCB 104/2017 (1 August 2018), Deputy High Court Judge Saunders (“DHCJ Saunders”) considered and granted a Chabra Injunction in the bankruptcy proceedings.


On 6 January 2017, a bankruptcy petition against Mr Jaffe Lau Yu ("Mr Lau") was presented by The Hongkong and Shanghai Banking Corporation (the “HSBC”). On 5 September 2017, Mr Lau was adjudged bankrupt and trustees were subsequently appointed. Upon investigation, the trustees found the following:

  • Mr Lau was the sole shareholder and director of a Hong Kong company called All Powerful Investment Ltd ("APIL").
  • On 19 December 2014, Mr Lau set up a trust called JL Family Trust (“JL Trust”). The trustee was a British Virgin Islands (“BVI”) company called All Power Group (PTC) Ltd (“APG”).
  • The JL Trust was the sole shareholder of another BVI company called All Powerful Holdings Limited (“APHL”) which was also incorporated on 19 December 2014.
  • On 20 January 2015, Mr Lau transferred the sole issued share in APIL to APHL for a sum of HK$1.00 (the “Share Transfer”).
  • On 15 September 2017, Mr Lau resigned as the director of APIL and Mr Xie Rongzong (“Mr Xie”) was appointed to be the sole director.

As a result of these findings, the trustees contended that the Share Transfer was in breach of s 49 of the Bankruptcy Ordinance (Cap 6) as it constituted a transaction at an undervalue and was a disposition of property made with intent to defraud creditors. The trustees sought Chabra injunctions against APHL and APIL, who are not parties to the substantive bankruptcy proceedings, but who hold assets ultimately reflected by the ownership of the single share in APIL.

APHL and APIL opposed the trustees’ application for Chabra Injunction on six different grounds:

  1. The Share Transfer was not at an undervalue. The consideration of HK$1.00 appropriately reflected the true value of APIL at the time;
  2. The Share Transfer was not a disposition of property made with the intent to defraud creditors;
  3. There is no risk of dissipation of assets of either APIL or APHL;
  4. The effect of granting the injunction will be to pierce the corporate veil of APIL and APHL;
  5. The balance of convenience lied against granting the injunction; and
  6. The trustees were not prepared to give the usual undertaking as to damages.


DHCJ Saunders held that in considering whether or not to exercise the Chabra jurisdiction, the court should consider the extent to which the cause of action defendant (“CAD”), in this case Mr Lau, has by way of control or interest in the assets of the non-cause of action defendant (“NCAD”), in this case APHL and APIL.

Having considered the following circumstances, His Honour accepted that there was a strong case that Mr Lau is in reality in control of the JL Trust, APHL and APIL:

  • According to the trust deed for the JL Trust, the beneficiaries are Mr Lau’s wife and his three children and Mr Lau may at any time to make himself a beneficiary.
  • Mr Lau remained a director of APIL until 15 September 2017.
  • In March and April 2014, Mr Lau transferred large amounts of cash or cash equivalents from his personal bank accounts to APIL’s bank accounts.
  • In December 2014, APIL transferred HK$30 million to a Hong Kong listed company which apparently resulted in Mr Lau becoming a substantial shareholder.
  • In May 2017, Mr Lau executed an assignment of an insurance policy “for and on behalf of APHL”.
  • Between 2010 and 2015, Mr Lau executed unlimited personal guarantees and “all moneys” charges on his properties to secure banking facilitates granted to, amongst others, himself, APIL and APHL’s subsidiaries.
  • Mr Xie, being the sole director of APIL, did not make an affirmation although the allegations cried out for a substantive answer from him.
  • No explanations were given by APIL and APHL with respect to the findings above.

His Honour then considered the evidence in relation to value of APIL at the time of the Share Transfer. He was satisfied that there is a good arguable case that the Share Transfer was at an undervalue.

His Honour also accepted that the creation of APHL and the JL Trust are arguably steps that were taken by Mr Lau to remove assets from and defraud creditors. His Honour took into account of the fact that the Share Transfer occurred in close proximity to the establishment of APHL and JL Trust of which Mr Lau may, at any time, become a beneficiary. His Honour also found that the acts of concealing Mr Lau’s control of APIL through the JL Trust, APG and APHL raised inferences of dishonesty on the part of Mr Lau, thereby giving rise to an inference of a risk of dissipation.

For the argument that the Chabra order would unlawfully pierce the corporate veil of APHL and APIL, DHCJ Saunders rejected it on three grounds:

  1. Chabra jurisdiction can be exercised where there is good reason to suppose that the assets of NCAD are in truth the assets of the CAD. It is not necessary to establish beneficial ownership in a strict trust law sense, so long as it can be shown that the CAD exercises substantive control over the assets.
  2. The steps taken by Mr Lau arguably amounted to an abuse of the separate corporate legal personality which justified the lifting of the corporate veil.
  3. There is simply no suggestion that the corporate veil is being pierced. All that is being done at this stage is that the assets of APIL and APHL are sought to be protected in favour of creditors, who may ultimately be able to access those assets to satisfy Mr Lau’s debts.

In determining where the balance of convenience lied, despite the assertions of APIL and APHL that APIL’s business would suffer catastrophic consequences should the injunction be granted, DHCJ Saunders found that the evidence regarding the extent and nature of APIL’s business was sparse and vague. His Honour therefore concluded that the balance of convenience lied with the granting of the injunction.

In relation to the trustees’ undertaking in damages, HSBC was only willing to indemnify the trustees in the sum of HK$40 million. His Honour then considered whether an undertaking of HK$40 million was commensurate with the size of APIL’s assets. Given that the only evidence regarding the extent of APIL’s business was a facility letter under which the amount secured was HK$34.5 million, DHCJ Saunders ordered the trustees to give the usual undertaking in damages with liability limited to the sum of HK$40 million.


It is not unusual for potential bankrupts to attempt to “ring-fence” their assets from their creditors through some complex corporate structures and trust arrangements. This case shows that the court is prepared to grant a Chabra injunction against a NCAD in bankruptcy proceedings provided that there is a good arguable case that the assets of the NCAD are in truth the assets of the bankrupt. In this regard, control of the NCAD’s assets is highly relevant. Furthermore, the proximity between the setting up the third party corporate structures and the relevant disposal is also a significant factor when the court considers whether there is an intent to defraud creditors.

Given the right set of facts, Chabra Injunction might be a useful and effective tool to provide protection to creditors in bankruptcy proceedings.