Re Union V-tex Shirts Factory Ltd

HCCW000019/1975

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING_UP)

NO. 19 OF 1975

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Coram: Li, J. in Chambers.

Date of Judgment:

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JUDGMENT

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1. The Union (V-Tex) Shirts Factory Limited (hereinafter referred to as the Union (V-Tex) had been a manufacturer of shirts and other business of some scale. It ran into financial difficulty. As a result, investigation was ordered and it was performed by Ian NaCabe & Company, a firm of Chartered Accountants in December 1974 as to that company's liability. A report was then given. The factory premises was seized on the 6th of March 1975 and from that day ceased its business as manufacturer of shirts. However, because of its business in the previous years, the company was holding then a quota for 330,000 pieces of restrained shirts of type B quota for export to Denmark, that is an asset of some value. One if its Directors Mr. LAU Yee-hang round about early in March negotiated with Mr. LI King-tso of Codify Limited for the sale of the said quotas to Codify Limited. Their negotiation resulted in an agreement to sell the 330,000 shirt quota to the Codify Limited in the sum of 5,500 dollars, and a debit note was issued by the Union (V-Tex). The transfer was signed by another Director of the Union (V-Tex) Mr. LEE Kwok-yat on the 26th of March 1975. In the meanwhile, the Union (V-Tex) was heavily in debt to various creditors, one of which was the Hong Kong & Shanghai Banking Corporation who presented a petition to have the Union (V-Tex) wound up on the 15th of March 1975. The petition was served upon Union (V-Tex) on the 18th of March 1975 and eventually an order of this court was made on the 18th of April 1975 to have the company wound up. The Official Receiver then became the Provisional Liquidator to take control of the assets. To make it quite sure, the Official Receiver made application to this court and on the 23rd of April 1975 obtained an order to sanction their power to take control and to sell the assets of the Union (V-Tex). There was a Creditors' Meeting held on the 7th of May 1975 and the Official Receiver or the Provisional Liquidator was appointed Liquidator. Thus, in all respects, the Liquidator took over all the assets "personified the Union (V-Tex)" in the words of the case of Alexander Ward & Company Limited v. Samyang Navigation Company Limited⁽¹⁾.

2. On the 26th of May this year, Mr. LI King-tso, the Director of Codify Limited, approached Mr. Marr, Assistant Registrar, the person in charge of the winding up operation on behalf of the Registrar General who was the Official Receiver and the Liquidator. He approached Mr. Marr in respect of the transfer and Mr. Marr accepted the $5,500 and issued a receipt. Mr. Marr, at the request of Mr. LI King-tso, also wrote to the Director of Commerce and Industry indicating that he had no objection to this transfer. I shall refer to these documents at a later stage. The Liquidator then in June 1975 to be precise, on the 27th of June, applied to this court for direction that the transfer from the Union (V-Tex) to Codify Limited of the 330,000 pieces shirt quota be set aside on the ground that it was not a dealing at arm's length and that the price of $5,500 was a gross under value of the quota then available.

3. The Liquidator's case is that the two companies, namely Union (V-Tex) and Codify Limited, were not dealing at arm's length because it is alleged that the Codify is an associate of the Union (V-Tex) in business; that they share banking facilities together; that LI King-tso, the Director of Codify Limited, is the brother of LEE Kwok-yat, a Director of Union (V-Tex). and another shareholder of Codify Limited is the wife of the brother of one of the Directors of the Union (V-Tex). It is also alleged that there had been buying and selling between the Union (V-Tex) and the Codify Limited of raw materials at grossly inflated prices and that the price of $3,500 was a gross under value because there was no less than two persons who claimed to be experts in this field, that they were prepared to offer something like 50,000 to 55,000 dollars for this sizable volume of a quota.

4. The Codify Limited's case is that the value that was offered and accepted was a fair price having regard to the circumstances then prevailing and that there was no collusion between the personnel of those companies or between those two companies.

5. Pausing at this stage, perhaps I should explain "the quota system" as one may call it and as understood by me. Apparently, between the government of Hong Kong and the government of importing countries in Europe and other parts of the world, there are from time to time bilateral agreements regulating exports from Hong Kong to such importing countries so as to effect a proper balance, that we in Hong Kong would practise a little bit of self-restraint on exports, so that we may not be a commercial nuisance to other countries. The term "commercial nuisance" is mine. The consulation will take place from time to time with the view to formulate these bilateral agreements on exports of commodities. In so doing they will take into consideration of the total volume of 12 months' export of certain commodities, the subject-matter of the bilateral agreement, terminating three months prior to and preceding the months prior to and preceding the month of consultation. Sometimes they can arrive at an agreement and sometimes they cannot. Sometimes the agreement would be on yearly basis and sometimes for other periods. If and when a bilateral agreement is reached for a quota for a certain period, then the Director of Commerce and Industry will invite applications and applicants for quotas from manufacturers and exporters. There will be an allocation and the allocation will be based on the applicant's previous trade performance in the year. If there had been bilateral agreements that go on from year to year, then the allocation in any particular year will be based upon the previous performance of the exporter or manufacturer in the previous years. Such allocation is only on the basis that it will be used within that current year of allocation. For this matter, I would again use my own term of what I call "quota rights". A manufacturer or exporter may be allocated a quota for so many pieces of shirt or garment or the commodity. He has the right to export so many pieces of shirt up to the quota. In order to obtain a similar quota next year, he would have exercised his right to export the pieces of shirt to the full quota that has been allocated to him in that year or have by somebody else exercised that right. However, having fully utilized the quotas of the current year does not necessarily ensure that the said manufacturer or exporter will be allocated the similar volume of quota in the following year. It merely formed the basis for consideration. On the other hand, for people who cannot obtain any allocation at all, they may take advantage of the practice that the quota should be utilized within the current year. They will ask for a transfer from the possessor of quota rights to allow them to use a part of the possessor's quota rights to export garments or shirts to the importing countries. That is what is commonly known as "a type A transfer" or "shipment quotas". This quota does not entitle the transferee any right of allocation in the next year of quota rights, but its mere utilization of the current year's quota would enure to the benefit of the possessor of the quota rights so that in the following year, the possessor of the quota rights may well be considered for all the quota rights which had utilized in the current year by himself or his transferees.

6. From time to time, there are what is called "free quotas", that is if, for various reasons, there are after allocation spare quotas to be allocated, then invitation will be made by the Director of Commerce and Industry to the manufacturers and exporters to apply for them. If they were granted these free quotas, then again it does not mean that they will obtain the quota rights in the following year, but they would be given first consideration after the priority of the current year's quota possessor had been allocated the appropriate volume of quota. It is also the practice of the Director of Commerce and Industry to recognize and approve transfer of quota rights or shipment quotas. The reason is obvious. The Director's function is to promote exports from Hong Kong and to regulate it. If there is any quota which is unused, it will be an utter waste, to the detriment of the export trade of Hong Kong. For this reason although the quota could and should have been allocated without any payment, he would approve despite payment if the transfer has been signed with the real consent of both parties, stamp duty has been paid on the transfer, all the conditions applicable to importers has been agreed, and that the transferor of the quota has the necessary amount of quota rights to be transferred to the transferee.

7. According to Mr. WONG Cho-yin, a Trade Officer from the Commerce and Industry Department, the year 1975 is of a special year and a special situation obtained. Various consultations took place in 1975 without any result to any bilateral agreement. By February and March this year or even earlier than that, it was fairly indicative that no agreement could be reached for the purposes of allocation of quota rights to manufacturers in the first quarter of the year, so much so that the Director had to adopt the rule of the thumb and applied last year's quota system for the first three months of 1975. In other words, he would take into consideration of what was the total number of quota rights allocated in 1974 and allocate on temporary basis one-quarter of the 1974 quota rights for the purposes of allocation in the first quarter of 1975. That was a unilateral action forced upon him in the circumstances. By May or June or near July, it was quite apparent that the negotiation again would break down. As a result, the Director again used this method and applied last year's allocation system but then to enlarge it for 1975 pending any concrete result being reached by virtue of consultation between the Hong Kong Government and the appropriate European Economic Community authorities. Such is my understanding of the quota system and I shall not apologize for giving some length in my decision in explaining the system as I understand it, because it does have some effect on the question of the prices of the quota in the case of a transfer.

8. Having dealt with this, I now then consider the other facts and factors in this application. Various affidavits have been filed by both parties. Oral evidence have been called by both parties in support and in opposition of this application. So far as the question of association between the companies, I am of the opinion that it has been established beyond doubt that the Union (V-Tex) and the Codify Limited are business associates in the real sense. I have no doubt that the MaCabe report is genuine and accurate. However, Mr. Poon of MaCabe & Company suffers a handicap in the sense that he has only the books of Union (V-Tex) to audit and to form the basis of his investigation. He fairly said, and very properly so, that the Codify Limited, in their dealings with the Union (V-Tex), only received disbursement and no profits. There had been buying and selling at inflated prices. However, he could only say this from his reading of the accounts and the books of the Union (V-Tex). He had no access to the books of Codify Limited. He also put as a matter of fact - and that is not subject to any dispute - that two of the Directors of the Union (V-Tex) are somewhat related to the shareholders and one Director of the Codify Limited and that Codify Limited shares belong to two persons. One is LI King-tso, who is a brother of the Director of Union (V-Tex) LEE Kwok-yat, and the other shareholder is a certain Madam Chan who is the wife of the brother of a former Director of Union (V-Tex) Mr. CHAN Tai-chi. So much is the association between the two companies.

9. Then the Liquidator has filed two affidavits of the experts on quota prices or quota right prices - Mr. Zorn of Jacobsen Van Den Berg Hong Kong Limited and Mr. Peyer of Etacol Hong Kong Limited. The former is the Manager of the Export Department of his company which deals with export of garments, and the latter is the Manager of a company which practically monopolized the majority of the trade in making shirt collars and shirt cuffs. Both are well versed in the system of quota and quota rights purchasing. I accepted them as experts in this field. Both of them advanced the opinion that the quota right of 330,000 pieces of restrained shirt export to Denmark in quota should be worth between 50,000 to 55,000 dollars. In short, they were prepared to offer this price. However, under cross-examination, it appeared to me that although they were the persons who authorized the purchase of quota rights, Mr. Zorn was the person who authorized sale and purchase of quotas or rather mainly purchase of quotas for his company for export, but had not dealt with any quota rights or quotas for export to Denmark. He said that he had never bought any quota although he said that he was prepared to pay a sum of $50,000 or 330,000 shirt quota.

10. On the other hand, the impression Mr. Peyer gave me was that the total export of shirts to Denmark in the year 1974 barely exceeded two million. His calculation is based on the fact that 330,000 pieces of shirt represent over one-seventh of the total volume of trade in this commodity between Hong Kong and Denmark. As such he placed great value in this asset of having these quota rights. He said he was prepared to pay up to $55,000 for it and would be able to make a profit. What he did not know is that in the year 1974, despite the quota rights for export of about 2.3 million shirts to Denmark, the quota rights for only 1.3 &$189; million shirt had been utilized in Hong Kong. In other words, only 60 per cent of the quota rights were materialized into actual quotas and used quotas. That is in the evidence of Mr. Wong of the Commerce and Industry Department. Neither of the experts gave evidence of any actual purchase for quota rights for export to Denmark. Mr. Peyer's valuation at $55,000 was based entirely on a reasonable calculation that if one cornered one-third of the total quota, he might be in a good position bargain for prices, and for the purposes of speculation. He said that a 330,000 shirt quota rights would be a very good bargaining point and would probably give the owner a huge profit. These expert opinions may form a basis for consideration but I will not and I will tate to use them as a conclusive evidence.

11. Now I come to Mr. Marr's position. Mr. Marr is the Assistant Registrar in charge of the winding up operation of Union (V-Tex) in the Registrar General's Department. For all intending purposes, one may say that he is in a position of the Liquidator himself because the Liquidator acts through him. In his evidence, he said that on the 26th of May, LI King-tso approached him in respect of the transfer of those 330,000 quotas or quota rights. At that time the debit note and a transfer were shown to him, and he consulted his senior officers and he accepted the payment of the $5,500 and, at the request of Mr. LI King-tso, wrote a memo to the Director of Commerce and Industry. The debit note dated the 15th of March 1975 reads:

The transfer is dated the 26th of March shows that the Union (V-Tex) being the quota holder of these 330,000 restrained shirts quota transfer to the Codify Limited of such quota. The price is evidenced in the debit note and the transfer is evidenced in the application for type B transfer quota. The former being exhibited in the affidavit of LI King-tso filed on the 9th of July 1975 as Ex. LKT 1 and the latter as Ex. LKT 3.

12. Having regard to the circumstances, it appears that all the essential elements of buying and selling were put before Mr. Marr. The price is certain; the volume of the quota is certain; the parties to the contract are certain all the facts material for the transaction of a purchase and sale were before him. At the request of the transferee (purchaser), he wrote to the Director of Commerce and Industry in these terms. That is exhibited in LKT 4 of Mr. LI King-tso's affidavit. It is entitled:

"330,000 pieces Restrained Shirts Type B Quota for export to Denmark (Quota Ref. No. 991)".

And then there is a postscript to this memorandum:

And Mr. Marr initialled the postscript. Before he wrote this memorandum to the Director of Commerce and Industry; before he received the $5,500 for which he gave a receipt, it must be clear in the mind of Mr. Marr that he had a right not to confirm this sale and not to receive the money because once a petition had been presented and an order to wind up had been made, any transaction made after the date of the petition would be void unless the court orders otherwise. It would be the case that that transaction was void as an executory contract had it not been properly confirmed. But there is something more to that. He wrote a receipt for the $5,500 which reads:

"Received from Codify Limited Five Thousand and Five Hundred only, being proceeds of transfer of Quota."

That was a receipt given by the Official Receiver.

13. Mr. Marr in his evidence also said that he had previous experience in handling winding up operations which involve sales of quota rights. He also took the precaution to consult his senior officer, Mr. Hall, so that at that time the only factor and only facts that were probably unknown to Mr. Marr was that Union (V-Tex) and Codify Limited were in fact business associates, and that the shareholders of Codify Limited were in some way personally connected to two of the Directors of Union (V-Tex). In the circumstances, if Mr. Marr were in doubt as to the price being a fair one, he could have either refused to confirm the sale or write that memo to the Director of Commerce and Industry. In that event, the contract would have been void because no one has tried to seek an order of this court to order otherwise. If he was uncertain of himself he could have come to this court and applied for direction to sanction the transfer or to refuse the transfer. He had previous experience in dealing with quota rights sales. In fact, prior to this he had the experience of putting quota rights on sale by auction. However, he did none of these things. He chose to give an unqualified receipt for the $5,500, and he wrote to the Director of Commerce and Industry that he had no objection to the transfer with a reference to this particular transfer.

14. Counsel for Codify Limited are not relying on the provisions of Section 182 of the Companies Ordinance in that he freely concedes that this court although has a discretion to order otherwise but the court would not, in view of certain cited authorities, because this would not be an attempt to continue to carry on the trading of the company. It was a plain selling of the company's assets. He is not relying on the provisions of that section. However, he argues that by virtue of Section 199 of the Companies Ordinance, the Liquidator obviously has a power of sale and he says that on the 26th of May 1975, there must have been a sale between the Liquidator and the Codify Limited when the purchase price was received and when the transfer was referred to the Director of Commerce and Industry saying that the Liquidator has no objection.

15. Mr. Hall, on the other hand, contends that there was no document to show that or evidence to show that there had been any contract between the Liquidator and the Codify Limited and in any event, the executory contract between Union (V-Tex) and Codify Limited being executory contract is void after the presentation of the petition and cannot be validated by the Liquidator on the 26th of May 1975.

16. However, I must look at the transaction as happened on the 26th of May 1975. There, all the elements of a contract were present. Mr. Marr was presented with a debit note, the agreement that was reached and the transfer that occurred on the 26th of March. He chose to adopt what was previously done on the 26th of May. He wrote an unqualified receipt and he was quite happy to part with his 330,000 quota rights at that time for a price of $5,500. I would not query the wisdom of this move. But all the elements of a contract had been present. There had been an offer; there had been an acceptance; there had been a concluded transaction. The only way to look at it is that Mr. Marr's action was either coming into agreement and there and then complete a contract with Codify Limited in his position as Liquidator. I would prefer to look at it this way alternatively, Mr. Marr was rectifying a contract which otherwise would have been void unless there had been a court order.

17. In all fairness to Mr. Marr, one must look at the market as it then existed. According to the evidence, despite various opinions, the price for quota rights fluctuated from week to week if not for shorter periods. Thus, to speculate on quota rights was a highly speculative business. The purchase of quota rights and to utilize them may be an advantage. But there is no absolute guarantee for obtaining allocation in the following year. The allocation is entirely in the discretion of the Director of Commerce and Industry. I also take into consideration that in March and April, the export quota to Denmark was not in a very great demand. This is evidenced by the fact that in 1974 only 60 per cent of the quotas were utilized. That is not a conclusive indication entirely for this purpose. I also take into consideration of Mr. Wong's evidence who said that in April Codify Limited applied for free quota. Out of their application for over 78,000 pieces, they were allocated a quota of something like 49,000 pieces. This might be indicative of the fact that Codify Limited was in need of quota rights, and therefore there should be higher price for export quota rights to Denmark. However, I must also take into consideration that at the material time, 330,000 pieces of such quota had been - again using my own terms - "frozen" because Union (V-Tex) could not use them while it is in the process of being wound up and such quota could not be allocated to anybody else because it had previously been allocated to Union (V-Tex). What is indicative of the price is this : that the Liquidator had previous experience in dealing in sales of quota. He knew the price was $5,500 for the quota rights. He knew the amount of the volume of the quota rights. Had the price been say $1.50, obviously he would turn his face against it. Had it been a million dollars, of course he would jump at it. But we are not dealing with such extremes. We are dealing with the price of $5,500. The offer was accepted and the transfer was not objected to, no obstacle was placed in the way of the intending purchaser - Codify Limited - and this transaction was allowed to go through. It may well be that in subsequent weeks the price changed to such a lot and that put the Liquidator in fear that he might have struck a wrong bargain. In the circumstances he felt he was under a duty to apply to set aside the sale. However, in this application, the Liquidator has not been able to adduce evidence of any material misrepresentation. The Liquidator only relies on two aspects - the close association of the two companies and the value as put by the two experts, Mr. Zorn and Mr. Peyer.

18. I find that as far as the prices are concerned, I have not sufficient evidence to indicate that $5,500 at that time is not a proper price or is that so grossly under value despite the evidence of Mr. Zorn and Mr. Peyer for the reasons I have already explained. It is quite true that the two companies are close business associates. Their personnel are linked together to a certain way. However, to my mind, it would not be material to the Liquidator if there were two natural persons dealing together, whether the son was selling to the father or a brother selling to the other brother. Provided the price was right, the Liquidator would in his wisdom have accepted and taken the contract. In fact on the 26th of May this year, the Liquidator must have taken upon himself to accept the offer and adopted the procedure of transfer and made it his own contract. Alternatively he was rectifying the contract with the full material facts before him. The two companies are separate entities. It is said in the case of Savery and King⁽²⁾ that before any rectification can take effect, the principal must have known all the material facts. That was a case where the fact the mortgage was invalid, was unknown to the principal who he rectified it. However, in the present case, the Liquidator knew that the contract was invalid or void unless the court orders otherwise. He knew that material fact, he adopted it because of the price as evidenced in the exhibit LKT 5.

19. Having regard to the circumstances because I have now heard the evidence, I have found that the bargain was not that unconscionable because the price fluctuation was such a way that I cannot use any ex post facto argument as a guide for the price, I find that despite the close association of the two companies, there was nothing to show any undue influence of one over the other. The contract was negotiated by a Director LAU Yee-hang who had no connection with Codify Limited, Indeed at the material time, Union (V-Tex) had other Directors as well. In the circumstances, I shall refuse to set aside the sale and accordingly the injunction would have to be discharged.

Submission on costs (Not Covered by Court Reporter)

Court : Yes, I feel that costs should follow the event and costs to the Respondent and to be paid out of the assets of the company.

Mr. Tang: Wold your Lordship certify this for counsel?

Court: Yes, there is a certificate for counsel.

Mr. Tang: Much obliged.

Representation:

(1) (1975) 2 AII England Law Reports, 424.

(2) 10 English Report 627.