SONIA YAU AND ANOTHER v. LAU MING YIN

HCCW 16/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 16 OF 2002

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D E C I S I O N

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1.  I have before me an amended summons issued by the liquidators of Kam Kuen Construction Company Limited (“the Company”) against a former director Lau Ming Yin, pursuant to sections 266, 266B and 276 of the Companies Ordinance, Cap. 32.

2.  The liquidators seek an order in terms of paragraphs 1 and 3 of the summons, namely, that a deed of assignment dated 10 December 2001 made between the Company, Kam Kuen Engineering Limited (“KKE”) and the respondent be declared void and that the respondent be ordered to repay to the liquidators HK$7,262,042.69.

3.  The summons had come before the court on 2 August 2006 and 20 October 2006.  The respondent was absent on previous occasions.  He is also absent today.  I am satisfied from the affirmations of service that the papers have been properly served on him at his last known address.  I noted that on one occasion the documents delivered by courier were received by a person who identified herself as his daughter.  The respondent has not filed any evidence or indicated his position to the application.  I have decided to proceed in his absence.

4.  The Company was incorporated on 1 June 1982.  Its principal business was providing sub-contracting works for civil and engineering projects in Hong Kong.  As of 31 March 2001, the respondent, Fung Wah Sang (“Mr Fung”) and Choi Ping Sang were directors.

5.  A petition was presented by a creditor to wind up the Company on 4 January 2002.  The Company was ordered to be wound up on 24 June 2002.

6.  The respondent had been a director of both the Company and KKE since the incorporation of these companies. According to the affirmation of Mr Fung, the respondent was the managing director of both companies and made all the decisions.  He is the majority shareholder of the Company, holding 9,980,000 shares out of 10 million issued shares.  KKE and the Company shared the same office for about 2 years in around 1989.  It would appear from Mr Fung’s affirmation that KKE or the Company would pay on each other’s behalf when needed.  KKE was struck off the register of companies in November 2005.

7.  The deed of assignment executed between the Company, KKE and the respondent in December 2001 was in these terms.  It provided that the respondent was indebted to the Company in the sum of HK$7,262,042.69; this was defined as “the Debt” in the deed.  It was stated that the Company was indebted to KKE in the sum equivalent to that of the Debt, and that the Company would pay off, satisfy and settle the debt due to KKE (in the sum equivalent to the Debt), and KKE agreed to do so, by assigning to KKE the Debt upon the terms set out in the deed.

8.  So by the deed, the Company assigned the respondent’s indebtedness of about HK$7.2 million to KKE in satisfaction of the indebtedness of the Company to KKE in the same amount.  It is alleged by the liquidators that this assignment by the Company constituted an unfair preference.  It was made within 6 months of the commencement of the winding up of the Company and was caught by the provisions for unfair preference being sections 266(1) and 266B(1) of Cap. 32.  By causing the Company to execute the deed, the respondent had caused unfair preference to be created in favour of KKE over the other creditors, in that the Company was deprived of funds of HK$7.2 million odd, which it could have used to repay its creditors.

9.  Under sections 50(3) and (4) and 51(2) of the Bankruptcy Ordinance, Cap. 6, which apply to companies winding up by virtue of section 266B(1) of Cap. 32, to constitute unfair preference, it is necessary for the liquidators to establish these matters:

(1)	KKE was one of the creditors of the Company;
(2)	the assignment of the debt had the effect of putting KKE into a position which, in the event of the liquidation of the Company, would be better than the position KKE would have been in if the assignment had not been made;
(3)	the Company in giving the unfair preference was influenced in deciding to give it by a desire to produce in relation to KKE the effect in (2); and
(4)	the Company was insolvent at the time of the assignment which was 10 December 2001.

10.  The condition in (1) is satisfied.  KKE was a creditor of the Company.  This was recited in the deed of assignment (see recitals, paragraph B).  In the audited accounts as at 31 March 2001, it was stated that the amount due by the Company to a “related company” was HK$14,665,278.36.  According to the working papers of the auditors, this related company was KKE.

11.  In the Company’s books as at 30 November 2001, the debt due to KKE would appear to have been reduced to HK$7,338,137.36.  However, the liquidators have not been able to ascertain any repayments from the Company to KKE between April to December 2001.  The reduction of debt to KKE would seem to be a paper entry without any payment from the Company to KKE.  As such, the amount due to KKE remains at HK$14,665,278.36.

12.  The condition in (2) is also satisfied.  With the assignment, KKE was put in a better position it would have been in in the event of the liquidation of the Company, as KKE was able to recover its debt from the respondent instead.

13.  The condition in (4) is satisfied.  The Company was insolvent at the time of the deed of assignment.  The balance sheet as at 30 November 2001 showed net liabilities of HK$14.5 million.  According to the draft balance sheet as at 31 December 2001, the net liabilities were increased to HK$26.3 million.

14.  I come to the condition in (3).

15.  There is no direct evidence on the requisite desire to improve KKE’s position in the event of an insolvent liquidation of the Company.  However, I am satisfied that KKE was an associate within the meaning of sections 51B(6) and (8) on the affirmation of Mr Fung.  It would appear that the Company and the respondent who was an associate of the Company together had control of KKE, in that the directors of the Company and of KKE were accustomed to act in accordance with the directions of the respondent.

16.  The liquidators are able to rely on the presumption in section 50(5), by which the Company is presumed, unless the contrary is shown, to have been influenced in deciding to give unfair preference to KKE by the desire to put KKE in a better position it would have been in if the assignment had not been made.

17.  As there is no evidence to rebut the presumption, the condition in (3) is satisfied.

18.  A case of unfair preference is made out.  I make a declaration sought in paragraph 1 of the summons that the deed of assignment is void.

19.  By section 50(2), the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that debtor had not given that unfair preference.

20.  Section 51A(1)(d) requires any person to pay, in respect of benefits received by him from the debtor, such sums to the trustee in bankruptcy as the court may direct.

21.  Upon declaring the deed of assignment void, the respondent would remain indebted to the Company of HK$7,262,042.69.  I make an order in terms of paragraph 3 of the summons that the respondent is to repay to the liquidators the sum of HK$7,262,042.69.

22.  I order the respondent to pay the liquidators their costs of this application.