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Re Arts Knitting Factory Ltd

Read the full judgment text of HCCW 13/1972 on BabelCite. This High Court CFI judgment.

1. On 9th March 1972, a petition was presented for the winding-up of Arts Knitting Factory Limited. Prior to that a distress warrant had been issued by the company's landlord on 11th February 1972 and on 28th February pursuant to that warrant, goods of the company were seized by the bailiff. These goods were never sold by the bailiff but, on 27th March 1972, that is after the date of the presentation of the petition, the arrears of rent and the bailiff's costs were paid by the company in order t

Case No.HCCW 13/1972
Court
High Court CFI
Date—
Judge—
Case Document
100%Judiciary

HCCW000013/1972

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

NO. 13 OF 1972

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  IN THE MATTER of the Companies Ordinance (Cap. 32)
  and
  IN THE MATTER of the Winding-up of Arts Knitting Factory Limited

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Coram: Pickering, J., in Chambers

Date of Judgment: 23rd September, 1974.

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JUDGMENT

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1. On 9th March 1972, a petition was presented for the winding-up of Arts Knitting Factory Limited. Prior to that a distress warrant had been issued by the company's landlord on 11th February 1972 and on 28th February pursuant to that warrant, goods of the company were seized by the bailiff. These goods were never sold by the bailiff but, on 27th March 1972, that is after the date of the presentation of the petition, the arrears of rent and the bailiff's costs were paid by the company in order to obtain the release of the seized goods. The money, amounting to $17,400, is now in the Kowloon District Court, having been frozen there by the court. It is important to state that all the preferential creditors have been paid in full so that the preference which they would otherwise have enjoyed over the landlord, by virtue of s.265(5) of the Companies Ordinance, is irrelevant.

2. There are conflicting claims to the money in court by, on the one hand, the Official Receiver as liquidator and, on the other hand, by the landlord. The summons with which I am now concerned has been taken out by the Official Receiver and seeks an order that he be at liberty to apply to the Kowloon District Court for an order that the sum of $17,400 be paid to him as being part of the assets of Arts Knitting Factory Limited.

3. Mr. Hall, presenting the case for the Official Receiver, emphasised the strong points of his case whilst conceding the weaknesses, with a nice balance of objectivity. Mr. Hall called in aid s.182 of the Companies Ordinance which provides that in a winding-up by the court any disposition of the property of the company made after the commencement of the winding-up shall, unless the court otherwise orders, be void. The date of commencement of the winding-up, it was argued, was the date of presentation of the petition, that is 9th March 1972, whereas the money had been paid into court by the company on 27th March, so that this disposition of the company's property was, on the face of it, void under the provisions of s.182; the payment was not a distress or the proceeds of a distraint but was rent by virtue of s.98 of the Landlord and Tenant (Consolidation) Ordinance (Cap.7) which provides that the court may "...... give time to the debtor to pay the 'rent' due from him on such terms as it may think just and reasonable". It could therefore be argued that the payment was merely rent paid after the winding-up proceedings had commenced and not a payment made in distraint. However in the case of C. Gordon & Co. (H.K.) Ltd. v. Hui Yuen trading as Tak Seng Dispensary (a firm)(1), money from the proceeds of an execution against a judgment debtor remained in court after the statutory period of fourteen days prescribed by the Bankruptcy Ordinance (Cap. 6) s.46 because of delay by the judgment creditor in applying for payment out. During the period of delay the judgment debtor filed a petition in bankruptcy. Three days later the judgment creditor unsuccessfully applied to the Deputy Registrar for payment out of the money in court. It was held that since the judgment creditor was not in receipt of the full amount of the levy whilst the money therefrom remained in court, the execution was not complete (Bankruptcy Ordinance (Cap. 6) s.45(2)(a)) and since the execution was not complete, the money in court was for "the benefit of the execution" and as such might not be retained by the judgment creditor after notice of the bankruptcy petition - Bankruptcy Ordinance (Cap. 6) s.45(1). Accordingly the money in court in the present case should still belong to the company.

4. I do not think that this case assists the Official Receiver for as Mr. Whyte, for the landlord, pointed out, it was a case under the Bankruptcy Ordinance and not the Companies Ordinance and if the defendant in that case had been a company the decision would have gone the other way. The whole point of the case was when was the execution complete and there was no provision in the Hong Kong Bankruptcy Ordinance, similar to that in the English Act, which says that execution is complete once seizure and sale has taken place. In the present case, Mr. Whyte argued, we are dealing with a limited company. Section 269(2) of the Companies Ordinance provides that execution is completed by seizure and sale.

5. Mr. Hall conceded that if his argument was correct a strange result ensued in that a landlord had properly issued a distress warrant and seized goods under it, the company had thereupon paid money into court and the goods were released, the company was then put into liquidation, and, if the arguments for the Official Receiver were correct, the landlord must, as a result, relinquish his security and be placed on the same footing as other ordinary creditors. It appeared wholly wrong, Mr. Hall continued, that if the landlord was a secured creditor. as he appeared to be, and if the distress could continue after the winding-up provided that it had been commenced before the commencement of the winding-up, that the landlord could lose his security and preference merely as a result of payment into court at an opportune moment. But that did appear to be what s.182 of the Companies Ordinance provided. At the same time the court had very wide powers under s.182 which section was governed by the words "unless the court otherwise orders".

6. Apart from discounting the case of C. Gordon & Co. (H.K.) Ltd. v. Hui Yuen trading as Tak Seng Dispensary(1), Mr. Whyte relied heavily upon In re Roundwood Colliery Company. lee v. Roundwood Colliery Company(2) in which it was held that a distress levied before the commencement of the winding-up of a company and before a receiver was effectively appointed on behalf of the debenture-holders of the company, was valid against the debenture-holders. In that case Stirling, L.J. observed:

"The result, as I understand it, is this: that a creditor who has issued execution, or a landlord who has levied a distress, before the commencement of the winding-up will be allowed to proceed. to sale unless there is established the existence of special reasons rendering it inequitable that he should be permitted to do so."

In the same case Lindley, L.J. said:

  "...... it becomes necessary to consider the respective rights of the landlord and of the debenture-holders to the goods seized. These rights depend upon the question whether the landlord distrained while the debentures were still a floating security, or whether the debentures are to be regarded as having definitively attached to the goods seized, so that, as between the landlord and the debenture-holders, those goods had become the property of the latter before the landlord seized them.  
            It is not contended that the landlord could distrain off the property demised on goods which were not the goods of the company, both at law and in equity. The debenture-holders contend that the goods seized were not the goods of the company, except subject to the equitable charge created by the debentures. As between the debenture-holders and the company this proposition is true; but it does not decide the respective rights of the lessor and the debenture-holders, which is what we have to consider. The goods seized by the lessor were seized under a power conferred either before the debentures were issued or whilst they were clearly a floating security, and in either case that power could be exercised before the debentures ceased to be floating securities. They did not cease to be so before the distress was put in. The winding-up did not commence until after that date, nor was any effectual order for a receiver made until after the same date. The order of October 7 was never really effective. It was never drawn up, the lessor had no notice of it, and before the receiver could take possession he had to give security. The distress, having been made before the commencement of the winding-up of the company, and before a receiver was effectively appointed, was, in my opinion, valid as against the debenture-holders."  

Thus Mr. Whyte argued, a landlord's charge takes priority over a floating charge and when the floating charge crystalises, the debenture-holders take priority over the ordinary creditors: that is, a landlord has a stronger claim than ordinary creditors in a winding-up. The only complication in the present case was that the landlord gave up his security, the goods seized, on payment by the company of the amount for which the distraint had been levied.

7. Mr. Whyte further made reference to s.265(5A) of the Companies Ordinance which provides that any money paid under a charge under sub-s.5 (which refers to distraint within three months next before the date of the winding-up order), shall be a debt due from the company to the landlord or other person having distrained, and that such debt shall be discharged, so far as the assets are sufficient to meet it, after payment of the preferential debts but before payment of the other debts proved in the winding-up. That provision, Mr. Whyte urged, should apply where a landlord had released his charge over the goods and accepted money; it would be inequitable that he should not recover the amount due to him once preferential creditors had been paid; the money received by the landlord was the equivalent of money paid under the charge and to the extent that the money was not needed to pay the preferential creditors it became a debt due from the company to the landlord.

8. It seems to me that this is the argument which must prevail and that the money paid by the company to obtain the release of the goods distrained upon, should properly be regarded as money paid under a charge so that, in accordance with s.265(5A), it became a debt due from the company to the landlord since the preferential creditors had all been paid.

9. I would only add that had I been of the contrary opinion I would, in the circumstances of this case, have exercised my discretion under s.182 of the Companies Ordinance, to order that the "disposition" made by the company for the purpose of redeeming the property distrained upon, should not be void as against the landlord.

10. In the result the summons must be dismissed. In this respect however as the summons was taken out merely for the purpose of a determination of conflicting claims as between the official receiver and the landlord, claims both of which were eminently reasonable having regard to the existing state of the law, and since such action was imperative on the part of one side or the other, the money being blocked in court, I will make no order as to costs.

Representation:

R.M. Hall for Official Receiver and Licuidator.

P.J.F. Whyte of Johnson, Stokes & Master for Landlord.

(1) 1967 D.C.L.R. 17

(2) 1897 1 Ch. 323 @ 381, 393