SAM EXPRESS (HK) LTD v. SUPREME DAY INVESTMENT LTD

HCMP 80/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 80 OF 2007

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J U D G M E N T

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1.  This is a vendor and purchaser summons taken out by the purchaser. 

Background

2.  The property is a unit in Lippo Centre in Queensway.  The sale and purchase agreement was made on 25 September 2006.  It required the defendant vendor to show a good title to the unit before 10 January 2007. 

3.  The unit was once owned by one Weld-Tech Electrical Supplies Companies Limited (“Weld-Tech”).  Weld-Tech sold it to one Unitech Electric & Lightning Technologies Limited (“Unitech”) by an agreement dated 22 May 2004.  Unitech mortgaged it to DBS Bank (Hong Kong) Limited (“DBS Bank”) on 25 June 2004.  Unitech defaulted on the mortgage.  DBS Bank exercised its power of sale and sold it to the defendant by an agreement dated 18 August 2005.  The defendant then sold it to the plaintiff by the sale and purchase agreement dated 25 September 2006 as referred to above. 

4.  Weld-Tech was wound-up by an order of the court on 21 February 2005 in HCCW No. 1061 of 2004.  A copy of the winding-up order was sent to the Land Registry on 22 March 2005 for registration.  It was however withheld from registration by the Registrar.  On 3 October 2006 when the solicitors for the plaintiff searched for the documents registered against the unit, this winding-up order was still recorded as pending registration at the Registry.

The requisition

5.  On 12 October 2006, the solicitors for the purchaser raised the following requisition:

“Upon perusal of the land search record, we note that a Winding Up Order was granted against Weld-Tech Electrical Supplies Company Limited and the Order was registered against the Property prior to your client’s acquisition of the Property, thereby your client had notice of the winding-up. 

We further note that the Property was sold to Unitech Electric & Lightning Technologies Limited the associate of Weld-Tech Electrical Supplies Company Limited within 2 years prior to the presentation of the petition for winding-up of Weld-Tech Electrical Supplies Company Limited.  The transaction between Weld-Tech Electrical Supplies Company Limited and Unitech Electric & Lightning Technologies Limited was therefore deemed unfair preference and subject to be set aside by the Official Receiver.”

6.  These solicitors further wrote on 16 October 2006:

“We further note that prior to the Winding Up Order, the Property was sold to Unitech Electric & Lightning Technologies Limited (Unitech), which we believed to be the associate of Weld-Tech as both companies having common directors and thus have control over each other within the meaning of “associate” under section 51B of Bankruptcy Ordinance) within 6 months before the presentation of the petition for winding-up of Weld-Tech.  The transaction between the Weld-Tech and Unitech Limited was therefore deemed fraudulent preference of its creditors and be invalid accordingly under Section 266 of Companies Ordinance. 

If so, the Assignment dated 25 June 2004 Memorial No. UB9287707 made between the Weld-Tech and Unitech would be rendered invalid by virtue of Section 266 of Companies Ordinance and no legal interest could be passed to your client.  Your client would then have no legal interest in the Property which could be sold to our client.”

The answer

7.  The solicitors for the vendors replied on 13 November 2006:

“Please note that in this case, right after Weld-Tech Electrical Supplies Company Limited (“Weld-Tech”) assigned the property to Unitech Electric & Lightning Technologies Limited (“Unitech”) Unitech mortgaged the property to DBS Bank (Hong Kong) Limited.  It is only when Unitech defaulted its mortgage payment, then the bank exercised its power of sale. 

…

In summary, dispositions to defraud creditors under the Conveyancing and Property Ordinance, transaction at an undervalue and unfair performances under the Bankruptcy Ordinance and the Companies Ordinance are all only voidable, not void.  Since the property has been mortgaged to a bank and it was the bank which sold the property by exercising its power of sale, the receiver or the creditor of Weld-Tech could not have any interest in the property.”

8.  The solicitors for the purchasers maintained their view.  They also wrote to the liquidators of Weld-Tech to seek their views on the matter.  The vendor’s solicitors further replied on 22 November 2006:

“It seems to us that you have mistaken the point that our client acquired the property from Weld-Tech Electrical Supplies Company Limited (“Weld-Tech”) which was not the case.  Our client purchased the property from DBS Bank (Hong Kong) Limited, to which Weld-Tech (should be Unitech) mortgaged the property when Weld-Tech (should be Unitech) acquired the property.  Therefore, whether the transaction between Unitech Electric & Lightning Technologies Limited and Weld-Tech was subsequently found to be voidable transaction or not, it would not be held void against DBS Bank as the bank must have acted in good faith with value and without notice and must therefore be protected.

As the said bank’s title in the property is indefeasible, it must follow that our client, being the said bank’s successor in title also has an indefeasible title.”

Has good title been shown?

9.  At today’s hearing, the plaintiff accepts that DBS Bank was in the position of a bona fide purchaser for value and without notice.  However, it still submits that since Weld-Tech’s winding-up order is shown in the Registry’s records as pending registration, anyone purchasing the unit from DBS Bank would have notice of it and the purchase would be liable to be set aside at the instance of Weld-Tech’s liquidators. 

10.  That means despite having a good title in the unit, DBS Bank would not have been able to assign the good title to a purchaser after Weld-Tech’s winding-up order has been shown in the Registry’s records regardless of whether the order would have any effect on the bank’s title.

11.  Furthermore, if the plaintiff should be correct and the defendant’s title to the unit could be set aside at the instance of the liquidators, for whose benefit would the set aside be made?  Would the title be vested unto DBS Bank?  If so, the creditors of Weld-Tech will not derive any benefit from it and the liquidator would not embark on such a course.  Alternatively, can it be argued that the unit could be vested unto the liquidators?  But the defendant has already paid DBS Bank the purchase price and there is no basis to require the bank to refund the price to the defendant as the bank had entered into the mortgage with Unitech as a bona fide purchaser for value and without notice.  All these problems reflect that there is something wrong in the plaintiff’s submissions. 

12.  Even if the sale by Weld-Tech to Unitech should be liable to be set aside on the ground of fraudulent preference, once it is accepted that DBS Bank was a bona fide purchaser for value and without notice and it had a good title to the unit, then the bank would have been at liberty to assign its good title to the defendant.  Subsequent notice by the bank of Weld-Tech’s winding-up order would not have affected the bank’s title, nor would it have affected the bank’s exercise of its power of sale or its ability to pass on the good title to the defendant.

Fraudulent preference?

13.  I would also discuss the question of unfair preference.  Sub-section 50(3) of the Bankruptcy Ordinance, Cap. 6 defines the meaning of unfair preference:

“	(3)	For the purposes of this section and sections 51 and 51A, a debtor gives an unfair preference to a person if-
		(a)	that person is one of the debtor's creditors or a surety or guarantor for any of his debts or other liabilities; and
		(b)	the debtor does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the debtor's bankruptcy, will be better than the position he would have been in if that thing had not been done.”

14.  Sub-sections 50(4) and (5) are relevant to the position of an associate of the debtor.  They provide:

“	(4)	The court shall not make an order under this section in respect of an unfair preference given to any person unless the debtor who gave the unfair preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (3)(b).
	(5)	A debtor who has given an unfair preference to a person who, at the time the unfair preference was given, was an associate of his (otherwise than by reason only of being his employee) is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (4).”

15.  I now move on to section 266(1) of the Companies Ordinance, Cap. 32 which defines fraudulent preference:

“(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:

Provided that, in relation to things made or done before the commencement* of the Companies (Amendment) Ordinance 1984 (6 of 1984), this subsection shall have effect with the substitution, for references to 6 months, of references to 3 months.”

16.  So there must be evidence that Unitech was a creditor of Weld-Tech before there could be the question of fraudulent preference.  If there was no such evidence, there would be no question of fraudulent preference.  In that event, the fact that Unitech was an associate of Weld-Tech would also be of no significance. 

17.  Weld-Tech’s liquidators replied to the plaintiff’s solicitors on 9 January 2007 and admitted that there was no evidence showing that Unitech was a creditor of Weld-Tech.  They further admitted that the price for the sale of the unit by Weld-Tech to Unitech at $6.7 million was above the then market price of $6.4 million as evidenced by a report of a professional valuer.  There was also no evidence that the price was not properly paid and discharged by Unitech.  The liquidators thus admitted that on the information available, there was no case of fraudulent preference that could be made against the sale of the unit by Weld-Tech to Unitech.  However, they reserved the right to make further investigation into the matter. 

18.  It is this reservation of right to investigate that the plaintiff says that it is worrying about.  It says that if it should complete the purchase, its title would be liable to be set aside at the instance of the liquidators. 

19.  I do not think the liquidators’ reservation is enough for the purchaser to say that the title of the unit is at risk of challenge.  It is not.  With a clear admission by the liquidators that they did not have sufficient evidence of fraudulent preference, it was safe to complete the purchase.

20.  In any case, as I have already pointed out above under the heading of whether good title has been shown, even if the transaction between Weld-Tech and Unitech could be set aside, DBS Bank still had a good title to the unit and the good title had already been assigned by it to the defendant.  The defendant’s title is thus immune from challenge by the liquidators.  That perhaps is the reason why the Registrar has not allowed the winding-up order to be registered at the Land Registry. 

Judgment

21.  In the light of my analysis above, I find that the solicitors for the defendant have properly answered the requisition of the plaintiff.  I therefore dismiss the originating summons.  I also order the plaintiff to pay the defendant the costs of these proceedings.