The Joint and Several Liquidators of Faith Dee Ltd v. Yip Shu Chee and Others
Read the full judgment text of HCCW 237/2005 on BabelCite. This High Court CFI judgment was delivered on 5 February 2013.
1. Faith Dee Limited (“ Company ”) was incorporated on 28 July 1989 under the Companies Ordinance Cap 32 (“ CO ”). A winding up order was made on 27 June 2005. The current liquidators of the Company are Mr Kong Chi How Johnson and Mr Lo Siu Ki of BDO Limited (“ Liquidators ”).
Cited by 5 cases · Cites 4 cases
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HCCW 237/2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) PROCEEDINGS NO 237 OF 2005 _________________________
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_____________ DECISION _____________ I. APPLICATIONS 1.Faith Dee Limited (“Company”) was incorporated on 28 July 1989 under the Companies Ordinance Cap 32 (“CO”). A winding up order was made on 27 June 2005. The current liquidators of the Company are Mr Kong Chi How Johnson and Mr Lo Siu Ki of BDO Limited (“Liquidators”). 2.On 7 June 2012, the Liquidators issued a summons against the 1st respondent Mr Yip Shu Chee (“Mr Yip”) under section 266B of the CO (“S 266 Summons”), which summons was amended on 18 June 2010 (“Amended S 266B Summons”) to seek the following reliefs:
The orders (and not the declarations) sought under the Properties and Payments Claims are “and/or alternatively” reliefs. 3.On 12 June 2012, Mr Yip issued a striking out summons (“Strike Out Summons”), which was amended on 22 January 2013 to become a summons by Mr Yip, United Focus and New Target (“Respondents”) to strike out the Amended S 266 Summons and to dismiss the Liquidators’ claims for disclosing no reasonable cause of action or as being frivolous or vexatious or an abuse of the process of the court on the ground that they set up causes of action that are time-barred under section 4(3) of the Limitation Ordinance Cap 347 (“LO”) at the time when the S 266B Summons was filed (“Amended Strike Out Summons”). 4.Before discussing the merits of the Amended S 266B Summons and the Amended Strike Out Summons, it is necessary to set out the relevant background facts. II. BACKGROUND 5.The Liquidators claim that the Company was set up as a property holding vehicle for inter alia Mr Yip (a director of the Company) and his brother Mr Ip Kam Chi (“Mr Yip’s Brother”). Mr Yip was a director and shareholder of the Company. Mr Yip claims that he emigrated to North America since 1983 and was therefore not active in the management of the Company’s affairs for a long time, and that he only got involved when he returned to Hong Kong at the end of 2004. 6.Mr Yip is a director of United Focus, and the only shareholders are Mr Yip and New Target each holding 1 share. Mr Yip is also a director of New Target, and the only shareholders are Mr Yip (99%) and United Focus (1%). Mr Yip’s Brother was a director of Set Phone Limited. 7.On 17 August 1996, the Company charged the 1st floor, Office C on the 7th floor, Offices A-C on the 9th floor, Offices A and C on the 16th floor, and Offices A-C on the 17th floor of the Building (collectively, “Set Phone Properties”) to Wing Lung Bank Limited (“Petitioner”) to secure a bank loan in favour of Set Phone Limited. As a result of default in repayment of such bank loan by Set Phone Limited, the Petitioner commenced HCMP 7593/1999 against the Company and Set Phone Limited to recover a sum of HK$14,671,650.75 with interest (“Debt”) and to demand delivery up of vacant possession of the Set Phone Properties. On 23 February 2000, the Petitioner obtained a money and possession order in its favour (“Order”). Subsequently, the Petitioner took possession of and sold the Set Phone Properties to partially settle the Debt, but there was still a shortfall outstanding and due from the Company and Set Phone Limited. 8.On 29 August 1996, the Company charged the New Target Properties that were registered in its name to the Petitioner to secure a bank loan in the sum of HK$4,500,000.00 in favour of New Target. Mr Yip claims (but the Liquidators dispute) that the New Target Properties were beneficially owned by him. On 28 December 2004, the bank loan to New Target was repaid to the Petitioner in full. Mr Yip claims he paid a sum of HK$2,695,230.70 (“Discharge Sum”) to the Petitioner for such purpose. On 21 January 2005, the Petitioner discharged the mortgage in respect of the New Target Properties. Apart from having paid the Discharge Sum Mr Yip has not adduced any affirmation evidence to support the assertion that he beneficially owned the New Target Properties. 9.The Company subsequently disposed of the redeemed New Target Properties as follows:
10.In February/March 2005 (ie within a period of 6 months prior to the commencement of the winding up of the Company), the Company made the following payments to Mr Yip by cheques drawn on the Company’s bank account with the Bank of America (“BA Account”) that were made payable to him and signed by him as authorised signatory (“Payments”):
11.Apart from the outstanding balance of the Debt owed to the Petitioner, the Company was also indebted to other creditors in the total sum of HK$871,445.00 (as shown on p 12 of the Company’s audited accounts for the period from 1 November 2003 to 31 May 2005 (“Accounts”)). 12.On 25 February 2005, the Petitioner served a statutory demand against the Company based on the shortfall. On 22 May 2005, the Petitioner petitioned to wind up the Company. As explained above, the Company was wound up on 27 June 2005. 13.On 27 June 2005, the Official Receiver (“OR”) was appointed by the court to be the provisional liquidator of the Company. On the same day, the OR appointed Mr Anthony Nedderman and Ms Yau Miu Ping of Messrs Tony Nedderman & Co to be the provisional liquidators of the Company under section 194(1A) of the CO. 14.On 31 August 2005, Mr Yip as former director of the Company submitted a statement of affairs to the OR. He states therein that the unsecured creditors as at the date of the winding up included the following:
15.In the List of Proofs filed on 3 October 2005, the Petitioner was the only creditor of the Company who tendered proof of debt for HK$9,425,604.73. 16.Subsequently, the OR and the provisional liquidators Mr Nedderman and Ms Yau respectively requested information from Mr Yip to assist in their investigation. 17.On 2 May 2006, the provisional liquidators wrote to Mr Yip to ask for additional information/documentation on inter alia detailed schedule of transactions relating to investment properties together with the supporting documents of their disposals. On 15 June 2006, Mr Yip replied to say that he was not the managing person of the Company and had been staying overseas for a number of years until his return to Hong Kong at the beginning of 2005. In his absence the Company was supposed to be managed by Mr Yip’s Brother. Mr Yip enclosed a schedule for the transactions in relation to the investment properties of the Company together with supporting documents for the period within 3 years before the date of the winding up order, but such schedule has not been disclosed in the affirmation evidence. 18.Provisional liquidators’ reports filed in the first half of 2007 stated there were reasonable grounds to believe that the property of the Company was not likely to exceed HK$200,000.00. In the circumstances, on 6 August 2007, Master Hui ordered that the Company be wound up in a summary manner and that:
19.Pursuant to the OR’s letter of enquiry dated 24 October 2006, Mr Yip by letter dated 10 June 2008 again explained that although he was a director of the Company he emigrated to North America and only returned to settle in Hong Kong towards the end of 2004. Mr Yip claimed that he never participated in the management of the Company, which was entrusted to the executive director being Mr Yip’s Brother, and he was not familiar with the day‑to‑day running of the Company, which was why it took him so long to gather the facts and familarise himself with the affairs of the Company. He further claimed it came to his knowledge that the Company was insolvent when “[at] the middle of March 2005 …… [he] received a copy of the statutory demand to pay a judgment debt to the judgment debtor” (query #4). Mr Yip says that he had complied with the requests for information and had honestly explained as best as he could given that he was only involved in the Company’s affairs for a short time after he came back to Hong Kong, and that he thought the matter was closed because for a long period thereafter there were no further communications from the OR and/or Mr Nedderman. 20.The liquidators’ report to the court was filed on 19 March 2010. On 31 March 2010, Master J Wong ordered inter alia that the submission of statement of affairs be dispensed with. 21.On 27 July 2010, Harris J ordered inter alia that Mr Nedderman and Ms Yau be removed as liquidators of the Company, and in their place the Liquidators be appointed as the joint and several liquidators of the Company. Thereafter, the Liquidators filed statements of account covering the period from 1 February 2008 to 30 November 2011. The Liquidators’ preliminary report was filed on 14 September 2011. 22.On 23 August 2011 (ie over 6 years after the Company was wound up), the Liquidators wrote to Mr Yip requesting him to provide details of the Payments which the Company had paid to him. 23.The Liquidators claim that on 31 August 2011 during a telephone conversation between Mr Ricky Chan representing the Liquidators and Mr Yip regarding the nature of the Payments, Mr Yip told the Liquidators that:
24.The above was recorded in a telephone attendance note made by Mr Ricky Chan inter alia as follows (and in a subsequent letter from the Liquidators to Mr Yip dated 19 November 2011):
25.On 14 September 2011, Mr Yip wrote to the Liquidators as follows:
Mr Yip attached to this letter his correspondence with the OR during the period from 24 October 2006 to 10 June 2008. In items 11-12 of the letter he wrote to the OR on 10 June 2008, he stated as follows:
26.On 30 September 2011, the Liquidators’ solicitors wrote to Mr Yip stating that pursuant to section 266B of the CO the Payments constituted unfair preference made to him by the Company, and that the Liquidators could apply to the court for an order for the return of the Payments to the estate of the Company so that the Company’s position might be restored to what it would have been if the Company had not given such unfair preference to him. Mr Yip was therefore asked to pay the sum of HK$1,931,000.00 to the Liquidators or their solicitors. 27.There was no substantive response from Mr Yip until 16 February 2012 when his solicitors replied stating that Mr Yip never admitted to Mr Ricky Chan and was not aware of the allegation of unfair preference under section 266B of the CO, and that Mr Yip had duly provided the liquidators with financial information of the Company since the winding up, attended to enquiries by Mr Nedderman, and submitted the statement of affairs of the Company. The letter stated that Mr Yip was surprised by the new enquiries after a hiatus for at least 3 years, and sought to clarify the following facts:
III. LIQUIDATORS’ CASE 28.The Liquidators say they have found no evidence of any pressure brought to bear on the Company by Mr Yip for the Payments made to him. They believe that at the time of the Payments Mr Yip was placed in a better position than other creditors because of those Payments to him, and that having regard to the Payments made to Mr Yip and the total sum owed to the Petitioner before the commencement of the winding up against the Company, there was clearly an intention to prefer Mr Yip as the Company was unable to pay other debts as and when they fell due. Since the Payments were made within the period of 6 months prior to the commencement of the winding up of the Company, they shall be deemed to be preference transactions pursuant to section 266B of the CO. 29.The Liquidators consider Mr Yip’s allegation in paragraph 27(d) above contradictory to the following:
30.The Liquidators claim that the New Target Properties were all purchased by Mr Yip himself and/or by companies related to him (ie United Focus and New Target of which he was both director and shareholder). They note that the redeemed New Target Properties were disposed of by the Company between 22 February and 2 March 2005 while the Payments were made between 26 February and 7 March 2005. Given that the Payments were unfair preferences and not valid loan repayments to Mr Yip himself, the net effect of the disposal of the New Target Properties together with the Payments to Mr Yip is that the New Target Properties were transferred to Mr Yip, United Focus and New Target essentially for free (“Scheme”):
IV. RESPONDENTS’ CASE 31.The Respondents claim that the New Target Properties were sold at prices that closely approximated bank valuation, and that Mr Yip was unaware of any petition filed against the Company when the New Target Properties were sold and when the Company made the Payments to him. It was later that he found out that a petition for the winding up of the Company was filed on 22 March 2005. In his letter to the OR dated 10 June 2008, Mr Yip stated that it came to his knowledge that the Company became insolvent when “[at] the middle of March 2005 …… [he] received a copy of the statutory demand to pay a judgment debt to the judgment debtor” (see paragraph 19 above). V. ISSUES 32.In respect of the Payments Claim, Mr Lau, counsel for the Respondents, confirms that for the purpose of the Amended Strike Out Summons the Respondents will not challenge whether the Payments made to Mr Yip constitute unfair preferences, but will say that the Payments Claim is time-barred and therefore frivolous or vexatious and/or an abuse of process. 33.In respect of the Properties Claim, Mr Lau contends that such claim is disingenuous in that it (a) discloses no reasonable cause of action, and (b) has been introduced at the last minute to salvage the time‑barred Payments Claim, and in any event such claim itself is also time‑barred. 34.In relation to the dispute as to whether the Properties and Payments Claims are time-barred,
V. LEGAL PRINCIPLES: NO REASONABLE CAUSE OF ACTION 35.Order 18 rule 19 of the Rules of the High Court (“RHC”) provides that:
Although the Properties and Payments Claims are made by way of summons in the winding up proceedings (see rules 5(1) and (3) and 7(2) of the Companies (Winding Up) Rules Cap 32H) and not by way of writ of summons, originating summons or petition, the Amended S 266B Summons is nevertheless an originating application for bringing the Properties and Payments Claims. Mr Lam has not taken any issue over the applicability of Order 18 rule 19 of the RHC to the Properties and Payments Claims. 36.The principles governing a striking out application are well established. Para.18/19/4 of Hong Kong Civil Procedure 2013 Vol 1 at pp 418-419 provides inter alia as follows:
37.There are obviously no pleadings in respect of the Properties and Payments Claims. The Amended S 266B Summons only set out the reliefs sought but not the material facts and/or the particulars of such claims. So transposing the above principles to the present circumstances in which the Liquidators have filed (a) the 1st affirmation of Mr Chan Leung Lee (“Mr Chan”), a senior manager of BDO Limited assisting the Liquidators in this action, on 9 May 2012 in support of the S 266B Summons, (b) Mr Chan’s 3rd affirmation on 13 July 2012 in response to Mr Yip’s affirmation filed on 12 June 2012 in support of the Strike Out Summons, and (c) the affidavit of the Liquidators’ solicitor Mr Bruno Pui‑loon Yiu on 18 January 2013, I will proceed on the basis that the matters alleged are to be assumed in the Liquidators’ favour, and no evidence from the Respondents insofar as they are disputed or not admitted by the Liquidators or which ought properly to be assessed at trial will be relied upon. 38.Presumably, it is on such basis that Mr Lau concedes that for the purpose of the Amended Strike Out Summons, the Respondents will not rely on Mr Yip’s assertion as to fact in his affirmation that he was the beneficial owner of the New Target Properties even though these properties were registered in the name of the Company. However, Mr Lau accepts that it is open to the Liquidators to rely on affirmation evidence as to what Mr Yip previously said about the New Target Properties to demonstrate reasonable causes of action (if they can) for the Properties and Payments Claims. 39.Insofar as I have been asked to go into the facts alleged in the affirmations and to analyse the versions on both sides, I would only say I have attempted to do so and scrutinised the affirmation evidence, but I do not find this exercise meaningful as, on the whole, I do not think it possible to resolve the differences at this stage. VI. PROPERTIES CLAIM – NO REASONABLE CAUSE OF ACTION? 40.Sections 266 and 266B of the CO provide as follows:
41.In section 266B of the CO, reference is made to section 50 of the Bankruptcy Ordinance Cap 6 (“BO”), which provides as follows:
42.Mr Lau submits that the Liquidators have failed to demonstrate any basis at all in respect of two essential criteria for a preference claim under section 266B of the CO:
43.For the purpose of the Amended Strike Out Summons, Mr Lau does not seek to dispute that the Company was insolvent at the relevant time under section 51 of the BO. This must be right because there is clear prima facie evidence that the Company was unable to pay its debts as and when they fell due at the time of the disposal of the New Target Properties. By that time, the shortfall in excess of HK$7,500,000.00 had been outstanding and due to the Petitioner for quite some time (see paragraphs 7 and 14 above), and the Company was indebted to other creditors as well (see paragraph 11 above). (a) Preferential effect 44.In the context of company liquidation, the objective of section 50 of the BO is to ensure that the creditors of the company are treated equally and none of them should be given preferential treatment. Whether what the company did had the effect of putting a creditor into a position (in the event of the company’s liquidation) better than the position he would have been if what the company did had not been done is one of fact (see Re Fairway Magazines Ltd [1993] BCLC 643). 45.It may be said that a creditor gains no advantage where he gives new value “for he does not take out a penny more than he puts in”, so a simultaneous exchange of property and money in a sale and purchase transaction normally does not involve a preference (see Goode, Principles of Corporate Insolvency Law (3rd ed) paras 13-83 – 13-84 at p 577). 46.But Mr Lam submits that the present circumstance is not a usual sale and purchase situation, and it is at least arguable that the net effect of the Scheme (ie the New Target Properties were allegedly sold to the Respondents for a total sum of HK$1,940,000.00 and almost all of the sale proceeds were transferred very shortly thereafter to Mr Yip by way of the Payments in the total sum of HK$1,931,000.00 allegedly as repayment of loans) is to transfer the New Target Properties to Mr Yip essentially for free, and that the disposal of such properties to the Respondents amounts to unfair preference within the meaning of section 50(3) of the BO. 47.Mr Lau disagrees and says there was no preferential effect on any of the Respondents. He submits that the Liquidators have never disputed Mr Yip’s assertion that the New Target Properties were sold to the Respondents for valuable consideration that closely approximated market value. In any event, taking into account the Discharge Sum of HK$2,695,230.75 already paid by Mr Yip to the Petitioner, it could hardly be said that the New Target Properties were transferred to the Respondents for free. Mr Lau in his written submissions states that “[in] fact, R1 [ie Mr Yip] had made a total payment of HK$4,635,230.70 (HK$2,695,230.70 + HK$1,931,000.00), which is much more than the value of the [New Target Properties]” (my emphasis). I believe that Mr Lau should have referred to HK$1,940,000.00 (being the consideration paid to the Company for the disposal of the New Target Properties) rather than HK$1,931,000.00 (being the Payments received and not paid by Mr Yip). 48.I am very conscious that at this stage it is not for me to assess and weigh the evidence for striking out applications are reserved for plain and obvious cases. All the Liquidators have to do is to make out a reasonable cause of action for the Properties Claim, and it is unnecessary to consider the viability of the defence assertions in response thereto. It is also competent for the court to consider whether true and proper inferences can arguably be drawn from the circumstances to establish the Scheme and to conclude that the Respondents (assuming they were creditors of the Company) were preferred. 49.I am not persuaded by Mr Lau’s argument that there could not have been any preferential effect if one considers not only the consideration for the New Target Properties (HK$1,940,000.00) but also the Discharge Sum (HK$2,695,230.75) paid by “R1 [ie Mr Yip]”. As Mr Lam rightly points out, for present purposes Mr Yip’s payment of the Discharge Sum to the Petitioner is to be regarded as director’s or shareholder’s loan to the Company and cannot be taken into account as part of the value received by the Company for the disposal of the New Target Properties. 50.Indeed, Mr Lau’s argument gives rise to concern. First, the fact that the Respondents regarded the payment of the Discharge Sum by Mr Yip (which for present purposes they accept should be regarded as a loan to the Company) and the payment of the consideration in respect of the disposal of the New Target Properties to Mr Yip, United Focus and New Target (which the Respondents say are separate arms-length transactions with separate entities) as amounts to be considered together for the value received by the Company for the disposal of such properties lends inferential weight to the suggestion of the Scheme. Secondly, there is no evidence that United Focus and New Target paid the respective sums of HK$955,000.00 and HK$515,000.00 for Offices 10A and 16B and Office 10C from their own funds, and Mr Lau’s submissions that “a total payment of HK$4,635,230.70 (HK$2,695,230.70 + HK$1,931,000.00 [should be HK$1,940,000.00]” by Mr Yip suggests that Mr Yip paid for all of the New Target Properties irrespective whether they were acquired by Mr Yip, United Focus or New Target. This raises the question whether United Focus and New Target were arms-length purchasers for value, which again lends inferential weight to the Liquidators’ suggestion of the Scheme. 51.On the basis of the above considerations and for the reasons explained below, I find that the Liquidators have established a prima facie basis for saying the United Focus and New Target were at the material time Mr Yip’s alter egos. Those reasons also support the possible inference of the perpetration of the Scheme by Mr Yip. That being the case, whether the disposal of the New Target Properties was on their face at open market value or for undervalue is neither here nor there. I bear in mind that “the preference provisions are not concerned with the fairness of the original bargain but with the improvement of the creditor’s position relative to the other creditors on the winding up notionally occurring immediately after the payment, transfer, etc in question” (see Goode, Principles of Corporate Insolvency Law (3rd ed) para 13-107 at p 596). In any event, it is only Mr Yip’s bare assertion that the consideration was a fair market price that was “close to market value” (see paragraph 24 above) or higher than “amounts fetched by the mortgage bank earlier at open market option for similar units” (see paragraph 25 above). No such bank valuation has been disclosed, and it is clear that the sale of “similar units” (presumably the Set Phone Properties) was forced sale by the Petitioner as mortgagee bank after recovery of possession of such properties under the Order. (b) Creditor 52.There is no doubt that Mr Yip was a creditor of the Company at the material time. Whilst New Target was a creditor of the Company as at the date of the winding up order (see paragraph 14(b) above), there is no evidence before me that New Target was independently by itself a creditor of the Company at the time of the disposal of Office 10C. Likewise, there is no evidence that United Focus was independently by itself a creditor of the Company at the material time. 53.In Sam Express (HK) Limited v Supreme Day Investment Limited HCMP 80/2007, DHCJ L Chan (as he then was) (unreported, 12 June 2007), it was said there must be evidence that the transferee was a creditor of the company that was eventually wound up before there could be any question of unfair preference. If there was no such evidence, the fact that the transferee was an associate of the company would be of no significance. 54.But Mr Lam says this is not the end of the matter for United Focus and New Target. He submits that bearing in mind the matters set out in paragraph 5-6 above, they were alter egos of Mr Yip who was undoubtedly a creditor of the Company. Mr Lau disagrees, and says the fact that Mr Yip was a director and 50% shareholder of United Focus and a director and 99% shareholder of New Target is not, without more, a ground for the court to lift the corporate veil. 55.In Winland Enterprises Group Inc v Wex Pharmaceuticals Inc & anor [2012] 5 HKC 494, the Court of Appeal accepted there are a few common law exceptions to the principle of separate corporate personality based on either a principle of public policy or on the principle that devices used to perpetrate frauds or evade obligations will be treated as nullities. To J at p 513 said as follows:
56.In Dransfield Holdings Limited (in liquidation) v Pearl Oriental Oil Limited (formerly known as Pearl Oriental Innovation Limited) HCMP 1392/2011, DHCJ L Chan (as he then was) (unreported, 29 May 2012), the plaintiff listed company held all of the shares in company A which in turn held 7 shares being all the issued shares in company B (which business was to hold the shares of a number of companies in the defendant’s group including all the shares of company C which owned a valuable asset) for US$7.00. Company A transferred the 7 shares in company B to company D. The plaintiff claimed this was a stripping by the defendant of the assets it owned indirectly as the defendant held all the shares of and in company D. The plaintiff suggested that because of the close relationship between the plaintiff and the defendant, it was to be inferred that the defendant through its directors controlled the plaintiff, company B and company C, and was aware of the true value of the 7 shares in company B and that their transfer to company D was substantially below value. The plaintiff further argued that it was to be inferred that because of the plaintiff’s substantial liabilities which far exceeded the remaining assets, the defendant procured company A to make the transfer with the intent of depriving the creditors of the plaintiff of the full value of the 7 shares in company B, and such transfer was inter alia an unfair preference under section 266 of the CO. 57.In that case, the plaintiff attempted to pierce the corporate veil by saying that company D was used as a sham device to receive the 7 shares of company B. The learned judge accepted that the corporate veil should not be lifted by the mere fact that company D was a wholly owned subsidiary of the defendant or that its business was to hold the 7 shares in company B. Further, even if the transfer was at an undervalue, it was not as gross as what the plaintiff suggested and did not justify the lifting of the corporate veil. There was also no flouting of the disclosure requirements in the annual report. In the circumstances, the plaintiff could not make out a case that company D was a sham to keep the transfer of the 7 shares in company B from the public eye and hence a vehicle for the defendant to evade liability that might rise from the transfer at alleged gross undervalue. Consequently, company D was not a creditor of company A and it could not be argued that company D had been unfairly preferred by company A within the scope of section 50(3) of the BO. 58.Mr Lam seeks to distinguish Winland Enterprises Group Inc and Dransfield Holdings Limited (in liquidation) by saying that in the former case the company in question had substantive business and in latter case the company in question held shares of other companies apart from those in company B, so these companies had some purpose apart from any evasion of obligations. In my view, each case must turn on its own facts, and it is the principles elicited from these authorities rather then their own factual matrix that are truly helpful in their guidance. 59.Mr Lam says there is no evidence of commercial justification or purpose for the existence of United Focus and New Target which appear to be mere holding companies for and on behalf of Mr Yip, so it is at least arguable that they were alter egos of Mr Yip for perpetrating the Scheme to the effect that Mr Yip and the companies owned or controlled by him acquired the New Target Properties essentially for free. On the other hand, Mr Lau says New Target has been in existence at least since 1996 (see paragraph 8 above) so it could not have been formed for the purpose of the Scheme. 60.Whilst there is no evidence at this stage to suggest that United Focus and New Target were formed as Mr Yip’s corporate vehicles to facilitate evasion of legal obligation, the question is whether there is any basis for saying that the purchase of Offices 10A and 10C and 16B by United Focus and New Target was a cloak, mask or sham for the purpose of enabling Mr Yip to perpetrate the Scheme to acquire the New Target Properties practically for free, and thereby evade the restrictions under section 266B of the CO. 61.Again, I remind myself the inferences to be drawn are only to satisfy the threshold for establishing a reasonable cause of action, and that striking out applications can only succeed in plain and obvious cases. As Mr Lam points out and I agree, the following matters give rise to possible inference of the Scheme:
62.Taking into account all of the above matters and the matters set out in paragraph 50 above, in my judgment it is eminently arguable that inference can be drawn for the Scheme whereby Mr Yip by himself and through his alter egos United Focus and New Target acquired the New Target Properties, and almost the whole of the consideration paid for such acquisitions were paid back to Mr Yip by the Company via the Payments. This is not a case of mere inter-related companies, but is one where the Liquidators have put forward some basis for raising the contention that United Focus and New Target were used by Mr Yip to perpetrate the Scheme to evade the restrictions imposed by section 266B of the CO. In my view, it is not so plain and obvious that the Liquidators’ assertions of the Scheme and of United Focus and New Target being Mr Yip’s alter egos can be brushed aside without further ado. (c) Desire to prefer 63.Whether the company in question was influenced by a desire to prefer a particular creditor is a matter of fact to be determined in each individual case having regard to the totality of the evidence and by drawing an appropriate inference (see Company Law in Hong Kong – Insolvency (2012) at p 365). The Liquidators do not have to produce direct evidence of the requisite desire to prefer; its existence may be inferred from the circumstances of the case (see The Official Receiver v James Conrad Louey & anor HCMP 2770/2003, Kwan J (as she then was) (unreported, 7 December 2006) at para 87). 64.Where the creditor is an associate, there is a rebuttable presumption that the company was influenced by the relevant desire (see section 50(5) of the BO), and the associate bears the burden to show the contrary (see Re Fairway Magazines Ltd [1993] BCLC 643, 649). The definition of associate is found at section 51B of the BO:
Kwan J (as she then was) held in The Official Receiver v James Conrad Louey & anor at paras 80-81 that a director is considered as an associate, and hence would be presumed to have been influenced by the relevant desire by reason of the operation of section 50(5) of the BO. 65.Since Mr Yip was a director of the Company at the material time, and I have found there is some basis to infer that United Focus and New Target were his alter egos, they are arguably associates of the Company and so by virtue of section 50(5) of the BO there is a presumed desire to unfairly prefer Mr Yip directly or indirectly through himself or his alter egos, which the Respondents carry the burden of proof to rebut. 66.Mr Lau, on the other hand, submits that the presumed influence is clearly rebutted on the facts as the New Target Properties were not sold at an undervalue, and Mr Yip had paid the Discharge Sum of HK$2,695,230.70 for the release of the mortgage of such properties. Since I accept there is basis to infer the existence of the Scheme, such arguments cannot stand in light of the above analysis. Further, since the party whose desire is relevant is the company, a defence of good faith is not open to the preferred creditor (see Goode, Principles of Corporate Insolvency Law (3rd ed) para 13-98 at p 589). 67.In any event, in considering whether the Properties Claim has any reasonable cause of action, it is enough that the requirement for a desire to prefer be raised by way of the presumption under section 50(5) of the BO, and it is inappropriate at this stage to consider whether the presumption is rebutted on the facts for which the Respondents carry the burden of proof. (d) Third party 68.Mr Lam submits that even if United Focus and New Target were not the alter egos of Mr Yip, it is at least arguable that by virtue of sections 51A(2) and (3) of the BO they are persons who have “received a benefit from the transaction or unfair preference” “otherwise than in good faith”, so that they will be caught by an order to re-vest Offices 10A, 10C and 16B. But in light of my conclusions above, it is unnecessary to consider this further argument. VIII. LIMITATION 69.Section 4 of the LO provides as follows:
(a) 12 years or 6 years 70.The Respondents contend that the applicable limitation period is 6 years whilst the Liquidators say it should be 12 years. There is no dispute that (a) the Properties and Payments Claims derived from section 266B of the CO are actions upon a specialty (see Collin v Duke of Westminster & ors [1985] 1 QB 581, 602), (b) the limitation period for an action upon a specialty under section 4(3) of the LO is 12 years, and (c) section 4(1)(d) of the LO applies where an action upon a specialty is to recover a sum under an enactment and the limitation period is 6 years (see McGee, Limitation Periods (6th ed) para 11.002 at pp 235-236). 71.In Re Priory Garage (Walthamstow) Ltd [2001] BPIR 144, a compulsory winding up was made against the company, and the liquidator sought to set aside inter alia as unlawful preferences certain previous transfers made by the company in respect of leases of two flats under the Insolvency Act 1986. The liquidator’s claim was also made under the same provisions for monetary relief. It was held that applications to set aside transactions under sections 238-241 of the 1986 Act were generally actions on a specialty within the meaning of section 8(1) of the Limitation Act 1980 and subject to a 12-year limitation period. However, where, in certain applications under sections 238-241 of the 1986 Act, the substance of the claim was not to set aside a transaction but “to recover a sum recoverable by virtue of” such provisions, such applications would be governed by section 9(1) of the Limitation Act 1980 and subject to a 6-year limitation period. In that case, the first and primary head of relief sought was the setting aside of the two transactions and the monetary claims were ancillary thereto with the result that a 12-year limitation period was applicable to the whole claim. 72.Deputy Judge J Randall QC at pp 160-161 said as follows:
73.In Giles v Rhind & anor (No 2) [2007] Bus LR 1470, the claimant and the first defendant were directors and shareholders of a company. The first defendant left to start his own business and used confidential information gathered whilst acting as director of the company to divert business to another company in which he had an interest. The company subsequently became insolvent. The claimant succeeded in an action against the first defendant for breach of confidence, and obtained a charging order over the first defendant’s interest in his matrimonial home. By a deed made before he left the company, the first defendant and his wife (the second defendant) agreed to hold the home in 20:80 proportion. The claimant sought to set aside the deed under section 423 of the 1986 Act. It was held that since the claimant’s claim was a challenge to the transfer under the deed, it was an action upon a specialty under section 8(1) of the Limitation Act 1980 and the applicable limitation period was therefore 12 years. 74.David Richards J at pp 1479-1480 said as follows:
75.Mr Lau submits that in looking at the substance or the essential nature of the relief truly sought, in respect of the Payments Claim, it is obvious from the correspondence by the Liquidators to Mr Yip that it is a monetary claim. The complaint had always been that the Payments made to Mr Yip were preference repayments of director’s loan. In respect of the Properties Claim, it is in substance a monetary claim as it is an alternative remedy and thus ancillary to the main monetary claim (ie the Payments Claim). The cause of action relied upon remains the recovery of preference repayments of director’s loans. Further, even if the Liquidators are successful in the Properties Claim under section 266B of the CO, a re-vesting order is unlikely to be sufficient to restore the position to that which the Company would have been without the disposal of the New Target Properties, and the court would have to make a series of balancing adjustments to achieve the ultimate purpose (eg adjustment to cover loss of rent or loss of appreciation of the properties). So realistically the relief will still be monetary, and hence the limitation period is kept short to avoid uncertainties. 76.Mr Lau submits that a 6-year limitation period is not harsh since the Liquidators should have known about the risk of losing their claims if timely action was not taken. He refers to Re Priory Garage (Walthamstow) Ltd where Deputy Judge Randall QC at p.161 observed as follows:
77.Mr Lau distinguishes Re Priory Garage (Walthamstow) Ltd and Giles by saying they were bona fide claims for setting aside the subject transactions, but here the sudden addition of the Properties Claim by way of amendment to the S 266B Summons when all along the Liquidators were only pursuing the Payments Claim was clearly made in response to Mr Yip’s complaint that the Payments Claim is time-barred. Mr Lau submits that the Properties Claim is “a sham or bound to fail”, and hence the relevant limitation period is 6 years and not 12 years. 78.I start by referring to section 50(2) of the BO which gives wide discretion to the court as to what remedy to grant to the applicant. The court can “make such order as it thinks fit for restoring the position to what it would have been if that debtor had not given that unfair preference”. The underlying rationale is thus to restore to the state of affairs to what it would have been had the unfair preference not been given. Without prejudice to the generality of section 50(2) of the BO, section 51A gives a list of possible orders that the court may make:
79.I am not persuaded by Mr Lau’s arguments. Having found that there is possible basis for inferring the existence of the Scheme, I do not accept that the Properties Claim is a mere tactical move that is bound to fail. In adopting a “look and see” approach, I agree with Mr Lam that the reliefs sought in respect of the Properties and Payments Claims are essentially declaratory to the effect that the Scheme was invalid as an unfair preference and the main purpose is to unwind the transfers and the payments. In the circumstances, the monetary reliefs (whether in the alternative or not) in the Amended S 266B Summons are merely a consequence of the application to invalidate the Scheme. The suggestion that a re-vesting order will be inadequate in that it has be augmented by monetary reliefs to make balancing adjustments only serve to highlight the fact that the primary remedies are the declarations for invalidating the transfers of the New Target Properties and/or the Payments, which will then be supplemented by monetary remedies in order to restore the position to what it would have been if the Company had not given the unfair preference. 80.As regards the Payments Claim, in my view it is again a claim not so much about recovery of a sum as about invalidating the Scheme, and the monetary remedy is consequential upon the unwinding of the transactions. I note that in the demand letter by the Liquidators’ solicitors dated 30 September 2011 to Mr Yip, the demand for payment of the sum of HK$1,931,000.00 was made on the basis that the Payments constituted unfair preference made to Mr Yip by the Company, and that “[the] Liquidators may apply to Court for an order for the return of the Payments to the estate of the Company so that the Company’s position may be restored to what it would have been if the Company had not given such unfair preference to [Mr Yip]”. In my view, this clearly shows that the primary concern is to unwind the Payments. It follows that the 12‑year limitation period applies. (b) Date of accrual of cause of action 81.Since I have found that the applicable limitation period is 12 years, there is no need for me to consider the date of accrual of the cause of action since on any view the Properties and Payments Claims are not time‑barred. However, in deference to counsel’s submissions, I will proceed to consider this issue briefly. 82.The general principle is that a period of limitation runs from the date on which the ingredients of the cause of action are complete, or to put it in another way, the date when the action may be commenced (see Hill v Spread Trustee Co Ltd & anor [2007] 1 BCLC 450, 481-482 and 487-488 and Re Overnight Ltd (in liq) [2010] BCC 787, 794). “A cause of action is complete when all the facts which it would be necessary to prove, if traversed, in support of the right to a judgment of the court, can be pleaded” (see McGee, Limitation Periods (6th ed) para 17.038 at pp 386-387 and Hill at pp 481-482). 83.Mr Lam submits that since the Properties and Payments Claims can only be brought by the liquidators and not by the provisional liquidators of the Company, such causes of action only started to accrue on 6 August 2007 when Mr Nedderman and Ms Yau were appointed as the liquidators of the Company. Mr Lam says that prior to that the appointment of the provisional liquidators did not confer any power on them to bring any unfair preference action. 84.At the hearing, Mr Lau submits that time started to run from 27 June 2005 being the date of the winding up order as well as the date when the provisional liquidators were appointed by the OR. Mr Lam accepts that if his contention as set out in the above paragraph fails, the fall-back date of the accrual of the causes of action for the Properties and Payments Claims would be the date as submitted by Mr Lau. That being the case, there is no need to consider any other alternative date as set out in Mr Lau’s written submissions, eg the date of the petition or a date between the date of transaction and the date of winding up. In the circumstances, the key question is whether or not time started to run when the liquidators were appointed. 85.Mr Lam places strong reliance on Re Overnight Ltd (in liq), so it is necessary to look into the authority in some detail. In that case, a winding up petition against the company was presented on 30 October 2001, and a provisional liquidator was appointed on 26 November 2001. A winding up order was made by the court on 5 December 2001. On 30 November 2007, the liquidator applied for orders against three persons for fraudulent trading under section 213 of the 1986 Act.[1] A limitation defence was raised, but the liquidator asserted that the cause of action arose within the 6-year period on the making of the winding up order, that being the earliest date on which all the elements necessary to plead the claim had arisen. 86.In that case, the order appointing the provisional liquidator contained conventional provisions but did not specify that he could commence proceedings pursuant to section 213 of the 1986 Act. Section 135 of the 1986 Act enables the court at any time after the presentation of a winding up petition to appoint a liquidator provisionally (similar to section 193(1) of the CO), and provides that the provisional liquidator shall carry out such functions as the court may confer on him. Section 135(5) of the 1986 Act further provides that “[when] a liquidator is provisionally appointed by the court, his powers may be limited by the order appointing him” (similar to section 193(3) of the CO). Sir Andrew Morritt C held that on the express terms of section 213 of the 1986 Act a fraudulent trading application can only be made (a) in the course of the winding up of a company and (b) on the application of the liquidator. He noted in relation to (b) above that the 1986 Act contains no general definition of “liquidator” so as to include a provisional liquidator appointed under section 135 of the 1986 Act. Certain provisions of the 1986 Act specify when it is intended that a power or duty may be exercised or performed by a provisional liquidator, in addition to a liquidator, or that his appointment should have some effect, but section 213 is not included in those provisions. By contrast, the provisional liquidator’s powers depend on what the court has allowed him to exercise (see section 135(4) of the 1986 Act). The learned judge therefore concluded that “[it] must follow from [what Sir Martin Nourse said in Hill as set out in paragraph 87 below] that the existence of a liquidator within the terms of the Act is a necessary condition for bringing a claim under s 213” (p 795). 87.I am not persuaded that the identity of a claimant or applicant in the present context may be a mere procedural point as suggested by Mr Lau. In my view, it is an essential ingredient of the cause of action under section 266B of the CO. Support can be found in Hill, which is concerned with setting aside transactions for defrauding creditors under section 423 of the 1986 Act. It was held by the majority (per Waller LJ and Sir Martin Nourse) that there might be separate limitation periods for different applicants under that provision, but the appointment of the trustee in bankruptcy was an ingredient of the cause of action vested in the trustee. It was not until a bankruptcy order was made that the trustee was identified as the person entitled to sue. In McGee, Limitation Periods (6th ed) para 17.038 at pp 386-387, in discussing Hill it was said that:
(see also Hill at pp 487-488 per Sir Martin Nourse cited in Re Overnight Ltd (in liq) at p 794). 88.It is plain from the wording of sections 266 and 266B of the CO that invalid unfair preferences are to be deemed “in the event of the company being wound up”. Hence, any application to invalidate an unfair preference can only be made in the course of the winding up of the company. Even though sections 266 and 266B are silent as to who can take out the relevant application in the course of the winding up of the Company, such question necessarily narrows down to whether it is the provisional liquidator or the liquidator who has the power to do so. 89.Under section 193(1) of the CO, the court may appoint a liquidator provisionally at any time after the presentation of a winding up order. Where a liquidator is provisionally appointed by the court, the court may limit and restrict his powers by the order appointing him (see section 193(3) of the CO). Once a provisional liquidation has commenced, it comes to an end at such time as the provisional liquidators or some other persons are appointed liquidators (see Re Lehman Brothers Securities Asia Ltd (No 2) [2010] 1 HKLRD 58, 74). 90.In the present case, no provisional liquidator was appointed prior to the winding up order. So pursuant to section 194(1)(a) of the CO, “subject to paragraph (aa) and subsection (1A), the [OR] shall by virtue of his office become the provisional liquidator and shall continue to act as such until he or another person becomes liquidator and is capable of acting as such”. Indeed, in the present case the OR was appointed by the court as provisional liquidator of the Company on 27 June 2005. 91.Section 194(1A) of the CO provides that where the OR (a) is the provisional liquidator of the company by virtue of section 194(1)(a) and (b) of the CO is of the opinion that the property of the company is not likely to exceed in value HK$200,000.00, he may, at any time, appoint 1 or more persons as provisional liquidator in his place. In the present case, the OR appointed Mr Nedderman and Ms Yau to be the provisional liquidators of the Company on 27 June 2005 pursuant to such provision. 92.Section 199(4)-(5) of the CO provides as follows:
93.Section 199(1)(a) of the CO provides that “[subject] to section 193(3), the liquidator in a winding up by the court shall have power with the sanction either of the court or of the committee of inspection - (a) to bring or defend any action or other legal proceeding in the name and on behalf of the company ……” 94.In the circumstances, I agree with Mr Lam that even though sections 266 and 266B of the CO do not specify who can sue (in contrast to section 213 of the 1986 Act in Re Overnight Ltd (in liq)), unless there is sanction by the court or the committee of inspection a provisional liquidator is not empowered to bring a claim under sections 266 and/or 266B of the CO. Mr Lau reminds that in any event it was held in Re Overnight Ltd (in liq) that the cause of action accrued on the day the winding up order was made. However, reading the judgment in context, it must necessarily mean that the liquidators were appointed on that day because the learned judge was adamant that the existence of a liquidator within the terms of the 1986 Act is a necessary condition for bringing a claim under section 213 of such Act. 95.Mr Lau submits that in section 50 of the BO which is incorporated by reference into the operation of section 266B of the CO, the person who may bring proceedings in that section is specified to be the “trustee”, and there is no authority to suggest that the equivalent of a trustee in bankruptcy excludes a provisional liquidator. However, it must be noted that section 2 of the BO distinguishes between “trustee” and “provisional trustee”. I am not persuaded that reference to “trustee” in the BO assists when the specific provisions in the CO prescribe the powers of provisional liquidators. 96.In the course of the hearing, I have raised with counsel the potential conundrum of the date of accrual of the cause of action being dependent on the diligence or otherwise in seeking sanction from the court or the committee of inspection during the provisional liquidation. However, on further reflection, this may not be a matter of real concern. The office of the provisional liquidator is statutory and his powers derive solely from statute. The objective of the appointment of provisional liquidators is to protect and preserve the assets of the company (see section 197 of the CO), and they have a duty to summon separate meetings of the creditors and contributories of the company for the purpose of determining whether or not application is to be made to the court for appointing a liquidator (see section 194(1)(b) of the CO) or alternatively to apply for winding up by way of summary procedure as in the present case (see section 227F of the CO). The statutory regime therefore envisages that the provisional liquidators will take steps to bring the provisional liquidation to an end. Anyway, without a grant of (in contra-distinction to an application for) sanction by the OR or the committee of inspection, provisional liquidators cannot commence any legal claim in the name and on behalf of the company in liquidation. 97.Mr Lau prays in aid section 239 of the 1986 Act which he says is in similar terms as the unfair preference provisions in Hong Kong. He refers to sections 239(2) of the 1986 Act which provides that: “[where] the company has at a relevant time …… given a preference to any person, the office-holder may apply to the court for an order under this section” to say that it is not just the liquidator who can bring an action to invalidate preferential transactions. However, in the case of corporate insolvencies, the only office-holders who can bring claims are the administrators (where the company enters into administration) and liquidators (where the company goes into liquidation) (see section 238(1) of the 1986 Act). There is no provision for a provisional liquidator to bring claims. 98.Mr Lau submits that apart from the provisional liquidator appointed under section 194(1A) of the CO, the OR may also bring a claim under section 266B of the CO under section 194(1)(e) which provides that “the [OR] shall by virtue of his office be the liquidator during any vacancy”. It is unclear whether the reference to “liquidator” in this provision includes provisional liquidators, but even if it does, there is simply no “vacancy” in the provisional liquidation of the Company for the OR to step in. Mr Nedderman and Ms Yau remained as provisional liquidators of the Company until they were appointed as liquidators on 6 August 2007. There is no merit to this argument. 99.In the circumstances, even though I do not have to decide the issue, I am inclined to think the liquidators have a reasonable basis to say that the Properties and Payments Claims accrued upon the appointment of the liquidators in 2007. IX. CONCLUSION 100.In the circumstances, the Amended Strike Out Summons is dismissed. There is no reason why costs should not follow event, and I grant a costs order nisi in favour of the Liquidators against the Respondents (including all costs reserved if any) to be summarily assessed. For the purpose of the summary assessment of costs, I grant the following directions:
101.In respect of the Amended S 266B Summons, I grant the following directions:
Mr Gary Lam, instructed by Chak & Associates, for the applicants Mr Keith Lau, instructed by Kelvin Cheung & Co, for the 1st, 2nd and 3rd respondents [1] Section 213 of the Insolvency Act 1986 provides as follows: “(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect. (2)The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper.” (my emphasis) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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