Re Kowloon Container Warehouse Co Ltd

HCMP000165/1977

Company law - winding up - distribution of surplus assets - whether registered shareholder, with beneficial interest in other shares, entitled to participate in distribution without first contributing debt owed to the company - whether equitable principle applicable where debtor is a company in liquidation - effect of s.250 Companies Ordinance.

Company law - articles providing for lien on shares - whether other remedies thereby excluded - meaning of "shall have a lien" .

Company law - notice of trusts - effect of s.101 Companies Ordinance - whether articles relating to recognition of equitable interests in shares provide a shield or prohibit company from recognizing such interests.

Conflict of laws - extent to which Hong Kong court should recognize a liquidation in Japan - situs of beneficial interest in shares.

IN THE SUPREME COURT OF HONG KONG

MISCELLANEOUS PROCEEDINGS

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Coram: Hon. Fuad J.

Date of Judgment: 4th March, 1981.

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JUDGMENT

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1. At the invitation of counsel, I have adjourned this summons into court for judgment because the matters that fall for consideration are of general interest and importance. By this summons, the joint liquidators of a private company in voluntary liquidation seek a number of declarations and orders to resolve certain questions which have arisen during the winding up. There are five respondents and the reasons for joining them will later appear.

2. The Kowloon Container Warehouse Ltd. ("the Company") was incorporated under the Companies Ordinance as a private company limited by shares on the 10th July 1970. The authorised share capital of the Company was HK$25 m. divided into 2,500 shares of HK$10,000 each, of which 1,040 shares have been issued and are fully paid up. In the middle of June 1975 the Company was unable to meet certain commitments to a Hong Kong bank, and on the 18th August 1975 the bank appointed the present joint liquidators as joint receivers and managers of the under-taking, property and assets of the Company in exercise of powers contained in debentures that it held.

3. The joint receivers and managers arranged for the sale of substantially all the business undertaking and assets of the Company, and the sale was completed during February 1976. In view of the situation, the members of the Company considered that it should be wound up, and on the 23rd March 1976 it was resolved that the Company be wound up by members' voluntary winding up.

4. Mr. George McCabe and Mr. Poon Hon Kam, who had up to then been acting as joint receivers and managers of the Company, became its joint liquidators by virtue of the resolution passed on the 23rd March 1976. For convenience the joint liquidators decided to divide the 1,040 share-holders into three groups. There were 10 shareholders, holding 354 shares between them, who were put in Part A of the schedule they prepared. In Part B there were four shareholders holding 658 shares, and there was one shareholder placed in Part C who held 28 shares. The joint liquidators got on well with their duties and after obtaining an Order from Mr. Justice Yang dated the 18th March 1977, they were able to pay a first interim dividend to the shareholders they had listed in Part A of their schedule. This interim dividend amounted to HK$25,000 per share.

5. At the time the joint liquidators made their application to Mr. Justice Yang, they considered that the status of the Part B and Part C shareholders had still to be resolved and therefore obtained the sanction of the court to place the amounts otherwise falling to be distributed to those shareholders in separate interest-bearing accounts, in the names of the liquidators, on terms that those sums, plus interest, would remain in separate accounts until the outstanding problems were settled. The matters which were then in dispute with the Part C share-holderswere subsequently resolved, and the amount he would have received under the first interim distribution was paid out to him.

6. The questions sought to be determined by this summons concern the Part B shareholders and relate respectively to the 658 shares, held by Oyama Shipping Co. Ltd. (40 shares), Mr. Tomomitsu Oyama (578 shares), Mr. Takashi Abe (20 shares), and Mr. Yoshinobu Abe (20 shares). Oyama Shipping Co. Ltd. ("Oyama Shipping") was incorporated in 1963 under the laws of Japan as a private company limited by shares. During the year 1975 Oyama Shipping got into financial difficulties and as a result it was adjudicated bankrupt under the Bankruptcy Law of Japan on the 21st August 1975. Its affairs in Japan are now in the hands of a Mr. Toshio Nomiya, who was appointed trustee in bankruptcy by a Japanese court. This is why Mr. Toshio Nomiya is the 2nd respondent in the proceedings.

7. On the 8th February 1977 an Order for the winding up of Oyama Shipping was made on that company's petition by a court in Hong Kong and, by notice under s. 194 of the Companies Ordinance, the Official Receiver became the liquidator in Hong Kong of Oyama Shipping. This is why he was joined as 1st respondent. The registered holders of the remaining 618 shares, Mr. Yoshinobu Abe, Mr. Takashi Abe and Mr. Tomomitsu Oyama are respectively the 3rd, 4th and 5th respondents.

8. Mr. Richard Scott appears for the joint liquidators of the Company and Mr. Alan Heyman for Mr. Toshio Nomiya ("the Japanese liquidator"). The Official Receiver of Hong Kong is not formally represented but he has written to Mr. Heyman to indicate that his interests coincide with those of the Japanese liquidator. The 3rd, 4th and 5th respondents were served with notices of this summons but are not represented before me.

9. It is common ground that apart from the 40 shares registered in the name of Oyama Shipping, they are, and have at all material times been, the beneficial owners of the remaining 618 shares which are relevant to the proceedings. The manner in which they acquired their interest in the shares will later fall for examination.

10. As a result of actions instituted in the Supreme Court of Hong Kong, between the 20th March 1978 and the 14th January 1980, Oyama Shipping became judgment debtors of the Company to the extent, including interest to date and costs so far taxed, of something in the region of HK$47 m. These judgment debts are still outstanding and the 3rd, 4th and 5th respondents have also been ordered to pay various sums arising out of some of the proceedings. Since the approximate amount of what might conveniently be called "the Oyama Shipping debt" is common ground, the details of the judgments and how the amount of that debt is arrived at need not be set out.

11. The joint liquidators now have available a sum in the region of HK$15 m. in cash for distribution amongst the shareholders of the Company. They are not able to make this further distribution until there has been a determination of the question that arises before me. Put quite simply, the question posed is this: "Is Oyama Shipping entitled to claim its share in the surplus assets of the company without first contributing to those assets the sums that they admittedly owe?" As the joint liquidators put it in their affidavit, if Oyama Shipping were to pay the total Oyama Shipping debt to the Company, all the contributories would share in the benefit of that asset and receive enhanced distributions accordingly.

12. In the forefront of Mr. Scott's submissions is his proposition that a person indebted to a trust estate who has an equitable interest in the estate cannot claim his share in that estate without first discharging his indebtedness. This principle ("the equitable principle") well established and has been applied in many cases. In Re Akerman [1891] 3 Ch. 212. at page 219 Kekewich J. Stated the principle thus -

"The principle is to be found laid down in Cherry v. Boultbee in the passage to which I have just referred, and also in Courtenay v. Williams, and no doubt, if search were made, it would be found to have been laid down in many other cases. It is this. A person who owes an estate money, that is to say, who is bound to increase the general mass of the estate by a contribution of his own, cannot claim an aliquot share given to him out of that mass without first making the contribution which completes it. Nothing is in truth retained by the representative of the estate; nothing is in strict language set off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back."

13. Other cases which apply the equitable principle, and which were cited to me as examples, were Re Rhodesia Goldfields Ltd.[1910] 1 Ch. 239 and Re Melton [1918] 1 Ch. 37. Although disputing the application of the principle to the facts of this case, Mr. Heyman accepts that such a principle is indeed firmly established.

14. Mr. Scott then contends that this principle is applicable to the distribution of the funds of a company in liquidation where persons have a claim (whether as creditors or contributories) to a share in the funds of the company in liquidation and are themselves indebted to the company in liquidation. The funds of the company in liquidation are to be regarded as a trust estate for the purposes of the equitable principle, the beneficiaries entitled thereto being the creditors or the contributories of the company in question. Mr. Scott relied upon a number of authorities in support of that proposition. In Re Auriferous Properties Ltd. (No.2) [1898] 2 Ch. 428, at the time each of two companies had gone into liquidation, one held shares in the other in respect of which calls had been made, and the company making the calls was indebted to the share-holder company. It was held that in the winding up of the debtor company, the shareholder company could not take any dividend on the debt owed until all calls due by it had been paid.

15. In Re National Livestock Insurance Co. Ltd. [1917] 1 Ch. 628, again two companies in liquidation were indebted to one another. Their liabilities arose respectively from unpaid calls and an unpaid debt. Astbury J. referred to a number of authorities (including Akerman and Rhodesia Goldfields) and adopted Buckley J's approach in Re Leeds and Hanley Theatres of Varieties Ltd. [1904] 2 Ch. 45, with the modifications dictated by the circumstance that there was no prospect of either company receiving a dividend in the liquidation of the other if it were first obliged to satisfy, in full, its indebtedness. In the result, the liquidator in the liquidation of each company was permitted to distribute its available assets in payment of dividends to its other creditors without regard to the respective claims of the debtor company.

16. Mr. Heyman challenges the application of the equitable principle to a case such as the present, where -

He submits that there is no room for the application of the equitable principle where the Articles which bind the company and its members have expressly legislated for the manner in which shareholders' indebtedness to the company is to be satisfied. As regards the lien, Mr. Heyman argues that it attaches only to shares in accordance with the registered holdings of shareholders, and therefore only to the 40 shares held by Oyama Shipping in its own name. The Articles, read with section 23 of the Companies Ordinance, created a contract which bound the members of the Company. Article 31 was couched in mandatory terms and could not be ignored. Where there was a contractual basis for dealing with the debts of members of a company, the equitable principle had no application. The Company could not waive its contractual right to obtain a better equitable right.

17. Article 31 is in the following terms -

"The Company shall have a first and paramount lien upon all the shares registered in the name of each member (whether solely or jointly with others) and upon the proceeds of sale thereof, for his debts, liabilities and engagements, solely or jointly with any other person, to or with the Company, whether the period for the payment, fulfilment, or discharge thereof shall have actually arrived or not, and no equitable interest shall be created in any shares except upon the footing and condition that Article 11 hereof is to have full effect. And such lien shall extend to all dividends from time to time declared in respect of such shares. Unless otherwise agreed, the registration of a transfer of shares shall operate as a waiver of the Company's lien, if any, on such shares."

Mr. Heyman relies on the point that the absence of a lien had been specifically mentioned in Re Peruvian Railway Construction Co. Ltd. [1915] 2 Ch. 442 and by implication in Auriferous Properties and argues that the result of these two cases would have been totally different had a lien been available. In all the other cases (for example, Leeds and Hanley and National Livestock Insurance) no reference had been made to whether or not there had been a lien. No case could be found where there was a lien and the equitable principle had yet been applied.

18. It is now necessary to examine the wording of Article 31, and in particular the words with which the Article begins: "The Company shall have a first and paramount lien upon all the shares registered in the name of each member .............". In Mr. Heyman's submission it is the use of the word "shall" which makes the provisions of the Article mandatory. I can do no better, I think, than to quote from the COMPOSITION OF LEGISLATION (2nd Edition) by the lerned Canadian lawyer and draftsman Dr. Elmer A. Driedger where he deals with the use of the word "shall" in the way that I think it must be interpreted in the sense it is used in Article 31. At page 13, he writes -

"There are also many situations where shall is used in an authoritative sense, but not as imposing on any identifiable persons an obligation that can be obeyed or disobeyed. Again, this use was more frequent in earlier legislation than it is in modern legislation. For example

In this use shall is obligatory in the sense of a divine ordination, and is the equivalent of Let him (it) be. When spoken by the supreme legislative body it creates a law. Fiat lux ergo est lux. This form can therefore be defended grammatically, but since the law is always speaking, it can also be expressed in the present tense, and more and more that is becoming the modern drafting style. Another reason for avoiding this future form of shall is that there can be doubt in a particular case whether shall is intended to create a rule of law or is intended to express obligation."

19. It is interesting to note the first example Dr. Driedger has selected. In my view the Article gives the Company the remedy of a lien but does not compel its use. Although I shall have to return to Peruvian Railway and Auriferous Properties again, I do not consider that they can be read as lending support to Mr. Heyman's submission. There is much force in the point made by Mr. Scott that in most cases the lien remedy would be sufficient to protect the company, and in such cases there would be no need to invoke the equitable remedy. However Mr. Scott does accept that parties are free by the express terms of a contract (or by necessary implication) to exclude an equitable remedy that might otherwise be available. Since I conclude that the Company cannot be compelled to exercise the lien given to it by its Articles, it seems to me to follow that it can rely on any remedy in law or in equity that is open to it.

20. The cases cited by Mr. Scott for his second proposition were all cases where claims were made by someone entitled at law to a share in funds to be distributed. His next proposition is that the principle, being an equitable principle, applies whether a creditor's or contributory's claim to share in the funds of the company in liquidation is made as legal or as equitable owner. It applies, therefore, to a person whose shares are held through a nominee as it applies to a person who holds shares in his own name. To illustrate this proposition, Mr. Scott cited Jacubs v. Rylance [1874] 17 L.R. Eq. 341 and Doering v. Doering [1889] 42 Ch.D. 203. In Jacubs, a woman appointed her husband as executor and bequeathed certain property to him in trust for her children. One of children died intestate and the executor was his sole next of kin. The executor owed money to the estate exceeding the amount he was due to take under the intestacy. The Court held that he must be taken to have paid himself all that he could claim out of the money that had come into his hands and for which he had not accounted, and that the sum to which he would have been entitled as next of kin must be paid over to the other children. In Doering, an executrix and trustee was also derivatively entitled, as mortgagee and assignee, to certain shares under a will. She assigned all her interest in the residuary estate of the testater to F. by way of mortgage. It later transpired that she owed a sum of money to the estate. She died insolvent and the court was asked to determine whether or not the beneficiaries under the will of which she had been executrix and trustee were entitled to have her default made good out of any share or interest she was entitled to thereunder, by virtue of the assignment and mortgages in her favour, in priority to the sum due to F. under the mortgage. Stirling J. applied Jacubs and held that although the breach of trust was committed after the assignment to him, F. was not entitled to any share or interest in the estate until the default was made good.

21. Mr. Scott also cited Re Brown & Gregory Ltd. [1904] 1 Ch. 627 by way of analogy, to emphasise that the general equitable principle applies notwithstanding that the claim is one in equity only. In that case by deed, certain debentures in a company were assigned by a firm, together with all its property, to P. as the trustee of the creditors' deed. By the debentures, which were in identical terms, the company charged its undertakings and its property in the usual way and bound itself to pay the money secured thereby to the registered holder for the time being. The debentures included conditions to the effect that the money secured would be paid without regard to equities and that only the registered holders would be recognised as having any rights under them. P's name was entered on the register as a holder of the debentures. The firm was found to be indebted to the company in a certain sum. When a fund became available for distribution in payment of a dividend to the debenture holders, the question arose whether P. could be paid his share in the dividend without paying or bringing into account the whole amount of the debt owed by the firm. Byrne J. held that P., as the assignee of the firm's interest, could not be in a better position than the firm would have been before the assignment and was thus only entitled to a share in the dividend subject to the same equities by which his assignor had been bound.

22. As regards the true effect of Articles 11 and 31, Mr. Heyman contended that when read with s. 101 of the Companies Ordinance (which provides that trusts are not to be entered on the register), the Company was obliged not to recognise any trust in a share. It was a fundamental principle that a company could only deal with its registered shareholders. However his main submission on Mr. Scott's third proposition did not depend on these provisions. If the equitable principle were applicable notwithstanding the existence of Article 31, it only applied between the Company and its registered shareholders, and not its beneficial shareholders, because s. 250 of the Companies Ordinance directed in mandatory terms that the property of the Company must (unless the Articles otherwise provide) be distributed among the members according to their rights and interests in the Company; and "members" meant members as defined by s. 28 of the Ordinance, that is to say subscribers and every other person who agrees to become a member and whose name is registered in its register of members. In his submission, s. 250 was a basic statutory provision dealing with liquidation and one that could not be avoided; and neither Jacubs nor Doering supported the proposition for which they had been cited. Both the cases had dealt with the question of defaulting trustees and were therefore not relevant. Doering was a special case, and merely established that an assignee could be in no better position than his assignor would have been, had he kept the shares throughout. Here, by law, the assets had to be distributed to the registered owners, subject only to the Articles.

23. Mr. Heyman also submitted that Brown & Gregory was not applicable to the present situation because there the holders' rights were not regulated by a statutory provision containing a mandatory direction, but only by a condition set out in the debentures themselves. Moreover, in that case the debt had arisen prior to the assignment so that if the assignee had received a better right (or claimed one) through the assignor this would have amounted to a device to avoid the assignor's obligations.

24. Section 101 of the Companies Ordinance provides that no notice of any trust, express, implied or constructive, shall be entered on the register, or be receivable by the Registrar, in the case of companies registered in the Colony. I understand the object of s. 101 to be to prevent the entering of trusts on the register so that it is at all times kept clear. In my view, Article 11, which I set out below, is designed to protect the company and does not prohibit it from recognising an equitable interest in shares if it chooses so to do, although s. 101 of the Ordinance would preclude its registration. Were it not so, the words I have placed in parentheses would surely have been omitted -

"11. Save as herein otherwise provided, the Company shall [be entitled to] treat the registered holder of any share as the absolute owner thereof, and accordingly shall not, except as ordered by a court of competent jurisdiction, or as by Ordinance required, [be bound to] recognise any equitable or other claim to, or interest in, such share on the part of any other person."

25. I now come to a consideration of s. 250 of the Ordinance which provides thus -

"250. Subject to the provisions of this Ordinance as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu, and subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company."

The Articles make no provision to the contrary, and therefore the section has full force in this case. However I am constrained to agree with Mr. Scott that in the application of this section, what has to be decided is what the particular rights and interests of members may be, and that one cannot answer that question by merely looking at the section. I accept that the application of the equitable principle has the effect of getting in by the company of an outstanding asset and the "rights and interests" of members are then calculated accordingly. On the admitted facts of this case, the registered holders of the 618 shares are mere nominees for Oyama Shipping and if the equitable principle is applicable their "rights and interests" in surplus assets must be ascertained after treating Oyama Shipping, in accordance with the authorities, as having already taken its due distribution to the extent of its unpaid debt. In my judgment it is not necessary to read the section as requiring the liquidator to pay out a distribution to nominee shareholders who make no substantive claim on the fund, ignoring the reality of the situation. It seems to me that the section does not prevent the liquidators of the Company from saying to Oyama Shipping: "You are in practical terms laying claim to a share of the Company's surplus assets because you are resisting the declarations for which we ask, but we are duty bound to determine the amount of those assets of which you demand a share, and the assets include the judgment debts you owe to the Company."

26. About Mr. Scott's next proposition there is no dispute, and it is based on authorities which include Leeds and Hanley and National Livestock Insurance. In order to apply the principle, where distribution of the surplus assets of a company in liquidation is concerned, it is necessary to calculate how much is owing to the company by the creditor or contributory in question and to treat that amount as a notional addition to the assets of the company in liquidation. The distributions payable by the liquidator must then be calculated by reference to the actual and notional assets, and the creditor/contributory is treated, to the extent of his unpaid debt, as if he had already been paid the distribution to which he is entitled.

27. Mr. Scott puts his next proposition in this way: prima facie the equitable principle still applies in that manner notwithstanding that the debtor is an insolvent company in liquidation and this is certainly the case if the creditor company's liquidation preceded the liquidation of the debtor. He submitted that Leeds and Hanley, Auriferous Properties and National Livestock Insurance made it plain that the equitable principle applies despite the fact that the debtor is insolvent for in all three cases the debtor company was insolvent and in liquidation. He contends that to understand the true basis of the decisions in Peruvian Railway and Cherry v. Boultbee 4 My. & Cr. 442 which he seeks to distinguish, it is necessary to have regard to the fact that the effect of bankruptcy on an individual is, inter alia, to vest his assets in his trustee in bankruptcy. This was quite unlike the position of a company in liquidation where the assets remained vested in the company, merely being administered by the liquidator as its agent. The reason why insolvency was material in those cases was because it affected both the identity of the claimant on the fund and also the amount of the debt the claimant owed. If it is the trustee, and not the person originally entitled to claim, who is claiming from the fund, it was crucial to have in mind what is the nature of the debt owed by the trustee. The debt he owes is not the bankrupt's debt but only the dividends payable in the bankruptcy.

28. In Cherry v. Boultbee, T.B. became bankrupt at a time when he was already indebted to C.B. C.B., under her will, made shortly after the bankruptcy, gave certain sums to her trustees and executors for the benefit of T.B., in a form designed to exclude the claims of creditors. C.B. did not prove her debt in T.B. 's bankruptcy and died before T.B. obtained his certificate. The plaintiff, as assignee of T.B., claimed the legacy. Cottenham L.C. said, at pp. 447-448,

"In the present case, however, the bankruptcy of the debtor having taken place in the lifetime of the testatrix, her executors never were entitled to receive from the assignee more than the dividends upon the debt; and although the bankrupt had not obtained his certificate, and the liability incident to that state remained upon him yet he, for the same reason, was never entitled to receive the legacy; and, consequently, there never was a time at which the same person was entitled to receive the legacy and liable to pay the entire debt; the right, therefore, of retaining a sufficient sum out of the legacy to pay the debt can never have been vested in anyone. The assignees who claim the legacy would, indeed, have been liable to the payment of any dividend upon the debt, had it been proved; and the Master of the Rolls proposed to the executors to make provision for deducting the amount of such dividend from the amount of the legacy."

In his judgment the Lord Chancellor distinguished the case where the liability to pay the debt and the right to receive the money had at any given time been vested in the same person.

29. In Peruvian Railway a company went into voluntary winding up in 1914. A. died insolvent in 1908 and fully paid shares in the company formed part of his estate. In 1909 it was found that A. was indebted to the company. In the winding up, surplus assets were available for distribution among the fully paid shareholders of the company, and A's debt exceeded the amount his estate would have received in the distribution. Applying Cherry v. Boultbee it was held that since the right arose in 1914 when the company went into winding up, the liquidator was not entitled to retain the testator's share in the surplus assets against more than such dividend on the debt as the executor could pay in due course of administration.

30. Mr. Heyman's main submission on the effect of these two cases in their application to the facts of the present case, depends to a great extent on his argument that a court in Hong Kong should recognise the Japanese liquidation. If, contrary to his submission regarding the effect of s. 250 of the Companies Ordinance, it were to be held that the equitable principle applies between the Company and its beneficial shareholder, Oyama Shipping, he contends that it only applies to the extent of the dividend that the Company would have been paid in Oyama Shipping's liquidation in Japan. Mr. Heyman argues that the bankruptcy of Oyama Shipping in Japan (which took place in August 1975, and therefore prior to the winding up of the Company in March 1976) should be recognised under Hong Kong law for the purpose of the distribution of the Company's fund, because whether it is a question of status or capacity to act, both are determined by Japanese law; although capacity might be limited by the law of the country which governs the transaction in question. Mr. Heyman cited National Bank of Greece and Athens S.A. v. Metliss [1958] A.C. 509 to show that the status of Oyama Shipping must be recognised, at any material time, at the stage of development at which it happens to find itself; here, in the state of bankruptcy which occurred before the liquidation of the Company. In his submission, in that case, the House of Lords had gone beyond the mere question of status. The facts of National Bank of Greece, in so far as they are relevant to this point, need only be briefly reviewed. Certain bonds issued by a Greek bank in 1927, were guaranteed unconditionally by another Greek bank. In 1953 by a Greek statute, the guarantor bank and a third bank were amalgamated into a new banking company, and that company was declared to be the successor to the rights and liabilities of the amalgamated companies. Mr. Heyman relied particularly on certain passages from the speeches. At p.525 Viscount Simonds said -

"But, my Lords, in the end and in the absence of authority binding this House, the question is simply: What does justice demand in such a case as this? I believe that justice will be done if your Lordships think it right not only to recognize the fact that the new company exists by the law of its being but to recognize also what it is by the same law. It is conceded that its status must be recognized. That is a convenient word to use. But what does it include or exclude? If a corporation exists for no other purpose than to assume the assets, liabilities and powers of another company, what sense is there in our recognizing its existence if we do not also recognize the purposes of its existence and give effect to them accordingly. If, for reasons of comity, we recognize the new company as a juristic entity, neither the Greek Government, the creator, nor the new company, its creature, can complain that we too clothe it with all the attributes with which it has been invested. Thus and thus alone, as it appears justice will be done."

The passage from Lord Tucker's speech at p.529 is as follows--

"The identity of the old bank has become merged in the amalgamation by a process which is by no means alien to English legal conceptions. It is of the very essence of the transaction that the liabilities and assets of the former should attach to the latter, and to recognize the existence of the new entity but to ignore an essential incident of its creation would appear to me illogical. Why an English court should be compelled to recognize that part of the decree which has extinguished the old bank but refuse to give effect to matters which are of the essence of the process of amalgamation I find it difficult to understand. In my view, the fact that this liability was attached to it at birth by its creator can properly be regarded as a matter pertaining to the status of the appellant company and accordingly governed by the law of its domicile."

31. In Re Matheson Brothers, Ltd.[1884] 27 Ch. D. 225, also cited by Mr. Heyman, a company was incorporated in New Zealand and its primary object was to carry on business in New Zealand, where most of its shareholders and creditors were registered, and where most of its assets were to be found. The company had a branch in London and owed debts in England. Liquidation proceedings were pending in New Zealand. The total English debts exceeded the assets available in England. Kay J. sanctioned the acceptance of an undertaking by the solicitor for the English agent of the company, that the assets should remain as they were, until the further order of the court, to secure the English assets until proceedings could be taken by the New Zealand liquidator, so as to make those assets available to the English creditors Pari Passu with those in New Zealand. Since it was clear, in his submission, that Kay J. was anxious to ensure that all creditors, both English and New Zealand, would be treated equally, Mr. Heyman contends that the Japanese liquidation of Oyama Shipping should be recognised to achieve the same result.

32. In the Queensland case cited by Mr. Heyman, Re Standard Insurance Co. Ltd. [1968] Qd. R. 118, a company incorporated in New Zealand was being wound up under the order of a New Zealand Court. Similar, but ancillary, winding up orders were made in each of the Australian States in which the company carried on business and was registered as a foreign company. In giving directions regarding the proper mode of distribution of the proceeds of the Queensland assets, Lucas J. referred, inter alia, to Matheson Brothers and applied a principle which he expressed in the following way, at page 125 -

"It is clear that when a winding up is proceeding in different jurisdictions, the principle to be applied is that, subject to priorities secured by local law, all creditors of the company are as far as possible to be treated equally wherever they are and wherever their debts were contracted. The principle was thus expressed by Griffith C.J. in Re Alfred Shaw & Co. Ltd. ex parte Mackenzie [1897] 8 Q.L.J. 93 at p.96'........ in the administration of the affairs of an insolvent company the assets of which are situated in several jurisdictions, the English law requires that (subject to any positive local law) the affairs of the company should be administered in such a manner as to provide for equal treatment of all the creditors, wherever their debts were contracted and wherever they may formally make proof of their claims.'"

The result of his order was that by amalgamating the New Zealand and Queensland funds, all the creditors would be treated equally, if dividends exceeded those which the Queensland preferred creditors had already received.

33. Mr. Heyman also relied in Re English, Scottish and Australian Chartered Bank [1893] 3 Ch. 385, and referred me, in particular, to a passage from the judgment of Vaughan Williams J. at page 394. It is as follows -

"One knows that where there is a liquidation of one concern the general principle is - ascertain what is the domicil of the company in liquidation; let the Court of the country of domicil act as the principal Court to govern the liquidation; and let the other Courts act as ancillary, as far as they can, to the principal liquidation. But although that is so, it has always been held that the desire to assist in the main liquidation - the desire to act as ancillary to the Court where the main liquidation is going on - will not ever make the Court give up the forensic rules which govern the conduct of its own liquidation."

34. Mr. Scott puts forward the contention that Mr. Heyman's submissions relating to the extent to which a Court in Hong Kong should have regard to the Japanese liquidation are wholly misconceived because they fail to keep in mind that the application before this Court is made by the liquidators of a Hong Kong company, in the liquidation of a Hong Kong company, for directions as to how they should deal with its surplus assets. The Court was not being asked for directions in the Japanese liquidation of Oyama Shipping as to how assets held by the Japanese liquidator should be dealt with. He accepted that the status and capacity to act of Oyama Shipping were both subject to Japanese law but argued that since the Court was not being called upon to decide what Oyama Shipping, or its liquidator in Hong Kong, or in Japan, could or ought to do with Oyama Shipping's assets, the question of capacity to act was irrelevant.

35. Mr. Scott suggested that the proper way to understand Matheson Brothers, and Standard Insurance Co. was to appreciate that the principle established by those cases was that in the liquidation of a company, equality between its contributories was to be aimed at. That principle was applicable to the liquidation of the Company, and therefore equality between claimants on the Company's surplus assets should be strived for. The solvency or otherwise of an individual claimant was irrelevant for this purpose, and equality could only be achieved by applying the equitable principle to the shares held and beneficially owned by Oyama Shipping. While the liquidation in Japan of Oyama Shipping was certainly to be recognised in Hong Kong for some purposes (indeed that was why the Japanese liquidator had been made a party to the present proceedings) it was not to be recognised for the purpose of discharging or affecting Hong Kong contractual obligations. In his submission the Japanese liquidation could not limit the efficacy of the Hong Kong judgment debts.

36. Mr. Scott sought to support this contention by citing a number of cases. In Anthony Gibbs & Sons v. La Societe Industrielle et Commerciale des Metaux [1890] 25 Q.B.D 399 the court held that a party to a contract made and to be performed in England was not discharged from liability under the contract by a discharge in bankruptcy or a liquidation under the law of a foreign country in which he is domiciled. In that case Lord Esher M.R. said, at page 405 -

"The question really is, whether anything has been proved which is an answer to the plaintiffs' action in this country according to the law of England. It is clear that these were English contracts according to two rules of law; first, because they were made in England; secondly, because they were to be performed in England. The general rule as to the law which governs a contract is that the law of the country, either where the contract is made, or where it is to be so performed that it must be considered to be a contract of that country, is the law which governs such contract; not merely with regard to its construction, but also with regard to all the conditions applicable to it as a contract. I say "applicable to it as a contract" to exclude mere matters of procedure, which do not affect the contract as such, but relate merely to the procedure of the court in which litigation may take place upon the contract. The parties are taken to have agreed that the law of such country shall be the law which is applicable to the contract. Therefore, if there be a bankruptcy law, or any other law of such country, by which a person who would otherwise be liable under the contract would be discharged, and the facts be such as to bring that law into operation, such law would be a law affecting the contract, and would be applicable to it in the country where the action is brought."

37. In New Zealand Loan & Mercantile Agency Co. v. Morrison [1898] A.C. 351, the question before the Privy Council was whether an arrangement made under the Joint Stock Companies Arrangement Act 1870 of the United Kingdom, agreed to by the majority stipulated by the statute of all the creditors in the winding up of an English company, carrying on business in Victoria, (the arrangement having been sanctioned by an Order of an English Court) was a good defence to an action brought in Victoria by one of the non-assenting creditors to recover a loan made in Victoria by him to the company before its winding up. The Privy Council held that the Act did not apply to the Colonies and therefore a scheme of arrangement made in accordance with its provisions and sanctioned by an English Court, was, in relation to the Colonies, a proceeding in a foreign Court and could not be pleaded by the company in the Courts of Victoria as a defence to the action.

38. In Suidair International Airways Ltd. [1951] 1 Ch. 165, in respect of a company registered in South Africa, but with an office in England, a winding up order was made in South Africa and a liquidator duly appointed. An English creditor of the company obtained judgment in England against the company and levied execution on the company's assets in England. A winding up order was made in England. Under South African law the execution, coming as it did after the presentation of the winding up petition, would be void. Construing s. 325(1)(c) of the Companies Act, Wynn Parry J. applied the principle stated in Re English, Scottish and Australian Chartered Bank and held that the English creditor should be allowed to keep the proceeds of his execution as against the English liquidator. At page 173, almost at the end of his judgment, he said this -

"It appears to me that the simple principle is that this court sits to administer the assets of the South African company which are within its jurisdiction, and for that purpose administers, and administers only, the relevant English law; that is, primarily the law as stated in the Companies Act, 1948, looked at in the light, where necessary, of the authorities. If that principle be adhered to no confusion will result. If it is departed from, then for myself I cannot see how any other result would follow than the utmost possible confusion."

39. Mr. Scott submitted that the case before me was stronger than that case. The Court here was sitting in a winding up of the Company which was a Hong Kong company. It was not sitting in the winding up in Hong Kong of Oyama Shipping. There was no reason why, in the winding up of the Company, any effect should be given to anything other than Hong Kong law and the rights subsisting under that law, together with the remedies and principles applicable.

40. Mr. Heyman sought to distinguish these cases. About Suidair International Airways, he submitted that the judge had appeared to depart from the other authorities and might have been influenced by his view of the conduct of the Company. As regards the Anthony Gibbs case, he argued that the case did no more than deal with what was the proper law of the contract under English law. A French discharge in bankruptcy under French law had no effect on an English contract, any more than a Hong Kong contract would be discharged by a Japanese dissolution or the discharge of a bankrupt. He accepted that the Hong Kong contracts still subsisted and could be sued upon although what might be recovered was another matter. Again in New Zealand Loan v. Morrison the real question had been what was the proper law of the contract, the same point dealt with in Anthony Gibbs. There was nothing in either of the cases to detract from his submission regarding the recognition under Hong Kong law of the Japanese liquidation.

41. As the learned authors of DICEY & MORRIS state in the commentary under Rule 143 (Vol. 2 page 741), the effect of a foreign winding up order (I might add, as distinct from an order for dissolution) has not been extensively considered by the Courts. While the authorities cited to me are undoubtedly helpful, I think it must be acknowledged at once that none of them really gives any guide to the solution of the problem faced here. In my judgment Mr. Scott was perfectly right in urging that I should firmly bear in mind the nature of the proceedings and the capacity in which the parties appear before me. It seems to me that the question cannot be said to relate to the status or capacity to act of Oyama Shipping in relation to the Japanese liquidation. In the absence of direct authority (or legislative sanction) I feel I must hesitate long before I accept a proposition, although put forward with such eloquence, whose boundaries are so ill-defined. I reach the conclusion that I am not permitted to recognise the Japanese liquidation for the purpose of the distribution of the Company's fund in this liquidation.

42. Apart from his submission on the basic conflict rules, Mr. Heyman pointed out that the liquidator of the Company was the trustee for all the creditors. As the evidence made clear, many of the preferential creditors in the Japanese liquidation (whose claims had been admitted) were employees of Oyama Shipping who were owed money in respect of wages and special retirement allowances. Justice demanded that the Court should not reach a conclusion that would have the effect of allowing the minority shareholders to be paid in full with the result that all the other creditors would receive, for all practical purposes, little if anything, for Oyama Shipping had few assets apart from the shares. He invited me to hold that the equitable principle was applicable only to the extent of the dividend which the Company would have been paid in Oyama Shipping's liquidation in Japan because of all the equities arising from the surrounding circumstances. I am persuaded by Mr. Scott's reply on this point, that this was not essentially a contest between the minority shareholders in the Company and the preferential creditors of Oyama Shipping, but between the shareholders of the Company. The position of an individual shareholder, whether a mere nominee or beneficially entitled, could not be improved or made worse by the personal circumstances of that shareholder. Moreover the Company was not a proving creditor in the Oyama Shipping liquidation, but was seeking directions as to how it should deal with its surplus assets in hand in order to do equity among the persons claiming those assets. While, of course, I have every sympathy for the position the employees of Oyama Shipping might find themselves in, in my judgment it would be wrong in principle to allow considerations of that kind to influence my decision. I hold the view that a discretion exercised on such grounds would be unruly, uncertain and sometimes arbitrary.

43. Mr. Heyman further submitted that the equitable principle should apply as between the Company and Oyama Shipping, if it applies at all, to the extent of the dividend which the Company would have been paid in the Japanese liquidation, because Oyama Shipping's beneficial interest in the 618 company shares were assets situate in Japan. He maintained that both under Japanese law and under Hong Kong law these shares were at the time of winding up of Oyama Shipping in Japan and thereafter, Japanese assets in the hand of the Japanese liquidator. Mr. Heyman contended that in those circumstances the decision in Stern v. The Queen [1896] 1 Q.B. 211 was applicable. In that case, at the time S. died he was in England. He had been a British subject, domiciled and resident in England. The executors under his will obtained a grant of probate and paid probate duty on the estimated value of S.'s personal estate. They subsequently alleged that probate duty should not have been paid upon certain shares which has been included in S. 's personal estate by error. These were shares in railway Companies incorporated under Federal or State American law. The railway companies were all domiciled in the U.S.A. On a special case stated by consent, the Court had to decide whether the executors were exempt from probate duty in respect of any of the shares in question. The special case found, inter alia, that -

44. At page 218, Wright J. after briefly reviewing the salient facts said -

"I think that the true inference to be drawn from the statements made in the case is that the duty has properly been claimed and paid upon these documents. It is not a matter that is susceptible of any lengthened statement; but the way I put it is this. "There is in this country within the jurisdiction of the Ordinary (now the Probate Court) a document the existence of which vouches and is necessary for vouching the title of some one to the foreign share, so that in the absence of that document no one at all could establish a title to the share. It is found by the case that the certificates are currently marketable here as securities for that share and the dividends payable on that share; it is found, in fact, that the delivery of the certificate in this country ipso facto affects the title in a sense that it entitles the transferee to all the transferor's rights. It follows that the certificate itself has some operative power here, and it seems to me not to be within the ancient rule that a simple contract debt or mere evidences of a simple contract debt are supposed to exist only at the place of the debtor's residence. It being a marketable security operative, though not completely operative, to pass the title, and having a marketable value here, I think that it is itself a document which is a document of value in the hands of the executors within the jurisdiction of the Ordinary. Therefore I think that the Crown is entitled to succeed."

45. In the Canadian case of Re Brookfield [1948] 4 D.L.R. 210, B. was both domiciled and resident in Nova Scotia at the time of his death. He had been the beneficial owner of certain shares in companies in the United States which had no share registries or transfer offices in Nova Scotia. The shares had been purchased in the names of different persons who were employees of a trust company, with money supplied by B. In each case the purchasers had endorsed the certificates in blank and signed a power of attorney, also in blank authorising the transfer of the shares upon the bocks of the company. These endorsements, completed with all the necessary formalities, were in the possession of B. at the time of his death. It was accepted by the parties that although B. 's name did not appear on any of the certificates, he had received and held them as bearer certificates. In the leading judgment, Doull J. recited these facts and held that in so far as the transfer offices of the companies were concerned, the death of B. made no difference whatever, for whether before or after his death, any purchaser might have transferred them to himself. He found the facts to be on all fours with those in Stern v. The Queen, and applied that case in holding that for the purposes of the relevant taxation law, the certificates so endorsed were to be regarded as property in Nova Scotia.

46. Mr. Heyman invited me to apply the principle in Stern v. The Queen to the facts before me. From the start of the liquidation of Oyama Shipping in Japan, the certificates of the 618 shares were held in Japan. The Company held declarations of trust relating to the shares, and blank transfers. It was not in dispute that the beneficial owner of the shares was Oyama Shipping. The question the Court had to answer in these proceedings was whether the holding of the share certificates in Japan, coupled with the right to ask the registered holders of the shares to execute transfers, was sufficient to bring the facts within the ambit of Stern. v. The Queen. In his submission, where the blank share transfers happened to be was of no relevance. A new transfer could always be executed, and therefore, provided the registered shareholders agreed to obey their beneficiary, they could execute the transfers in the favour of whomsoever they chose. He recognised that being a private company, the usual Articles restricted the right of transfer, but argued that since the registered shareholders controlled the Company (and would thus control the Board) they could accept a transfer of the shares if so directed. He went on to contend that since the shares were in Japan, in hands of the liquidator of a Japanese company, in a Japanese liquidation, and the registered shareholders themselves were in Japan and could have dealt with them subject to the Articles, the situs of the shares was Japan, as was the situs of the beneficial interest of Oyama Shipping in them. It followed that they should be treated as Japanese assets.

47. I am bound to say that I have no difficulty in deciding this aspect of the case. Put shortly, I am of the opinion that the decisions in both Stern v. The Queen and Re Brookfield were founded on facts that rendered the certificates, endorsed as they were, supported by documents of the kind and in the form that accompanied them, in effect marketable securities. Here, although the share certificates themselves, and their beneficial owners, are in Japan, I find that there are no other factors present that would justify a conclusion that Oyama Shipping's beneficial interest in the 618 shares is situate elsewhere than in Hong Kong. Therefore that interest, as well as the 40 shares registered in their name, are for all material purposes Hong Kong assets.

48. I turn now to Mr. Heyman's final submission, which he put forward in the alternative, challenging the application of the equitable principle is founded on the fact that Oyama Shipping is also in liquidation in Hong Kong. Mr. Scott had earlier submitted that this fact did not prevent the application of the equitable principle for in Leeds and Hanley, Auriferous Properties and National Livestock Insurance the debtor company had been insolvent and in liquidation. He had argued that this was so whether the debtor company or the creditor company had been the first to go into liquidation. It was his submission that the test was always whether at the commencement of the creditor company's liquidation, or at the date of the distribution of the company's surplus assets, whichever was the later, the debt in question was owed to the person seeking to participate in those assets. Cherry v. Boultbee showed that if it were so, the equitable principle applied, if not the principle had no application. Moreover it was clear that a company was not discharged from its debts by going into liquidation, for that only affected the method of their recovery. Mr. Scott had therefore contended that for these additional reasons the fact that Oyama Shipping was in liquidation in Hong Kong did not rule out the application of the equitable principle.

49. While disputing the correctness of Mr. Scott's analysis of Cherry v. Boultbee, Mr. Heyman argued that if the true test were as had been suggested, the relevant date for the application of the equitable principle was the 18th March 1977 (the date upon which the Order authorising the first interim distribution had been made) since this was later than the commencement of the Company's liquidation on the 23rd March 1976. By the relevant date Oyama Shipping had already been wound up in Hong Kong (8th February 1977). Therefore the Hong Kong winding up prior to the relevant date should be recognised by the Court in applying the principle. For these reasons, Mr. Heyman submitted, if the equitable principle did apply between the Company and the beneficial shareholder (Oyama Shipping), it only applied to the extent of the dividend which the Company would have been paid in Oyama Shipping's liquidation in Hong Kong.

50. In my judgment Mr. Scott's analysis of the effect of Cherry v. Boultbee and Peruvian Railway, to which analysis I earlier referred, is right. As I understand the decision in Cherry v. Boultbee it turned on the fact that at no time had counter obligations to pay in full existed. Whatever be taken to be the relevant date for the application of the principle, Oyama Shipping throughout owed debts to the Company, later established and quantified by the judgment debts which still subsist, and which they are estopped from denying. They now, in effect, maintain a claim on the surplus assets of the company based both on the shares registered in their name and on the shares of which they are beneficial owners. The assets of the two companies remain their own, although they are administered by their liquidators in Hong Kong as their agents. They have not been divested of their assets in the way that a bankrupt individual is divested of his. I conclude that up to this moment there exist cross-obligations of which the liquidators of the Company can take advantage. Therefore in the context of the Hong Kong liquidations, it cannot be said that all Oyama Shipping owes was such divided as would be payable to the Company in Oyama Shipping's liquidation.

51. Mr. Heyman also relied on what must be acknowledged to be a difficult case - Re Fenton (No. 2) [1982] 1 Ch. 178, which applied the principle laid down in Cherry v. Boultbee to a company in liquidation. In my view, the trustee's claim in that somewhat exceptional case was defeated by the rule against double proof, and the passage in Luxmoore J's judgment, at p. 186, upon which Mr. Heyman relies, was obiter. As I read his judgment, he was not purporting to depart from the decisions in Leeds and Hanley and National Livestock Insurance, two of the cases cited to him where insolvency did not prevent the application of the equitable principle; and, with respect, it does not seem to me that the dicta can be reconciled with those decisions as I understand them. In my view nothing turns on the circumstances surrounding the liquidation of Oyama Shipping in Hong Kong so as to preclude the application of the equitable principle.

52. For the reasons I have attempted to give, I hold that Oyama Shipping cannot be allowed to claim its distribution out of the surplus assets of the Company without first contributing to those assets the debts that it owes. Therefore in the exercise of my discretion, in respect of the reliefs asked for by the Summons -

53. These declarations and orders will, in my judgment, achieve a just result. To quote from the final paragraph of the affidavit of the liquidators of the Company, they will "[ensure] that on the one hand the part A shareholders are not prejudiced by the failure of Oyama Shipping to pay the total Oyama Shipping debt and on the other that Oyama Shipping does not both receive full distributions in the liquidation and at the same time fail to pay all or a substantial part of its debt".

54. It only remains for me to hear Counsel on the question of costs.

Representation:

Richard Scott, Q.C., Richard Sykes and Robert Ribeiro (J.S.M.) for Applicant (Liquidators of K.C.W.)

Alan Heyman, Q.C., Andrew Li (Wilkinson & Grist) for 2nd named Respondent, Toshio Nomiya.