Alan Hann and Another v. Hillory Ltd

HCMP000177/1983

Section 265(1) of the Companies Ordinance creates classes of preferential debts ___ The claims of ex-employees of an insolvent limited company fell within these classes ___ After the making of a winding-up order, ex-employees were paid directly by the Respondent against respective valid assignments of all their claims and interests against the company (in liquidation) in respect of their arrears of wages, salaries and severance payments.       Held:

IN THE HIGH COURT OF JUSTICE

HONG KONG

MISCELLANEOUS PROCEEDING

BETWEEN

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Coram: Hon. LIU J. in Chambers

Date: 12 March 1983

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JUDGMENT

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1. The Liquidators of Universal Container Services (H.K.) Limited (in liquidation) are seeking a determination on the following question:

"Whether the debts or any part thereof set out in the Proof of Debt lodged on behalf of the Respondent on 24th December 1982 should be paid in priority to all other debts within the meaning of section 265(1) of the Companies Ordinance or otherwise."

2. The net assets of the company in liquidation are slightly over $900,000, and the aggregate of the Proofs of Debt lodged with the Liquidators amounts to $65,000,000. After the commencement of the winding up of the above company the Respondent paid $116,336.65 to some ex-employees of the company in satisfaction of their arrears of wages, salaries and severance payments. These sums were paid with the knowledge of the Liquidators against whom, the court was assured, no claim in equity or on estoppel would be made. It was also common ground that these ex-employees had validly assigned to the Respondent all their rights and interest against the company in respect of their claims and that these ex-employees' claims would have constituted preferential debts liable to be paid in priority to other debts in accordance with section 265(1) of the Companies Ordinance. To all intents and purposes, the Respondent has now lodged with the Liquidators a Proof of Debt in that total sum of $116,336.65 under this subsection. In essence, the court is asked to decide whether the ex-employees' statutory preferences under section 265(1) of the Companies Ordinance can be claimed by an assignee.

3. The opinion of an English silk was exhibited to an affidavit. It was the consensus that the same was to be perused as if it had formed part of the submissions. There would seem to be a need for reproducing the observations of Megarry V.C. in Gleeson v. J. Wippell & Co., ⁽¹⁾:

"The plaintiff's affidavits avoid these defects of form, though only partially as to R.S.C., Ord. 41 r.9(5); but one of them displays undesirable features that I think ought not to be allowed to pass unchecked. In Mr. Broom's affidavit he quotes a passage from an opinion of a silk, and he exhibits an article in a journal concerned with patents. The object appears to be to demonstrate that the plaintiff has prospects of success against Wippell if her action is not halted. The main objection to the extracts from the article is that they do not appear to me to constitute any evidence; and the purpose of affidavits is, or should be, to provide evidence. As I told Mr. Jacob, I would listen with pleasure to any submission upon the subject that he chose to put before me, whatever his source of inspiration, but I would not listen to the words of a Queen's Counsel, however eminent, or the author of an article, when proffered as evidence of the legal rights and prospects of a litigant. A court does not hear expert evidence on what the law of England is, or what the rights of parties are under that law.................. The function of counsel's opinion in cases where litigation concerning an infant is being compromised, and so on, is, of course, quite different."

Section 265(1) of the Companies Ordinance is set out below:

"In a winding up there shall be paid in priority to all other debts -

(a) all statutory debts due from the company to the Crown at the relevant date and which became due and payable within 12 months next before that date;

(b) all wages and salary (including commission provided that the amount thereof is fixed or ascertainable at the relevant date) of any clerk or servant in respect of services rendered to the company during 4 months next before the relevant date, not exceeding $3,000;

(c) all wages of any labourer or workman not exceeding $3,000, whether payable for time or for piece work, in respect of services rendered to the company during 4 months next before the relevant date;

(ca) any severance payment payable to an employee under the Employment Ordinance, not exceeding in respect of each employee $6,000;

(cb) any amount due in respect of compensation of liability for compensation under the Workmen's Compensation Ordinances accrued before the relevant date and, where the compensation is a periodical payment, the amount due in respect thereof shall be taken to be the amount of the lump sum for which the periodical payment could, if redemmable, be redemmed on an application being made for that purpose under the Workmen's Compensation Ordinance, but this paragraph shall not apply to any amount due in respect of compensation or liability for compensation where the company has entered into a contract with a person carrying on accident insurance business in the Colony in respect of its liability under the Workmen's Compensation Ordinance for personal injury by accident to the employee to whom the compensation or liability for compensation is due or where the company is wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company;

(cc) any wages in lieu of notice payable to an employee under the Employment Ordinance, not exceeding in respect of each employee one month's wages of $2,000 whichever is the lesser;

(d) all debts, other than statutory debts, due from the company to the Crown at the relevant date and which became due and payable within 12 months next before that date."

4. The Liquidators' resistance to the Respondent's claim was founded on a submitted interpretation which this court was urged to embrace. It was contended that any provision seeking to rearrange the pari passu distribution of a company's assets in liquidation, such as section 265(1) of the Companies Ordinance, ought to be construed with "some strictness". The argument was not so much as suggesting that the ex-employees' claims had been put an end to by satisfaction or were otherwise unassignable or that the assignment was ineffectual in passing all their interests including their priority; the bone of contention was that within its narrow ambit section 265(1) of the Companies Ordinance was not intended to and did not include an assignee of a preferential creditor.

5. There is admittedly no direct authority on this point, and I was constantly reminded that the cases sought to be relied upon by the Respondent were decided on legislation wholly irrelevant, viz. section 5 of the Mercantile Law Amendment Act 1856.

6. Section 5 of the Mercantile Law Amendment Act 1856 which reappears in section 15 of our Law Amendment and Reform (Consolidation) Ordinance reads as follows: ⁽²⁾

"Surety who discharges the liability to be entitled to assignment of all securities held by the creditor, and to stand in the place of the creditor

Every person who, being surety for the debt of duty of another(,) or being liable with another for any debt or duty, (shall pay) pays such debt or (perform) performs such duty, shall be entitled to have assigned to him, or to a trustee for him, every judgment, specialty, or other security which (shall be) is held by the creditor in respect of such debt or duty, whether such judgment, specialty, or other security (shall or shall not be) is or is not deemed at law to have been satisfied by the payment of the debt or performance of the duty, and such person shall be entitled to stand in the place of the creditor, (and) to use all the remedies, and, if need be (,) and upon a proper indemnity, to use the name of the creditor, in any action or other proceeding (,) at law or in equity, in order to obtain from the principal debtor (,) or any co-surety, co-contractor (,) or co-debtor, as the case may be, indemnification for the advances made and loss sustained by the person who (shall have) has so paid such debt or performed such duty, and such payment or performance so made by such surety shall not be (pleadable in) a bar (of) to any such action or other proceeding by him(: Provided always, that no). No co-surety, co-contractor, or co-debtor, shall be entitled to recover from any other co-surety, co-contractor, or co-debtor, by the means aforesaid, more than the just proportion to which, as between those parties themselves, such last-mentioned person (shall be) is justly liable."

7. Much emphasis was sought to be placed on the English equivalent of section 15 of our Law Amendment and Reform (Consolidation) Ordinance, and for that reason it is a matter of convenience to begin with the English Act of 1856 and related decisions in search of an answer to the question posed for my consideration. It would seem to be of assistance, for better appreciation of the authorities cited, to recount the mischiefs which this section was designed to remedy.

8. At common law, upon the payment of a debt or performance of a duty on behalf of the debtor by his surety, any security held by the creditor in respect of the debt or duty would be deemed to have been satisfied by such payment or performance. See paragraph 196 and footnote (2) of Volume 20 Halsbury's Law of England, 4th edition. Therefore, before the passing of the 1856 Act, a surety who had paid a debt in full and was thus entitled in equity to be subrogated had to call for a transfer to him by an assignment of any securities held by the creditor in a court of equity. See paragraph 1440 16 Halsbury's Laws of England 4th edition. . Again, formerly when a debt was paid by the surety, he would only become a simple contract creditor and would not enjoy the priority of a specialty creditor even if the contract creating the debt was under seal. See paragraph 212 Volume 20 ibid. In Batchellor v. Lawrence, ⁽³⁾ Byles, J. summed up succinctly the aims of section 5 of the 1865 Act:

"In all rational systems of law, where a surety pays the debt, he is entitled to the benefit of all securities which the creditor held. Such is the law of France where law and equity are blended. Such also is the law of Scotland. The preamble to the Mercantile Law Amendment Act recites the inconvenience of the law of England being in some particulars different from that of Scotland: and I apprehend that the enactment now under consideration was made with the intention of assimilating the law of this country with the Scotch law in this particular. In England, prior to the passing of this act, a surety or co-debtor who had been compelled to pay the debt for which he was liable, could not obtain the benefit of any securities held by the creditor without having recourse to a court of equity; and not always then. The section in question, I think, meant to afford the party at least the same remedy at law as he would have had in equity. This it does in two modes, __first, by enacting that he shall be entitled to have the securities assigned to him, __ secondly, by taking away the technical difficulty that before existed to his making the security available, viz. that the remedy was taken away by payment."

9. For completing the historical review, I should mention that Byles J. must have envisaged cases such as that of securities provided by co-sureties when he spoke of the occasional inability to obtain the benefit of securities from a court of equity. In Duncan, Fox & Co., v. North & South Wales Bank, ⁽⁴⁾ Little, V.C. observed:

"It cannot be said that in every instance a surety is entitled to stand in the place of the principal creditor as regards other securities. That is true as regards securities given by the debtor, but is not true as regards securities given by co-sureties".`

10. Section 5 of the Mercantile Law Amendment Act, 1856 removed these archaic anomalies. In aid of the principle of subrogation in equity, section 5 of the Mercantile Law Amendment Act 1856 conferred on a surety who had paid the preferential debt, a statutory right to an assignment of the creditor's securities held in respect of the debt and put the surety "in the place of the creditor" for the purpose of using his name in "all the remedies". It has been held that payment by a surety of a debt would procure for him the benefit of the securities held for the debt together with their priority or the debt's own statutory preference, as the case may be. In In re M'Myn Lightbown v. M'Myn,⁽⁵⁾ the priority was that of a judgment creditor who would have duly completed execution in the enforcement of his judgment and thereby gained priority. In In re Lord Churchill Manisty v. Churchill, ⁽⁶⁾ the benefit lied in the statutory preference of a Crown debt. In _Re Lamplugh Iron Ore Co. Ltd., ⁽⁷⁾ the preferential debt was a rate paid by a company director who had guaranteed such payment to the authority.

11. But the benefit of statutory preferences, and not priority of securities is presently under consideration. As for statutory preferences, they seem to fall outside the words "judgment, specialty, or other security" in section 5 of the 1856 Act which appears to be dealing with securities alone. Statutory preferences can hardly be taken as securities held for a debt, and that explains the lack of reference to any assignment in cases decided on satisfaction of preferential debts under the 1856 Act. But statutory preferences of these debts do pass under section 5 to a surety together with the creditor's other rights and remedies. It is true to say that the benefit of preference there passes merely by virtue of an Act of Parliament, but, however such privilege is made to pass, it is thereby reasonably demonstrated that the benefit of the creditor's preference may be readily transmitted to and assumed by the payer.

12. Section 265(1) of the Companies Ordinance is silent on an "assignee", but neither does it expressly exclude it. There is no prohibition in the section against a transfer of any statutory preferences by an assignment or otherwise. If the Legislature had been minded to abrogate the rights of an assignee for section 265(1), it could have said so in plain language. Moreover, in defining classes of debts section 265(1) has a purpose of its own to serve. It is not even remotely associated with the general law regulating the legal effect of an assignment or the status of an assignee. It certainly does not seek to vary it. Statutory preferences have also not been known, in their nature, to be unassignable.

13. A word of caution was offered by Danckwerts J. in Re Baker, ⁽⁸⁾ "not to extend unduly the privilege or preference" in "a provision which confers special preference on certain debts" but to construe such provision with "some strictness". It must not be overlooked that it is the claim which is preferential and that the employees have not been themselves, in their capacity as employees, made a privileged class. The statutory preference is not personal to the employees but only incidental to their claims as statutorily specified. If indeed such a preference may effectually be transmitted from a creditor of a preferential debt by an enactment, there is no conceivable reason why the privilege of a class or classes of preferential debts in section 265(1) cannot be transferred under an assignment, voluntary or otherwise, to an assignee. The transmission of statutory preferences would not extend the scope and extent of the section which, as Mr. Bonsall rightly submitted, elevates only classes of claims and not classes of creditors. It is the very same class of preferential debt which the Respondent now calls in aid, and no new class of debt is sought to be introduced.

14. Mr. Buckley for the Liquidators warned that as an assignee of a preferential debt might not have given adequate consideration, the inclusion of an assignee would create the undesirable possibility of a person enjoying a priority over what he had actually made payment for by taking an assignment. However, the liabilities of an insolvent company for any preferential debt would not be different whatever the consideration it had been assigned away for. The company would suffer no prejudice.

15. Solicitor for the Liquidators also referred to sections 122 and 125 of the Employment Protection (Consolidation) Act 1978, which inter alia vest the rights and remedies including the benefit of preference of a paid employee out of the "Redundancy Fund" in the Secretary of State. It was argued that if, in fact, the statutory preference of the paid employees could validly be vested in an assignee and therefore the mere execution of an assignment had been sufficient for that purpose, there would have been no necessity for bringing in these redundant sections in the 1978 English Act. First of all, an assignment may not always be compellable, and other distinguishing features are also found in the 1978 Act. Moreover, no parallel can be drawn between provisions in the 1978 Act and section 265(1) of our Companies Ordinance. Any attempt to do so would only burden the construction of one statutory provision by the possible pitfalls in another.

16. The Respondent need not assert any right to an assignment which it has already secured from each of the paid former employees. The Respondent claims under these assignments whereby the preferential debts and their privilege are said to have been transferred. If other statutory preferences can be made to pass under the 1856 Act, there does not appear to be any sound reason as to why the preferences under section 265(1) should not be able to pass to a voluntary assignee. I can find no valid objection to the proposition that statutory preferences under that section are transferable and may be transmitted to and vested in an assignee of a voluntary assignment. The assignments do therefore effectually pass these preference rights. No attempt is made to broaden the purview of section 265(1). The Respondent merely claims to be entitled to preference on the debts which fall within the specified classes in that section. In my view, statutory preferences can be parted company with and the assignments have carried that into effect.

17. In conclusion, the Respondent has acquired the statutory preferences conferred by section 265(1) of the Companies Ordinance by the said assignments, and its Proof of Debts lodged with the Liquidators must be accorded with like priority.

18. The answer to the question (without the last two words thereof) posed for my consideration is, therefore, in the affirmative, Both parties to the application were of one voice that each side was to pay its own costs, and I order accordingly.

(1)    [1977] 1 W.L.R. 510 at p. 519 D to G

(2 )   Our Hong Kong equivalent omits the punctuations and words within parentheses but incorporates the substitutions and additions as underlined. 

(3)    9 C.B. (N.S.) 543 at pp. 555 & 556

(4)    11 Ch. D. 88 at p.95

(5)    [1886]33 Ch. D. 575

(6)    [1888] 39 Ch. D. 174

(7)    [1926] A.E.R. Rep. 682; [1927] 1 Ch. D. 308

(8)    [1954] 2 A.E.R. 790 at p, 793 F

Representation:

Mr. Buckley of Messrs. Simmons & Simmons for the Applicants

Mr. Bonsall of Messrs. J.S.M. for the Respondent