Elson-vernon Knitters Ltd v. Sino-indo-american Spinners Ltd

IN THE SUPREME COURT OF HONG KONG

(APPELLATE JURISDICTION)

CIVIL APPEAL NO. 22 OF 1972

(On appeal from K.C.J. Action No. 6950/1971)

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Coram: Blair-Kerr, Huggins and McMullin, JJ.

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JUDGMENT

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Huggins, J.:

1.  This is an appeal against a judgment of Judge Baber in favour of the Plaintiff in an action brought under the Fraudulent Transfer of Businesses Ordinance. The Plaintiff obtained a judgment in the Supreme Court against a company called Elson Knitting Factory Ltd. That company having disposed of all its assets, the Plaintiff looked to the transferees of the stock-in-trade, the Defendant in the present action, for satisfaction of their debt up to the monetary limit of the District Court’s jurisdiction.

2.  The Defendant is a company called Elson-Vernon Knitters Ltd., which is carrying on a business in the premises formerly occupied by the Elson Knitting Factory Ltd. The business is, as was that of the previous occupier, that of manufacturing knitted garments. Of the garments manufactured by the Defendant 70% are of synthetic fibre whereas all those produced by Elson Knitting Factory Ltd. were of wool. One CHAN Yau-ching is a director of Elson Knitting Factory Ltd., the other director being his wife. Chan was understood by the Plaintiff’s sales manager to be a director also of the Defendant company, but Chan denies that, maintaining that he is merely employed by the Defendant as manager. He admits, however, that the Defendant printed for him visiting cards which named him as a director, the purpose apparently being to mislead prospective customers. The learned judge was inclined to believe that Chan was not in any event the owner of the Defendant company. At some date which is not revealed in the evidence the Elson Knitting Factory Ltd. appears to have sold the premises to Vernon Enterprises Ltd., a company associated with the Defendant, from which they then took a tenancy. This tenancy was surrendered after the stock and machinery had been sold. The machinery was sold to one WAT Po-ki, who proceeded to hire the machinery to the Defendant. Thus not only did the Defendant use the identical premises but it also used the identical machinery which had been used by the Elson Knitting Factory Ltd. No notice in accordance with the Fraudulent Transfer of Businesses Ordinance was given.

3.  The decision of the learned judge that there was a transfer of the business and a transfer to the Defendant company is attacked on three main grounds. First it is contended that in order to establish liability under s.3 of the Ordinance a plaintiff must establish fraud, and it is not in dispute that the learned judge has not made any express finding of fraud. Counsel’s contention is that the very titles of the Ordinance indicate that it is concerned with fraudulent transfer. At one stage I thought it might be right to regard the Legislature as having intended to create a kind of statutory fraud, but I think the better view is that the Ordinance is not so much concerned with overcoming the effects of transfers which are shown to be fraudulent as with discouraging transfers which may be fraudulent. I adopt the words of Lindsell, J. in Union Trading Co. Ltd. v. The Kwok Man Chau Ka (1938) 30 H.K.L.R. 19,32:

“There can be no dispute that the aim of the Ordinance, as indicated by its title, was to prevent the transfer of his business by one man to another in any such way as might defraud his creditors and leave them without a remedy, or, to put it in other words, to prevent a man from secretly divesting himself of his business assets, on his possession of which his creditors relied in giving him credit and to which they would otherwise have had recourse if he could not meet his liabilities.”

Where a business has been transferred without the prescribed notice it matters not whether any fraud has been perpetrated: that might have been the intention and it was the mere possibility of fraud which exercised the minds of the Legislature.

4.  Then it is said that the statute has no application to a case where the alleged transferor is a limited company. No relevant distinction was indicated between a limited company and any other corporation in this connection and I think the argument advanced would apply to all corporations. It is submitted at the outset that a corporation cannot transfer its “business” because “business” is defined in the Ordinance as meaning

“any trade or occupation, other than a profession, carried on with a view to profit”.

The contention is that a corporation cannot “carry on” a trade. I confess that this appears to me a remarkable proposition and one which is wholly untenable. I find nothing in the Ordinance itself which is inconsistent with its having been intended to apply to corporations. However, it is then said that we can properly look to the statement of Objects and Reasons appended to the Bill as introduced into the Legislative Council and that this indicates an intention to exclude corporations. We were referred to a number of cases for authority to show that the courts are not prohibited from making any reference to Objects and Reasons and counsel sought to distinguish between purposes for which such reference was admissible and those for which it was inadmissible. As I understand him, counsel for the Respondent concedes that we are not prohibited altogether from looking at the Objects and Reasons annexed to a Bill but submits that we should do so only in cases where that assists us to understand legislation of a highly technical nature and he relies upon a dictum in parenthesis in the admirable speech of Lord Glaisdale in Ealing London Borough Council v. Race Relations Board 1972 2 W.L.R. 71, 82. I do not think it necessary to quote this passage or to review all the other cases to which we have been referred on the point. I believe their general effect to be that the court may look at a statement of Objects and Reasons for the purpose of ascertaining the mischief which it was intended to remedy, but not for the purpose of deciding whether the language used has in truth supplied a remedy or, if it has, the extent of that remedy. However, in my view nothing really turns upon the point in the present case because when I turn to the statement of Objects and Reasons of and for the statute we have to interpret I find nothing which supports the argument on behalf of the Defendant. Paragraph 1 of the statement is in these terms:

“This bill, which is of a somewhat exceptional character, is an attempt to combat a form of fraud which has unfortunately become rather common in Hongkong recently. The fraud is this. A firm gets into difficulties, or it finds itself saddled with contracts which have become unprofitable owing to the fall in the market price of the goods contracted to be bought. The firm purports to transfer to a new firm the goodwill and other assets of its business, but not the liabilities. The partners of the transferring firm then disappear. Sometimes the person who was looked upon as the active partner in the old firm re-appears as the manager of the new firm, but he denies partnership in the old firm, asserting that he was only an employee. The creditors are thus left without any remedy.”

Counsel seizes upon the words “firm” and “partner” and submits that a transfer by a corporation, which has an existence independently of its shareholders, is not within the contemplated mischief. I am by no means persuaded that the Legislature contemplated anything quite so restricted. Whether that be right or not I am satisfied that the language in fact used in statute cannot fairly be interpreted in the restrictive manner contended for. The substance of the argument to the contrary is that the ordinary meaning of the words of the statute would produce such unreasonable results that it cannot have been what was intended. In Sun Wai-min v. Horizon Shipping Co. S.A. O.J. No. 689 of 1972 Briggs, J. had to decide whether the provisions of the Ordinance applied in a case where the allegation was that a corporation had transferred its business and he said:

“The situation we have here of a Hong Kong company transferring its only assets to a foreign company, those assets being a foreign ship, might be described as a classic situation for which Cap.49 was designed as a remedy.”

The point which has been argued before us was not taken in that case but in view of that observation by the learned judge I would find it difficult to say that the interpretation which he adopted without question was so unreasonable that it cannot have been intended. With respect I think his interpretation was right and, further, I am not persuaded that the results are so unreasonable as has been suggested, but I shall have more to say on this subject when I turn to consider the evidence. If it were permissible to have regard to the statement of Objects and Reasons in this connection I might have added that I find there a possible answer to the argument because para.1 begins

“This bill, which is of a somewhat exceptional character ......”

while para.5 says

“The bill is rather in the nature of an experiment, but it is asked for by both Chambers of Commerce.”

That seems to me to negative any intent to restrict the legislation within narrow limits. However, I must deny myself this support in view of what I believe to be the proper canon of interpretation.

5.  Finally it is submitted that, even assuming that the statute has to be given the interpretation which I would hold to be correct, the evidence did not support a finding of the transfer of the business. Counsel maintains that the courts have held a mere transfer of assets to constitute a transfer of the business and that that must produce, and would produce here, an absurd result. Counsel emphasises that under s.3 a transfer of even a portion of a business may make the transferee liable for all the liabilities of the transferor, including those of portions of the business not transferred. Therefore it would follow, he says, that anyone who took a transfer of any part of the assets would be so liable. With respect I do not think the cases do decide that a mere transfer of assets constitutes a transfer of the business and if they did I would not be prepared to follow them unless compelled to do so. A transfer of assets may be evidence indicative of a transfer of the business but it is not enough per se. In the present case we have a garment making business being carried on in the same premises, with the same machinery and under the same control, the business starting with the same stock-in-trade. It is very different from the example given in argument of a proprietor selling off all his property and going to continue his own business elsewhere: Elson Knitting Factory Ltd. has discontinued its business and Mr. Chan is working for the Defendant, a company with a very similar name, as manager. In my view the learned judge applied the right test and applied it correctly. He looked to the circumstances as a whole and came to the conclusion that the business had been transferred to the Defendant. He attached no weight to the fact that only one of Elson Knitting Factory Ltd.’s customers was dealing with the Defendant and little weight to the fact that the Defendant is knitting largely synthetic fibres rather than wool. Again, I think he was entirely right. It makes no difference that Vernon Enterprises Ltd. and WAT Po-ki were the persons who acquired from Elson Knitting Factory Ltd. some of the assets which have now found their way into the hands of the Defendant: we are not concerned with the mechanics of the transfer but with the fact of transfer.

6.  I would dismiss this appeal.