The Joint & Several Liquidators of Color Bridge Printing & Packaging Co Ltd (in Liquidation) v. Hung Choi Construction Ltd

HCCW 81/2018

[2021] HKCFI 1483

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 81 OF 2018

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Before: Hon Harris J in Chambers

Date of Hearing: 14 May 2021

Date of Decision: 28 May 2021

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D E C I S I O N

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1.The Liquidators of the Company have issued a summons seeking a declaration that the transfer of a S class Mercedes Benz (“Vehicle”) to the Respondent on 2 May 2018 is void pursuant to s 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32. The transfer took place after the petition was presented on 27 March 2018 and before a winding up order made on 30 May 2018. There is no dispute that the Respondent acquired the Vehicle after presentation of the Petition or that it paid for it. The Respondent has issued a cross-summons for a validation order.

2.Although the Liquidators have called into question the Respondent’s description of the circumstances in which it bought the Vehicle it seems to me that on the balance of probabilities the following material facts are established by the affirmation evidence:

(1)  The Vehicle was subject to a lease by Hitachi Capital for the purchase price.  The Vehicle has been acquired in July 2014 for HK$2,562,000.

(2)  The registration document showed the Company as the owner, but was retained by Hitachi Capital and under the terms of lease, in particular clauses 6.1, 9.1, 11.1, 13.2 and 15.1, it is clear in my view that Hitachi Capital was the legal and beneficial owner of the Vehicle.  This is not disputed by the Liquidators.

(3)  On 18 April 2018 the Company and the Respondent signed an agreement, which talks in terms of the Company selling the Vehicle to the Respondent if the Respondent paid it HK$137,880 and paid of the balance of the loan of HK$431,880 owed under the lease to Hitachi Capital.

(4)  On or about 18 April 2018 the Respondent paid the Company HK$137,880.

(5)  The Vehicle was already in the Respondent’s possession on 18 April 2018 and had been for some time.

(6)  The Respondent paid Hitachi Capital the balance of the loan, namely, HK$431,880 on or about 2 May 2018.

(7)  Hitachi Capital released the registration document to the Respondent presumably when the cheque for HK$431,880 cleared.

3.So far as the Liquidators’ summons is concerned the determinative issue is whether or not title (both legal and beneficial) passed from Hitachi Capital direct to the Respondent (as the Respondent contends) or, as the Liquidators argue, it passed briefly to the Company and then to the Respondent.  Section 182 is only engaged if I prefer the Liquidators’ analysis.

4.The agreement dated 18 April 2018 was drafted by one, it is not clear to me which, of the parties and is phrased as one would expect in non-legal terms.  I can see no reason not to accept the evidence of Tang Po Keung on behalf of the Respondent that as far as the Respondent was concerned it was a party to a straightforward agreement to buy a second hand car from a company with which it was familiar.  Neither party had any reason in April 2018 to think in terms of title to the Vehicle and how legally it should be regarded as passing ultimately to the Respondent.  Unfortunately neither counsel has in my view satisfactorily identified and analysed the issues that arise for consideration despite filing lengthy, unnecessarily so, skeleton argument. Neither had thought through, for example, the nature of Hitachi Capital’s interest, a question which was difficult for me to explore in pre-reading because the terms and conditions of the lease were illegibly small.  At the hearing both counsel took the position that Hitachi Capital were the legal and beneficial owner of the Vehicle.  I note in passing that two days after the hearing the Liquidators’ counsel sought to submit a further 14 pages skeleton appending eight further decisions and addressing issues on which he had made no submissions during the hearing.  This is inappropriate and I did not refer to it.

5.It seems to me that the analysis, which best fits with what the parties agreed and the facts described in [2] considered in context is as follows.  What the parties were agreeing was that if the Respondent paid the Company HK$137,880 (which was HK$600,000 less the amount owed to Hitachi Capital and a repair fee of HK$30,240 paid in respect of the Vehicle by the Respondent) the Respondent could acquire ownership of the Vehicle.  This is what happened.  It follows that when Hitachi Capital passed the registration document to the Respondent it acknowledged that the loan had been settled and it transferred ownership.  The question is: to which company was title passed by Hitachi Capital?  Did it pass directly to the Respondent or did first pass to the Company and then onto the Respondent?

6.It being accepted by both parties that Hitachi Capital was the owner of the Vehicle on 18 April 2018 it follows that in order to identify to whom title passed on the loan being settled one needs to look at the agreement between Hitachi Capital and the Company.

7.Clause 6.1 of the terms of the Lease provides:

“If the Lessee shall have paid in full and punctually the option fee, rentals and all other amounts payable under this Agreement, the Lessor shall transfer to the Lessee the title in the Goods and the Goods in its then existing state and condition on the expiry of the term of lease. The Lessee acknowledges, understands and accepts the Goods on an as-is basis and that the Lessor will not make any representation or warranty whatsoever in respect of the Goods (as to its working order, function, quality or otherwise).”

8.In my view as there is no evidence that suggests that Hitachi Capital released the registration document on any basis other than that set out in the lease, title passed to the Company and then immediately to the Respondent.  Section 182 is, therefore, engaged and the transaction is void unless I grant a validation order.

9.The principles by reference to which the court determines applications for a validation order has been most recently considered by Godfrey Lam J in Re Hsin Chong Construction Co Ltd (No. 3)[1]:

“25. While the discretion conferred by section 182 of CWUMPO has been said to be ‘entirely at large’[2] and ‘not fettered by any statutory criteria’[3], it is well established that the court is guided by the evident purpose of the section that the creditors are generally to be paid pari passu.[4] The court has to do its best to ensure that the interests of the unsecured creditors will not be prejudiced.[5]

26.  The application is being made retrospectively for dispositions already made.  On such an application it would not be a correct approach merely to compare the position of the unsecured creditors if a validation order is made with their position if the order is not made.[6]  Instead the court should ask itself:[7]  (1) If a prior validation order had been sought, would it have been granted?  (2) Has the disposition had the result, in the events which have happened, of reducing the assets available in the winding up for the unsecured creditors?”

10.I was referred by Mr Fan to a decision of Poon J (as he then was) in Re Jazz Photo (Hong Kong) Ltd [8] in which he says this in [10]:

“The court will normally validate dispositions carried out in good faith in the ordinary course of business at a time when the parties did not know that a petition had been presented, unless there are grounds to believe that the transaction involved an attempt to prefer the party in whose favour the dispositions were made.”

11.With respect I do not consider this to be an accurate summary of the two decisions referred to, which simply explain that the fact a payment is made in good faith by a person unaware of the presentation of a petition is a factor to be taken into account.  It is not, however, in my view sufficient to justify granting a validation order that confirms a transaction that causes prejudice to unsecured creditors.  The reason for this is that there will be many creditors, who have advanced goods, services or money in good faith ignorant of a company’s financial position. There is no particular reason to treat differently a person who provides goods or services after presentation of a petition pursuant to a transaction for which that person has been paid—which is caught by s 182, thus on the face of the matter requiring return of the sums received and turning the person into an unsecured creditor—just because they acted in good faith.

12.In my view the application of the principles explained by Godfrey Lam J require the court to ask, first, whether the applicant has demonstrated that it is probable that the transaction of which validation is sought would have been granted if the application has been made in the period between presentation of the petition and the making of a winding up order.  If the answer is in the affirmative, secondly, the court asks if there are any countervailing considerations that suggest that despite the court’s initial view it would not be appropriate to make an order at the time the application has in fact been made.

13.In the present case I can see nothing objectionable in the sale of the Vehicle.  The Liquidators have suggested that the sale was not genuine.  I can see nothing inherently implausible in the Company’s evidence.  If the Liquidators had wanted to challenge the credibility of the Company’s evidence they should have applied to cross-examine Mr Tang. The court cannot determine that he is a dishonest deponent on affirmations alone particularly when the Liquidators’ case is based on surmise as they have no first-hand knowledge of what transpired in April 2018.

14.It seems reasonable to me for the Vehicle to have been sold if the Company was likely to go into liquidation as its value was likely to depreciate over time as is normal in the case of cars. A sale would necessarily have involved repaying Hitachi Capital.

15.There are two issues which require further consideration.  The Liquidators say that the Vehicle was sold at an undervalue.  They say this for two reasons.  First, that the transfer document says the purchase price was HK$800,000.  Mr Tang says that he does not know why this is, but assumes that as the transfer was registered by an intermediary, who did not have a copy of the sale agreement the person who completed the form in the Transport Department estimated the price.  I cannot think of any particular reason to assume that there is any nefarious explanation for the amount being different from that on the sale agreement other, perhaps, than that the Respondent wanted to show a higher value for their own purposes, but this has no bearing on the issue of validation.

16.The second is that the price of HK$600,000 was too low.  The Liquidators have obtained a valuation from JR West, which simply says that they estimate the value of the Vehicle in May 2018 at HK$825,000.  This letter was exhibited to the final round of evidence filed by the Liquidators, which was after Mr Tang’s final affirmation had been filed.

17.I think the court would probably have approved an application for sanction made in May 2018, although the circumstances of the application would have been different.  I do not think, however, it would have been validated on the terms agreed, which include a cash payment.

18.The next issue is whether or not there is any subsequent matter, which leans in favour of declining the application at this stage.  The Liquidators wrote to the Respondent suggesting the transaction was void in June 2018.  However, the matter appears to have proceeded slowly and it was not until December 2020 that the Liquidators issued a summons to set aside the transaction.  It would appear from the correspondence that at no time did the Respondent’s solicitors suggest that s 182 was not engaged; their letters dealt with the details of the purchase.  Mr Tang says in his 2^nd affirmation that the Respondent’s “substantive reply” was made by its solicitors on 21 November 2019.  This says “We need to emphasis that all material times our client was a bona fide purchaser without the notice of such Winding Up proceedings and good consideration has been given by our client to the company in making the transfer of Vehicle AG336.”  There is no suggestion here or in the earlier correspondence that s 182 was not engaged.  This being the case, as s 182 was engaged the Respondent should have been advised that the transaction was void and the Vehicle would have to be returned unless a validation order was obtained.  In other words the onus was on the Respondent to take action.  By failing to do so they caused delay, an escalation in costs and have made what might have been a straightforward matter to determine in late 2018 more complicated.  It seems to me that these are highly material considerations in the exercise of my discretion.  I, therefore, decline to make an order validating the transfer.  Mr Fan accepted that the relief sought in [2] of the summons was not something (if, which is unclear, it is meant to be some form of unfair preference claim) that fell to be determined in this application.

19.I make the following order:

(1)  A declaration in the terms of [1] of the summons;

(2)  An order that the Vehicle be passed to the possession of the Liquidators within seven days of the date hereof along with completed transfer documents, the vehicle registration certificate and any insurance certificates recording insurance in respect of the Vehicle;

(3)  General liberty to apply; and

(4)  An order nisi that the Respondent pays the Liquidators’ costs of the application and all reserved costs, such costs to be taxed on a party and party basis if not agreed.

Mr Alex Fan, instructed by Hon & Co, for the applicant

Mr Perlman Sam, instructed by Y L Yeung & Co, for the respondent

The attendance of the Official Receiver was excused