Re Intex Garment Factory Ltd

Case No.HCCW 30/1977

Court

High Court CFI

Date—

Judge—

Case Document

100%Judiciary

HCCW000030/1977

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

NO. 30 OF 1977

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	IN THE MATTER of the Companies Ordinance (Cap. 32)
	and
	IN THE MATTER of INTEX GARMENT FACTORY LIMITED

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Coram: LI, J.

Date of Judgment: 2nd August, 1978 at 10.00 a.m.

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JUDGMENT

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1. This is a motion by the Official Receiver in his capacity as a Liquidator of the Intex Garment Factory Limited (hereinafter referred to as Intex) for a declaration that the machinery and assets sold by the liquidator formed part of the assets of Intex and that the Bill of Sale dated 28th February 1977 in favour of Just Jeans Manufacturing Limited (hereinafter referred to as Just Jeans) is void as against the liquidator for want of registration in accordance with Section 80(1) of the Companies Ordinance.

2. The facts as disclosed from the affirmations filed may be summarized as follows: Just Jeans and Intex had been in business transactions which involved the former supplying the material to the latter to be made into shirts or garments. The money so advanced by Just Jeans to Intex was to be set off by charges payable to Intex when the shirts had been made up. By the 15th of December 1976 Intex was short of cash. At that time $10,000.00 had been advanced by Just Jeans to Intex over and above what could be set off by charges payable to Intex. Between the 15th of December 1976 and the 14th of February 1977 Just Jeans had advanced a total of $145,600.00 less repayment of $33,730.00 to Intex, leaving a balance of $111,870.00. Just Jeans' account is that the total advance of money in that period amounted to $150,600.00 and that the balance not yet set off and unpaid was $116,870.00. However, the difference of $5,000.00 is immaterial because Just Jeans admit that payment for approximately $16,870.00 might be due to Intex in respect of charges payable to Intex. What is material is the common factor, that is, the $100,000.00.

3. Sometime in mid-February 1977 negotiations took place between Just Jeans and Intex whereby it was arranged that the $100,000.00 owed by Intex be settled by Intex vesting the ownership of some 49 machines in Just Jeans. Invoices setting out the serial numbers of the various machines and receipts to the total sum of $100,000.00 as evidence of payment were given to Just Jeans by Intex.

4. According to the affirmations the machines were allowed to remain with Intex. This is evidenced in the affirmation of TSANG Shing-chi, Director of Just Jeans, filed on the 21st of July 1978 in parapgraph 16 of which he says:

	"16. Thus by 12th February 1977, the ownership of the said 49 machines vested entirely with Just Jeans, and it was clearly understood that if we wished to remove the machines we were free to do so. However, the directors of Intex had pressed us to grant them the favour of allowing them to continue to use the machines for which they would pay us a monthly rental. We on our part did not wish to seem too hard-hearted and we trusted the directors of Intex, and so we were receptive to the request. However, we were apprehensive that the continued use of the machines would depreciate their sale value. The directors of Intex therefore assured us that if by their use of the machines, the value fell below the sale price of $100,000.00 they would undertake to purchase the machines themselves for that sum. The arrangement seemed reasonable and our money seemed to be at no risk consequently, therefore we agreed to their request. The monthly rental at the start when we had only the machines transferred on 14th January 1977, was $800.00, but as the subsequent lots came to us, the rental was raised to $2,000.00 and these rentals as admitted by TSANG Kwok-ying were in fact paid to us by Intex.
	17. The sale of the machines to Just Jeans is thus evidenced by documents admitted by Intex to be genuine and all the transactions have been properly recorded in the company's books. The company is therefore estopped from denying the validity of these transactions unless the directors of Intex confess that they were fraudulent. I on my part deny that there was any fraud on the part of Just Jeans in this matter or indeed in regard to any matter in relation to Intex or that Just Jeans was a party to any sham transactions with Intex, in regard to these machines."

5. On the 28th February, however, a Bill of Sale was executed for the same 49 machines, securing payment of $100,000.00 at a rate of interest of 2% per month. This was executed by Intex in favour of Just Jeans in the office of Just Jeans' solicitors. Following this there was a petition for winding up of Intex on the 10th of May 1977. The Official Receiver was appointed provisional liquidator on the 12th May 1977. An inventory of all the goods and assets of Intex was taken by the Official Receiver in his position as provisional liquidator on the 16th of May 1977, the inventory included all the aforesaid 49 machines. The Official Receiver wrote to Just Jeans on the 20th of May. After some exchanges of correspondence the Official Receiver, in exercise of his power of sale, sold the machines and assets, including the 49 machines on the 30th of May 1977. The total proceeds of sale amounted to $70,000.00.

6. The Official Receiver's argument is that by Section 80(1) of the Companies Ordinance the Bill of Sale should be registered. This was not registered and therefore it was ineffective.

7. Parapgraph 6 of the affirmation of TSANG Kwok-ying, a director of Intex, dated the 7th of June 1978, reads as follows:

"6. In January 1977 meetings took place between the company's directors and a Mr. Ellie Tsang and a Mr. Leung Kwok Chu, both representing Just Jeans. At these meetings the suggestion was made that the company's machines be sold to Just Jeans as security for the advances already made and for further advances requested by the company. The proposal eventually agreed was that the machines would be sold to Just Jeans and that the company would re-purchase the machines at the same value within 6 months when it was in a position to do so. The company could buy the machines back all together or one by one and in the meantime it would pay Just Jeans $800.00 by way of rent per month. This figure was later varied to $2,000.00 a month. The machines would of course remain at the company's factory as the whole purpose of this arrangement was that the company would be in a position to fulfil its outstanding orders."

8. Thus, the agreement before the 28th February was only a matter of security because if there was an arrangement of sale and re-purchase the intention was, in fact, to create a charge on the machines. Another argument is that because the Bill of Sale was executed it should supercede, vis-a-vis the parties, the prior arrangement made by them.

9. Learned counsel for Just Jeans contends that the receipts and invoices are evidence of sale as no fraud or sham is alleged. It should have been final. After the sale and payment there was no more subject matter for the charge set out in the Bill of Sale. The invoices and receipts cannot be regarded as a Bill of Sale and therefore they are not registrable. The liquidator is estopped from denying the sale because the directors signed the invoices and never complied with the duty to register the Bill of Sale at all.

10. He cites a number of cases, including Stoneleigh Finance Ltd. v. Phillips (1965) 1 A.E.R. ; Snook v. London & West Riding Investments Ltd. (1967) 1 A.E.R.; Kingsley v. Sterling Industrial Securities Ltd. (1966) 2 A.E.R. and Belvoir Finance Co. Ltd. v. Stapleton (1970) 3 A.E.R. ; in support of his argument. However, I find that all these cases refer either to the rights and obligations vis-a-vis the borrower and the lender, or that they are referrable to hire purchase agreements which are not registrable anyway. They are not relevant to questions on Bill of Sale.

Section 80(1) of the Companies Ordinance provides:

"Subject to the provisions of this Part of this Ordinance, every charge created after the fixed date by a company registered in the Colony and being a charge to which this section applies shall, so far as any security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument, if any, by which the charge is created or evidenced, are delivered to or received by the Registrar for registration in manner required by this Ordinance within 5 weeks after the date of its creation, but without prejudice to any contract or obligation for repayment of the money thereby secured, and when a charge becomes void under this section the money secured thereby shall immediately become payable.

(2)

This section applies to the following charges -

	(a)	a charge for the purpose of securing any issue of debentures;
	(b)	a charge on uncalled share capital of the company;
	(c)	a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale;
	(d)	a charge on land, wherever situate, or any interest therein;
	(e)	a charge on book debts of the company;"

and so on and so forth. And Section 81(1) -

"It shall be the duty of a company to send to the Registrar for registration the particulars of every charge created by the company and of the issues of debentures of a series, requiring registration under section 80, but registration of any such charge may be effected on the application of any person interested therein."

Section 81(3) provides that if the directors of a company which created the charge neglect to file with the Registrar such a bill of sale after a certain date, it will be a continuing offence the penalty for which would be $500 for each day that the default continues. There is a provision also that if the director of a company fail to register the charge with the Registrar, the person to whom the charge was made in favour, may register the charge himself.

11. Thus, the whole argument that because the directors of Intex failed to register the Bill of Sale would render it ineffective and that such default should render the Official Receiver liable is entirely untenable. The binding force of a registered Bill of Sale is a matter vis-a-vis the debtor and lender. If the debtor's failure to register the charge or the Bill of Sale affects the position of the other creditors and the liquidator, then the provisions in Section 80(1) will be a complete farce.

12. I am therefore asked whether I should either ignore the Bill of Sale as if it never existed and therefore look into the invoices and receipts as the documents evidencing an out and out sale and nothing else or I should read more into the Bill of Sale and say that that evidence is the true intention of the parties.

13. According to the evidence in affirmations tendered by TSANG Shing-chi, the director of Just Jeans, it was an outright sale with a guaranteed value. According to TSANG Kwok-ying, the director of Intex, the transaction had the appearance of a sale and re-purchase but in fact was to enable Intex to create a charge to secure a debt.

14. Looking into the transaction as a whole, I have to ask myself that if there had been a sale in the middle of Februrary, the purchaser normally would assume all the risks of depreication and had the benefit of the increase in value of the machines. If in the middle of February there had been an agreement of sale it would be odd that that the debtor, Intex, was required to re-purchase the machines at the same price within 6 months. In a normal transaction of sale the vendor is rarely required to re-purchase at the same price within a given time. This is not so even in a car-hire transaction. Here the re-purchase price is the same amount as the debt owed by Intex.

15. Yet another peculiar feature is that Just Jeans, having purchased the machines, should, some ten days later, instruct their own solicitors to prepare a Bill of Sale to be executed on the 28th February 1977 in respect of the same machines. Had there been an outright sale in the middle of February, if Just Jeans wanted to have their rights protected from depreciation in the value of the machines, they could have accepted a guarantee to be given by Intex. They insisted on a Bill of Sale. Yet another peculiar coincidence is that on the Bill of Sale they charged a rate of interest at 2% per month which amounted to the same rate of so-called rent deposed by Tsang Shing Chi because 2% of $100,000.00 is exactly $2,000.00 per month.

16. Looking at the transaction as a whole, I have come to the conclusion that either the parties in the middle of February had decided to make some arrangement to secure a debt that had already been advanced to Intex in the form of sale and re-purchase while the machinery would remain with the debtor or that in fact they were merely trying to find the best formula to create a charge and subsequently on the 28th February, they have thought of a satisfactory way on the 28th February and therefore the Bill of Sale was executed on the instructions of Just Jeans.

17. By so saying I am not suggesting any fraud or sham in this matter. I am of the opinion that the parties were merely finding the best formula to the best satisfaction of all the parties at the time and eventually they found one - a Bill of Sale. Unfortunately, through the neglect of the directors of Intex and the neglect of the directors of Just Jeans this Bill of Sale was not registered.

18. I find that I am not in a position to ignore the Bill of Sale. The invoices and receipts preceding the Bill of Sale were merely evidence of the purchase. The formal transaction did not take place. There was no delivery. There was no document vesting the machinery in Just Jeans. Such preliminary documents of agreement should be excluded if they are incompatible with the final contract which is embodied in a deed - the Bill of Sale.

Chitty on Contracts (24th Ed.) in Paragraph 735 reads that -

"Where the parties have embodied the terms of their contract in a written document, the general rule is that 'verbal evidence is not allowed to be given .... so as to add to or subtract from, or in any manner to vary or qualify the written contract.' This rule is often known as the 'parol evidence' rule. Its operation is not confined to oral evidence, but extends to extrinsic matter in writing, such as drafts, preliminary agreements and letters of negotiation. Evidence is not admissible of negotiations between the parties; nor is it permissible to adduce evidence to show that their subjective intentions were not in accord with the particular expressions used in the written instrument. Nevertheless, it is permissible to inquire beyond the language of the instrument and to see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. 'Evidence of negotiations' said Lord Wilberforce, 'or of the parties' intentions ... ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the 'aim' of the transaction."

19. There is no doubt of the aims and objects of the transaction as evidenced in this Bill of Sale. The recital set out all the backgrounds of how the Bill of Sale came to being. It is quite plain. I am of the opinion that the receipts and invoices are merely evidence of the negotiations at the time leading to the Bill of Sale. The purchase and re-purchase was just the agreement of the parties to create a charge.

20. Accordingly I find that the Official Receiver is justified in acting the way he did and that there should be order in the terms of paragraphs 1 and 2 of the Notice of Motion.

	(Simon F.S. Li)
	judge

Representation:

B. Van Burren (Alfred Lau & Co.) for Respondent

Packwood (O.R.) for applicant.