Kazan Properties and Investment Ltd v. King's Dyeing and Weaving Factory Ltd (in Liquidation)

CACV000013B/1988

IN THE COURT OF APPEAL

BETWEEN

Coram: Cons, V.-P., Clough and Power, JJ.A.

Date of hearing: 26th-29th April,2nd-4th May, 1988.

Date of handing down Judgment: 28th June, 1988.

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J U D G M E N T

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Clough, J.A. :

1. This appeal by Kazan Properties and Investment Limited ("Kazan"), a creditor of King's Dyeing & Weaving Factory Limited ("King's"), an insolvent company in liquidation, is against the order made on. the application of Messrs Johnstone and Etches the liquidatiors of King's by Jones J. On the 5th January 1988 in the compulsory winding up proceedings whereby a debenture ("the Kazan debenture") issued to Kazan by King's on the 17th June 1986 and certain payments made by King's to Kazan both before and after the commencement of the winding up, were declared to be void. The payments in question were ordered to be repaid by Kazan to King's.

2. The Kazan debenture was expressed to be an "all monies" debenture relating to all past and future indebtedness of King's to Kazan. It purported to constitute a fixed first charge over equipment, book debts, accounts receivable and over securities and shares held by King's. The Kazan debenture also purported to constitute a first floating charge over the undertaking and all the property whatsoever of King's. In so far as the Kazan debenture constituted a fixed charge it was declared by Jones J. to be void as constituting a fraudulent preference under section 266 of the Companies Ordinance (Cap. 32). As a result of the issue having been conceded during the hearing by Mr. John Swaine, leading counsel for Kazan, Jones J.'s order also contained a declaration to the effect that in so far as the Kazan debenture constituted a floating charge, it was void by virtue of section 267 of the Companies Ordinance.

3. To enable the Official Receiver, in his then capacity as provisional liquidator of King's, to sell the undertaking of King's as a going concern an agreement evidenced by a letter dated the 4th September 1986, signed by both parties, had been made between Kazan and the Official Receiver whereby Kazan relinquished its claim under the Kazan debenture to security in the form of King's assets and transferred either its claim to both a fixed and floating charge or (according to the terms of the agreement which are disputed) to a floating charge only, to a fund of $11 million in the hands of the Official Receiver.

4. After Mr. Swaine for Kazan had conceded the invalidity of the floating charge constituted by the Kazan debenture, Mr. Graham for the liquidators made several applications to Jones J. to amend the liquidators' originating summons to raise the question whether, having regard to the terms of the letter dated the 4th September 1936, Kazan had by the agreement comprised in that letter, retained only a claim to a floating charge (and no fixed charge) over the fund of $11 million in the hands of the official Receiver. All these applications were opposed on behalf of Kazan and refused by the judge on the basis that the question of interpretation would only require to be determined if the liquidators failed in their claim that the fixed charged constituted by the Kazan debenture was invalid as constituting a fraudulent preference under section 266 of the Companies Ordinance.

5. The refusal of Mr. Graham's application for amendment has resulted in a respondent's notice filed by the liquidators. I will return to that notice below. Suffice it to say at this stage that, having held that the Kazan debenture was void both, in so far as it constituted a fixed and floating charge in favour of Kazan, the judge formally ordered Kazan to take all steps necessary to release to the liquidators the sum of $11 million referred to in the letter dated the 4th September 1986 recording the agreement between Kazan and the Official Receiver which facilitated the sale of King's undertaking for $33 million.

6. As to the payments by King's to Kazan which were the subject of Jones J's order, these fell into two categories. The first category comprised payments of $1,567,000 and $760,361.66 respectively made before the commencement of the winding up which the judge held to be invalid as constituting fraudulent preferences under section 266 of the Companies Ordinance. The second category comprised payments of $380,000 and $170,000 made after the commencement of the winding up which, the judge held to be void under section 182 of the Companies Ordinance.

The ownership and management of King's

7. King's was incorporated in 1965. Its issued capital of 200,000 ordinary shares of $100 each was owned at all material times as to 83.33 per cent in equal shares by Mr. Wong Che Keung ("C.K. Wong") and the estates of his two deceased brothers Wong Tien Chun and Huynh Nghiep Dinh. The remaining 16.6. per cent of the issued capital was held by Winland Investment Limited ("Winland"). Winland is a public company in which the majority shareholders of King's had a material interest. Winland was the landlord of King's factory premises and, according to a press advertisement published by Winland in the Hong Kong Standard on the 20th May 1986 as at the 31st December 1985 King's was indebted to Winland to the extent of $30.9 million which was outstanding at the date of the advertisement.

8. The main business of King's was printing and dyeing its customer's grey cloth. It was also involved in rice trading. Until April 1986 it also traded and processed grey cloth for its own account. The dyeing business necessitated a heavy consumption of water resulting in heavy water bills.

9. At all material times the direct ors of King's were C.K. Wong, Wong Yip Man (a distant relative of C.K. Wong), Wong Tai Ho (a son of C.K. Wong) and Wong Kam Hing (a nephew on C.K. Wong). According to the advertisement published by Winland in the. Hong Kong Standard on the 20th May 1986 all the directors of King's except Wang Tat Ho were also directors of Winland.

Mr. Roger Wong ("Roger Wong"), another son of C.K. Wong returned to Hong Kong in mid-1984 from the United States of America where he had resided for the previous fourteen years and qualified as an electronic engineer. Soon after returning to Hong Kong he joined King's which he described in his evidence as in essence a family business founded in 1965 by his father C.K. Wong and the latter's two brothers.

10. By April 1986 Roger Wong had become the Acting General Manager of King's. He had become aware by about September 1985 that King's was in financial difficulties. It was at about that time that he had begun to accompany his father, C.K. Wong ,who was then about 74 and in failing health, to meetings with various banks and financial institutions.

11. Roger. Wong's evidence was to the effect, that after he became Acting General Manager in about April 1986 the management of the debt restructuring of King's was effectively controlled by his father and himself. He said in chief that C.K. Wong was very concerned about the finances of King's but that ill health due to a heart condition coupled with poor hearing resulted in his spending only one or two hours a day on The company's premises.

12. Roger Wong's evidence under cross-examination was that C.K. Wong was not responsible for the actual running of the company because of his ill health, althoug he acknowledged that King's was otherwise a typical Hong Kong.Ch.inese family company. He said that the day to day running of the company was in the hands of one of the directors Mr. Wong Kam Hing (C.K. Wong's nephew referred to above) who took over in about April 1986 when a Mr. Lau Shing who had previously been responsible for management was removed from the board.

13. Roger Wong's wife Mrs. Emily Wong ("Emily Wong") was described by him under cross-examination as his assistant. At one stage he described her as a treasurer and said that she was responsible for the financial affairs of the company. Mr. Chapman ("Chapman"), a solicitor who advised, King's concerning, its debt restructuring prior to its liquidation, gave oral evidence to the effect that he had had discussions with Emily Wong about King's finances and that he believed that she was effectively financial controller of the company.

The ownership and management of Kazan

14. The liquidators' searches disclosed that the shareholders of Kazan were a Panamanian corporation called Hyperion Corporation ("Hyperion") which held 999 shares and C.K. Wong who held one share. The original shareholders of Hyperion were C.K. Wong and his son Wong Tai Ho who had each acquired 500 shares in that company on the 20th April.977 when Hyperion had acquired its 999 shares in Kazan. On the 15th July 1981 Wong Tai Ho had transferred his 500 shares in Hyperion to C.K. Wong so that C.K. wong then became the owner of all the shares in that company. On the 8th September 1981 the shares in Hyperion were replaced by bearer shares. It was common ground below that at all material times for the purposes of these proceedings the bearer shares had become the property of Madam Lau, the wife of C.K. Wong and the mother of Roger Wong.

15. The directors of Kazan were C.K. Wong (who resigned on the 17th June 1986), his two daughters Carol Wong and Wong, Yue Mui, Mr. Arzoony and Ephra Limited and Anclar Limited. The last mentioned two companies were appointed on the 17th June 1986 and were evidently creatures of K.K. Young and Company, a firm of chartered accountants, whose employee Mr. H.Y. Yeung was in charge of the administration of Kazan. Mr. Benedict Young of K.K. Young and Company was a signatory of Kazan's bank account and his firm kept Kazan's books. The firm were also auditors of both Kazan and King's.

16. Mr. Etches asserted in his affidavit evidence, and it was not challenged, that Kazan had only a few customers and that its main business was to provide finance for King's and Corona Corduroy Factory Limited, a company which was associated with C.K. Wong and his family and occupied the same factory building as King's. Such finance as Kazan did from time to time inject into King's came from the assets of C.K. Wong and Madam Lau. Prior to September 1985 Kazan had made advances to King's to the extent of $6.85 million.

The salient events leading up to the liquidation of King's

17. The evidence of Mr. Roger Wong was that by September 1985 he had become aware that King's was suffering serious financial difficulties which would bring its business to a halt if no plans were implemented to save it from liquidation The company, which had been incorporated in 1965 by C.K. Wong and his two brothers had built up legacy of indebtedness over the years and was also suffering a serious cash flow problem. Although the dyeing business had a relatively good turnover, the company was by the early part of 1986 experiencing increasing difficulties in meeting its daily and short term outgoings. Mr. Roger Wong attributed this problem principally to the company's long standing debts (many of which carried heavy interest liabilities) and the lack of fresh finance.

18. The extent of the formerly incurred indebtedness of King's is apparent from a report dated the 25th April 1986 prepared by Mr. Ho Man Kwong ("Ho"), an accountant employed by K.K. Young and Co., the auditors of King's, containing debt rescheduling proposals intended to be presented to banks and other creditors. The debts of King's due to a total number of 7 banks and other creditors amounted to $l71.13 million of which debts to trade creditors amounted to only $28.5 million. The report indicated that if the company were then to be wound up by the court it was highly unlikely that the unsecured creditors would recover anything.

19. Mr. Roger Wong described in his evidence the efforts made by C.K. Wong and himself towards the end of 1985 to obtain further finance for King's. Their negotiations began with the Nanyang Commercial Rank ("NCB") who were one of the company's largest creditors and who held security in the form of three debentures creating fixed charges over specific plant, machinery and accessories of King's. A further advance of $30 million from NCB was the objective. According to Mr. Roger Wong, in December 1985 the then Chairman of NCB was giving indications of support, but that Chairman retired in January 1986 when his successor indicated through NCB's solicitor that NCR would not make any further advances to King's unless the company underwent a restructuring of its debts.

20. In March 1986, NCB suggested that King's should seek the advice of solicitors. This led in early April 1986 to the introduction by K.K. Young and Co. of Roger Wong to Chapman, a solicitor who was a partner in the firm of Messrs. Johnson Stokes & Master and an insolvency specialist. Thereafter there seem to have been two successive restructuring schemes put forward on behalf of King's after it had consulted Chapman.

21. The first scheme was outlined in Ho's report dated the 25th April, 1986 referred to above. This scheme was aimed at achieving what Roger Wong referred to as an informal scheme of debt restructuring. In accordance with Chapman's advice it was designed to obtain an informal six months' moratorium from the company's banks and other creditors.

22. The scheme proposed that the debts of trade creditors in the sum of $l8.99 million would be settled when due so as to secure the then existing credit terms granted by them Liabilities in respect of utilities and wages amounting to $3.35 million were also to he discharged. The total liablities of King's as at the 24th April 1986 was stated to be $173.131 million so that the discharge of liabilities of $18.99 million and $3.35 million left a net balance of $148.79 million. The scheme proposed that if King's were allowed to continue with new financing and to retain its asset this  net balance of indebtedness should be recoverable by the creditors with interest at 5 per cent per annum whithin 8 years. The report envisaged that the landlord (Winland) of the factory premises if King's would be required not to distrain for rent during the operation of the scheme.

23. The amount of the proposed new financing suggested in the report to be adequate to support the continuation of the business at its forecasted levels of activity was $15.5 million. The report stated that C.K. Wong would use his best endeavours to seek "... for other new financing of up to $9 million interest free subordinated loan (which shall not be repaid or repayable by the company prior to the end of the Scheme Period)". It was proposed that the balance of $6.5 million hould be obtained in the form of a bank loan from the creditor banks. This loan was to be fully repaid in the fourth month. Security for the bank loan was proposed in the form of a fixed charge on the rest of the plant and machinery of King's not already subject to NCB debentures and by a floating charge on all the assets of King's. An appropriate draft debenture was settled by Chapman who envisaged that the debenture would be issued to NCB as the lead banker as trustee for itself and the other major creditors who were to be required to lend the additional $6.5 million.

24. The report mentions that K.K. Young and Co. were given to understand that on the 25th April 1986 $2.3 million had been injected into King's by "the Wong Family" for settling; arrears of water charges. This was intended to be a reference to the initial payments by Kazan to King's which were made on the 23rd April 1986 in the amounts of $200,000 and $2 million, followed on the 25th April 1986 by a payment of $350,000.

25. The initial aim to achieve an informal six months moratorium was substantially successful with the assistance of Mr. Chapman, although the first restructuring scheme failed for want of the required finding. Mr. Roger Wong exhibited to one of his affirmations 32 letters (two of which appear to relate to the same creditor) from creditors indicating some of them in qualified or incomplete terms, agreement to withhold legal action to enforce outstanding debts from the dates of the respective letters until the 31st October 1986 on the footing that interest on the principal debts concerned should accrue at the rate of 5 per cent per annum and be payable on demand thereafter.

26. The dates of the letters range from the 30th April (from NCB) to the 3rd June 1986 (from Tak Shing Buying Office Limited). All but two of the letters from creditors had been written in May. The only letter received in April was from NCB but it was the largest creditor and regarded as the lead bank. It was stated, in Mr. Ho's report to be, owed $43.684 million of the total of $55.706 million owing to banks as at the 24th April 1986. The letter from NCB confirming its agreement to the proposed six months moratorium was so qualified as not to create any legally binding obligation. It was headed "SUBJECT TO CONTRACT" and expressed to be subject to the signing of a formal contract and subject to such formal contract as approved by NCR being signed by all parties concerned on or before the 15th May 1986. No such agreement ever came into being. Furthermore an analysis of interest charges paid by King's between the 9th January and the 25th July 1986 exhibited to an affirmation of Ho shows that substantial sums of interest continued to be paid by King's to NCB during May, June and July.

27. No letter from Winland, another major creditor, was exhibited by Roger Wong. Winland was shown in Ho's report to be a creditor of King's to the extent of $31 million. Winland's announcement published in the Hong Kong Standard on the 20th May 1986, to which reference has been made above, confirmed that it had decided in principle to support the debt rescheduling scheme proposed by King's and that inter alia Winland, as landlord of King's would be required to continue to let Winland's factory premises to King's and not to distrain on the premises during the operation of the scheme. No reference is made in the press announcement regarding interest payable by King's to Winland. Ho's analysis of interest charges paid by King's between the 9th January and the 25th July 1986 does not indicate any appreciable falling off of interest paid to Winland during May, June and July 1986 compared with the previous months in 1986.

28. Nevertheless it seems clear from Ho's analysis of interest payments by King's that there was an appreciable drop in the overall total interest paid to creditors by King's during the informal moratorium. Thus King's paid sums of interest amounting to $914,334.22 and $830,500.54 in March and April 1986 respectively whereas in May, June and the first 25 days of July 1986 King's paid $556,862.14, $549,925.71 and $420,328.01. Furthermore the major creditors did not seek to recover their debts from King's by legal action. There was undoubtedly a breathing space but, by the 30th June 1986, 17 writs had been issued by creditors claiming sums ranging between $48,860 and $826,610 amounting in aggregate to $5.874 million. Chapman's firm was making every effort to persuade these creditors to hold their hand pending the acceptance of a debt restructuring scheme.

29. Reverting to the end of April 1986 when NCB gave its qualified agreement to the six months moratorium, there was as yet no agreement by NCB to provide any further finance for King's. The next objective of Roger Wong, C.K. Wong and Chapman was to obtain sufficient additional funding from NCB, or failing NCB, from some other source. In the meantime the cash flow problems of King's were acute. There was a need for bridging finance to keep the company operating pending the obtaining of capital funding to put the company on the road to recovery under a debt restructuring scheme. A formal request for such bridging finance in the sum of $6 million (without reference to the terms of the funding) was made by a letter dated the 8th April 1986 addressed to Kazan by King's. On that date K.K. Young and Co. had submitted a debt restructuring plan to King's (which was later superseded by Ho's report dated the 25th April 1986) which included a proposal that King's should obtain a new short-term credit line of about $5.3 million for a period of three months.

30. Towards the end of April 1985 the cash flow problem of King's was such that it had to call on Kazan to pay its outstanding water charges amounting to over $2 million, non-payment of which would have resulted in the cutting off of its water supplies and the cessation of the company's dyeing business.

31. Kazan came to the rescue and advanced $2.2 million to Ying's on the 23rd April. This was the loan mentioned in Ho's report dated the 25th April 1986 referred to above. Kazan made further advances to King's. Between the 23rd April and the 19th May 1986 altogether eleven payments were made by Kazan to King's amounting to a total of $5.55 million.

32. The evidence of Roger Wong supported by that of Ho was that the $5.55 million in question was part of the $9 million mentioned in Ho's report dated the 25th April 1986 as the funding which was to be procured by C.K. Wong. They affirmed that the $9 million was intended by C.K. Wong to be raised from Kazan which in turn was to obtain the money from Madam Lau after it had been raised by the sale of property at Nos. 10A and 10B Conduit Road which was held in trust for Madam Lau by a company of which C.K. Wong was the managing director.

33. The evidence of Ho and Roger Wong was to the effect that Madam Lau's Conduit Road property was sold for $24 million. A deposit of $7.2 million was paid by the purchaser to the estate agent on the 22nd April 1986 and $6 million of this deposit money was transferred to Kazan on the 23rd April. The property had been mortgaged to the Chiyu Banking Corporation Limited for $15 million. It was therefore envisaged that when the balance of the purchase price had been received another 3 million would be available to be paid to Kazan and then advanced to King's. However the Chiyu Bank asserted a claim to retain all the balance of the purchase money when it was paid by the purchaser on the 23rd June 1936 and so no further money, apart from the initial $5 million, was available to be advanced to King's by Kazan.

34. The $6.5 million bank funding proposed in Ho's report dated the 25th April 1986 was never forth coming. It proved to be impossible for King's, assisted by Chapman to persuade NCB to agree to provide the required funding or to accept the informal restructuring scheme originally proposed in Ho's report dated the 25th April 1986, nor would NCB be prepared to consider any restructuring scheme except on terms which King's would not accept. Telexes passing between Chapman and NCB's solicitors between the 23rd May and the l8th July 1986 tell a sorry tale of the negotiations. By the 10th June 1986 it had become clear that NCB were insisting on very stringent and, to King's, unacceptable terms as the price for their co-operation. Thereafter a sharply acrimonious note creeps into the telexes which display no prospect whatever of a successful outcome.

35. Attempts were made by Roger Wong and Chapman to obtain the required finance for King's from other banks in Hong Kong, namely the Hong Kong and Shanghai Banking Corporation, the Standard Chartered Bank, the American Express Bank and the Rang Lung Bank, Chapman deposed that he hadaecompanied Roger Wong to various meetings with representative of those banks on or about the weeks commencing the 19th May, 26th-May, 2nd June and 9th June 1986.

36. On the 14th June 1986 at a board meeting of King's, attended by all the directors of the company except C.K. Wong, it was resolved that the Kazan debentore be executed by the company. The circumstances under which the debenture came to be executed on the 17th June 1986 (when C K. Wong resigned as a director of Kazan) are considered below, together with the subsequent transactions between Kings and Kazan between the 18th June and the 24th July 1986, in relation to the issues of fraudulent preference under section 266 and of the invalidity of payments by virtue of section 182 of the Companies Ordinance which are raised in these proceedings.

37. On the 26th June 1986 Ernst & Whinney, the accountants, were instructed by Roger Wong on behalf of King's to prepare a report on the financial position of King's as at the 31st May 1986. This action was taken on the advice of Chapman who had recommended the appointment of an independent firm of accountants to review the company's financial position and prospects in order to support the negotiation of a debt restructuring plan with the creditors. It seems that Chapman must have recommended this course at the end of May or early in June 1986 because by that time Chapman had approached Mr. Crawford ("Crawford"), a partner in Ernst & Whinney, who had attended meetings at Chapmans office to discuss the affairs of King's and discuss whether Ernst & Whinney could be of  assistance.

38. The report was prepared by Mr. O'Driscoll ("O'Driscoll"), an accountant in the employ of Ernst & Whinney. It was prepared in five days and submitted to King's on the 2nd July 1986. O'Driscoll deposed that because of the time constraints his firm was forced to place heavy reliance on representations by the management of King's. This fact was stressed in a covering letter addressed to the directors of King's in which it was also made clear that Ernst & whinney had not been requested to carry out an audit of the affairs of King's, so that the report could not be construed as an audit opinion.

39. As in the case of Ho's earlier report dated the 25th April 1986, the Ernst & Whinney report made it clear that liquidation was inevitable if a debt restructuring plan could not be devised. The company's critical cash flow position was reflected in the fact that the balance sheet annexed as an appendix to the report showed current liabilities of $172.5 million which were $87.6 million in excess of current assets All bank facilities were stated, to be fully drawn and a large proportion of other liabilities to be overdue, including the rent on the factory premises which Winland was nevertheless permitting the company to continue to use pending the outcome of the restructuring negotiations. Another appendix set out a list of creditors' writs as at the 30th June 1986 claiming sums amounting in the aggregate to $5.87 million. It was estimated that the deficiency for unsecured creditors in a liquidation would be $160 million and that unsecured creditors could only expect to recover less than 1 cent in the dollar.

40. Although the report indicated that due to the then existing cash flow problems and the uncertainty as to the company's future, it would have to cease trading unless additional funding could be obtained, it recognised the worth of its core processing business, as distinct from its then trading and financial structure. As one of four major printing and dyeing firms in Hong Kong which controlled equally approximately 60 per cent of the local market, King's processing capacity was stated to be a valuable asset. The report suggested that there was the capacity for increased processing throughout and that there were indications of significant profit potential if the "....core business can be insulated from the current financial structure and trading constraints and put on a sound financial footing."

41. The gist of the conclusions and recommendations in the report was that whilst the company was obviously insolvent there was evidence of a profitable core business (the profit potential of which could be assessed within another 10 days) which appeared to be "capable of generating a return for the unsecured creditors generally, which is significantly in excess of the negligible return forecasted under liquidation." This was the basis for the report's recommendation of the formation of further restructuring proposals based on an independent assessment of the cash generating potential of the core business. It was however recognised that restructuring would be difficult to achieve because of the involvement of a large number of creditors of different types with different security and set-off rights. The report concluded with the realistic observation that "The fact that additional funds are required is an added complication".

42. The report made no reference to the Kazan debenture (which had not at that stage been registered under section 80 of the Companies Ordinance) or to the amount ($12.4 million) of King's debt to Kazan secured by the debenture. The report merely stated that charges on the company's assets were those revealed by a search at the Companies Registry and by the various financial statements up to the 31st May 1986 (which was the terminal date of the report) made available by King's management.

43. Having obtained Ernst & Whinney's report, King's then embarked on its final attempt to obtain the approval of its creditors to a new debt restructuring plan with the assistance of Chapman and Ernst & Whinney. On the 9th July 1986 a circular letter was sent by Chapman's firm to all creditors of King's inviting their attendance at a creditors' meeting to be held on the 15th July 1986. Accompanying documents included a letter from the directors of King's setting out brief details of the company's financial position and of its restructuring proposals, a pro forma Realisation Statement as at the 31st May 1986 and profit/cash flow forecasts for the year to the 31st may 1987 (both prepared by Ernst & Whinney and a schedule containing the restructuring proposals.

44. The aim of King's was to persuade the creditors that the company had a profitable cash generating core business which, given capital funding, was capable of trading out of its difficulties and eventually paying off its debts whereas the alternative of liquidation would result in the unsecured creditors recovering virtually nothing. The letter from the company's directors stressed that the severity of its cash flow problems was such that the restructuring had to be implemented without delay to avoid inevitable liquidation.

45. The proposals contemplated two stages. The first stage would be an interim moratorium of 21 days to which the approval of all creditors was sought within 6 days of the creditors' meeting. During the 21 day interim moratorium it was proposed that creditors should take no action to recover debts or prosecute proceedings against the company. A committee of creditors' was to be appointed at the creditors meeting to represent the creditors in the second stage of the restructuring scheme.

46. The proposals for the second and long term stage of the restructuring plan (to which agreement in principle was required from creditors within 11 days of the creditors' meeting) included the obtaining by the company of new credit facilities of up to $18 million on a reducing/revolving basis upon the security of a new debenture. One of the termination events proposed was the presentation of a winding up petition against the company. Conditions to which the scheme was proposed to be subject included the sufficiency of available funds to continue the company's operations during the 21 day interim moratorium and the availability of the required $18 million funding for the scheme.

47. The creditors' meeting was held on the 15th July 1986, but on the same day Yat Sun Dyestuffs & Chemilcals Co. Ltd., a creditor, presented a winding up petition against the company. On the 17th July 1986 the Kazan debenture was registered by Mr. Chapman's firm on behalf of the company. On the 23rd July the petitioning creditor applied for the appointment of a provisional liquidator and on the 25th July the Official Receiver was appointed to be the provsional liquidator of the company with  effect from the 23rd July. On the 30th July Messrs. Johnstone and Etches were appointed special managers of King's. On the 26th August it was ordered that the company be wound up by the court.

48. On the 4th September the Official Receiver and Kazan made the agreement whereby Kazan released its claim to security under the debenture in relation to the company's assets and transferred its claim to the fund of $11 million held by the Official Receiver. On the 15th September a regulating order was made under section 227A of the Companies Ordinance and the special managers were appointed to be  joint and several liquidators of King's.

49. It was in the context of the events outlined above that the liquidators issued their originating summons initiating these proceedings on the 14th November, 1986. Then claim of fraudulent preference relating to the sum of $760,361.66 being the total sum of interest paid by King's to Kazan between the 15th January and the 7th July 1986 was added by amendmeat of the originating summons made with the leave of Jones J. given on the 26th May 1987.

The Witnesses

50. Initially affidavits and affirmations were filed on both sides. On the 14th November 1986 Jones J. directed pursuant to rule 210 of the Companies (Winding-up) Rules and Order 38 rule 2(3) that all deponents should be available for cross-examination on 14 days notice. In the event the liquidators relied at the hearing on the affidavit evidence of Etches and O'Driscoll, both of whom were cross-examined. Kazan relied on the affirmation evidence of Roger Wong and Ho and on the affidavit evidence of Chapman. All these witnesses were cross-examined.

51. Affirmations made by Emily Wong and Carol Wong were filed on behalf of Kazan but they evidently did not attend for cross-examination. In the case of Emily Wong this was because she was in the United States at the time of the hearing and had received medical advice not to travel. It appears that accordingly the affirmations of Emily Wong and Carol Wong were not used by Kazan.

52. In the case of Chapman the transcript shows that difficulties arose regarding his evidence. He had been subpoenaed by Kazan but at the hearing Mr. Swaine indicated on the 7th December 1987 that he did-not intend to use his evidence. There was argument as to whether he was entitled to take this course, particularly after it had been relied upon in the course of cross-examination of the liquidators' witnesses. The judge ruled that Chapman should attend for cross-examination. However the transcript shows that when Chapman did attend court he was first examined in chief at length by Mr. Swaine whowas clearly treating him as Kazan's witness.

The issues of fraudulent preference under section 266 of the Companies Ordinance

(1) The law

53. Kazan does not contend that the judge mis-stated the law in his reserved judgment, but it does contend that he misapplied it. The relevant provisions of section 266(1) which the judge set out in his judgment below are as follows:

"266(l) Any conveyance mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company within 6 months before the commencement of its winding up which had it been made or done by or against an individual within 6 months before the presentation of a bankruptcy petition on which he is adjudged bankrupt would be deemed in his bankruptcy a fraudulent preference, shall in the event of  the company being wound up be deemed a fraudulent preference of its creditors and be invalid accordingly."

54. Those provisions are required to be applied in the light of the following provisions of section 49 of the Bankruptcy Ordinance (Cap. 6):

"49(1) Every conveyance or transfer of property, or charge thereon made, every payment made, every obligation incurred and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor or of any person in trust for any creditor, with a view to giving such creditor, or any surety or guarantor for the debt due to such creditor, a preference over the other creditors, shall, if the person making, taking, paying or suffering the same is adjudged bankrupt on a bankruptcy petition presented within 6 months ... after the date of making, taking, paying or suffering the same, be deemed fraudulent and void as against the trustee in the bankruptcy."

55. In the present case it was not disputed that (1) at all material times Kings was unable to pay its debts as they became due from its own money during 1986 until the commencement of its winding up on the 15th July 1986, (2) the Kazan debenture and the payments challenged by the liquidators under section 266 were issued and made respectively in favour of a creditor of King's, namely Kazan, and (3) all the relevant transactions were effected within six months before the commencement of the winding up of King's.

56. It was accordingly common ground below and on appeal that the crucial issue was whether each of the relevant transactions had been effected by King's "with a view to giving" Kazan "a preference over the other creditors" within the meaning of section 49 as explained by Lord Tomlin (by reference to section 265 of the Companies Act 1929 and section 44 of the Bankruptcy Act 1914) in the following dictum in Peat v. Gresham Trust Ltd.⁽¹⁾ at p. 262 which was cited by Jones J.:

"In my opinion in these cases the onus is on those who claim to avoid the transaction to establish what the debtor really intended, and that the real intention was to prefer. The onus is only discharged when the court upon a review of all the circumstances is satisfied that the dominant intent to prefer was present. That may be a matter of direct evidence or of inference, but where, there is not direct evidence, and there is room for more than one explanation it is not enough to say there being no direct evidence the intent to prefer must be inferred."

57. I interpose here, that as Lord Greene indicated in In re M. Kushler Ltd.⁽²⁾, those observations of Lord Tomlin were not intended to be taken to imply that in every case where there is no direct evidence of intention to prefer and there is some other possible explanation the inference of  intention to prefer must not be drawn. Lord Greene observed as follows at p. 253:

"I do not think Lord Tomlin could have meant that, in every case where there is no direct evidence of intention to prefer, the court is bound to say that the onus of proof is not discharged if any view of the facts not involving an intention to prefer can possibly be taken. It is hard to imagine circumstantial evidence of facts in regard to which there might not be a possible alternative explanation. I cannot bring myself to believe that Lord Tomlin, who was only dealing with the particular facts and a particular argument in one case, intended to say that whenever there is some other possible explanation the inference of intention to prefer must not be drawn. It would be entirely contrary to his earlier statement that the court must be satisfied of an intent to prefer 'upon a review of all the circumstances.'"

58. Whilst the mere possiblity of another explanation is not to be permitted, where there is no direct evidence of intention to prefer to prevent the proper inference of intention to prefer from all the facts of the case, no such inference can properly he drawn where the inference from the facts is equivocal. Thus in In re Cutts⁽³⁾ Lord Evershed, after stating that the onus was upon the person alleging fraudulent preference added.

"It is competent for the court to draw the inference of intention to prefer from all the facts of the case, particularly when there is no direct evidence of intention before it. But the inference should not be drawn, having regard to the situation of the onus of proof, unless such inference is the true and proper. Inference from the facts proved. Thus, it will not be drawn, if the inference from the facts is equivocal and, in, particular, it will not be drawn from the mere circumstance that the creditor paid was in fact 'preferred', in the sense that he was paid when other creditors were not paid and could not be paid."

59. Accordingly the judge (who had previously rightly described the issue as one of fact in respect of which the onus of proof was on the liquidators) was applying the correct approach below when, confining himself to the Kazan debenture, he observed:

"At the time the debenture was given King's was unable to pay its debts as they fell due and a winding up order was made two months later. My task is therefore to consider whether the dominant intention of King's in granting the debenture was to prefer Kazan.

Apart from the evidence of Mr. Roger Wong who, as I have said, was the only member of the Wong family who gave evidence, I am entitled to look at all the other circumstances as to whether the onus of proof has been discharged. If any doubt arises it must be resolved in favour of the debenture holder."

(2) The Kazan Debenture

(i) The evidence on behalf of the liquidators

60. The liquidators relied on the evidence of Etches supplemented by that of O'Driscoll. Etches' affirmation evidence set out much of the background already outlined above. His initial affidavit filed in support of the liquidators' originating summons on the 14th November 1986 deposed to the following among other facts (ascertained frofa searches, books and records of King's and Kazan, and examination under section 221 of the Companies Ordinance of various persons including C.K. Wong, connected with King's) from which he contended that it was to be inferred that the purpose of the Kazan debenture was to give Kazan reference over other unsecured creditors, so that fraudulent preference for the purposes of section 266 of the Companies Ordinance and insolvency of King's for the purposes of section 267 had been established.

61. He sought to emphasise the close relationship of King's and Kazan as Wong family companies with C.K. Wong as a common director. He deposed that Kazan was a company with few customers which C.K. Wong had originally formed as the vehicle through which to inject capital derived from himself and Madam Lau into King's, which had had cash flow problems since 1977 or 1978, by giving it a cheque discounting facility with Kazan. He mentioned that C.K. Wong had given personal guarantees in respect of King's borrowings from Kazan in the past and he exhibited to a subsequent affidavit minutes of board meetings of the directors of King's held between the 23rd May 1977 and the 14th August 1982 recording these matters.

62. Etches explained that the validity or otherwise of the Kazan debenture had assumed special importance to the special managers of King's when they were seeking to sell the undertaking of the company as a going concern. When they investigated the matter they discovered that the board of King's had approved the issue of the "all monies" Kazan debenture on the 14th June 1986 and that although it had been issued on the 17th June it had not been registered until the 17th July, two days after the presentation of the petition on the 15th July to wind up King's he also drew attention to the fact that the Kazan debenture was not mentioned in the report of Ernst & Whinney dated the 2nd July 1986 in which it was made clear that as at the 31st May 1986 the company was hopelessly insolvent.

63. As to the extent of indebtedness of King's to Kazan, Etches deposed that according to the books and records of the company, on the 15th June 1986, the day before the issue of the Kazan debenture the balance owing to Kazan by King's was approximately $12.4 million. He added that between the 17th June and the 24th July 1986 (the day before the appointment of the Official Receiver as provisional liquidator) King's had received approximately $9,530,000 and had during the same period paid approximately $11,267,000 to Kazan, of which $550,000 had been paid on or after the 15th July 1986 when the petition was presented and the winding up was deemed to have commenced. Etches exhibited a schedule prepared by his staff giving a break down of the relevant payments. The schedule is annexed at the end of this judgment because it would otherwise be difficult to comprehend the effect of the evidence of Etches.

64. As to advances made by Kazan to King's after the date of the Kazan debenture, Etches asserted that they were in fact sham transactions which were, for the most part repaid on the first day and probably designed to create the illusion that the Kazan debenture was primarily in respect of new advances rather than to secure past advances. Much of Etches' subsequent affidavit and oral evidence was directed to answering the evidence of Roger Wong to the effect that the sole or dominant purpose of  the Kazan debenture so far as, King's was concerned was, to obtain the availability bridging finance pending the agreement of the creditors of King's to a debt restructuring scheme. He very properly went into considerable detail when examining the books and records of King's and Kazan to make his points, which I attempt to summarise very broadly below.

65. Etches examined the circumstances under which King's indebtedness to Kazan had arisen before the Kazan debenture was issued on the 17th June 1986. For convenience I will, when referring to the effect of Etches' evidence, use the group numbers for the different loan groupings which Mr Kaplan, leading counsel for the liquidators, adopted at the hearing of the appeal.

66. Initially, in 1978, there was a secured loan of $l.2 million (Group 1) made by Kazan to King's. This loan was fully documented and was secured by the deposit by C.K. Wong of 5 million Winland shares. The loan was rolled over from year to year.

67. Thereafter, but before 1986 an aggregate sum of $5.65 million (Group 2) had been lent to King's by Kazan. This amount was shown as outstanding at the 31st March 1986 in the Notes Payable Account of King's, which also contained entries relating to numerous other loans from other creditors. The aggregate loan represented sums advanced against cheques which had been discounted by Kazan prior to the 1st April 1986 and had been subsequently rolled over.

68. There followed 11 advances, already referred to above, made by Kazan to King's between the 23rd April and the 19th May 1986 amounting in aggregate to $5.55 million (Group 3). These loans were also entered in the Note's Payable account of King's. They were advanced against post-dated cheques and initially also rolled over.

69. The system of discounting cheques relating to Groups 2 and 3 was that post-dated cheques(for the amount of the advance) were issued to Kazan by King's (the post-dating being usually but not invariably for two weeks or a month) together with a contemporaneous payment of interest in advance for the period between the date of the issue of the cheque and the date to which the cheque was post-dated. Roll over was achieved by the substitution at the end of the interest period of a new post-dated cheque for the same amount as the original post-dated cheque together with another payment of interest in advance in respect of the original advance until the maturity date of the replacement post-dated cheque. In this way the loans were progressively rolled over from time to time and the post-dated cheques were never presented or cleared through bank accounts.

70. Etches' evidence was to the effect that after the Kazan debenture had been issued on the 17th June 1986 some of the loans in Groups 2 and 3 continued to be rolled over for a period but that between the 18th June and the 24th July all those loans were dealt with in such a manner as to give the impression that Kazan had made new advances to King's subsequent to the date of the Kazan debenture when, in reality, no new money had passed from Kazan to King's.

71. In the course of the hearing Etches produced a revised Schedule setting out details of the advances from and repayments to Kazan during the period between the lst April and the 25th July 1986. The data contained in the revised schedule had been assembled after being extracted from the books and records of King's and Kazan. In the case of King's this task had presented considerable difficulty because of the multiplicity of the entries and records and also because that company's Notes Payable account included numerous transactions with creditors other than King's.

The revised schedule shows that, on the 17th June 1986 when the Kazan debenture was issued, King's was indebted to Kazan to the extent of $12.4 million comprising:

72. Identifying payments relating to the discounting of  cheques by Kazan referable to the Group 2 and Group 3 loans, Etches was able to demonstrate by the revised schedule that between the 18th June and the 24th July 1986 King's had paid to Kazan by successive payments the equivalent of the amount of all the discounted post-dated cheques referable to the Group 2 and Group 3 loans.

73. The Group 3 loan post-dated cheques were initially the subject of the payments by Kings to Kazan on eight days during the period between. The 18th and the 27th June 1986 During that period King's paid a total of $5.9 million to Kazan. The last payment of $600,000 on the 27th June related as to $250,000 to a Group 3 loan post-dated cheque and as to $350,000 to a Group 2 loan post-dated cheque. Thus, during this period an amount equivalent to $5.55 million, being the amount of the Group 3 loan, had been paid by King's to Kazan together with a further $350,000 referable to the Group loan.

74. During the same period payments matching King's payments were made by Kazan to King's, in all but one case, on the same day, so that the respective payments which were made by cheques cleared through accounts of King's and Kazan respectively in the same bank, the Bangkok Bank, cancelled each other out for all practical purposes. I will return below to the one case where the revised schedule does not show matching payments on a particular day where Kazan made a payment to King's.

75. The revised schedule shows that during the period between the 30th June and the 24th July, 1986 King's made payments on 13 days amounting in the aggregate to $5.367 million. Included in a payment of $2.017 million on the 7th July 1986 was a sum of $67,000 interest which did not reduce the amount of the Group 2 loan, so that the balance of $5.300 million (i.e. $5.367 million - $67,000 = $5.300 million) together with the sum of $350,000 paid to Kazan, on the 27th June 1986 was equivalent to $5.65 million, being the amount of the Group 2 loan.

76. During the same period Kazan had not made equivalent matching payments to King's on all the relevant dates, and the total amount paid by Kazan to King's was $3.63 million. Accordingly the total sum of $5.717 million ($5.367 million paid during this period plus $350,000 paid on the 27th June 1986) paid by King's to Kazan had not been completely cancelled out by payments from Kazan on the same relevant day. The difference between $5.717 million and the $3.98 million (namely $3.63 million plus $350,000 of the $600,000 paid to King's on the 27th June 1986) which was paid to King's by Kazan, amounts to $1.737 million.

77. It was common ground that the residuary sum of $1.737 million which King's paid to Kazan came from two payments by C.K. Wong to King's. One payment of $1.567 million was paid to King's by C.K. Wong and immediately paid by King's to Kazan on the 7th July 1986 as part of the $2.017 million payment made to Kazan on that date. The balance of $450,000 came from Kazan itself on the same date. The payment of $1.567 million to Kazan by King's was applied as to $1.5 million towards reduction of King's debt and the balance of $67,000 was treated as an interest payment.

78. The other part of the residuary sum of $1.737 million comprised a sum of $170,000 which the books of King's and Kazan show to have been paid by C.K. Wong to King's on the 24th July 1986 and then immediately paid to Kazan. The revised schedule shows that the total indebtedness of King's to Kazan on the 18th June 1986 was $12.4 million and that on the 24th July 1986 the indebtedness was $10.73 million. The difference of $1.67 million represents the payments of $1.5 million (comprised in the payment of $1.567 million) and $170,000 made to King's by C.K. Wong and immediately passed as to Kazan.

79. Reverting to the payment by King's to Kazan of a total sum of $5.9 million during; the period. between the l8th and the 27th June 1936 and the corresponding matching payments from Kazan, Etches acknowledged that there was a period between Friday the 20th June and Monday the 23rd June when Kazan's aggregate loan to King's could be said to have increased by $500,000 from $12.4 million to $12.9 million. Indeed this was shown in his revised schedule

80. The increase was attributable to the fact that, after an "overpayment" of $250,000 by King's to Kazan on the 19th June, King's had received a payment of $750,000 from Kazan on the 20th June but made no payment at all to Kazan on the same date. The total loan was thus increased to $12.900 million. On the next day, Saturday the 21st June there were corresponding payments between the companies of $750,000, so that the total loan remained at $12.9 million on that date. On Monday the 23rd June 1986 the total loan again became $12.4 million (and remained at that figure until the 7th July 1986) because King's paid Kazan $950,000 but Kazan only paid King's $450,000.

81. Etches attributed this temporary increase in the overall amount of King's indebtedness to Kazan to the fortuitous late presentation by Kazan of a cheque for $500,000 dated Friday the 20th June 1986 which was not presented until the following day. He maintained that if this cheque had been presented and cleared on the same day as it was drawn, as in other cases the imbalance, which was righted on Monday the 23rd June, would not have occurred. At the hearing of the appeal Mr. Kaplan produced a helpful analysis of the various payments which were made by each of the companies during the relevant period. However I content myself with setting out the following explanation given by Etches in the course of his re-examination:

"The pattern that we have seen established really only began on the 18th of June with the first of the exchanging of cheques on that day, and already on the 19th of June it was not exactly in synchronisation, I mean it wasn't exattly the same amounts going each way. By the 24th of June the pattern had sort of re-established itself and things were even again. I believe that the receipt of the $750,000 on the 20th of June, part of which is the $500,000 you referred to, and no equivalent payment being made out on that day was merely a timing difference. As I have said there was in fact a cheque drawn dated the 20th of June for $500,000 although it was not presented until the following day. If it had been presented on the day it was drawn, we wouldn't have seen the imbalance at the end of the day of the 20th of June."

82. The fundamental point sought to-be made by Etches (which was particularly pertinent to the section 267 issue concerning the floating charge) was that in reality there had been no new advances made to King's by Kazan after the issue of the Kazan debenture. He maintained, and his revised schedule was relied upon to demonstrate, that all moneys received from Kazan by King's during this period had been used to pay back indebtedness incurred by King's to Kazan before the Kazan debenture was issued and thereby give the impression that genuine advances had been to King's after the issue of the debenture. The corresponding payments between the companies had in most cases been effected on the same day through accounts with the Bangkok Bank which would have been cleared internally.

83. Etches also deposed that the companies had changed their method of accounting after the issue of the Kazan debenture in order to create the impression that genuine loans had been made by Kazan to King's subsequent to the issue of the debenture. He went into minute detail on these matters but it suffices for the purposes of this appeal to mention the following mattera in general terms. Before the issue of the Kazan debenture the loans by Kazan to King's were shown as a credit (i.e. debt due) in the Kazan current account maintained by King's. The issue of a post-dated cheque for the amount of the loan was recorded as a debit entry in the Kazan current account in the King's books-and a credit entry in the Notes Payable account of King's. Rolling over was recorded by debit and credit entries in the Notes Payable account.

84. In the books of Kazan loans to King's were entered in the Kazan Loan Register which showed each loan being repaid by a  post-dated cheque for the same amount on the "due, date" of the post-dated cheque together with an entry of the amount of interest received.

85. After the issue of the Kazan debenture payments from Kazan were recorded by King's as a credit in the Kazan current account and a debit in the Bank Book. This gave the appearance of new loans. No post-dated cheques were given and so no entries were made relating to the payments in the Notes Payable account. Payments by King's to Kazan were however the subject of a debit entry in the Notes Payable account reflecting a repayment of the pre-debenture loan. A corresponding credit entry was made in the Bank Book.

86. In the case of Kazan, payments by King's after the issue of the Kazan debenture were shown as re-payments in the Kazan Loan Re gister. Some of the entries are not in chronological order. Payments made now by Kazan to King's were the subject of entries in a new account called the "Secured Loans A3(b)" account. Those entries corresponded with the entries in the Kazan current account maintained by King's.

87. The liquidators' only other witness was O'Driscoll, the accountant who had prepared the Ernst & Whinney report dated the 2nd July 1986. He had come on the Scene on the 26th June 1986, after Crawford, a partner in Ernst & Whinney had been consulted by Chapman. The view he and Crawford had formed of the affairs of King's at this time was expressed in the following passage in O'Driscoll's affidavit:

"We concluded that the liquidation of Kings was inevitable unless a debt restructuring scheme was put in place. Kings' cash flow was adverse and a number of writs were pending against it; trade creditors were not being paid and King's liabilities exceeded its assets. In short, it was clear that Kings was, at 31st May, 1986, hopelessly insolvent and it was clear to us that management appreciated this fact.

88. Under cross-examination O'Driscoll acknowledged that it was clear to him that in May, June and July 1986 the management of King's had been trying very hard indeed to save the company. He also said under cross-examination that the view of himself and Crawford at the time he prepared the Ernst & Whinney report was that restructuring would have been a better result for the creditors "... given the state of the industry and given on one hand the positive side of continuing and on the other side, the unattractiveness of liquidation" which would be disastrous in terms of return for creditors.

89. As to the Kazan debenture, he deposed that he first became aware of its existence at the meeting at Chapman's office on the 26th June 1986 when his firm received instructions to prepare its report. He said there was first private discussion between Chapman and Roger Wong which he later perceived was for the purpose of deciding whether or not to tell him and Crawford of the existence of the Kazan debenture which was not then registered.

90. He deposed that he and Crawford were advised that the purpose of the Kazan debenture was to secure additional borrowings which, due to severe cash flow problems, were needed to enable King's to continue trading while the debt restructuring scheme was being negotiated. This seemed to be a reasonable explanation in the light of the company's severe financial difficulties and of their having been advised by Roger Wong that, despite a good trading performance, the financial position of King's had continued to deteriorate during June 1986.

91. O'Driscoll further deposed that he and Crawford understood that the bridging finance had been advanced to enable King's to meet bills for wages and other essential expenses. He was not, he deposed, aware that there was an earlier outstanding loan from Kazan to King's of $1.2 million, nor was he aware that King's overall indebtedness to Kazan amounted to $12.4 million. He perceived Kazan to be a new entity formed for its then present purpose, which he described in his oral evidence at the hearing to be the advancing of short term critical funding to King's.

92. He further supplemented this evidence in his oral evidence in chief when he said that he and Crawford were advised that the Kazan debenture had been put in place to secure new funds provided by the Wong family, of a relatively minor amount, or insignificant in relation to the overall liabilities and assets of the company. As far as he was concerned his personal understanding (he was not exactly quite sure how he reached that understanding) was that the funds concerned were in the region of one or two million dollars which represented approximately two months wages.

93. O'Driscoll, who made his affidavit on the 11th February 1987 after reading the earlier affidavits of Roger Wong and Chapman giving their account of the matter, deposed that Ernst & whinney had agreed, at Roger Wong's request, not to disclose the Kazan debenture either in the Ernst & Whinney report or at the subsequent proposed meeting of creditors called to consider the restructuring proposals. He stressed that his firm did not advise King's not to disclose the Kazan debenture but was prevailed upon to agree to the non-disclosure.

94. According to O'Driscoll, Ernst & Whinney had agreed to the request not to disclose the Kazan debenture after consideration of three factors, namely:-

(1) The representations of King's that the Kazan debenture was necessary in order to obtain  additional bridging funds s vital to the survival of King's during the restructuring period. In this connection O'Driscoll mentioned that on several occasions in June and early July 1986 King's claimed an inability to meet essential payments - even to the extent of claiming inability to make more than minor partial payments of Ernst & Whinney's fees for the services being rendered by that firm to King's.

(ii) King's was concerned that disclosure of the Kazan debenture, which Ernst & Whinney understood to secure only a relatively immaterial amount, might be misunderstood and further complicate reatructuring proposals which Ernst & Whinney believed to be in the beat interests of all creditors.

(iii) Representations by Roger Wong that Kazan had agreed that in the event of a successful restructuring it would allow new financiers to share in the security provided by the Kazan debenture. To this factor was added the understanding that the general principle of insolvency law would ensure that in the event of King's going into liquidation, the debenture would only secure the relatively immaterial amounts of new additional funds which Ernst & Whinney understood to have been advanced by Kazan to King's.

95. O'Driscoll deposed that had he known on the 2nd July 1986, when the Ernst & Whinney report was issued, that King's had been indebted to Kazan to the extent of approximately $12.4 million at the time the Kazan debenture was issued he would have insisted on the disclosure of the debenture. At the conclusion, of his oral evidence in reply to a question from the judge, he said that, in view of the facts which had by then been revealed, if he were making the decision again he would have revealed the Kazan debenture.

96. He deposed that he was not a party to any discussion regarding the question of the registration of the Kazan debenture.

(ii) The evidence on behalf of Kazan

97. The principal witness for Kazan was Roger Wong whose evidence was supported by that of Ho and Chapman.

98. Roger Wong's evidence was to the effect that the Kazan debenture had been issued by King's with the dominant intention of obtaining the availability of bridging finance from Kazan whenever it was needed pending the acceptance of a debt restructuring plan by the creditors of King and the availability of long term finance from bankers or other sources pursuant to such a plan.

99. He affirmed that Chapman had explained to him and to C.K. Wong that if any further loans were to be obtained from banks or financial institutions they would expect security. Chapman had therefore prepared a draft debenture to be available to meet such expectation on the part of NCB. Roger Wong was, he affirmed, fully convinced by late April 1986, in agreement with his father, that King's  would be certain to survive provided the moratorium and additional funding could be achieved. This view persisted in the case of both Roger Wong and his father into (and after) early June 1986 when, Roger Wong affirmed, they still believed that all was required was time and funds.

100. He described how Kazan had provided finance in April and May 1986 (the Group 2 loan of $5.55 million) from the proceeds of sale of Madam Lau's Conduit Road property to enable King's to survive as a going concern. He went on to affirm that by early June 1986 NCB's reluctance to provide further funding for King's had become apparent. When examined in chief he acknowledged by reference to a telex that NCB dated the 10th June 1986, that NCB's proposed terms for further finance were unacceptable, and regarded by Mr. Chapman as outrageous. It was at this stage that he and Mr. Chapman tried unsuccessfully to obtain finance from the other Hong Kong Banks.

101. Under cross-examination he was pressed with the suggestion that it had now become apparent that King's was never going to obtain finance in Hong Kong, but he said the Hong Kong banks were adopting a wait and see position and that he had also thought at this stage of his friends in San Francisco who knew and understood him. He accepted that NCB was not going to provide finance but stressed that they supported the moratorium and were not taking legal action against King's.

102. Roger Wong affirmed that at this time, when negotiations with NCB and other banks had not resulted in the availability of any funding King's was trading with a very tight cash flow and it was essential to preserve the business as a going concern if there was to be any hope of achieving a moratorium. According to him the only source of finance that appeared to be prepared to assist at that time was Kazan. He affirmed that he knew from his father that it might be possible to obtain further finance from Kazan but that "it might be necessary to provide Kazan with some security if it was to continue to assist King's at that stage."

103. Later in his third affirmation he said that given the diminishing prospect of NCB's co-operation and the fact that $5 million of his mother's money has previously been injected into King's in April and May to provide bridging finance "my father could only make funds available to Kazan, so as to provide bridging finance for King's, if King's would give security to Kazan."

104. When examined in chief by Mr. Swaine, Roger Wong said he had talked to his father about bridging finance for King's and that "he and I were concerned whether we would be throwing good money after bad". Under cross-examination he said that funds were available "from the family via Kazan but we don't want to throw good money after bad".

105. As to the available resources which he had in mind to provide bridging finance for King's through Kazan his affirmation and oral evidence was to the effect that this included $3-4 million representing the balance of the proceeds of sale of Madam Lau's Conduit Road property, which he expected to be paid to Kazan on the 23rd June 1986 but was in fact retained by the Chiyu bank. In addition he said that he had in mind his mother's residence at 72 Macdonnell Road worth about $1.8 million, her personal savings of about $900,000 and her Winland shares worth about $1-1.4 million.

106. As to his father's available assets although he had said at one stage in his oral evidence that his father (whom the Ernst & Whinney report showed to be owing an "uncollectable" debt of $8.552 million to the company as at the 31st May 1986) had no assets, he was able to point to his father's Hing Fung shares worth $1.567 million and to a sum of $170,000 cash, both of which sums were in the event paid to Kazan in circumstances which are under consideration in these proceedings.

107. Roger Wong affirmed that when consulted about this matter Chapman had re-iterated the importance of keeping King's trading as a going concern and of obtaining bridging finance for this purpose, and that it would be proper to issue a debenture to Kazan ".. as that might ensure that Kazan would continue to support the company by providing the necessary finance."'

108. He insisted under cross-examination that C.K. Wong was at no time pressing for security for King's earlier unsecured debts. He said that he himself had never read the Kazan debenture which had been kept in the office of Chapman's firm until it was registered. Asked under cross-examination if Madam Lau had been pressing for security he replied that she was pressing about what was going to happen to the proceeds of the sale of her Conduit Road property.

109. At a later stage of his cross-examination be was asked if he was maintaining that neither his father nor anyone else at King's had instructed Chapman to make sure that the Kazan debenture gave security in respect of the past indebtedness of King's. His answer was - "They were not even aware of the details of the debenture, so I don't think they did." Asked thereafter when he first realised that the kazan debenture gave Kazan security in respect of past indebtedness of King's he replied that it never occurred to  him because it wasn't a concern, adding "We were more concerned in getting the company to go through the moratorium successfully and the debenture would be issued or released to the creditors' committee and the new financier."

110. As regards the circumstances under which the Kazan debenture came to be approved by the directors of King's on the 14th June 1986, Roger Wong affirmed, in his first affirmation, that he C.K. Wong and the directors of King's were convinced that in view of the positive response of the creditors to the informal moratorium, if the required (long term) funding could be made available King's would be saved, the creditors duly paid and the company brought back into profitability after a time. He then went on to affirm as follows:

"To make sure that this took place the Board accepted the advice of Mr. Chapman and resolved to execute a Debenture in favour of Kazan, which was duly done using the draft which had been prepared by Mr. Chapman to be granted in favour of Nanyang as had been originally intended. There was no intention on the part of my father or myself or any of the directors of Kings to effect a fraudulent preference of Kazan over the other creditors of Kings : the intention was to ensure the availability of further finance to the latter company, which was in the best interests of the company and all its creditors."

111. When he gave evidence in chief Roger Wong said that it was on the basis of Chapman's advice, that the Kazan debenture could be issued for bridging funds, that a directors meeting was held on the 14th June 1986. He said that he did not think he attended the meeting but he had spoken to the directors before the meeting about money being lent by Kazan to King's. He added that the resolution of the directors (contained in the minutes which stated that the debenture was approved in consideration that the Company needs to acquire excess funds from Kazan in order to continue its operation ...") reflected his understanding of the, reason why King's issued the debenture to Kazan under cross-examination he was asked if the directors of King's were involved in the preliminary discussions about bridging finance and he repeated that he thought the initial conversation arose between himself and Chapman.

112. As regards the absence of any reference in the Ernst & Whinney report to the Kazan debenture. Roger Wong affirmed that there was nothing sinister in this. He explained that King's had been advised at a meeting attended by Chapman, Crawford, O'Driscoll and himself that the debenture should not be disclosed to the creditors prior to the creditors meeting because such disclosure might be open to "misinterpretation" and  might have a disastrous effect on the whole scheme. King's had., he affirmed, accepted this advice. The debenture had accordingly not been referred to in the Ernst & Whinney report and "under the advice of Mr. Chapman, was not registered by Johnson, Stokes & Master until the last moment, which would be after the creditors' meeting had been held."

113. He added that the existence of the debenture would not have affected the debt restructuring scheme as it would either have been released in favour of or shared with the banks, financial institutions or   creditors who were to find the further necessary funding once the moratorium had been agreed to.

114. As to the time after the issue of the Kazan debenture, Roger Wong affirmed that towards the end of June 1986, and thereafter until the winding up, King's had enjoyed an improved cash flow. He also knew, he affirmed, that further assets, which he had particularised earlier in his evidence, were available to be realised "by virtue of the debenture" and applied through Kazan to King's as and when required.

115. He attributed the cash flow improvement to some extent to the measures he had taken to improve the management of King's since he had become Acting General Manager of the company in April 1986. In this connection he affirmed that he had sought to refuse trading discounts, to encourage payment in cash, to trim expenses and increase production. He had also sold some minor assets of the company.

116. When he gave oral evidence in chief he emphasised that business was very good at the time and King's had required customers to pay cash before processing their material. He said - "So we were able to get some cash and also with some money that Kazan lent us we were able to muddle through so to speak." He added that, with the help of Chapman firm, the company was refusing to pay water bills. If money had been needed he reiterated it would have come from Kazan. He had learned shortly after the 23rd June 1986 that the Chiyu Bank had retained the $3 million expected from the balance of the proceeds of sale of Madam Lau's Conduit Road property but, to his surprise, the company had managed to muddle through for such a long time.

117. Roger Wong affirmed that he was not apprised of the details of the discounting of cheques by Kazan, but joining issue with the contentions of Etches, he contended in his affirmation evidence that  it was not the case that, during the period between the issue of the Kazan debenture and the winding up of the company, money was circulating between the accounts of King's and Kazan in the Bangkok Bank. He pointed out that King's used its Bangkok Bank account to bank cheques received from its trading customers and to pay its outgoings. The account was, he affirmed, continuously in funds and trade creditors were prepared to accept cheques drawn on that account because the Bangkok Bank was not a creditor of King's.

118. During these last days of the trading life of King's Roger Wong and C.K. Wong were, so Roger Wong affirmed, confident as they had been throughout, that King's would be saved, given the necessary co-operation. In this connection he had, he affirmed, gone to the U.S.A. in July 1986 in search of bank financing necessary for the proposed debt restructuring. He exhibited a letter dated, the llth July 1986 which he had subsequently received from the America California Rank about his application for a loan in which he was invited to provide, more information including a detailed plan.

119. Roger Wong was cross-examined at some length about events subsequent to the issuing of he Kazan debenture with particular reference to the exchange of cheques between Kazan and King's through their accounts with the Bangkok Bank between the 18th June and the 24th July 1986. Asked if he knew anything about the exchange of cheques he replied that hls wife Emily Wong was, his assistant and it was she who had taken care of the financial matters at that time.

120. Roger Wong said, when pressed about the relationship or otherwise of the exchange of cheques, with the Kazan debenture, that he understood that money was going to be put into King's. He mentioned specifically $900,000 from his mother ($900,000 had been paid by Madam Lau into Kazan's account with the Bangkok Bank on the 19th June 1986) and went on to say that he entrusted Emily Wong to make use of the money judiciously and to keep King's continuing on a day to day basis while he was trying to negotiate for the support of creditors. He was unable to explain the system behind the exchange of cheques.

121. He said that his understanding was that Emily Wong would pay out to the vendor suppliers what she could afford or persuade them to accept. If there was not enough money coming in from customers to pay the suppliers then she would ask Kazan for money to assist King's. He had no knowledge of the details of these matters because he was involved in negotiations with creditors. He believed the cheques, were signed by the directors and Emily Wong was a kind of treasurer. He added that she resented interference.

122. He said that the reason he had in his affirmation evidence contradicted the accusations of Etches about the exchange of cheques circulating money between the accounts of King's and Kazan was that he did not believe the accusations. He insisted that he was not involved in the exchange of cheques, adding - "I know Kazan is lending, Kazan is not going to do anything bad for King's."

123. He was pressed about the extent, if any, to which money in fact went from Kazan to King's after the issue of the Kazan debenture, with particular reference to the $900,000 paid in to Kazan's account with the Bangkok Bank on the 19th June 1986 by Madam Lau which he had previously affirmed was additional funding available for King's. He acknowledged that such a sum would not by itself have been sufficient to keep the company going for a month, but went on to say as follows:

"Well, there were times that the company needed money and with the injection concerned it kept the company going on a day today basis. So that was one of the contr1hutinp factors, I won't say it was the only factor certainly JSM was very important in that case as far as helping us to stop people from winding up the company."

124. He was asked by Mr. Graham to explain, by reference to Etches' revised schedule, when Madam Lau's $900,000 was paid to King's by Kazan. He said he could not do this without further study of the accounts but re-iterated his belief that such a sum had been paid to Kazan by Madam Lau at the relevant time and then paid by Kazan to King's. When it was all the payments between the two companies during the relevant period cancelled each other out he replied to the effect that it was possible that money lent by Kazan to King's on one particular day was used to pay off immediate bills but the day's takings from customers matched or partially matched the amount advanced by Kazan which could therefore be wholly or partially repaid.

125. As to the resignation of C.K. along on the 17th June 1986 as a director of Kazan and Hyperion, Roger Wong said under cross-examination that C.K. wong was concerned about his personal guarantees and did not want, people to be confused into thinking that he was the owner of Kazan whereas Madam Lau owned the shares in that company.

126. The second witness for Kazan was Ho, the certified accountant employed by K.K. Young & Co. Who were auditors of King's and Kazan. He had been involved in the and it work done in 1986 by his firm for King's and had worked on his firm's reports comprising King's restructuring, proposals dated the 19th and 25th April 1986. His evidence, being that of an accountant who had studied the books and records of King's and was qualified to speak as to the affairs of the company as reflected in those books and records, was relied, upon, as that of an expert to support that of Roger Wong and to rebut that of Etches.

127. He affirmed, in support of Roger Wong's evidence, that his understanding had been that the funding of $9 million, to be obtained by C.K. Wong under his firm's restructuring proposals dated the 28th April ,1986 was to come from the proceeds, of sale of Madam Lau's Conduit Road property.

128. He exhibited to his affirmation summaries and analyses intended to support aspects of Roger Wong evidence regarding the conduct of the business of King's and the state of its finances after the issue of the Kazan debenture. By reference to a schedule of the total bank balances available to the company during the six months immediately preceding the winding up of the company, he demonstrated that, whereas, at the end of April and May 1986, (despite the injection of the $5.55 million  Group 3 loan in April and May), the total available bank balances had been substantially lower that at the end of each of the first three months of the year the total available bank balances at the end of June had substantially increased. Thus the available balances at the end of May were only $0.872 million compared with $1.48 million at the end of June. When he gave evidence in chief Ho said this supported his point that King's had been running on its own resources after the issue of the Kazan debenture without depending on Kazan's new funds.

129. He affirmed that another schedule exhibited to his affirmation showed that King's had applied the $5.55 million Group 3 loan on various essential outgoings of the company such as water charges, rates, electricity charges, wages and salaries, for which there would not have been funds had the loan not been made. When giving evidence in chief he said he concluded that King's could not have survived without this loan.

130. Ho also exhibited a summary of bank and cash movements relating to King's between the 17th June and the 25th July 1986 which showedthat during that period the total receipts and debit entries ($35.269 million) exceeded the total payments and credit entries ($25.851 million) and that the total trading receipts ($11.313 million) exceeded the total purchases and trading expenses ($9.277 million).

131. Ho exhibited to his affirmation a schedule showing, on a monthly basis, an analysis of the interest payments made to creditors by King's between the 9th January and the 25th July 1986. When givide evidence in chief he explained (along the lines I have already indicated when referring to the evidence of Etches) the cheque discounting procedure which had been applied to the Group 2 and 3 loans. He explained further in his evidence in chief and in a second affirmation (permitted to be made at the time he was giving oral evidence for reasons that remain obscure) that the advances made to King's by Kazan after the issue of the Kazan debenture were governed by a different procedure.

132. The substance of his evidence was as follows. After the issue of the Kazan debenture the Group 2 and 3 loans were paid off by King's. This was achieved by the progressive surrender to King's of all the post-dated cheques which had previously been treated as security for the loans. At the time each post-dated cheque had been surrendered by Kazan there had been an actual payment (by a cheque drawn by King's in favour of Kazan and presented and cleared by Kazan) of the amount of principal specified in the surrendered post-dated cheque.

133. Where a post-dated cheque had been surrendered before the date appearing on that cheque(interest having previously been paid in advance by King up to that date) a pro rata adjustment had been made giving credit to King's for the interest overpaid. Ho said this was done to the extent of a total of $59,800 by way of set-off by kazan against other interest payable by King's to Kazan.

134. Ho explained that the new advances made by Kazan after the issue of the Kazan debenture were not made in accordance with the post-dated cheque procedure. Those advances were made by Kazan to King's by way of cheque payments. No discounting fee was paid by King's who did not give Kazan a post-dated cheque. No advance interest was paid by King's and no date was fixed for repayment. Ho said he had seen no instance of interest being paid by King's to Kazan in respect of any of these advances.

135. Under cross-examination Ho was asked why the post-dated cheques had been replaced by current cheques after the issues of the Kazan debenture. He said he did not know the reason. He agreed that examination of the books indicated an attempt to wipe off the past indebtedness and replace it with a current indebtedness.

136. Asked if he could give any commercial explanation for what happened, he replied that he could see some points beneficial to King's. These were that in the case of "loans under the debenture" no interest was ever paid by King's, and there was no due date for repayment of the new advances.

137. As regards the balance of $500,000 shown in Etches' revised schedule as owing by King's to Kazan between the 20th and the 23rd June 1986, Ho said in chief, by reference to Madam Lau's loan accunt with Kazan, that this represented part of a sum of $900,000 paid by Madam Lau to Kazan on the19th  June 1986.

138. The third witness for Kazan was Chapman, the solicitor who had been instructed to advise King's regarding its debt restructuring proposals He had sworn an affidavit and was subpoenaed by Kazan to give evidence at the hearing. He deposed that at the time the informal moratorium scheme was devised he was not told by Roger Wong that Kazan was connected with the Wong family, but he was told it was a creditor which would support the scheme.

139. He deposed that at the time when efforts to obtain funding from NCB and the other banks had proved unsuccessful and when he understood that the company was in such a critical position that interim finance was required pending the procurement of funding for the restructuring scheme, Roger Wong told him that interim finance could be provided through Kazan. It was at this stage that he became aware that Kazan was connected with the Wong family.

140. In his oral evidence in chief he said that he was not aware at that time that Kazan had been lending short term money to King's to enable it to continue from day to day. He only knew that Kazan was a creditor of King's, he did not know the nature of the debt. He had no recollection of the Group 3 loan of $5.55 million made by Kazan to King's between the 23rd April and the 19th May 1986.

141. In his affidavit he deposed that it appeared that King's required interim finance immediately but that the funds advanced would most likely be irrecoverable if the informal restructuring scheme did not materalise. He said that there was discussion about the issuing of the debenture to Kazan to secure interim finance on the basis that the debenture would be either released or shared if full funding was obtained and the restructuring scheme proceeded.

142. In his oral evidence in chief he said that his discussions had been with Roger Wong and to a degree with Emily Wong. There were no direct discussions with C.K. Wong who did not speak much English.

143. He was extensively cross-examined regarding the non-availability of the long term funding required for the restructuring proposals having regard to the negative attitude of NCB and the other Hong Kong banks. He accepted that a bank in California was not likely to inject a substantial amount of money into a comparatively small Hong Kong textile operation like King's. He was also-prepared to go so far as to acknowledge that at this time he had considered the, chance of achieving a successful restructuring of the debts of King's to be slim, but he insisted that there was nevertheless a chance.

144. His reasons for that view were that he considered the trade creditors of King's to be supportive. There was, he said, a lot of good will towards he business (which was a viable business) of the company, and the individuals behind it. In his view at the time, if the lead banks could have been approached on the basis of substantial support in dollar terms of trade creditors indicating that bank capital was far less at risk than previously supposed, then there might prove to be a basis for a restructuring scheme after the creditors' meeting.

145. He said that his view had been that if sufficient interim finance could have been provided to keep the company going past the creditors meetings and those meetings had (as actually appeared to be the case in the event) been supportive, then he felt that there were grounds to pursue restructuring further.

146. As to the immediacy of the requirement for interim finance, he said under cross-examination that his advice had been that the company would have to cease trading unless it had been able to continue business and that his understanding at this time was that it could not continue business without financial support, in particular immediate financial support. In chief he had said that from discussions with Emily Wong (whom he believed to be effectively the financial controller of the company) he understood that things were not easy on a day to day basis.

147. He insisted under cross-examination that his understanding at the time was that the family, through Kazan, would be prepared to inject interim finance into King's in the sense that they were to provide finance. His recollection was not, he said, that it was a subjunctive "might" situation. He was able to recall, when cross examined, that $3 million was due at the time from the sale of the Conduit Road property but he had no recollection of any other particular funds being mentioned in connection with the finance to be provided.

148. He was cross-examined at length about the question of the irrecoverability of interim finance advance to King's by Kazan if the restructuring proposals should not be accepted by the creditors. He made it clear that his attitude at the time was that if the Wong family were prepared to inject funds into King's and perhaps throw good money after bad, then it was a decision for the family to consider. The issue of the debenture - "flowed through from the discussions on other institutions acting as the bank and the idea of Kazan coming in, whether it could take the debenture, to which the answer was 'Yes, it could'."

149. He said that he had discussed with Roger Wong whether or not such a security to a connected company would be valid and he had explained to Roger Wong the effect of sections 266 and 267 of the Companies Ordinance. There was, he said, no question of conflict in his role because he was advising Roger Wong as general manager of King's concerning new security. He was not advising Kazan or the Wong family. According to Chapman, if King's chose to give security to Kazan in order to obtain financing of whatever nature, that was the company's decision.

150. He made it clear under cross-examination that he viewed the involvement of the Wong family from April 1986 until the liquidation of King's as having been one of genuine concern to try to save their company. He had no reason to doubt the genuineness of that position, nor to doubt that they wished to inject further finance into King's. However in chief he had said that he did not know who was going to provide the interim finance for King's during the 21 day negotiation period, which was later contemplated as part of the restructuring proposals, which accompanied Chapman's letter dated the 9th July 1986 to the creditors of King's. Roger Wong had said that he looked to Kazan for this finance.

151. As to the circumstances under which he had settled the terms of the Kazan debenture, Chapman deposed that it was based on the draft form he had previously prepared for NCB and the other creditor banks. When he gave oral evidence in chief he was asked if he recalled how the Kazan debenture came to be drafted in terms as an "all moneys" debenture securing past as well as future indebtedness of King's to Kazan. He could only say that his recollection was that the Kazan debenture was based on the NCB document. Under cross-examination he referred to the NCB draft as having been basically in a standard form.

152. Cross-examined about the terms of the Kazan debenture, Chapman, who had kept no attendance note of the matter, said he could not recall specific discussion about the provision for an "all moneys" debenture. He could not give evidence one way or the other about that. He said that he had not been told that Kazan would not be prepared to lend interim finance unless it was given security in respect of past borrowings. In this connection he commented that he had not been Kazan's solicitor. Kazan had been free to obtain legal advice about the debenture he had settled for King's.

153. At one stage in his cross-examination he said that he could not recall if he had been instructed to make it an ''all moneys" debenture or, whether the debenture acquired that  character as a result of time pressure in the sense that the cash flow position of King's was critical. His understanding was that basically security had to be provided to enable funds to flow and the debenture had been prepared in a bit of a rush.

154. When cross-examined about the King's  board meeting held on the 14th July 1986 to approve the Kazan debenture Chapman said he had not attended the meeting; nor had he talked to the directors or explained the debenture to them before the meeting. He said that the whole progress of restructuring involved his liaising with and through Roger and Emily Wong. There was little purpose in addressing C.K. Wong because he did not speak English. According to Chapman, Roger Wong was an intelligent and educated man, and, he would have understood the advice Chapman gave and would have relayed that advice as appropriate to the board.

155. Asked in cross-examination about the minutes of the board meeting held on the 14th July 1986 embodying the resolution of the board approving the Kazan debenture, Chapman could give no firm evidence. He said he believed he would have prepared a draft board resolution but the actual minutes exhibited to Etches' affidavit were not prepared by him and and did not follow the form he presumed he would have prepared. Whilst he believed that he had prepared a draft resolution he could not categorically say that he did.

156. In his affidavit Chapman confirmed Roger Wong's evidence that he had advised against the disclosure of the Kazan debenture in the Ernst & Whinney report. He regarded the debenture as an interim measure in the provision of additional interim finance required to keep King's in business pending the acceptance of an informal scheme by the creditors He deposed that he considered "and it was generally agreed that disclosure of the Kazan debenture to the company's creditors was not required and might be prejudicial to obtaining the creditors agreement to an informal scheme whereas if  the scheme proceeded the Kazan debenture would either be released to or shared with the creditors providing the new finance. Disclosure would have been inevitable if the scheme had proceeded.

157. Chapman also deposed that at about the same time as non-disclosure was discussed Roger Wong had asked if registration of the Kazan debenture could be delayed and Chapman had advised that it would be possible during the five weeks registration period prescribed by section 80(1) of the Companies Ordinance. He deposed that Roger Wong had then instructed him to delay the registration of the debenture.

158. He was pressed in cross-examination with the suggestion that the existence of the Kazan debenture would have effectively ruined whatever remaining chance there was of achieving a deconstruction. He accepted that the debenture would have had to become a matter of public record and that it would obviously have had to be disclosed if the restructuring scheme was to proceed. However he repeated that his understanding at the time was that there was substantial trade creditor support for King's and that if the creditors meeting came through (as in fact it appeared to do on the 15th July when the meeting was held but the petition was also presented) there were grounds for going back to NCB and the other banks and pointing out, as the Ernst & Whinney report had done the importance of the viable business of King's.

159. Chapman indicated under cross-examination that his view was that immediate disclosure of the Kazan debenture to the creditors "would focus the creditors on to the wrong issue". He went on to say:

"The issue at stake was whether they were prepared to wait their time and support the company or whether they were not. And the existence or otherwise of the debenture was considered to hb not material on that particular question because we were at a very preliminary stage. Further along, if there had been creditors support then of course, it is material and a matter for discussion with the new finance creditors."

160. His attitude to the question of non-disclosure was manifested in the following, earlier passage of his evidence under cross-examination:-

"-- but if Kazan had provided interim finance to support the operation and we had got to  that stage, then it would only have been proper for the banks to have recognised that contribution in terms of the survival position. Whether, as a matter of negotiation, the family would have agreed to waive any rights that they may have is again another matter. In terms  of a restructuring, you have to be prepared to negotiate on every basis."

(iii) The judge's findings

161. The judge accepted the statement in Ernst & Whinney's report that King's had been hopelessly insolvent on the 31st May 1986 with massive debts, but found that the company had had a profitable core business which was enabled to continue on a day to day basis as a result of the injection by Kazan of funds for essential payments.

162. However he described the hope for further loans from NCB or any other bank as but a pious hope. He mentioned that Mr. Swaine had cited In re M'Innes⁽⁴⁾ for the proposition that even if the hope of saving the company was over sanguine that did not decide the issue of fraudulent preference. Whilst the judge accepted that the Wong family desired to save King's and that genuine efforts were made to achieve restructuring by bringing in Chapman's firm and Ernst & Whinney, he gave his reasons for concluding that this was not a case of the debtor company being over sanguine but being wholly unrealistic.

163. His reasons for this conclusion were that it had become apparent during negotiations with the creditors that there would be no money forthcoming to save the company and that the business could only continue at all on a day to day basis. The creditors may, he found, have been supportive in the early stages, but creditors had filed writs claiming over $5 million by the time the petition was presented. He concluded that on the facts the hopes of Roger Wong and his family were quite unjustified. In arriving at this conclusion he rejected the opinion expressed in Chapman's evidence that there was still a chance, albeit a slin chance for a successful restructuring of King's.

164. The judge accepted without hesitation the evidence of Etches concerning the exchange of cheques which took place between King's and Kazan after the issue of the Kazan debenture. He did not consider that evidence had been seriously disputed. When reviewing Ho's evidence he had observed that he regarded Ho as an unimpressive witness who did not add anything to the case, and that nothing he said had in any way detracted from the evidence of Etches. In particular he pointed out that neither Roger dong nor Ho had given an explanation for the transactions effected by the exchange of cheques between King's and Kazan after the issue of the Kazan debenture. He observed in relation to those transactions:

"I am satisfied and accept the evidence of Mr. Etches that there could be no possible commercial explanation for them and that the only purpose was to give he impression that the Kazan debenture was primarily in respect of new advances rather than past advances. I am quite satisfied that the cheque exchanges were a sham to give the impression that new advances were made."

165. The judge regarded the reasons given for the failure to disclose the existence of the debenture to the creditors in the Ernst & Whinney report (namely that disclosure would be open to misinterpretation or would create some form of emotion amongst the creditors) as a masterpiece of understatement. He was satisfied that Chapman had explained & the provisions of sections 266 and 267 of the Companies Ordinance to Roger Wong who had made the decision after receiving that advice that the debenture should not be disclosed. He rejected Roger Wong's evidence that the non-disclosure occurred as a result of Chapman's suggestion.

166. Roger Wong had impressed the judge as an intelligent man but clearly had not impressed him as a witness. He described him as lacking candour in his evidence and found him to have been inconsistent on various matters including his evidence concerning the insistence of C.K. Wong before the issue of the Kazan debenture that security be given by King's, whereas his previous evidence had been more modified. The, judge referred to Roger Wong's reasons for delaying the registration of the debenture as another example of his intention to withhold the existence of the debenture for as long as possible.

167. O'Driscoll's evidence that he gained a wrong impression from Roger Wong regarding the nature of Kazan and that he would have insisted on disclosure of the debenture had he known the full facts, was accepted by the judge who considered that, even on the facts as O'Driscoll had understood them, the debenture should have been disclosed in order to present a full and fair picture of the situation of King's at that time. In this connection the judge did not. Accept Chapman's evidence that the failure to disclose the debenture would not have misled the creditors. He observed:

"In my judgment the failure to disclose amounted to a deliberate attempt to mislead in a vain hope that a restructure of the company would be successful. If the debenture had been disclosed it would obviously have ruined any chance of success. The debenture was given for the express purpose of transforming Kazan from an unsecured creditor to a secured creditor which would inevitably result in the unsecured creditors receiving almost nothing. I am satisfied that it was not given for the purpose of making new advances."

168. In connection with this finding it is pertinent to observe that after reviewing the evidence of Chapman the judge had expressly rejected as untenable a suggestion that Chapman may have blundered by overlooking the fact that the Kazan debenture was an "all moneys" debenture as he was working under pressure.

169. The judge added at the end of his judgment that another factor to be taken into account was C.K. Wong's resignation as a director of Kazan on the date of the Kazan debenture (and also from Hyperion a few days earlier), which the judge considered was obviously done to give the impression that C.K. Wong was no longer concerned with Kazan and Hyperion. The judge stressed that the close connection between King's and Kazan resulted in it having been clearly in the interests of the Wong family to have the debenture. He rejected the suggestion that Roger Wong (who was not a director or shareholder of King's or Kazan) could be regarded is an independent witness and found that he had every incentive to act in the manner that he did in order to protect the interests of his family.

170. Accordingly the only and irresistable inference of fact which the judge said he drew from the evidence and the surrounding circumstances was that the dominant intention of King's had been to prefer Kazan as a creditor to the detriment of the general body of creditors. He therefore held the Kazan debenture to be void as constituting a fraudulent preference.

(iv) The appeal

171. On behalf of Kazan it was contended by Mr Swaine that the judge had been altogether too dismissive of Katan's case below when he found that fraudulent preference had been established by the liquidators in relation to the Kazan debenture. It was contended that this finding was unsound because he had not given sufficient consideration to a substantial body of direct and contemporaneous evidence which did not support the liquidators case, that he had had regard to irrelevant matters and that he had wrongly considered neutral matters to be supportive of the liquidators' case.

172. Matters in favour of Kazan which were contended to be facts clearly established by the evidence were enumerated by Mr. Swaine in his skeleton argument. I accept that most of the matters enumerated had been established, but two very important matters enumerated by Mr. Swaine were, in my judgment, dependent upon the credibility of Roger Wong and could not, on appeal, be treated as established in the light of the view expressed by the judge as to his credibility.

173. There was ample evidence to show, and the judge found, that the Wong family desired, to save King's and that genuine efforts were made to effect a restructuring of the company debts with the assistance of a solicitor and accountant. The evidence also established that in order to negotiate a restructuring, interim finance was essential to ensure the continued day to day operation of King's. Such interim finance had been made available to King by Kazan in April and May 1986 when the company needed funding to meet essential services such as water and received the Group 3 loan of $5.55 million.

174. There was also evidence that on the 17th June 1986, when the Kazan debenture was issued a further $3 million was expected to he received from Kazan in respect of the sale of Madam Lau's Conduit Road property, so that Kazan, would have expected to have at least that sum available by the 23rd June 1986 to be lent to King's. However in the event the Chiyu Bank retained the $3 million on the 23rd June 1986. In addition C.K. Wong and Madam Lau had between them other assets with a value of about $5.5 million which might have been made available to King's through Kazan.

175. As regards the intentions of King's at the time Kazan debenture was issued, Chapman had confirmed that at the time the question of the issue of the debenture was discussed with him by Roger Wong the discussion had been on the footing that if a restructuring scheme could be achieve then King contemplated that the debenture would have been released to or  shared with the creditors who provided the major funding for the scheme. This was also subsequently the understanding of O'Driscoll. On this basis ultimate disclosure of the Kazan debenture would have been inevitable if a restructuring scheme had been achieved.

176. As to events subsequent to the issue of  the debenture it was clear that the company had in fact continued to operate until the 24th July 1986 and that the cash flow had improved from the end of June onwards.

177. Then there were two matters relied upon by Mr. Swaine as clearly as established which lay at the heart of the issue between the liquidators and Kazan and depended ultimately on the evidence of Roger Wong. Thus it was contended to have been clearly established that there was a genuine intention to inject further funds into King's and that the debenture was granted in order to ensure the availability of further interim finance to King from Kazan.

178. In this connection Mr. Swaine contended that when the judge rejected Kazan's case and held that the Kazan debenture was not given for the purpose of making new advances he had failed to address his mind to the precedent question whether, having regard to the evidence of the resources of Madam Lau and of Kazan's willingness to lend further money to King's, the latter company issued the Kazan debenture with the genuine hope of borrowing further money from Kazan in order to keep King's going, albeit pending a restructuring scheme which the judge considered to he unrealistic. Relianee was placed on the fact that the judge had not found in terms that Kazan never intended to lend new money to King's or that it did not have the resources to lend new money.

179. In seeking to ascertain the dominant iniention of King's at the time of the issue of the Kazan debentore it seems to me, as, I apprehend, it did to the judge and the parties to these proceedings, that the persons who exercised the mind of the company, at the material time were primarily Roger Wong and to a lesser extent C.K. Wong who was a founding director of the company and very concerned about its finances but failng in health at the time and therefore relying on Roger Wong, who was not a director, or shareholder to act for him and the company. There was no evidence that the board of directors (all relatives of C.K. and Roger Wong) did anything on the 14th June 1986 when approving the issue of the Kazan debenture but accept the recommendation of Roger Wong who was the person in charge of the company's restructuring proposals and had obtained the advice of Chapman regarding the issue of the debenture.

180. At the material time the only person mentioned by Roger Wong in his evidence as dealing with him on behalf of Kazan was C.K. Wong who was a director of Kazan and whom Roger Wong described as "taking care of matters for Kazan because it's my mother's company". The extent to which C.K. Wong and Roger Wong were actively contemporaneously concerned with the interests of both Kazan and King's was demonstrated by the choice of pronoun by Roger Wong in his oral evidence when describing the discussions between himself and C.K. Wong prior to the issue of the Kazan debenture regarding further bridging finance from Kazan to King's. In chief Roger Wong said "he and I were concerned whether we would be throwing good money after bad". Under cross-examination he said that funds were available "from the family via Kazan but we don't want to throw good money after bad".

181. The onus being on the liquidators to establish fraudulent preference, it seems to me, as it must have done to the judge, that Etches evidence with its virtually unchallenged analysis of the dealings between Kazan and King's following upon the issue of the debenture clearly established a strong prima facie case of fraudulent preference. He had exhibited the minutes of the board meeting held on the 14th June 1986 when the issue of the Kazan debenture had been approved. The minutes recorded that the Company is greatly in need of cash as working capital at the present stage" and that "Kazan has agreed to lend the Company excess funds so that the Company would be able to continue its operation during the period of difficulties". They also recorded that "The 'Debenture' was approved after deliberate consideration on (sic) the terms of the 'Debenture' in consideration that the Company need  to acquire the excess funds from 'KAZAN' in order to continue  its operation during the present difficult time which is of critical importance".

182. In the light of the formal expression by the board of those reasons for the issuing of the Kazan debenture it would be only reasonable, in the context of the issue of fraudulent preference, to test such reasons by inquiring whether in fact further advances were made by Kazan to King's after the issue of the debenture. A superficial examination of the books and records of King's and Kazan confirms that there had been such further advances made between the 18th June and the16th July 1986 by a succession of payments amounting to a total of $9.530 million which were recorded in Kazan's books in a Secured Loans account.

183. Furthermore, on a superficial reading of the accounts of both companies it appeared that between the 18th June and the 24th July 1986 King's had made payments to Kazan amounting to a total of $11.267 million which, after deduction of a payment of interest amounting to $67,000, leaves $11.200 million. The latter sum of $11.200 million is the aggregate of the Group 2 and 3 loans of $5.650 million and $5.550 million respectively. In the result it appeared that by the 24th July 1986 King's had paid off the unsecured  Group 2 and 3 loans, but not the Group 1 loan of $1.2 million which was secured. It also appeared that Kazan's new loan of $9.530 million was secured by the Kazan debenture.

184. The evidence of Etches, which reflected the results commendably thorough scrutiny and analysis of the books of King's and Kazen, exposed what has all the appearances of an attempt by King's to manipulate the account between the companies by the making of artificial mutual payments so as to give the impression that Kazan, another Wong company, had made genuine new loans to King's after the issue of the debenture on the security of that instrument and for the reasons recorded in the minutes of the board meeting held on the 24th June 1986.

185. In the absence of any explanation, such evidence led to the irresistable inference that the Kazan debenture had been issued to Kazan with the dominant intention of preferring not only Kazan but also C.K. Wong who had guaranteed part of the indebtedness of King's to Kazan, because the process of manipulation involved in the self-cancelling dealings between the companies, which eliminated the unsecured Group 2 and 3 loans and artificially created new secured loans, had begun on the very next day following the issue of the debenture. This conduct was wholly inconsistent with the statement in the minutes of the board meeting held on the 14th July 1986 that King's was "greatly in need of cash as working capital at the present stage" and that Kazan had agreed to lend King's "excess funds" to enable King's "to continue its operation during the period of difficulties."

186. However, the main thrust of Mr. Swaine's argument on appeal was that Kazan's case had never been that the Kazan debenture had been issued by King's for the purpose of obtaining specific advances but with the dominant intention or hope or expectation that additional advances would be lent to King's by Kazan to enable King's to keep going on a day to day basis until a genuinely sought restructuring scheme could be achieved. He contended that the judge had failed to appreciate this and that whatever the effect of the cheque exchange transactions, they did not preclude the subjective "hope or expectation" dominant intent relied on by Kazan.

187. On this footing Mr. Swaine contended that the judge was wrong in drawing adverse inferences from the cheque exchange transactions as he had been invited to do in the evidence of Etches. He submitted that the transactions were bona fide financial arrangements. He emphasised on appeal that it had not been Kazan's case that the interim finance for which the debenture was granted had anything to do with the exchange of cheques between the two companies. He relied on the denial by Roger Wong under cross-examination that the transactions question had anything to do with the Kazan debenture.

188. However this does not appear to have been Kazan's stance initially, because it was not unti1 the third day of the hearing below, on the 2nd December 1987, that Mr. Swaine told the court that Kazan was not contending that any new money had been advanced (other than the sum of $500,000) by Kazan after the issue of the debenture. Later on the same day Mr. Swaine told the judge that he could not support the floating charge constituted by the Kazan debenture. That charge would only have met the requirements of section 267 of the Companies Ordinance if new moneys had been advanced to King's after the issue of the Kazan debenture. In making the concession it did Kazan (which had preserved its claim to a floating charge under the agreement made on the 4th September, 1986) clearly faced difficulties regarding the real purpose of the cheque exchange transactions.

189. Thus, before the hearing the liquidators evidence had relied through the affidavit of Etches on the fact that, when mutual payments were made on the same day between the companies, no new money was effectively paid by Kazan to King's. Roger Wong had denied this in his affirmation evidence and had affirmed that "It was not the case that the same money was circulating between accounts, as King's used its account to bank cheques received from its trading customers and to pay its own outgoings."

190. There had in fact been payments each way through the Bangkok Bank because the cheques had been presented and cleared. Moreover the payments by King's to Kazan discharged loans within the Group 2 or 3 categories which carried interest and were due on fixed dates whereas the contemporaneous (in most cases) payments by Kazan to King's created loans with no liability for interest and no specified due date. This was all reflected in the books of both companies.

191. If the books of the companies had reflected genuine transactions and there had been no liquidation, then it seems to me that if Kazan had sought to recover paiyment of its loans to King's it would have had to claim under the Group 1 loan and under the secured loan made on and after the 18th June 1986. Yet, when it suited their case after making the important concession regarding the floating charge, Kazan was acknowledging by its leading counsel that no new money had passed from Kazan to King's after the issue of the debenture.

192. Be that as it may, Mr. Swaine contended that the cheque exchanges were not a sham but served a commercial purpose because they were the means by which the system of discounting post-dated cheques was wound down by terminating the payment of interest and replacing fixed date repayment with open-ended repayment. He submitted that in making the adverse inferences suggested by Etches regarding the purpose of these cheque exchanges the judge, who had shown an imperfect understanding of the transactions in question, had overlooked their commercial effect and purpose which was consistent with the evidence of Ho, and also with the evidence of Chapman that he was concerned to get rid of all the cheque discounting financing of King's.

193. On this important matter it seems to me that the judge was fully entitled to accept the evidence of Etches and draw the inferences he did from the cheque exchanges that began immediately after the issue of the Kazan debenture in the absence of any explanation or reason from Emily Wong or Ho or from any other possible witness for Kazan for using such an artificial and complicated method to achieve the limited commercial end contended for by Kazan at the hearing below, the adverse inference drawn by the judge on the invitation of the liquidators seems to me unavoidable. For my part I have no difficulty in accepting the submission of Mr Kaplan for the liquidators, that if the sole objective of King's on and after the 18th June 1986 had been to wind down the post-dated cheque discounting system of loans, then that objective could have been achieved far more simply without any mutual paymants, by cancelling all the understanding post-dated cheques and converting the Group 2 and 3 loans into one loan with no interest liability and no fixed repayment date.

194. I accept that Mr. Swaine was able to show that when referring to the evidence of Etches the judge seems to have been confused regarding the distinction between the manner in which on the one hand the post-dated cheque discounting system  operated in respect of the Group 2 and 3 loans without any cheques being actually presented and cleared, whereas, on the other hand the cheques exchanged between the companies after the issue of the Kazan debenture were current cheques which were actually presented and cleared. However, what mattered was the effect of the change of procedures and the implications arising from the cheque exchanges following the issue of the debenture. The evidence of Etches dealt with these matters with convincing clarity.

195. One of the matters which loomed large below and was the subject of a considerable volume of oral evidence was that the Kazan debenture secured both the past indebtedness ($12.4 million) of King's to Kazan and all future indebtedness. Mr. Swaine contended that the evidence showed that the security for past indebtedness of King's constituted by the Kazan debenture had not been sought by Kazan and was not intended by King's. He called it a "windfall" which could not constitute a fraudulent preference.

196. This argument depended on the evidence of Roger Wong. Although he had said under cross-examination that Madam Lau had been pressing to know the fate of the proceeds of sale of her  Conduit Road property, he also said that C.K .Wong had at no time pressed for security for the earlier unsecured debts of King's when the question of the Kazan debenture had been under consideration. According to Roger Wong neither he nor anyone else concerned with the management of King's had instructed Chapman to make the Kazan debenture secure past indebtedness King's to Kazan. If Roger Wong was to be believed no one concerned on behalf of King's was even aware of the terms of the debenture.

197. Chapman's evidence was of no assistance on this point. He had adapted the Kazan debenture from the draft he had prepared for NCB. He had kept no attendance note or record of his instructions for the debenture and he could not recall specific discussion about the provision for an "all moneys" debenture, nor could he say if the terms of the debenture were the result of his being under pressure at the time.

198. However Chapman was able to recall that he had discussed with Roger Wong whether or not the security constituted by the proposed Kazan debenture to be given to a related company would be valid and he had explained the effect of sections 266 and 267 of the Companies Ordinance to him.

199. The judge rejected the suggestion of Mr. Swaine that the evidence justified the conclusion that the Kazan debenture was framed to secure the past indebtedness of King's to Kazan as a result of some blunder or inadvertence on the part of Chapman. This he was entitled to do, particularly as Chapman was not a potential "blundering, attorney's clerk" but a specialist in insolvency law and a partner in a leading Hong Kong firm of solicitors. In impliedly rejecting the evidence of Roger Wong that the Kazan debenture was only intended to secure future advances from Kazan to King's the judge was making a decision based on his assessment of Roger Wong's credibility and it is not for this court to question such a decision which is consistent with the indication by the directors of King's in the minutes of their meeting dated the 14th July 1986 that they had approved the Kazan debenture after "deliberate consideration" of its terms.

200. There is no suggestion in the minutes that Kazan had demanded security for past advances (in addition to security for future advances) as a quid pro quo for making future advances. The evidence of Roger Wong was that Kazan had made no such demand through C.K. Wong. Chapman was not told of any such demand. Once the possibility of a blunder by Chapman is eliminated, as it was by the judge, the "windfall" argument fails and the reasonable inference is that the security for past indebtedness of King's to Kazan was volunteered by the company. The implications on the fraudulent preference issue are obvious.

201. The judge made it clear in his judgment that he did not regard Roger Wong as a reliable witness and that he was not impressed by Ho whom he did not consider had said anything that detracted from the evidence of Etches. I accept that the data produced by Ho was consistent with Roger Wong's evidence that the cash flow of the company had improved in June and July 1986 but ultimately the case for Kazan depended on the credibility of Roger Wong. Ho's attempts to support Roger  Wong's contentions that $500,000 had been genuinely lent to King's by Kazan between Friday the 20th and 23rd July 1986 cannot have impressed the judge, particularly in the light of Kazan's concession that it could not satisfy the requirements of section 267 of the Companies Ordinance regarding the floating charge constituted by the Kazan debenture.

202. In my judgment there was nothing in the evidence of Chapman which can be relied on to fault the  judge's rejection of Roger Wong's evidence on the issue of fraudulent preference. Indeed some of Chapman's evidence indicates that he was made to believe that the purpose of the Kazan debenture was to obtain immediate financial support and not merely the availability of future advances as and then required.

203. I have borne in mind that Chapman was adamant that between April 1986 and the liquidation of King's in July 1986 he never doubted the genuine concern of the Wong family to try to save the company and that he had no reason to doubt that they wished to inject further finance into King's. He had insisted under cross-examination that his understanding at the time the issue of the debenture to Kazan was discussed had been that King's could not continue business without immediate financial support and that the family, through Kazan, would be prepared to inject interim tinance into Kings.

204. However, Chapman had been dealing with Roger Wong and Emily Wong. The former was responsible for the restructuring arrangements of the company, the latter was in charge of the daily financial affairs of the company. Chapman saw her as the financial controller. It was from Roger Wong and Emily Wong that Chapman must have obtained his understanding that, at the time he was consulted about the Kazan debenture, the need of King's for interim finance was immediate and that Kazan was prepared to meet such immediate need. There was no evidence that Chapman had any direct knowledge regarding the cash flow problems of King's at the material time.

205. Despite Chapman's understanding, derived from Roger Wong and Emily Wong of the immediacy of the need for bridging finance at the time the Kazan debenture was issued, no effective advances were ever by Kazan to King's after the issue of the debenture because, as Roger Wong put it, they were able to muddle through with the benefit of improved cash flow and trade receipts and by holding off creditors, Roger Wong said that he was unable to explain the payments between the two companies after the 17th June 1986 because his wife Emily Wong had been in charge of the day to day finances of the company. She was not available to give evidence and Ho, the accountant, could suggest no explanation.

206. Mr. Swaine criticised the judge for commenting that Kazan had not called the directors of King's who had approved the Kazan debenture on the 14th July 1986. I do not consider such criticism justified. The liquidators were, in my judgment, entitled to rely on the cogent evidence of Etches, supplemented by that of O'Driscoll, which was in itself sufficient to establish a strong prima facie case of fraudulent preference without any additional evidence from the directors in question who were all related to C.K. Wong and Roger Wong. Likewise the absence of evidence from Emily Wong due to medical reasons was not to be held against the liquidators' case. Furthermore there was no suggestion that she would have been able to rebut the inferences the liquidators sought to draw from the exchange of cheque payments between King's and Kazan after the issue of the Kazan debenture nor was any application made to the court for the admission of any affirmation evidence of Emily Wong in the exercise of the discretion of the court under order 38 rule 2(3): see In re A Debtor⁽⁵⁾ per Buckley L.J. at pp. 1516A-B and 1519A-B.

207. Much time was spent below considering the implications, if any to be drawn from the decision not to register the debenture immediately and not to disclose it in the Ernst & Whinney report. The evidence of O'Driscoll indicates that the question of non-disclosure in the Ernst & Whinney report did not arise until the 26th June 1986 when O'Driscoll and Crawford attend a meeting with Chapman and Roger Wong at Chapman's office. The evidence of Chapman indicated that the question of delaying registration of the debenture arose at about the same time as non-disclosure was discussed, but O'Driscoll's evidence was that he was never consulted about delaying registration. The proceedings were concerned with the intentions of King's on the 17th June 1986 when the Kazan debenture was issued. The matters of delayed registration and temporary non-disclosure of the debenture were therefore relevant only as to the credit of the witnesses concerned.

208. For my part I entirely agree with the judge that the delaying of registration and disclosure of the debenture amounted to a deliberate attempt to mislead the creditors on the part of Roger Wong. It detracts materially from his credit as a witness. Although the Ernst & Whinney report did not relate to the finances offing's beyond the 31st May 1986, it was intended to he used to give the creditors a candid appraisal of the financial position of King's for the purposes of debt restructuring proposals being laid before the creditors. It goes without saying that suppression of the truth is as wrong as positive statement of untruth. By concealing the existence of the debenture by non-registration alone King's was, whilst complying with the letter of sections 80 and 81 of the Companies Ordinance on the advice of Chapman, concealing from creditors, who were at the time either giving indulgence or being asked to give indulgence to King's, the fact that another Wong family company had been given the security of the debenture, by way of fixed and floating charge, in respect of an existing debt of $12.4 million which hitherto had been unsecured except to the extent of $1.2 million.

209. Bearing in mind the fact that the Ernst & Whinney report indicated that unsecured creditors could expect to receive a dividend of less than one cent if King's were wound up, it is not difficult to guage the reaction of such creditors if they had come to know, by search of the Companies Registry or by disclosure in the Ernst & Whinney report, about the Kazan debenture, the timing of its issue and the family connection between King's and Kazan. The position would have been further aggravated if King had also disclosed that no advances had been made by Kazan to King's subsequent to the issue of the debenture.

210. The likelihood of these consequences must have been obvious to Roger Wong when he proposed delaying registration and disclosure of the debenture to creditors. Indeed it was the likely consequences which were the explanation for the concealment. But it was sought to justify the concealment on the footing that the restructuring scheme itself required a debenture to be issued for the benefit of the creditors who were to fund King's under the scheme. It was always contemplated by King's that when the committee of creditors had been set up (after the agreement in principle to the restructuring scheme had been obtained following the creditors meeting) the debenture would have been disclosed with the proposal that it should be released to or shared with those creditors who would agree to provide finance to King's under the restructuring scheme. Chapman qualified his evidence on this aspect of the matter by adding that it would be for Kazan to decide whether or not it would agree to such release or sharing of its security.

211. Thus it was contemplated that the creditors were first to be persuaded to agreeing principle to a restructuring scheme, involving the indulgence of a moratorium, on a false basis and, then to be put in the position where if they did not agree to the scheme after disclosure, Kazan would be left with all its  indebtedness secured whilst the unsecured creditors would receive, in effect, nothing. Given that the judge found that the Wong family were genuinely, albeit unrealistically, seeking to save King at the time it is not difficult to see why Mr. Kaplan described the Kazan debenture as a '"back pocket" debenture." In my judgment, the conduct of Roger Wong in initiating the proposal to conceal the Kazan debenture as long as possible richly deserved the censure it received below and was rightly regarded as a factor adverse to his credit generally as a witness.

212. His conduct was not rendered any more worthy of credit by reason of his having obtained the prior approval of O'Driscoll to the non-disclosure of the debenture to the creditors and that of Chapman to such non-disclosure and to the delaying of registration of the debenture. In the case of O'Driscoll, his evidence makes it clear that he was not fully informed as to the extent of King's indebtedness to Kazan and as to the age and purposes of the latter company. His evidence also makes it clear that had he known at the time the Ernst & Whinney report was prepared that when the Kazan debenture was issued King's was indebted to Kazan to the extent of $12.4 million he would have insisted on the disclosure of the debenture to the creditors.

213. Mr. Swaine relied on the judge's finding that the Wong family desired to save King's and that genuine efforts were made with the assistance of Chapman's and O'Driscoll's firms to achieve a debt restructuing plan for the company. However he contended that the judge had concerned himself with irrelevancies when he pursued the question whether the Wong family's or Chapman's hopes of achieving the necessary finance for and the creditors' agreement to the company's debt restructuring proposals were justifiable.

214. In particular it was contended that the judge fell into error when he concluded that there was only a "pious hope" that NCB or any other bank would provide King's with the requisite funds when he rejected Chapman's evidence that there was still a chance, albeit a slim chance of a successful restructuring scheme and when he held that the hope of achieving such a scheme was unrealistic.

215. There was force in these criticisms and in the reference in the judgment to "the vain hope" of effecting restructuring which the judge held to be the reason or the deliberate decision not to disclose the Kazan debenture to the creditors prior to the creditors' meeting, fixed for the 15th July 1986. As Mr. Swaine rightly contended, the only relevant question was whether the hope of successful restructuring was genuine, because the issue of fraudulent preference is to be determined by reference to subjective intention of King at the date the Kazan debenture was issued. The fact that a genuine hope for such a scheme may have been unjustified, and in that sense vain, is not relevant once the hope is held to be genuine. This was the principle applied in Re M'Innes⁽⁴⁾

216. However the judge's references to the pious hopes for further finance and to the unjustified hopes for the achievement of a restructuring scheme, which he had found to be genuinely sought, came in the preliminary stages of his judgment, and the "vain hope" passage occurred when he was dealing with the reasons for the concealment of the debenture some appreciable time after the issue of the debenture. He actually cited Re M'Innes⁽⁴⁾ when he made the earlier findings in question in the course of rejecting Mr. Swaine's contention. That the hope of the company may have been "over sanguine".

217. I do not understand the basis for the judges decision on the fraudulent preference issue concerning the Kazan debenture to be wholly or substantially (if at all) arrived at in reliance upon his finding that the hopes of the Wong family and Chapman for a successful restructuring scheme, although genuine were not, with hindsight, justified. The real reason for the decision seems to me to be based on the judge's acceptance of the evidence of Etches supplemented by that of   O'Driscoll as being sufficient to raise a prima facie case of fraudulent preference, and the rejection of the evidence of Roger Wong supported by Ho and Chapman, not withstanding the judge's finding that the Wong family had a genuine hope of saving the company.

218. Put another way, the judge's finding of fraudulent preference is in my judgment wholly sustainable by reference to the matters subsequently referred to in his judgment, including his acceptance of the evidence of Etches and all its implications.

219. Then there were two matters which Mr. Swaine contended were neutral and which the judge had wrongly relied on in his judgment for the liquidators. One matter was the resignation of C.K. Wong from Kazan and Hyperion which coincid with the issue of the Kazan debenture. The judge held that this was obviously done to give the impression that C.K. Wong was no longer concerned with Kazan and Huperion. Mr Swaine argued that C.K. Wong action was consistent with a bona fide decision taken, not to give a false impression but to give the true impression that the beneficial ownership of Kazan to King's came from funds belonging to her and not to C.K. Wong. On this point he relied on Roger Wong's evidence that C.K. Wong had resigned because he did not want people to be confused into thinking that he was the owner of Kazan.

220. This seems to me, as I apprehend it did to the judge, to be a disingenuous argument. After all Roger Wong's evidence was that the Kazan debenture had been issued after he and C.K. Wong (acting on behalf of Kazan because it was Madam Lau's company) had put their heads together and  decided that "we" did not want to throw good money after bad. There was no evidence that any director of Kazan other than C.K. Wong had anything to do with the negotiation of the Kazan debenture. Having negotiated the debenture on behalf of his wife's company Kazan, C.K. Wong who was going to be effectively relieved of his guarantee of part of King's indebtedness to Kazan if the debenture was valid, proceeded to resign his directorships of Kazan and Hyperion, in order, it is now contended to avoid the impression being given that he was the owner of Kazan and that it was his money which was being paid to King's through Kazan. In my judgment the only realistic conclusion in all the circumstances is the one arrived at by the judge.

221. The other matter which Mr. Swaine submitted the judge should have treated as neutral was the fact that Chapman had given advice to Roger Wong concerning sections 266 and 267 of the Companies Ordinance. The judge referred to this matter in his judgment and added that he was satisfied that it was after receiving this advice that Roger Wong decided that the Kazan debenture should not be disclosed in the Ernst & Whinney report. The matter of sections 266 and 267 was not raised at all when Roger Wong gave evidence.

222. My understanding of the evidence of Chapman is that he explained sections 266 and 267 to Roger  Wong when the question of the validity of the proposed Kazan debenture was discussed in circumstances where Chapman's attitude was that it was a matter for King's to decide whether or not to issue the debenture and he, Chapman, was not advising Kazan or the Wong family. For my part I find the relevant passage in the judgment obscure, but, on any footing, the fact that Roger Wong was receiving advice at this time about the effect of sections 266 and 267 is material to the motivation of be company in relation to the Kazan debenture.

223. In all the circumstances I conclude that there was ample evidence to justify the judge's conclusion that the fixed charge constituted by the Kazan debenture constituted a fraudulent preference contrary to section 266 of the Companies Ordinance. He arrived at this conclusion after hearing and observing Roger Wong and Kazan's other witnesses in the witness box for substantial periods of time. Being unable to accept that the judge's decision is otherwise flawed I am, as Lord Evershed M.R. expressed himself to be in In Re Cutts⁽3) at p. 735, most unwilling to interfere with the judge's finding Accordingly I would dismiss the appeal on this issue.

(3) Payments by King's to Kazan within six months before the winding up of King's

(a) Payment of $1.567 million on the 7th July 1986

As already indicated when considering the evidence of Etches, the sum of $1.567 million was part of the larger sum of $2.017 paid to Kazan by King's on the 7th July 1986. The former sum had been paid by C.R. Wong to King's and was immediately paid by that company to Kazan. of the sum of $1.567 million $1.5 million was applied towards the reduction of the debt of King's to Kazan. The balance of $67,000 was treated as an interest payment.

The finding of the judge that the payment of $1.567 million constituted a fraudulent preference was challenged by Kazan on appeal but abandoned by Mr. Swaine during the hearing of the appeal because he considered that his grounds were not supported by admissible evidence from Kazan.

(b) Payment of an aggregate sum of $760,361.66 by King's to Kazan by way of interest between the 15th January and the 7th July 1986

224. The liquidators' claim for the repayment of $760,361.66 interest was not made when the summons was issued on the 14th November 1986 because the liquidators' investigations had not yet been completed. A claim for the total sum of interest paid during the relevant period (less the sum of $67,000 claimed separately as part of the$15.567 million mentioned at (3)(a) above) was foreshadowed in the affidavit of Etches filed on the 10th January 1987, and it was later introduced when leave was given on the 26th May 1987.

(i) The evidence on behalf of the liquidators

225. Etches exhibited a schedule of the interest payments which had been made at rates of between 1.8 and 2 percent per month during the relevant period. He pointed out that when the interest in question was being paid by King's to Kazan the debts of many other creditors were not being paid when they fell due or, in many cases, at all. He stressed the fact that during the relevant period King's had paid no rent to Winland in respect of the factory which represented King's most significant asset but in respect of which the company had been in arrears of rent to the extent of $4.995 million on the commencement of the winding up.

226. He referred to the passage in the Ernst & Whinney report where it had been mentioned that, although the factory lease had been valued at $21 million, no value was put on it in the report because it was subject to forfeiture. Etches also deposed that trade creditors were not being paid at the material time and that King's had been substantially in arrears with payment to water Authority in respect of essential supplies of water.

227. Etches stressed that there was no evidence of any pressure being put on King's by Kazan to repay any sums due and that King's had continued to make payments to Kazan at a time when it was clearly insolvent and when payments essential for the continuation of King's business were not being made. He also deposed that there was no evidence that Kazan, a licensed moneylender, had complied with the documentary requirements of the Moneylenders Ordinance (Cap. 163).

228. Replying to affirmation evidence of Ho and Roger Wong suggesting that Kazan had been treated no differently in the matter of interest payments than other creditors of King's, Etches maintained that on the whole, with the notable exception of payments to Winland (which was closely connected with King's), the payments of interest referred to in a schedule which Ho had prepared had been to bankers or recognised finance companies. He mentioned that the liquidators were considering the possibility of claiming to recover the interest paid to Winland during the relevant period on the grounds of fraudulent preference.

229. He returned again to the subject of the lease of the factory premises of King's and drew attention to the fact that when interest was being paid to Wong family companies, namely Kazan and Winland, the directors of King's had been failing to take steps to protect the lease of the factory which was the most valuable asset of the company. He deposed that by March 1986 King's had been already a year in arrears of rent due to Winland and that unless King's protected the lease it was impossible for King's to continue as a going concern, with or without any proposed restructuring.

230. It was pointed out to Etches under cross-examination that on the 20th May 1986 Winland had published the announcement in the Hong Kong Standard, already referred to, to the effect inter alia that it had agreed in principle to the debt rescheduling scheme of King which was based on an eight year plan during which Winland would be required to let the factory to King's continuously and not to distrain for rent. The transcript does not indicate any reaction from Etches about this press annoucement and the matter does not seem to have been the subject of any re-examination.

(ii) The evidence on behalf of Kazan

231. Ho exhibited a schedule which he affirmed was based on entries in the King's ledger and demonstrated that King's had during the relevant period made regular payments of interest to many of  its creditors. His schedule contained a list of 15 creditors, including Kazan and Winland. The other 13 named creditors all appear to be banks or financial concerns except Yu Fat Piecegoods Company and Thai East Textile Limited who respectively received payments of interest in June ($48,101.19) and February ($15,847.40) only.

232. In his second affirmation and in his oral evidence Ho explained his understanding of the post-dated cheque discounting system and the manner in which interest was paid in advance by King's to Kazan under that system. As already indicated in the earlier part of this judgment he also mentioned that after the 22nd May 1986 Kazan as part of the informal moratorium had agreed not to charge interest until the 31st October 1986 on the Group 2 loan. He affirmed that the fall in interest paid by King's to Kazan in June and July was attributable to this agreement because interest had only been paid on the Group 3 loan which had been made in April and May 1986.

233. His evidence, which does not seem to be open to challenge, was that no interest had been paid by King's to Kazan on any of the payments which were made to King's by Kazan after the issue of the Kazan debenture on the 17th June 1986. In this connection it seems clear from the analysis of the accounts and records by Etches that interest paid by King's to Kazan after the 17th June 1986 was attributable to the last stage of the cheque discounting roll-over system (at least regarding the Group 3 loan) which overlapped the 17th June 1986 until all the post-dated cheques had been cancelled and followed by cheque exchange payments of equivalent amounts between the two companies.

234. Thus an example can be identified by reference to Etches affidavit filed on the 10th January 1987 in which, at paragraph 45 he refers to a cheque (No. 794602) issued by King's on the 23rd April 1986 (when King's received an advance from Kazan as the second payment in the Group 3 loan) drawn on its account with Liu chong Hing Bank Limited in favour of Kazan in the sum of $2 million. This cheque was post dated to the 23rd June 1986. Etches pointed out that on the 23rd June 1986 (i.e. after the issue of the Kazan debenture) cheque No. 794602 was cancelled and replaced by cheque No. 548348 in the same amount of $2 million drawn by King's on its account with Bangkok Bank Limited in favour of Kazan. This cheque was post-dated to the 8th July 1986, so that there would have been interest due in advance, under the old system, for 2 weeks when this cheque was issued.

235. In fact interest payments in respect of this cheque are identifiable in Etches schedule of interest payments which shows a payment of $20,000 interest (at the rate of 2 per cent on an amount of $2 million) in respect of the period between the 23rd June and the 8th July 1986. Later in the same affidavit, at paragraph 48, Etches describes how cheque No. 548348 came to be cancelled without roll-over because the sum in respect of which it was drawn became involved in the new cheque exchange mutual payment system adopted by the two companies.

236. Roger Wong affirmed that in being paid interest Kazan was not in any way treated differently from other creditors of King's and that Kazan only differed from other creditors in that it continued to lend money to King's when all others declined to do so. When he gave oral evidence he reiterated that Kazan had been paid interest by King's during the relevant period because Kazan had lent critical money to enable King's to survive. They had been the ones, he said, who were willing to support King's during the most critical time from April onwards. Asked by Mr. Swaine what he thought would have happened if King's had not paid the interest to Kazan he replied - "Well, who will lend money without paying interest."

(iii) The judge's findings

237. The judge dealt with this matter in the following passage of his judgment:

"During the period from the 15th January 1986 to the 7th July 1986, a sum of $760,361.66 was paid by Kings to Kazan by way of interest. It was contended that the interest was paid because interest was also being paid to other banks and financial institutions yet other creditors were receiving no payments. However, Kazan being a Wong family company was clearly not hostile to Kings and would not be expected to apply pressure as in the case of the banks. In those circumstances, the payments clearly amounted to a fraudulent preference and are therefore void."

(iv) The appeal

238. Mr. Swaine argued on appeal that the error of the judge in finding a fraudulent preference was apparent on the face of his decision, because, whilst proof that a Payment was made under pressure brought to bear upon the debtor, and was therefore involuntary, will "disprove" a claim of fraudulent preference, the judge had erred in applying the converse of this principle, namely that the proof of no pressure will suffice to establish a fraudulent preference.

239. Reliance was placed on the passage in Halsbury's Laws of England, 4th edition, Vol. 3 para 914 where, after stating that "In order to ascertain whether the giving of a preference was the principal or dominant view in the debtor's mind, the test to be applied is: was the act done voluntarily?", it is asserted that:

"Where the bankrupt has made a voluntary payment which in fact gives the creditor a preference, the onus is still on those who claim to avoid the transaction to satisfy the court that the real intention was to prefer."

240. In my judgment the approach of the judge in concluding that there was fraudulent preference was, with respect, erroneous, because to the extent that there was actual preference, he appears to have based his decision that at the material times the dominant intention of King's was to prefer, solely on the absence of pressure by Kazan on King's for payment of the interest. He does not appear to have given sufficient consideration to whether in the light at all the relevant circumstances, the only proper inference to draw, despite the absence of pressure, was that King's had a dominant intention to prefer at the material time.

241. For my part, I respectfully adopt the view expressed by Lord Evershed M.R. in Re Cutts⁽³⁾ to the effect that evidence of pressure is not the only way to negative a dominant intention to prefer. At page 734 he observed:

"Though the question of pressure in some form or another has, in the reported cases, often been the crux of the matter, it is plain that an inference of intention to prefer may be displaced in many other ways than by showing that the debtor acted under pressure.

242. I also accept the law as accurately stated in the passage cited by Mr. Swaine from Halsbury. The matter was put in the same way by Pennycuick J. in In re F.L.E. Holdings Ltd.⁽⁶⁾ in the following dictum at p. 1420D-E cited in Williams and Muir Hunter oh Rankruptcy, 19th edition at p. 352:

"... it does not follow because there is no pressure or consideration that the dominant intention is to prefer the other party. Pressure and consideration will be conclusive that there is not a dominant intention but the converse is not so."

243. Given that Kazan was a related company which Roger Wong had, acknowledged would not harm King's and that trade creditors and suppliers were from time to time left unpaid when Kazan was receiving interest payments, nevertheless there was no evidence that Kazan was being treated in any way differently from any bankers or other creditors who had made interest bearing loans to King's. Some of those creditors had advanced money by the same cheque discounting procedure as had operated between King's and Kazan. The interest rates paid by King's to Kazan were high but there was no evidence that they were higher than the rates payable to other loan creditors.

244. This was not therefore a case where an insolvent company was deciding, to prefer one or only a few creditors at the expense of all the other creditors All the loan creditors who had made interest bearing loans were treated in the same way In so far as they were all preferred as a class as against creditors to whom the company owed non-interest bearing debts there was an advantage to the company in making the interest payments to keep the company going and prevent its indebtedness from increasing.

245. I accept that whereas, in the case of the payments of interest to banks and unrelated creditors a dominant intention to prefer can be displaced by express or implied pressure no such pressure existed in the case of Kazan. If the question of pressure is regarded as the decisive test as the judge regarded it in this case, it follows that his finding of fraudulent preference necessarily implies that at all material times when interest was being paid to other loan creditors according to their entitlement, King's should have discriminated against Kazan (which was entitled to interest on  its loans) solely because it was a Wong family company which would not harm King's by driving it into liquidation in default of payment of interest, so that any payment of interest to it would be a fraudulent preference. This seems to me to ignore the advantage to the company in keeping up interest payments as part of the general purpose of keeping going and preventing the company's indebtedness from mounting.

246. If interest had been paid to King's and not to any other loan creditors entitled to interest at the material time, the position would clearly have been different. However under the circumstances pertaining in the present case it seems to me that the fact that King's was treating Kazan in the same way as the other loan creditors during the material period was cogent evidence tending to displace an inference of intention to prefer.

247. Furthermore, Mr. Swaine relied, rightly in my judgment, on the system of the post dated cheque discounting facility and on the fact that the system (which was also operated by other creditors of King's) had been in existence for some time before 1986, some of the items in the account having been outstanding since 1980. As already explained, interest on the successive short term loans was paid in advance when each advance was made.

248. Roll-over was achieved by the payment of further interest in advance when a post-dated cheque matured and was surrendered and replaced by another post-dated cheque for the same amount as the cheque it replaced.

249. Thus the payment of interest to advance was an integral part of the manner in which the loans by Kazan to King's were made or extended under the post-dated cheque facility. When interest payments were made during the relevant period in 1986 King's was continuing with a system which had been in force for years and there was considerable force in Mr. Swaine's contention that the roll-over system had continued in the ordinary course of business during the relevant period and not with a dominant intention to prefer.

250. The importance of the system employed to operate the cheque discounting facility is also apparent when consideration is given to the Group loan of $5.55 million which was made up of advances made by Kazan to King's between the 23rd April and the 19th May 1986. Thus on the 23rd April 1986 Kazan lent King's $2 million and on the same date King's paid Kazan $81,333.33 as interest in advance in respect of the period from the 23rd April to the 23rd June 1986. That cheque was later rolled over on the 23rd June to the 8th July 1986 in accordance with the established system.

251. In my judgment it would be unrealistic to hold, as the judge has impliedly done, that when King's paid Kazan the sum of $81,333.33 on the 23rd June 1986 (when Kazan lent King's $2 million to keep it going at a time when it could not pay its water bill) the dominant intention of King's was to prefer Kazan to any of its other creditors. The dominant intention must surely have been to keep the company going with the benefit of the loan made by Kazan subject to the payment of interest.

252. The liquidators had relied strongly, in the evidence of Etches, on the substantial arrears of rent that built up in 1986, but the weight to be given to that matter was greatly lessened when it became apparent that the company's landlord, Winland, had issued a press announcement on the 20th May 1986 indicating that it would not oust King's or distrain for rent during the relevant period.

253. I have borne in mind that the second restructuring report dated the 25th Apri1 1986 prepared by Ho envisaged the raising of a loan of $9 million by C.K. Wong for King which was to be a subordinated interest free loan, but that was part of a scheme which never materialised. I have also borne in mind that Kazan conceded at the hearing of the appeal that the interest payment of $67,000 paid by King's to Kazan on the 7th July 1986, (being part of the payment of $2.017 million made on that date to Kazan) constituted a fraudulent preference. However the concession was related to a similar concession regarding $l.5 million paid to Kazan after being received by King's together with the. $67,000 from C.K. Wong. The concession was made for want of admissible evidence and it related to the last payment of interest and the only payment made in July. I do not therefore consider that this concession should weigh materially in relation to the motivation to be attributed to the earlier interest payments.

254. The fact that fraudulent preference has been established in relation to the Kazan debenture should not in itself be regarded as indicative that interest payments made after the 17th, June 1986 were likewise motivated by a dominant intention to prefer. The transactions should be considered separately in the light of the circumstances under which they were effected.

255. Having held that the judge did not adopt the right approach on the issue of fraudulent preference in relation to the relevant interest payments, I conclude that, in the light of all the relevant circumstances, the liquidators did not discharge the onus of establishing that hen King's made the payments in question it was motivated by a dominant intention to prefer I would therefore allow the appeal of Kazan in respect of those payments.

The issues under section 182 of the Companies Ordinance

256. Section 182 of the Companies Ordinance provides that :

"In a winding up by the court, any disposition of the property of the company ... made after the commencement of the winding up, shall, unless the court otherwise orders, be void."

257. In the present case the winding up of King's commenced on the 15th July 1986. King's had paid $380,000 to Kazan on the same date. On the 24th July 1986 King's had paid Kazan $170,000. The judge upheld the claim of the liquidators that both these payments were void under section 182 and ordered repayment by Kazan to the liquidators.

(1)    The payment of $380,000

258. Initially the liquidators relied simply on the fact that this sum had been paid after the commencement of the winding up of King's. Kazan sought to associate the payment with a payment of a similar amount which Kazan had made to King's on the 16th July 1986 (i.e. the day after the payment, of $380,000 by King's to Kazan) for the purpose of assisting King's to pay its liability for wages. Roger Wong's evidence was to this effect. He exhibited a letter dated the 15th July 1986 from Kazan to King's enclosing cheques for $300,000 and $80,000 dated respectively the 15th and 16th July which the letter expressed to be advances to King's for the settlement of its accrued wages and salaries.

259. However this evidence was countered by detailed evidence from Etches to demonstrate that the payment of $380,000 made by King's to Kazan on the 15th July was not related to the payment of the same amount by Kazan to King's on the next day He was able to show by reference to the books of both companies that the payments were not related as alleged by Roger Wong.

260. The payment of $380,000 by King's to Kazan on the 15th July had been effected by three cheques dated the 14th July drawn on King's account with the Bangkok Bank in the sums of $200,000, $50,000 and $130,000 respectively. Each of these cheques was the subject of entries in the books of King's indicating that they were intended to discharge the liability of King's to Kazan for specific post-dated cheques previously drawn by King's in favour of Kazan in relation to the Group 2 loan of $5.650 million.

261. Likewise the books of Kazan showed the payments in question to be entered as re-payments of the former loan whereas the payment by Kazan of $380,000 to King's on the 16th July 1986 by two cheques for $300,000 and $80,000 respectively was the subject of debit or "payment" entries in the Secured Loans A3(b) account.

262. Faced with this formidable evidence leaving no doubt that there had been a disposition of $380,000 by King's in favour of Kazan on the 15th July, Mr. Swaine was reduced to arguing that irrespective of whether or not the payment to Kazan was a void disposition the liquidators were not entitled to an order for repayment. He sought to rely on the evidence of Etches who had, when seeking to demonstrate the artificiality of the self-cancelling mutual payments between the companies, deposed that the payment of $380,000 by King's on the 15th July had been "re-imbursed" by Kazan on the next day Mr. Swaine argued that there was thus no disposition of the property of King's subsisting at the time of the liquidators' application or thereafter.

263. I can see no substance in this argument. The judge rightly accepted the evidence of Etches as proving a clear disposition of the property of King's on the 15th July. By then the winding up of King's had commenced. Section 182 therefore applied and rendered the disposition void unless the court otherwise ordered. No application was ever made to the court to validate the disposition.

264. In any event such an application would only have had any claim to merit if there had been credible evidence that the payment of $380,000 by Kazan to King's on the 16th July was a repayment of the payment of a like sum by King's to Kazan on the previous day. The evidence, based on the books of King's and Kazan was all the other way. The evidence of Etches about "re-imbursement" was clearly intended only to make the point that Kazan had not made any effective new loans to King's after the issue of the Kazan debenture.

265. I would therefor dismiss the appeal against the judge's order for repayment of the $380,000 in question.

(2)          The payment of $170,000

266. It was common ground that the sum of $170,000 which was paid to Kazan by Emily Wong on the 24th July 1986 was paid in the form of cash provided by C.K. Wong. Etches gave detailed evidence by reference to the books and accounts of Kazan to show that both companies had recorded the payment of $170,000 as having been made by King's to Kazan in discharge of the post-dated cheque securing the last outstanding part of the Group 2 loan of $5.65 million.

267. The cheque in question had been drawn on the 14th July 1986 in favour of Kazan on King's account with the Liu Chong Hing Bank and post-dated the 18th July 1986. It had been cancelled on the 24th July 1986 when the cash payment of $170,000 was paid to Kazan who had issued a receipt to King's on the same date acknowledging that the payment had been made "in repayment of outstanding note payable". Kazan's Cash/Bank Book recorded the payment of the money into Kazan's account with the Bangkok Bank on the 25th July and on the same day a credit entry had been made in the Kazan Loan Register in respect of King's former indebtedness to Kazan.

268. Ho's affirmation evidence stressed that the entries in the cash account of King's on the 24th July 1986 relating to the payment of $170,000 were accompanied by a note that the money had been received from C.K. Wong and paid to Kazan. His evidence was to the effect that, as the money had come from C.K. Wong and been used to reduce the debt of King's to Kazan, there had been no depletion of the funds of King's. Under cross-examination he confirmed that C.K. Wong had guaranteed the account of King's with the Liu Chong Ping Bank, so that he would have been liable as guarantor if the post-dated cheque for $170,000 had been presented and dishonoured.

269. The substance of Kazan's case lay in the evidence of Roger Wong. His evidence was to the effect that the sum of $170,000 in question had not been paid to Kazan by King's because it had always been the property of C.K. Wong and King's had never owned or possessed it.

270. He affirmed that on or prior to the 24th July his father had withdrawn $170,000 from his personal account with the Liu Chong Hing Bank and had instructed Emily Wong "to apply the funds so as to reduce his indebtedness with King's and Kazan". He went on to affirm that he had been consulted about this by his wife who intended that the sum should be paid into King's and had given instructions for a credit entry for that sum in the books of King's. According to Roger Wong he then told Emily Wong that C.K. Wong was no longer indebted to King's and consequently no payment was ever made to King's He added that it would appear that the matter was resolved in the books by a series of accounting entries.

271. Roger Wong enlarged on this evidence when he gave oral evidence. Under cross-examination he said that he believed, on information-from his wife, that she had gone with C.K. Wong to help him withdraw the $170,000 from the bank in cash and that C.K. Wong had given her instructions to pay off   "his debts of either King's or Kazan". He added that C.K. Wong had been indebted to both companies. Asked if C.K. Wong had therefore been indifferent as to whether Kazan or King's were paid he first answered in the affirmative but when pressed again he replied:

"Well, I think my father should pay King's first if he is indebted to King's. If he is not indebted to King's than he should not be thinking of that."

272. Both in chief and under crass-examination Roger Wong explained that before his wife spoke to him about the $170,000 he had learned that NCB had sold for over $8 million, 7.4 million Winland shares which C.K. Wong had deposited to secure King's indebtedness to NCB amounting at the time of the sale of the shares to some $40 million. According to Roger Wong he had understood that the value of the shares thus sold were more than sufficient to cover C.K. Wong's debt to King's. That debt was stated to be $8,552,662 in the Ernst and Whinney report and had been reduced by $1.567 million on the 7th July 1986.

273. Under cross-examination Roger Wong attributed the failure to rectify the accounts of Kings regarding the payment of $170,000 to the confusion that prevailed on the 24th July 1986, by which time the Official Receiver was at the company's premises and the books were locked up. He said that when his wife paid the money to Kazan she was just paying off C.K. Wong's debt to Kazan. When he was taken through the relevant entries in the books of Kazan which were consistent with those of King's and asked to explain why Kazan were inconsistent with his evidence, he replied that Kazan's books were wrong "because my wife went to Kazan to pay the cash and they thought she was from King's as she had been dealing with the affairs of King's at that time". Asked whether Emily Wong would not have made the position clear namely that the payment was in respect of the indebtedness of C.K. Wong and not that of King's, Roger Wong said he thought his wife had been quite confused.

274. When Etches was cross-examined he confirmed that C.K. Wong had proved for about $4 million in the liquidation and was contending that King's owed him money and not vice versa. Etches said that the proof had been rejected and that the matter was then under appeal. He accepted that C.K. Wong was claiming to be entitled to reimbursement by King's of the value of the Winland shares which he had deposited as security for King's debt to NCB and which NCB had sold.

275. The judge rejected Kazan's case that the $170,000 had been paid to discharge a debt of C.K. Wong to Kazan because the entries in the books of King's refuted this and because he had no hesitation in rejecting the evidence of Roger Wong which he found most unconvincing.

276. On appeal Mr. Swaine contended that the judge's appraisal of the evidence was wrong and that the reason given for rejecting the evidence of Roger Wong was unsound for my part, I am most unwilling to disturb the finding of the judge regarding the credibility of Roger Wong whom he had seen and heard being examined and cross-examined at considerable length in the witness box. Much of his evidence was in any event hearsay based on what he alleged Emily Wong had told him. There was no admissible evidence from her, nor was there any evidence from C.K. Wong whose motivation regarding the payment of $170,000 was crucial.

277. The absence of evidence from Emily Wong and C.K. Wong was due to medical reasons, but that  is not to be held against the liquidators. Ho's evidence was of no material value to Kazan case. In the event they were obliged to rely on the evidence of Roger Wong which the judge rejected in my judgment the judge was fully entitled, once he had disbelieved Roger Wong's evidence, to rely on the books of King's and Kazan as correctly recording the character and purpose of the payment of $170,000.

278. Mr. Swaine contended that the judge should have concluded that section 182 did not apply because the sum of $170,000 never became the property or came into the possession of King's, or alternatively that sum was impressed with a trust in the hands of King's to be paid to Kazan.

279. Mr. Kaplan contended that there was no evidential basis for this argument. I agree. The judge having rejected the evidence of Roger Wong, there was no evidence, other than the entries in the books of King's and Kazan regarding the motivation of C.K. Wong and the affected companies at the time the relevant payment was made.

280. Etches had confirmed that NCB had sold for over $8 million C.K. Wong's Winland shares which were security for the indebtedness of King's to Kazan. He had also confirmed that C.K. Wong had sought unsuccessfully to prove in the liquidation on the basis that he could set off his consequential loss against King's and that King's in fact owed him money. It was never contended by Mr. Swaine that these claims of C.K. Wong were indisputably valid. Mr. Kaplan contended they were not valid.

281. However Mr. Swaine made it clear that he relied on the existence of a genuine set off claim (whether valid or otherwise) by C.K. Wong to extinguish his indebtedness to King's. Roger Wong's evidence was that he himself considered that his father had such a claim at the time he spoke to Emily Wong about the $170,000 sum of cash. But there was no admissible evidence whatsoever that at the time Emily Wong received the $170,000 cash she was only instructed by C.K. Wong to pay it to Kazan on his behalf to discharge or reduce his indebtedness to Kazan. On the contrary, Roger Wong's evidence in his affirmation had been that his understanding from Emily Wong had been that she received the money with instructions to apply it "so as to reduce his indebtedness with King's and Kazan". When under cross-examination Roger Wong changed this to "either King's or Kazan".

282. At the very most the evidence of Roger Wong had been to the effect that he, Roger Wong, had formed the view that C.K. Wong was no longer indebted to King's and had, in effect, countermanded C.K. Wong's instructions. This evidence having been rejected, no evidential basis for the Kazan's case remained.

283. Then it was contended by Mr. Swains that in any event, if there had in fact been a payment of $170,000 to Kazan by King's, it was common ground that the money came from C.K. Wong. He emphasised that the liquidators by their own witness, Etches, had contended that the history of the transaction, supported by the relevant entries in the books of King's, showed that the receipt of the $170,000 was intended to be and in fact was utilised as repayment of part of the old indebtedness of King's to Kazan as then represented by the post-dated cheque for $170,000 mentioned above as issued on the 14th July 1986 and post dated the 18th July 1986. In the light of those admissions on behalf of the liquidators it was argued by Mr. Swains, in reliance on a line of authority beginning with Toovey v. Milne⁽⁷⁾ and ending with Barclays Bank Ltd. v. Quistclose lnvestments Ltd.⁽⁸⁾, that the judge should have found that the $170,000 was impressed with a trust, or a purpose in the nature of a trust, so that it never became the property of King's for the purposes of section 182.

284. However in all the cases cited by Mr. Swaine the facts indicated a sole purpose for the money paid to the debtor by the party subsequently claiming to recover it, in effect on the basis of a resulting trust arising upon the failure of the original purpose which, by implication, had precluded the money paid becoming part of the general assets of the debtor. In none of those cases was the payment made by a person who was or believed himself to be the debtor of the payee.

285. In the present case there was no admissible evidence that C.K. Wong had paid the $170,000 to King's through Emily Wong for the sole purpose of its being paid to Kazan to discharge the indebtedness of King's to Kazan on the footing that C.K. Wong was not making the payment through King's to Kazan in order to reduce his own indebtedness to King's in addition to discharging the debt of King's to Kazan. On the contrary the books of King's upon which the Ernst & Whinney report was based showed C.K. Wong as a debtor of King's to the extent of $8.5 million as at the 31st May 1986 and although C.K. Wong had reduced this liability by the payment $1.567 million to King's on the 7th July 1986, there was no evidence that when he gave the $170,000 to Emily Wong on the 24th July 1986 he believed himself no longer to be indebted to King's because he had a claim on the company after NCB had sold his 7.4 million Winland shares.

286. There was evidence that he subsequently proved unsuccessfully (subject to appeal)on this basis but that is a different matter. There was also the evidence of Roger Wong that when he discussed the $170,000 with Emily Wong he believed that C.K. Wong was no longer a debtor of but Roger Wong's evidence was rejected by the judge. I therefore conclude that Mr. Swaine's arguments cannot be sustained because they have no evidential basis.

287. I mention that at one stage the basis of the liquidators' claim to actual repayment of the sums of $380,000 and $170,000 was somewhat faintly questioned, in reliance on In re Leslie Engineers Co. Ltd.⁽⁹⁾ on the footing that section 182 was not concerned with providing a right of recovery and that questions of tracing arose. For my part I do not consider that there are any difficulties on the facts of the present case where the money was in each case clearly proved to be indentifiable as money of King's paid to Kazan. The payments having been rendered void under section 182 were recoverable by the liquidators as money had and received: c.f. Rank of East Asia Ltd. v. Rogerio Sou Fung Lam⁽¹⁰⁾ where at pages 191H - 193D the relevant principles were considered by another division of this court, in relation to payments by an insolvent company's bank to a creditor.

Conclusion

288. Accordingly I would allow Kazan's appeal in relation to the sum of $760,361.66 interest but dismiss it in. relation to all the other issues argued on the appeal. One of the issue raised by the notice of appeal concerned the award below to the liquidator was of costs on a common fund basis in support of the proposition that the normal basis of taxation of litigious costs of liquidation was the common fund basis Mr. Kaplan cited In re Nation Life Insurance. Co. Ltd.⁽¹¹⁾ which was applied by Hunter J. (as he then was) in American Express International Banking Corporation v. Johnson⁽¹²⁾ at p. 389 and by Jones J. in the unreported case of In Re Irish Shipping Limited⁽¹³⁾. No argument was raised by Mr Swaine in support of the appeal against the basis of costs awarded below, but although the issue was not expressly conceded, it was clearly not arguable. I would also dismiss the appeal on this issue.

289. There remains the respondent notice. This falls away in the event because the court proposes to dismiss the appeal against the judge's order invalidating the Kazan debenture and the respondent's notice only seeks relief if that part of the judge's order should be overturned on appeal.

SCHEDULE

KINGS DYEING & WEAVING FACTORY LIMITED

DETAILS OF ADVANCES FROM AND REPAYMENTS TO KAZAN

FOR THE PERIOD FROM 1.4.1986 to 25.7.1986   

* Group 3 loan repayment.

**Group 2 loan repayment.

Cons, V.-P. .

291. Whether a particular transaction was prompted by the dominant intention of a debtor to prefer one particular creditor above others is very much a matter for the judge of first instance.

292. My Lord has set out in full the substance of the evidence which was before the judge below, both by way of affidavit or affirmation and orally. It may be that the judge did not fully appreciate the changes made in the postdated cheque loan system after the debenture had been given, or it may be that he was not sufficiently careful when dealing with that aspect in his judgment. But given the whole of the evidence, and in particular that the judge accepted from Mr. Etches that the subsequent transactions served no possible commercial purpose - and Mr. Swaine has not persuaded me otherwise - and that the judge rejected Mr. Roger Wong's evidence that the idea for non disclosure came from Mr. Chapman, it seems to me that the judge's conclusion as to the debenture was inevitable.

293. However, while there can be no doubt that as from the 17th June Kings intended to prefer Kazan by way of security, it does not necessarily follow that at the same time, or even earlier, Kings intended to prefer Kazan by way of the advance payments of interest. Such payments were a normal practice of the company, adopted with regard to other lenders as well as Kazan. It is quite possible that King's did not direct its mind to the question at all, but simply paid the advances, and carried on doing so after the 17th June, without thought in the ordinary course of its business. As the judge observed with regard to the debenture, "if any doubt arises it must be resolved in favour of (the recipient)". With respect he overlooked the possibility of doubt with regard to the payments of interest and proceeded solely, and as my Lord has observed, erroneously, upon the absence of pressure from Kazan. I agree with my Lord that the liquidators have not sufficiently made out their case in this respect and would allow the appeal to the extent of the $760,361.66 paid between the 15th January and 7th July 1986.

294. I agree too that the remainder of the appeal should he dismissed, and for the reasons he has given.

Power, J.A.

295. I have had the opportunity of reading in draft the judgment of my Lord Clough. I agree with it and for the reasons he gives I too would allow the appeal in relation to the sum of $760,361.66 interest but dismiss it in relation to all the other issues raised by it.

Cons, V.-P.

Order

296. To avoid further costs we shall hand down this judgment. The appeal is allowed in relation to the sum of $760,361.66 interest only. As the liquidators have been substantially successful in resisting most of the relief sought by the appeal there will be an order nisi that (1) the order made by Jones J. is to be varied to the extent that the liquidators are to have 80 percent of their costs below and (2) the liquidators are to have 80 percent of their costs of the appeal, in both cases on the common fund basis.

(1) [1934] A.C. 252

(2) [1943] Ch. 248

(3) [1956] 1 W.L.R. 728

(4) (1891) T.L.R. 14

(5) [1978] 1 W.L.R. 1512 (C.A.)

(6) [1967] 1 W.L.R.1409

(7) 2 B. & Ald. 683

(8) [1970] A.C. 567, (H.L.)

(9) [1976] 1 W.L.R. 292

(10) [1988] 1 H.K.L.R. 181

(11) [1978] 1 W.L.R. 45

(12) [1984] H.K.L.R. 372

(13) Companies Winding-up No. 408 of 1984

Representation:

John Swaine, Q.C. & J.J.E. Swaine (M/S Vivien Chan & Co.) for Appellant/Respondent.

Neil Kaplan, Q.C. & Peter Graham (M/S Clifford Chance) for Respondent/Applicant.