Nicholas Timothy Cornforth Hill and Another v. Tsun Yip Waterworks Construction Co. Ltd. and Others

HCCW 356/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 356 OF 1997

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Coram: Deputy High Court Judge S. Kwan in Court

Dates of Hearing: 27, 28 February, 1 March 2001

Date of Handing Down Judgment: 9 March 2001

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J U D G M E N T

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1. This application is taken out by the liquidators of Hoi Sing Construction Company Limited ("the Company"), which was ordered to be wound up compulsorily on 20 August 1997 upon the petition of a creditor presented on 12 July 1997. The application is made against 22 respondents for declarations that the payments made to them by the Company in early May 1997 in the total sum of about HK$11.9 million constituted fraudulent preferences under section 266 of the Companies Ordinance, Cap. 32 and are therefore invalid. An order is sought that the sums paid to the respondents as set out in a schedule to this judgment be repaid to the liquidators for general distribution to all the creditors of the Company. The respondents were paid about 60% of their debts in full and final satisfaction of their claims against the Company.

2. The background matters may be given as follows.

3. The Company was incorporated in December 1976 with an issued share capital of HK$3.5 million. It was wholly owned by Hoi Sing Holdings Limited which was renamed CEF Concord Holdings Limited ("CEF Concord") in April 1995. The shares of CEF Concord were listed on the stock exchange. CEF Concord was the intermediate holding company until the Company was sold in March 1997.

4. The Company was the principal construction arm of CEF Concord and was engaged primarily in public sector construction work for the Hong Kong Government, the Housing Authority and various public utilities. It had an annual turnover of about HK$400 million in 1994 and 1995. The audited accounts for the year ended December 1995 showed that the Company had reported significant losses, although the directors had expressed the view that CEF Concord "should be able to provide continuous financial support to the Company". The total assets as at 31 December 1995 were approximately HK$282 million and total liabilities were approximately HK$364 million, giving a net asset deficiency of HK$82 million. According to the latest management accounts of the Company prepared as at 30 November 1996, the total assets were approximately HK$573 million and total liabilities HK$601 million with a net asset deficiency of HK$28 million, without making adjustments for uncollectable debts.

5. In January 1997, CEF Concord issued a public circular with proposals for group reorganization. This took place on 27 January 1997. In summary, International Tak Cheung Holdings Limited ("ITC") became the controlling shareholder of CEF Concord and CEF Concord acquired substantial assets from ITC including a sizeable portion of shares in Paul Y.-ITC Construction Holdings Limited ("Paul Y.-ITC"). Following the reorganization, CEF Concord was renamed once more as Pacific Rim Infrastructure Management Enterprises Limited or "PRIME". The name of this entity was changed yet again to ITC Corporation Limited in December 1997, after the events in question.

6. The reasons for and effects of the proposal of reorganization, as stated in the circular, would appear to be as follows:

"The implementation of the proposals will result in a substantial increase in the construction, civil engineering and building materials activities of the CEF Concord group. The CEF Concord group will include Paul Y.- ITC which is one of the largest construction and civil engineering concerns headquartered in Hong Kong and has achieved over the past three years a record of substantial and increasing profits attributable to its shareholders. Following the implementation of the proposals, it is intended that CEF Concord will gradually run down its existing building and construction business. CEF Concord has confirmed with Paul Y.- ITC that following the implementation of the proposals all new building and construction contracts will be undertaken through Paul Y.-ITC. It is expected that the existing contracts of CEF Concord will be progressively completed in the period from 1997 to 2000, the total unexecuted value of which is approximately HK$581 million..."

7. Thus, it was envisaged in the circular that the construction operations of the Company would be wound down. The circular further sets out the existing contracts of CEF Concord undertaken by the Company. Some of these contracts had expected completion dates in 1998 and 2000. The total value of the contracts that CEF Concord had engaged in or completed as in December 1996 was HK$1.754 billion.

8. On 27 March 1997, PRIME issued an announcement that it had disposed of the Company and two wholly owned subsidiaries of PRIME, Hoi Sing Builders Limited ("Hoi Sing Builders") and Hoi Sing Marine Engineering Limited ("Hoi Sing Marine"), collectively called the Hoi Sing Construction Group, to Vogue Union Limited ("Vogue Union"). It was stated in the announcement that all new building and construction contracts would be undertaken by Paul Y.- ITC, a company owned 49.3% by PRIME and its subsidiaries. The announcement gave these reasons for the sale:

"Since 31 August 1996, the financial condition of the operations of the Hoi Sing Construction Group has continued to deteriorate due principally to the disruption of the schedules of certain contracts caused by the shortage of working capital and it has been estimated that further provisions amounting to between approximately HK$25 million and approximately HK$85 million against further losses on certain construction contracts up to 31 December 1996 would be required. The Directors have recently completed a review on the continuing viability of the Hoi Sing Construction Group. The financial impact from winding down the existing operations of the Hoi Sing Construction Group is projected to be adversely greater than the above anticipated provisions. As such, the Hoi Sing Construction Group was disposed of by [PRIME]."

9. The consideration for the sale of the shares of the Company to Vogue Union, as provided in the agreement for sale and purchase, was HK$400,000.00. Also included in the sale was the assignment to Vogue Union of HK$45 million of a total debt of HK$317,456,913.00 stated to be due to PRIME from the Company at a consideration of HK$1.00, which in effect was a write-off by PRIME of the debt due to it by the Company.

10. All the directors of the Company had resigned by 1 March 1997. On 27 March 1997, the day after the sale to Vogue Union, two companies were appointed directors of the Companies. These corporate directors were controlled by Mr. Chan Chung On and Mr. Tung Hong Keung. Hence, Mr. Chan and Mr. Tung were in effect the directors of the Company from 27 March 1997 onwards and of the two, it was Mr. Chan who was in control and Mr. Tung was assisting him. Mr. Chan has since emigrated to Australia.

11. By the end of April 1997, all the employees of the Company had been dismissed and the Company had closed its office. By then, most of the construction contracts on which the Company was employed had been re-entered by the Government or by the private employer. The last contract was re-entered on 12 May 1997.

12. As stated earlier, a petition for winding up was presented by a creditor, not a respondent in this application, on 12 July 1997. It was unopposed and an order for winding up was made on 20 August 1997. The order appointing Mr. Nicholas Hill and Mr. Alan Rennie the liquidators of the Company was made on 7 October 1997.

13. Over 40 writs were issued against the Company in 1997. Of the 22 respondents, only the 13th and the 22nd respondents had brought proceedings against the Company. None of the creditors that had issued writs, with the exception of these two respondents, had received any payment.

14. As in November 1998, a total of 170 proofs of debts had been submitted to the liquidators claiming a total of about HK$480 million. The largest proof of debt was submitted on behalf of PRIME for about HK$308 million. It has been estimated by the liquidators that the assets realized would probably not exceed HK$100 million, leaving a net deficit of about HK$380 million.

15. The Company is owed about HK$37 million by Hoi Sing Marine and HK$297 million by Hoi Sing Builders. Both these companies are in creditors voluntary liquidation. The resolution to wind up these companies, which was initiated by the liquidators, was passed on 6 February 1998. The assets of Hoi Sing Marine have been estimated at no more than HK$10 million. As for Hoi Sing Builders, a final dividend of HK$252,555.47 has been received by the liquidators.

16. There is no question that the 22 respondents, in receiving payments of about 60% of their debts, have been preferred over the other creditors.

Events leading up to the payments to the respondents

17. I set them out in chronological order as follows. I should add that the liquidators have not disputed that the incidents had taken place.

18. On 4 February 1997, the solicitors for the 13th respondent sent a letter of demand to the Company for payment of a debt of HK$2.1 million. This was followed by a writ issued on 8 April 1997. On 14 March 1997, the solicitors for the 22nd respondent issued a demand letter to the Company seeking payment of HK$7 million. A writ was issued on 24 March 1997. In respect of both respondents, the Company instructed its solicitors, Messrs. Vincent T.K. Cheung, Yap & Co. ("the Company's solicitors") to negotiate a settlement with the respondents' solicitors.

19. On 25 March 1997, a group of unpaid sub-contractors of the Company went to the head office of PRIME, the then holding company, seeking immediate payment. They were told to leave by a personnel manager of Paul Y.-ITC. They went again to the office of PRIME the next day. They were stopped by the security guards at the entrance of the building and the police was called. They left without seeing any one from PRIME. They went again the day after and staged a protest outside the office with banners and placards. They were told by a staff that PRIME had sold Hoi Sing to a third party and was no longer responsible for paying any debt of the Company. They were further told to go to the head office of Hoi Sing in Chai Wan and to talk to the new directors there.

20. The sub-contractors then marched to Hoi Sing's office and they had a meeting with Mr. Tung. Mr. Tung told them he needed to go through the books and files during Easter and promised another meeting on 1 April. On that day, the sub-contractors met Mr. Chan who suggested that he should meet them in two groups because there were so many sub-contractors. The first group met him on 3 April. He told them that the Company had cash flow problems but he was willing to settle the certified payments of the sub-contractors at a big discount on condition they were to continue to work at the sites. He said that if work was continued, the Company could expect to receive payments from the Government and this would alleviate the Company's financial situation.

21. As no concrete solution was offered by Mr. Chan, the sub-contractors called a meeting themselves the next day to discuss what action should be taken. They decided to stage a petition to Mr. Tung Chee Hwa, who was then the Chief Executive designate. Each sub-contractor contributed HK$1,000.00 for the hiring of a van and the making of banners. Notice of the protest was given to the media the day before with a list of the participating sub-contractors and a press release accusing PRIME of cheating them of their hard earned monies in that PRIME had, through company reorganization, squeezed the Company dry and then sold the Company cheaply to a third party with no financial backing to get rid of its responsibility of paying the sub-contractors. They called on the Government to exercise effective control of construction companies licensed to tender for public construction work. The protest took place in the morning of 11 April 1997. About 60 to 90 persons protested outside the office of the Chief Executive designate and a petition letter was presented to a representative of the office. The petition letter was in the same vein as the press release. Copies of the letter were given to the media. In the afternoon, the protesters went to the office of PRIME with a Legco member. They were expelled from the premises by security guards after spending eight hours in the building. The protests that day were reported in the Hong Kong Economic Times and the Apple Daily.

22. In the morning of 12 April 1997, the sub-contractors staged another protest and submitted petition letters to the Governor of Hong Kong Mr. Patten and the Executive Council members. They then marched to the headquarters of the Cheung Kong Group in Central as this group had an indirect interest in PRIME and presented a petition letter to a representative of the chairman Mr. Li Ka Shing. The protesters had grown to over a hundred to 250 persons. In the afternoon, they protested outside the Legislative Council Building and asked some of the Legco members for assistance. The crowd then marched along Queensway and Hennessy Road chanting slogans. The banners they displayed stated that PRIME had cheated the sub-contractors of their money in selling the Company. They presented a letter to the Hong Kong Builders Society in Wanchai. They then marched back to Murray Building in Central and had a meeting with the Deputy Secretary of Works. The procession was reported in the Apple Daily.

23. For the whole day of 13 April 1997, they protested again outside the office of PRIME demanding that a director should talk to them. The police was called to expel the protesters.

24. Eventually, during 14 to 19 April 1997, six representatives of the sub-contractors were allowed to meet Mr. Tom Lau Ko Yuen, an executive director of ITC and a director and the deputy chairman of PRIME, in three meetings. What was discussed at these meetings will be dealt with below.

25. It is not in dispute that the 22 respondents were the sub-contractors that had taken part in the campaign to press for payment during March and April 1997.

The part played by Mr. Lau

26. Mr. Tom Lau was subpoenaed by the liquidators to give evidence. He did so in a guarded manner. Mr. Lau became a director of PRIME on 18 February 1997 with the company reorganization when ITC became the controlling shareholder of PRIME. He negotiated the sale of the Company to Mr. Chan in March. He knew Mr. Chan for about ten years. Their relationship was strictly business. Mr. Chan owned a company that was used by Paul Y.-ITC as a sub-contractor. According to Mr. Lau, Mr. Chan approached him for the sale of the Company to Vogue Union, another company owned by Mr. Chan. Mr. Lau was not forthcoming as to the circumstances of the sale, why Mr. Chan was interested in acquiring the Company which had a net asset deficiency of HK$82 million according to the audited accounts in December 1995, how the purchase price of HK$400,000.00 for the Company was arrived at, and why Mr. Chan bought a debt of HK$45 million owed by the Company to PRIME at the nominal sum of HK$1.00.

27. As for the events after the sale of the Company, Mr. Lau claimed he does not have a clear recollection but he confirmed that a lot of sub-contractors had protested outside the office of PRIME and created a disturbance. As a result, he had two or three meetings with the protesters. The first meeting took place with one or two Legco members, the police and the security guards in attendance. He told the sub-contractors at the first meeting that he represented PRIME only, that the debts due to them from the Company were not his responsibility, and he was not a party capable of making payment. The protesters appeared to understand his position but they refused to back off. At the second meeting, he told the sub-contractors that he might act as a go-between and relay their demands to Mr. Chan, if he could locate Mr. Chan. He later spoke to Mr. Chan on the telephone and had a meeting with him. He asked Mr. Chan to deal with his own creditors and not to have them coming to the office of PRIME, disrupting its business and disturbing its workers. He asked Mr. Chan to do his best to discharge his responsibilities and Mr. Chan agreed. There was no discussion how many creditors there were or how much was owing and Mr. Lau did not offer financial assistance to Mr. Chan. Mr. Lau had no knowledge of the payments made to the sub-contractors.

28. I am not impressed with Mr. Lau as a witness. I do not accept that he does not have a clear recollection of his discussions with the sub-contractors after they had staged repeated protests outside the office of PRIME. He could recall with no apparent difficulty the explanation he gave to the sub-contractors at the first meeting, and I note that this was something in his interest. I do not think he has told this court the whole truth of what he had said to the sub-contractors at those meetings and the discussions he had with Mr. Chan as a result.

29. Evidence on the sub-contractors' discussions with Mr. Lau was adduced in the two affirmations of Mr. Kan Kwok Cheung of the 1st respondent and confirmed in his oral testimony. In addition, there were the letters to the liquidators written by the solicitors for some of the respondents and the letter of the 17th respondent dated 8 September 1998 in which mention was made of the contents of the discussions with Mr. Lau during 14 to 19 April 1997. I accept the respondents' evidence here. I find that Mr. Lau has played down his part in the incident (and also the role of PRIME) in giving his testimony to the court. I find that in his discussions with the sub-contractors, Mr. Lau had proposed that he would "suggest" to the new directors of the Company to pay around 60% of the sub-contractors' certified payments on condition that the sub-contractors would stop their campaign and give up the balance of their debts. This proposal was accepted by the six representatives who had the meetings with Mr. Lau after they had discussed with all the participating sub-contractors. I am mindful of the fact that counsel for some of the respondents, Mr. Lawrence Ng and Mr. M. C. Chiu, did not put it to Mr. Lau that he would propose to the Company to pay 60% of the debts. This is regrettable. However, I do not think this is something that Mr. Lau would forget and, as I have stated earlier, I do not accept that he does not have a clear recollection of this incident. I would also point out that when the sub-contractors received a fax on 1 May 1997 giving a list of the sub-contractors who were to receive payments with instructions of what documents they should bring to the Company's solicitors who would effect payment, the fax was sent by PYITC Management Ltd., a subsidiary of Paul Y.-ITC which in turn was a subsidiary of PRIME.

The legal advice to the Company

30. Mr. Augustus Au of Messrs. Vincent T.K. Cheung, Yap & Co. gave evidence of the legal advice given to the new management of the Company during March to May 1997. His evidence was unchallenged.

31. Mr. Au's firm was instructed by Mr. Chan to act for him in his acquisition of the Company from PRIME. The solicitors were not given any access to the books, records and accounts of any of the Hoi Sing group of companies prior to the acquisition. What Mr. Au knew at the time was the information available to the public such as the circular issued by CEF Concord in January 1997 on the group reorganization. Mr. Au was aware that the Company had suffered substantial losses for three years and it was sued in various proceedings. Mr. Au suspected that the Company was in financial difficulty.

32. Prior to completion of the purchase, Mr. Au had advised Mr. Chan and Mr. Tung of the duties of directors of companies that were in financial difficulties. He warned them of the dangers of preferring one creditor to another creditor and of continuing to carry on the business of an insolvent company with intent to defraud its creditors. He also advised them that misfeasance proceedings could be brought against the directors if it was shown that they had acted inappropriately. He referred them specifically to sections 266, 275 and 276 of the Companies Ordinance.

33. After the completion, Mr. Au's firm continued to represent the Company in the legal proceedings brought against it. It had become clear to Mr. Au around late April 1997 that the Company would not be able to pay off all its creditors in full without a large injection of capital.

34. In around late April, Mr. Chan sought advice whether the Company could pay wages to the employees in full. The wages were two months in arrears. Mr. Au advised him against such payments and reminded him of his obligations under section 266 of the Companies Ordinance.

35. On 1 May 1997, Mr. Chan requested a meeting with his solicitors, Mr. Vincent Cheung and Mr. Au. A meeting was arranged the same day. Mr. Chan attended the meeting with Mr. Eric Chung, who was employed by PRIME but seconded to the Company as the manager at that time. Mr. Chan told his solicitors that some sub-contractors had been "stirring up trouble" and he had agreed to make some payments to these sub-contractors. He did not explain in detail what he meant by "stirring up trouble". He said that in view of the tension between the sub-contractors and him, he thought it best that the Company's solicitors as an independent third party should be brought in to administer the payments made to the sub-contractors. In fact, Mr. Chan had already arranged with the sub-contractors that they should attend the offices of the Company's solicitors to collect payment. Mr. Au reminded Mr. Chan of the implications of sections 266, 275 and 276 of the Companies Ordinance and the dangers of preferring one creditor to another. Despite the advice, Mr. Chan told Mr. Vincent Cheung the distribution should proceed. At the end of the meeting, Mr. Eric Chung gave Mr. Au the documents for him to carry out the distribution. They were a list of the sub-contractors to be paid, a pro forma agreement to be signed by each of them acknowledging receipt and agreeing to accept payment in full settlement of their claims, and 25 cashier orders drawn in favour of the sub-contractors. Mr. Au was told that the sub-contractors would attend the solicitors' office on 2 May 1997.

36. After discussion with Mr. Vincent Cheung, Mr. Au sent a letter to the directors of the Hoi Sing group of companies dated 1 May 1997 recording the advice given to Mr. Chan that day and again advising the directors not to proceed with the distribution. The crucial parts of that letter read as follows:

"At our meeting, we also explained to you that the companies in the Hoi Sing Group are in serious financial difficulties and are no longer viable short of injection of substantial working capital from its controlling shareholders. To date, several creditors, including [the sub-contractors], have commenced legal actions or have threatened to take legal actions against the companies in the Hoi Sing Group and summary judgment had been entered against the Hoi Sing Group in respect of some of these actions. In light of the recent development, it is very likely that winding up proceedings would be commenced against any one or more of the companies in the Hoi Sing Group shortly. WE THEREFORE STRONGLY RECOMMEND YOU NOT TO IMPLEMENT THE DISTRIBUTION AND IF YOU CHOOSE TO DO SO, YOU WILL DO SO AT YOUR OWN RISK." (words in bold and capitals as per the original document)

37. No response was received from the directors to this letter. On 2, 3 and 5 May 1997, the Company's solicitors made payments to the 22 respondents. There is no dispute that the payments were made from the monies of the Company.

Was the Company insolvent at the time of payment

38. It has not been seriously challenged by counsel for some of the respondents that the Company was insolvent at the time the payments were made in early May 1997.

39. I have already set out the figures of net asset deficiency in the audited accounts for 1995 and the management accounts up to November 1996 without making adjustments for the substantial debts owed to the Company by Hoi Sing Builders. According to Mr. Nicholas Hill's evidence, if such adjustments were to be made, the net asset deficiency as at 31 December 1995 would be increased from HK$82 million to HK$160 million and the net asset deficiency as at 30 November 1996 would be raised from HK$28 million to HK$249 million. If further adjustments were to be made for advances to sub-contractors, the net asset deficiency at this time would be increased to HK$449 million. Mr. Hill is of the opinion that the Company was insolvent on a balance sheet test and on a cash flow test at the time of the payments and had been so for some considerable time earlier. I accept his evidence entirely. Similar evidence was given by Mr. Mark Wong, the former financial controller of PRIME. As Mr. Westbrook who appeared for the liquidators has put it so graphically, the Company at that time was on its last gasp.

40. Were the directors, in particular Mr. Chan who was controlling the Company, aware that the Company was hopelessly insolvent when the payments were made? I find that Mr. Chan was fully aware of the dire financial position of the Company. I attach no weight to the fact that he was willing to buy the Company in March 1997 for HK$400,000.00 notwithstanding that the Company was clearly insolvent according to the accounts supplied to him as I do not know the full circumstances in which he had entered into the agreement to purchase. Mr. Chan did not inject any capital into the Company after the purchase. No or no effective action was taken for the Company to resume normal operations. I have mentioned that all the employees were dismissed by the end of April 1997, the office was closed, and most if not all of the sites were re-entered by the Government or the private employer. There was a flurry of writs issued against the Company and summary judgment had been entered in some instances. Mr. Chan had sought advice from Mr. Augustus Au in late April if the Company could pay wages to the employees in full. There was also the clear advice from Mr. Au which I have set out earlier to the effect that the Company was no longer viable short of injection of substantial working capital and it was likely that winding up proceedings would be commenced by a creditor shortly. Mr. Chan could have been in no doubt that the Company was heavily insolvent when the payments were made.

41. Mr. Tung had suggested to the liquidators when he was interviewed in February 1998 that Mr. Chan had thought that if he could settle with all the creditors, even if the business was suspended for a few years, it might be revived as it could again tender for public construction works as it had a licence. I do not attach any weight to this. Mr. Chan was not called to give evidence, nor was Mr. Tung, notwithstanding that leave had been given to the respondents to issue subpoenas against them in March 1999. What Mr. Tung had said about Mr. Chan's thinking is double hearsay. Further, I agree with Mr. Hill's evidence that it would have been thoroughly unrealistic for Mr. Chan to think that he could just suspend the Company without addressing the liabilities. There was no way that Mr. Chan could have settled with all the creditors on the available assets of the Company. I find that the Company was beyond salvage at the time of the payments and Mr. Chan was aware of this.

The statutory provisions

42. There is no doubt that the respondents had been preferred over the other creditors, but was this a fraudulent preference within the meaning of the statutes? I turn to consider the relevant provisions and the case law.

43. Section 266(1) of the Companies Ordinance is as follows:

"Any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company within 6 months before the commencement of its winding up which, had it been made or done by or against an individual within 6 months before the presentation of a bankruptcy petition on which he is adjudged bankrupt, would be deemed in his bankruptcy a fraudulent preference, shall in the event of the company being wound up be deemed a fraudulent preference of its creditors and be invalid accordingly..."

44. As the commencement of the winding up in this case was before the Bankruptcy (Amendment) Ordinance, No. 76 of 1996, came into operation on 1 April 1998, the old section 49(1) of the Bankruptcy Ordinance, Cap. 6 is applicable. This section, which has been repealed, provided as follows:

"Every conveyance or transfer of property, or charge thereon made, every payment made, every obligation incurred and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor or of any person in trust for any creditor, with a view to giving such creditor, or any surety or guarantor for the debt due to such creditor, a preference over the other creditors, shall, if the person making, taking, paying or suffering the same is adjudged bankrupt on a bankruptcy petition presented within 6 months...after the date of making, taking, paying or suffering the same, be deemed fraudulent and void as against the trustee in the bankruptcy."

45. I have found that the payments were made to the respondents by the Company within six months before the commencement of its winding up and that the Company was insolvent at the time of the payments. The remaining question is whether the payments were made "with a view to giving [the respondents] a preference over the other creditors". How this question should be approached has been established in the case law.

The case law

46. The relevant propositions of law extracted from the cases may be set out as follows:

(1) The debtor's state of mind is the paramount consideration. The intention or view to prefer, as the immediate cause of the debtor's conduct, is the cardinal point round which the whole question turns. This is a question of fact to be derived from a review of all the circumstances of the case (Peat v. Gresham Trust Ltd. [1934] A.C. 252 at 262; Banque Nationale de Paris v. Sam Wah Hing Garment Factory Ltd. & Ors. [1985] 2 HKC 499 at 506I; Halsbury's Laws of England, 4th ed., Vol. 3, para. 918).

(2) A limited company cannot have a view except so far as the views of the agents by which it acts. In this context, the state of mind of those in control of the company has to be examined as it is only through such persons that any view can be attributed to the debtor company (Peat v. Gresham Trust Ltd., supra. at 261).

(3) The onus is on the person alleging a "fraudulent preference" to prove to the satisfaction of the court that the payment impugned was made by the debtor "with a view of" preferring the payee over his other creditors. In other words, he must prove the debtor's intention to prefer. This burden does not shift, even where it is shown that a voluntary payment has been made which in fact gives a creditor preference (In re Cutts [1956] 1 W.L.R. 728 at 733; BNP v. Sam Wah Hing Garment Factory Ltd., supra. at 506D).

(4) It is competent for the court to draw the inference of intention to prefer from all the facts of the case, particularly when there is no direct evidence of intention. But the inference should not be drawn, having regard to the situation of the onus of proof, unless such inference is the true and proper inference from the facts proved. Thus, it will not be drawn, if the inference from the facts is equivocal and, in particular, it will not be drawn from the mere circumstance that the creditor paid was in fact "preferred," in the sense that he was paid when other creditors were not (In re Cutts, supra. at 733, 739).

(5) The intention to prefer, which must be proved, is the principal or dominant intention. It is recognised that there may be more than one intention involved. There may also be a valid distinction for present purposes between a view or intention to prefer and the reasons for forming and executing that intention, i.e. motive (In re Cutts, supra. at 734, 740, 750).

(6) The time at which the intention is adjudged is the time of payment. The section is not looking to future events in this respect (In re Matthews Ltd. [1982] 1 Ch. 257 at 264B to D).

(7) "Fraudulent preference" does not necessarily involve an element of dishonesty. Nevertheless, it must be remembered that the inference to be drawn is of something which has about it, at the least, a taint of dishonesty, and, in extreme cases, much more than a mere taint of dishonesty. The court is not in the habit of drawing inferences which involve dishonesty or something approaching dishonesty unless there are solid grounds for drawing them (BNP v. Sam Wah Hing Garment Factory Ltd., supra. at 506B; In re Kushler Ltd. [1943] 1 Ch. 248 at 252; Re Wing Hong Woo Co. Ltd. [2000] 4 HKC 186 at 201A to C).

(8) The word "preference" imports in it the voluntary act of a person who can do either the one thing or the other as he prefers. Inasmuch as preference implies selection and selection implies freedom of choice, a payment must in order to constitute a preference be voluntarily made, and that a payment made under pressure, e.g., in the shape of proceedings actual or threatened by the creditor concerned, or fear of such proceedings, is not for this purpose a voluntary payment (Butcher v. Stead (1875) L.R. 7 H.L. 839 at 846; Sharp v. Jackson [1899] A.C. 419 at 423, 425, 427; In re Cutts, supra. at 740; BNP v. Sam Wah Hing Garment Factory Ltd., supra. at 507H to I; Halsbury's Laws of England, 4th ed., Vol. 3, para. 914).

The liquidators' case

47. It was submitted by Mr. Westbrook for the liquidators that as the Company had collapsed beyond the point of no return, there was no possible commercial benefit that the Company could hope to gain by making the payments to the respondents. Further, the writs and threatened legal proceedings would have constituted no pressure on Mr. Chan as the Company was effectively going under at the time of the payments. This is borne out by the fact that of the 40 odd creditors that had issued writs against the Company in 1997, only the 13th and 22nd respondents got paid. This is not a case where payment was made mistakenly. It is plain that there was a selection as to which creditors should be paid and payment was made despite strong legal advice to the contrary.

48. Mr. Westbrook further submitted that the marches, demonstrations and protests might have constituted pressure if the Company was alive and functioning as the Company might wish to avoid damage to its goodwill and reputation. However, the loss of goodwill and reputation would be meaningless here as the Company was not a going concern. This was a company that was bound to collapse, and whoever happened to get Mr. Chan's ears and bothered him most would get paid. This is no different from a situation in which a debtor, knowing himself to be insolvent, deliberately chooses to pay his old friend or near relative leaving the other creditors unpaid.

49. To illustrate his point, Mr. Westbrook has referred me to the case of In re Ramsay [1913] 2 K.B. 80 and the following dicta of In re Cutts, supra.:

"If a debtor, knowing himself to be insolvent and knowing also that bankruptcy is imminent, deliberately elects to pay his oldest friend or his closest relative and to leave his other creditors unpaid or with little chance of being paid, it would appear to me to be irrelevant that he made the selection because of the love he bore for his friend or relative or because of his hopes for general but unspecified favours from them in the future...For if a debtor deliberately selects for payment A in preference to all his other creditors, it cannot, to my mind, matter, in the absence of other relevant circumstances, whether A is the debtor's oldest friend, closest relative or best client." (at 734, per Lord Evershed, M.R.; emphasis supplied)

"Indeed, no pressure was exercised by any creditor and the payment must, I think, be regarded as voluntary...The bankrupt was beset by perils on every hand, the society was not the only victim of his fraud, and, again using the language of the Divisional Court, it was not unnatural that Mr. Wintle and the bankrupt, putting their heads together to find some way out of the imbroglio which affected them both, should decide that the society was the first dragon in the path and the first with whom it was wise to make friends.

Thus they put the society first, and in doing so were not, I think, acting with an intention different in kind from that of the debtor, who knowing himself to be insolvent, deliberately chooses to pay his old friend or near relative leaving the other creditors to suffer accordingly." (at 751, per Hodson L.J.)

Should the inference of an intention to give fraudulent preference be drawn

50. There is little direct evidence of the intention of Mr. Chan. As I have mentioned, Mr. Chan has emigrated and the respondents did not subpoena him. The liquidators have adduced an extract of the relevant part of an interview they had with him in March 1998 with Mr. Tung acting as his interpreter. I attach little weight to what Mr. Chan had said in the interview. Mr. Chan had denied in the interview that he was advised by the Company's solicitors not to make payment to the respondents or that he was told by the solicitors that the Company was insolvent at the meeting on 1 May 1997, contrary to Mr. Au's evidence which I accept. I agree with Mr. Westbrook that the directors had reasons not to be truthful or at least not to tell the whole truth in the interviews with the liquidators because of the possibility of misfeasance proceedings. I note also that Mr. Chan did not mention in the interview that Mr. Tom Lau had talked to him and asked him to do his best to pay the respondents and that he had agreed to do so, a matter mentioned in the evidence of Mr. Lau.

51. By the same token, I attach little or no weight to what Mr. Tung and Mr. Eric Chung had said in their interviews with the liquidators regarding Mr. Chan's thinking or reasons for making the payments. These two individuals were not called to give evidence by the respondents. Besides, their evidence in this respect is double hearsay.

52. In my view, a more reliable way to ascertain Mr. Chan's state of mind at the material time would be to look at his actions in the light of the circumstances in which he was placed. I take into account that none of the respondents are the friends or associates of Mr. Chan. The common factor among them was that they had joined forces to mount a campaign against the Company and PRIME to press for payment in March and April 1997. The protests outside PRIME's office and the Company's office for three days in March 1997 were to no avail. The officers of PRIME declined to deal with their grievances. Although Mr. Chan did have meetings with them in early April, he did not offer anything concrete. It was not until the respondents had taken to the streets and publicized their campaign to the media with accusations they were cheated by PRIME (I am making no finding or observation if there was any basis for such accusations) that they managed to see Mr. Tom Lau in mid April. Mr. Lau then mediated with Mr. Chan. The tactics of the respondents in exerting pressure to pay via PRIME on the Company were successful. As I have found earlier, Mr. Lau's role in the incident was a more significant one than what he had said in his evidence. It was he who had mentioned to the respondents that he would "suggest" to the Company to pay 60% of their debts. The respondents, after discussion among themselves, told Mr. Lau they would accept his proposal. They did not deal with Mr. Chan. There was no further incident or demand after they had told Mr. Lau that the proposal was acceptable.

53. It was what Mr. Lau had said to Mr. Chan in their telephone discussion and meeting that had resulted in Mr. Chan forming the intention to pay the respondents who had exerted pressure on PRIME. Mr. Chan had chosen not to disclose these discussions when he was interviewed by the liquidators. I am not satisfied that Mr. Lau has told this court the whole truth of his discussions with Mr. Chan. Mr. M. C. Chiu has submitted that Mr. Chan could have agreed to pay the respondents because Mr. Lau did have substantial influence over him as Paul Y.-ITC was giving work to Mr. Chan's other business interest as a sub-contractor and the failure to rid PRIME of the respondents' disturbance might lead to a loss of business for Mr. Chan. On the available evidence, it would not be proper for me to speculate what were Mr. Chan's reasons for agreeing to the "suggestion" of Mr. Lau that the respondents should be paid 60% of their debts. I would only say that on the evidence, the reasons for Mr. Chan's action might well have been due to reasons unconnected with any intention to prefer. My view is reinforced when I take into account the fact that Mr. Chan had been advised by the Company's solicitors on more than one occasion of the implication of fraudulent preference and the possibility of misfeasance proceedings against the directors if they had acted improperly and that despite strong and clear advice from the solicitors on 1 May 1997, he gave instructions to them to effect payment. It seems to me that Mr. Chan must have compelling reasons for acting against such clear legal advice and in the face of a specific warning that he would do so at his own risk. Looking at Mr. Chan's action in the history of all that had happened, I cannot be satisfied that he was exercising a free choice when he decided to accept the "suggestion" to pay 60% of the respondents' debts.

54. In any event, the evidence before me is not sufficiently unequivocal for a true and proper inference to be drawn that the payments were made with the dominant intention to prefer the respondents over the other creditors. In the circumstances, I find it impossible to hold that the liquidators have discharged the onus of proving by direct or indirect evidence to the degree of proof required that the Company had made the payments with the dominant intention of giving the respondents a preference over the other creditors. I therefore dismiss the liquidators' application. I make an order nisi for costs in favour of the respondents.

Representation:

Mr. Simon Westbrook, instructed by Messrs. Simmons & Simmons, for the Applicants

Mr. Lawrence Ng, instructed by Messrs. Rowdget Young & Co., for the 1st, 2nd, 4th to 9th, 11th, 13th, 14th and 18th Respondents.

Mr. M.C. Chiu, instructed by Messrs. K.F. Wong & Co., for the 22nd Respondent.

The 3rd, 10th, 12th, 15th to 17th, 19th to 21st Respondents, acting in person, absent.

SCHEDULE