Emsworth Ltd v. Howard William Burdett

CACV000049/1978

-----------------

Coram: Briggs, C.J., Huggins, J.A. and Leonard, J.

Date of Judgment: 20th October, 1978.

-----------------

JUDGMENT

-----------------

Huggins, J.A.:

1. The appellant Company seeks to set aside a judgment entered against it as the alleged transferee of a business, the learned judge having found that there was a transfer of the business of which notice had not been given in accordance with the provisions of the Fraudulent Transfers of Businesses Ordinance.

2. The sale and purchase which was held to have constituted the transfer of the business was pursuant to a contract between the Appellant and the receivers and managers of the property of Cape Yachts Ltd. (to which I shall hereinafter refer as "the Company"). The receivers had been appointed by two of three holders of debentures in the Company. The debenture holders were all corporations in which one or more of the directors of the Company had a substantial interest. The directors of the Company were its only shareholders.

3. The Plaintiff in the action, Mr. Burdett, had a contract with the Company for the sale and purchase of a yacht to be built by the Company, the purchase price of $315,000 to be paid by instalments. Under that contract the vessel was to remain the property of the Company until delivery. Before she was completed, but after Mr. Burdett had paid $157,500, the Company fell into financial difficulties: work on the vessel stopped and Mr. Burdett paid no further instalments. It is not in dispute that this yacht was part of the property which was covered by the debentures and that it was part of the subject matter of the sale by the receivers to the Appellant. The judgment was for the current value of the hull as it stood at the time of the sale to the Appellant.

4. In the event the only point upon which we have heard argument in the appeal - and, it may be added, it was argument on only one side, for Mr. Burdett has not contested the appeal - relates to the question whether the company was a "transferor" within the meaning of s. 3 of the Fraudulent Transfers of Businesses Ordinance. The material part of that section reads:

"Whenever any business or any portion of any business is transferred, with or without the goodwill or any portion thereof, the transferee shall .... become liable for all the liabilities .... arising out of the carrying on of the business by the transferor, unless due notice in accordance with this section has been given and has become complete at the date of the transfer".

What is contended by Mr. Potts on behalf of the Appellant is that the learned judge implicitly decided that the Company was the transferor to the Appellant, not only of the property which the receivers conveyed to it but of its business. The relevant passage in the judgment reads as follows:

"I have left to the last of Mr. Li's most fundamental contention which is that the Ordinance is not intended to apply to the sale of assets by a receiver appointed whether under a debenture on otherwise. He cited no authority in support of this proposition and for my part I cannot see any reason why I should discriminate between a sale or transfer made by such receiver and one made by a private individual or company".

Of course the Appellant does not in truth suggest that the Ordinance is not intended to apply "to the sale of assets by a receiver": its contention is that in relation to such a sale the receiver is the transferor, so that it is only liabilities arising out of the carrying on of the business by the receiver for which the transferee may possibly become liable under the Ordinance - and here the receivers did not carry on the business at all. The learned judge in the court below must, I think, have assumed that the receivers were the agents of the Company in respect of the sale and stood in its shoes. I have sympathy with him, for it has been common to refer to a receiver as the "agent" of the company of whose property he has been appointed receiver. Thus in In re B. Johnson & Co. (Builders) Ltd. (1955) 1 Ch. 634, 644 Sir Francis Evershed, M.R. said:

"The situation of someone appointed by a mortgagee or a debenture holder to be a receiver and manager - as it is said, 'out of court' - is familiar. It has long been recognized and established that receivers and managers so appointed are, by the effect of the statute law, or of the terms of the debenture, or both, treated, while in possession of the company's assets and exercising the various powers conferred upon them, as agents of the company, in order that they may be able to deal effectively with third parties".

However, the description is misleading and the learned judge went on:

"But, in such a case as the present at any rate, it is quite plain that a person appointed as receiver and manager is concerned, not for the benefit of the company but for the benefit of the mortgagee bank, to realize the security; that is the whole purpose of his appointment; and the powers which are conferred upon him, and which I have to some extent recited, are (as Sir Lynn observed, and I think fairly observed) really ancillary to the main purpose of the appointment, which is the realization by the mortgagee of the security (in this case, as commonly) by the sale of the assets".

By "such a case as the present" he meant a case (like the one before us) where the receiver is appointed not as a result of the voluntary act of the company but as a result of the act of a party with a different, and probably conflicting, interest. The fact that the debentures here were in common form and that Clause 16 deemed the receivers and managers to be the agents of the Company did not make them its agents generally: that clause was concerned with liability for the acts and defaults of the receivers and managers and with liability for their remuneration, costs, charges and expenses. The distinction between a manager of a company in the ordinary way of business and a receiver and manager of the property of a company appointed by a debenture holder is clearly stated by Jenkins, L.J. in the case cited at p. 661:

"...... the phrase 'manager of the company,' prima facie, according to the ordinary meaning of the words, connotes a person holding, whether de jure or de facto, a post in or with the company of a nature charging him with the duty of managing the affairs of the company for the company's benefit; whereas a receiver and manager for debenture holders is a person appointed by the debenture holders to whom the company has given powers of management pursuant to the contract of loan constituted by the debenture, and, as a condition of obtaining the loan, to enable him to preserve and realize the assets comprised in the security for the benefit of the debenture holders. The company gets the loan on terms that the lenders shall be entitled, for the purpose of making their security effective, to appoint a receiver with powers of sale and of management pending sale, and with full discretion as to the exercise and mode of exercising those powers. The primary duty of the receiver is to the debenture holders and not to the company. He is receiver and manager of the property of the company for the debenture holders, not manager of the company. The company is entitled to any surplus of assets remaining after the debenture debt has been discharged, and is entitled to proper accounts. But the whole purpose of the receiver and manager's appointment would obviously be stultified if the company could claim that a receiver and manager owes it any duty comparable to the duty owed to a company by its own directors or managers."

The contract of sale in the present case leaves no doubt but that the receivers were selling in their capacity as appointees of the debenture holders.

5. In short, this appeal must succeed because the action against the Company was misconceived. The aim of the Fraudulent Transfers of Businesses Ordinance was authoritatively stated in Union Trading Co. Ltd. v Kwok Man Chau Ka (1938) 30 H.K.L.R. 19, where Lindsell, A.C.J. said at p. 32:

"There can be no dispute that the aim of the Ordinance, as indicated by its title, was to prevent the transfer of his business by one man to another in any such way as might defraud his creditors and leave them without a remedy, or, to put it in other words, to prevent a man from secretly divesting himself of his business assets, on his possession of which his creditors relied in giving him credit and to which they would otherwise have had recourse if he could not meet his liabilities."

The sale to the Appellant here was not an attempt by the Company secretly to divest itself of its business assets but a sale by the receivers appointed by the debenture holders to enforce their security. The receivers were not acting on behalf of the Company and the Company had no power to prevent the sale. That is not to say that Mr. Burdett would not have had a remedy if he could have proved actual fraud against the Appellant, but none was alleged. The fact that the debenture holders were corporations in which the shareholders of the Company had an interest is therefore irrelevant. Nor is it any direct concern of the Appellant that the receivers are said to have acted precipitately in concluding the sale of the assets.

6. As already indicated, I would allow this appeal and enter judgment for the appellant Defendant.

20th October, 1978.

Representation: