RE WING HONG WOO CO LTD

CACV 1004/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. CACV 1004 OF 2000

(ON APPEAL FROM HCCW 532 OF 1995)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from the judgment of Le Pichon JA given on 20 October 2000 (whilst still sitting as a judge of the Court of First Instance). The judgment was in respect of an application by the liquidator of Wing Hong Woo Company Limited under section 266 of the Companies Ordinance, Cap. 32. The judge dismissed the application and this appeal is brought against that order.

Background

2. Wing Hong Woo Company Limited ("the Company") traded in fresh fruit and vegetables. It conducted a wholesale business primarily, it seems, in the Yaumati market. It was a business which was controlled by Mr Mak Ping Nam. Mr Mak had commenced his business under the name Wing Hong Woo Company in 1968. The Company was incorporated in 1984 and it would appear that gradually it took over the business which Mr Mak had originally conducted in his own name.

3. As well as conducting a wholesale business, Mr Mak carried on business under the name Wing Cheong Laan. When carrying on business under that name, Mr Mak retailed fresh fruit and vegetables. As with Wing Hong Woo, a company was incorporated and, eventually, the retail business was transferred to that company, Wing Cheong Laan Limited ("WCLL"). Mr Mak and his wife were the original shareholders and directors. Mr Mak owned 70% of the shares.

4. Whilst, for a long time, Mr Mak and his companies' businesses prospered, it appears that, as the judge held, by mid 1995 Mr Mak knew that the business of the Company was doomed to fail. A winding up petition was presented on 3 November 1995 and eventually the Company was wound up. Mr Mak was also made bankrupt.

5. These proceedings were brought by the liquidator to set aside various payments which had been made to Wing Hang Bank Limited ("the Bank"). The Bank was one of four banks which had been used by the Company. Initially the application was made to set aside all payments which had been made into the bills account (designated the "I/B account") between 1 August 1995 and 3 November 1995. The sum involved was $20,817,443.16. By the time of the hearing the liquidator had reduced the claim to $19,534,652.76. As recorded in the judgment, at the hearing, it was conceded on behalf of the liquidator that a sum of $3.2 million, which had been received by the Bank, was not a preferential payment. That sum of money had been received by the Bank in return for release of a property which had then been sold. The claim was thus reduced at the hearing to approximately $16.3 million.

6. When the notice of appeal was filed in December 2000 an order was sought that the Bank should repay $16,497,553.17. When the first skeleton argument on behalf of the liquidator was filed shortly before this hearing the claim was reduced to $11,145,945.30. This reduction was caused by a concession that a large part of a payment of $7 million was not a fraudulent preference. The remaining part of that $7 million, namely $2,757,655.36, was still claimed on the basis that this was an amount which was owing from WCLL to the Company. After the Bank's skeleton argument was filed further concessions were made on behalf of the liquidator and the claim was again reduced. The liquidator's position in respect of the $7 million was again changed and by this time, the amount of the liquidator's claim was put in the liquidator's supplemental skeleton as $10,979,838.21. By the time counsel for the Bank was called upon, the liquidator's claim appeared to be in the region of $10,610,233.15.

7. After this rather inauspicious series of reductions in the amount alleged by the liquidator to have been preferential payments and changes in stance, there now remain four payments which need to be considered. These are in date order: a payment of approximately $1.7 million on 8 September 1995, this was part of a total payment of approximately $4.9 million which included the payment of $3.2 million referred to above; there is then a payment of approximately $7 million on 11 September 1995; there is a payment of approximately $1.1 million on 15 September 1995 and finally a payment of over $2.77 million on 16 September 1995.

8. For convenience the payments of $7 million and $2.77 million will be considered separately.

Fraudulent Preference

9. Section 266(1) of the Companies Ordinance (Cap 32) provides (so far as is material) that:-

"266(1) 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 ...."

10. Section 49(1) of the Bankruptcy Ordinance (Cap 6) as it existed at the relevant date, deals with fraudulent preferences in these terms (so far as is material):-

"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, ... be deemed fraudulent and void as against the trustee in the bankruptcy."

11. In the context of this case, the following matters therefore needed to be established in order to show that there has been fraudulent preference:-

1. that at the time the Company was unable to meet its debts as they became due from its own resources it made the relevant payments to the Bank;

2. that the dominant intention with which the payments were made was a desire to prefer the Bank over other creditors;

3. that the payments gave the Bank preference over the other creditors.

12. The effect of these two sections and their equivalents in United Kingdom legislation has been considered in a number of cases. It is unnecessary to cite from the judgments in those cases. They have been cited to us. The most notable were Peat v Gresham Trust Limited [1934] AC 252, In re M. Kushler Limited [1943] 1 Ch 248, In re F.P. & C.H. Matthews Limited [1982] 1 Ch 257 and Banque Nationale De Paris v Sam Wah Hing Garment Factory Ltd [1985] 2 HKC 499. In view of the submissions made, an analysis of the judgments does not, in my view, take the matter further than has already been stated.

13. Mr Harris, appearing on behalf of the liquidator sought to suggest that the decision in the Matthews case might have, in some way, watered down the effect of a statement contained in Lord Greene's judgment in the Kushler case. Lord Greene had observed that the question as to whether there existed a dominant intention to prefer was a matter which had to be ascertained by evidence and inference. He then went on to observe that when the court was considering whether an inference could be drawn it had to be remembered that such an intention had about it something of a taint of dishonesty.

14. In my view the Matthews case is no more than an example of a case where the court considered that the conclusion should have been drawn that there had been fraudulent preference. Nothing in the judgments indicates any dissent from Lord Greene's approach to the question.

The payments of $7 million and $2.77 million

15. In my view, the liquidator's case in respect of these payments lacks a number of the criteria which would be essential if these payments were to be held to be fraudulent preference. In the first place they were not payments made by the Company. In the second place they did not constitute a preference. In the third place they were made as a result of an arrangement made with the Bank in consequence of the Bank putting pressure upon guarantors of the Company's debts to discharge the debts. In the fourth place they can be considered the result of the Bank enforcing security over third party property, which it had in respect of the Company's debts.

16. The position as of August 1995 was as follows. As already observed, by mid 1995 Mr Mak knew that the Company was hopelessly insolvent. On 1 August 1995 a sum of $16,197,190.57 was owing on the I/B account. Mrs Mak had given a personal guarantee to the Bank up to a limit of $9,350,000 to secure the Company's indebtedness. There was also a mortgage to the Bank of Mr and Mrs Mak's Australian property. The Bank's evidence, which the judge accepted, was that in early September 1995 Mr Tsang, who was the person at the Bank responsible for the Company's accounts, began to threaten to enforce Mrs Mak's guarantee. As a result of that pressure, Mrs Mak eventually agreed to repay part of the Company's indebtedness to the Bank. Mr Tsang indicated to Mrs Mak that she would have to pay at least $7 million to the Bank before it would consider withholding enforcement of her guarantee. Mrs Mak was apparently unable to raise that amount.

17. An arrangement was then arrived at whereby the Bank would release its mortgage on the Australian property, Mr Mak would sell his half share in the Australian property to Mrs Mak, Mrs Mak would then mortgage the property to the Bank to raise the purchase money for Mr Mak's half share, she would then give the Bank a 2nd charge to secure facilities to WCLL and WCLL would pay $7 million to the Bank to discharge her liabilities under the guarantee. It may be observed that on 24 August 1995 Mr Mak sold his 70% shareholding in WCLL to a Madam Wong for about $1.6 million.

18. Those transactions were carried out. The relevant banking documents have been produced, but it is unnecessary to recite their terms in any detail. Mrs Mak financed the purchase of Mr Mak's half share in the Australian property by mortgaging the property to the Bank. That purchase money, which was thus raised by a first mortgage on the Australian property, was paid by the solicitors who were acting both for the Maks and the Bank back to the Bank by a cheque made in favour of the Bank.

19. In anticipation of the 2nd charge going through the Bank raised the overdraft limit for WCLL to enable WCLL to pay the $7 million and in turn released Mrs Mak from her guarantee.

20. There were, as the judge observed, what in effect were circular transactions. In summary the Bank used the guarantee which Mrs Mak had given in a perfectly legitimate manner. It threatened to enforce that guarantee. As a result of that pressure two things came about. First Mrs Mak was able to secure that a company, of which she and a third party were the sole shareholders, would pay the Bank a sufficient amount to discharge her liability. In the second place Mr Mak was able to sell his share in an asset which had been mortgaged to the Bank and the Bank released that mortgage in order for that sale to take place and for it to receive the proceeds.

21. There is, thus, no need for the court to draw any further inference. There was no fraudulent preference for the reasons which I have indicated, which are the same as those referred to by the judge below.

22. Mr Harris argued that because the payments had been made into the current account rather than the I/B account and had been transferred to the I/B account thereafter they constituted, in effect, monies which the Company had at the time the amounts were notionally in the current account. In my view this argument is untenable. Even if it were correct to consider the monies in the current account as separate and belonging to the Company, these were clearly payments made to the Bank. They were not made to the Company. Clearly the Bank never intended to give those funds to the Company, even for the brief interval that they were shown as being passed through the current account. Furthermore, they were funds given by third parties to the Bank for the specific purpose of discharging the indebtedness in the I/B account. This is no mere inference. This comes from the evidence of the Bank.

Payments of $1.7 million and $1.1 million

23. In the light of the concessions now made on behalf of the liquidator there are only two further payments which require to be considered. These payments were made into the I/B account on 8 September and 15 September respectively.

24. Although Mr Mak appreciated that the Company was hopelessly insolvent he was able to keep the business going. In considering the transactions recorded in the I/B account, it is clear that there were shipments which came in for the Company at least until 14 September 1995.

25. The Company had accounts with three other banks. In respect of all three other banks there were I/B loan accounts on which substantial amounts were owing. It is clear however that in respect of for example the HSBC account there had been no transaction after 25 July 1995 and that bank formally withdrew its facilities to the Company on 24 August 1995. In respect of the Belgian Bank there had been no transaction after 23 June 1995 and the account in the Dah Sing Bank was dormant by August 1995. Both these latter two banks withdrew their facilities from the Company on 14 September 1995.

26. It would appear therefore that the Bank was the only bank in respect of which the Company did, or perhaps could, operate its I/B account. There was clearly a running account between the Bank and the Company under the I/B account which was active at least until 8 September 1995. The transactions in the I/B account have been conveniently summarised on page 11 of the judgment below. That summary shows that, despite the fact that there was a limit of $16 million available for trust receipts up to a hundred and twenty days, the Company often exceeded that limit. Therefore, insofar as there have been any suggestions that there was early retirement of the bills this is clearly explicable on the basis that for any further transactions to take place there would have had to have been some payment into the account to free up part of the facilities to enable those new transactions to take place. Towards the end of the period from August to 18 September, which is set out in the chart on page 11 of the judgment, the payments of $7 million and $2.77 million were made. The payment of $1.7 million on 8 September 1995 is recorded as being part of a payment in of $4.9 million. The other part of that payment was the $3.2 million arising from the sale of Mr Mak's share of the Australian property.

27. A matter which must be borne in mind is that the I/B account was in respect of the importation of fresh fruit and vegetables. On 8 September 1995 a new trust receipt of $722,109.73 is recorded. On 14 September 1995 there is a new trust receipt of $877,451.73. These were clearly in respect of perishable commodities. There was obviously a need to dispose of the goods as quickly as possible. The two payments into the I/B account, which are now under consideration, coincided with these shipments. As submitted by Miss Wong on behalf of the Bank, the I/B account was secured in terms of pledges over the documents in the form of trust receipts. When the Company sold goods under a trust receipt it did so as the Bank's agent. It was obliged to use the proceeds of the sale to repay the Bank. Thus the documents and the goods which were the subject of the trust receipts were subject to actual, or at least de facto, security in favour of the Bank. Therefore they did not constitute assets with which the Company was free to deal. This was clearly the contractual position between the Company and the Bank albeit similar positions are commonly, no doubt, honoured in their breach rather than in their observance.

28. In my view the judge came to the correct conclusion that these payments, too, did not constitute fraudulent preference. The Bank was entitled to receive the money and would no doubt not have continued the running account arrangements unless it had received the money.

29. In my view this appeal must be dismissed. There should be an order nisi for costs in favour of the Bank.

Hon Keith JA:

30. I agree.

Hon Woo JA:

31. I entirely agree with the judgment of the Vice-President and I would also dismiss this appeal.