LUNG KAM CHIU v. LIANG HUI TAO AND OTHERS

HCCW 209/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 209 OF 2014

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D E C I S I O N

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1.  On 30 July 2014 the Petitioner, who owns 34% of the issued shares of the 3^rd Respondent (“Company”), issued these proceedings seeking a winding up of the Company on the just and equitable ground alternatively an order that his shares be bought by the 1^st and 2^nd Respondents who own the remaining issued shares of the Company. Approximately two months earlier on 30 May 2014 the Company had entered into a sale and purchase agreement for the sale to a third party of a flat it owns in Telford Gardens. Completion is to take place on 29 August 2014.

2.  On 15 August 2014 the Company issued a summons for an order pursuant to section 182 of the Companies (Winding up and Miscellaneous Provisions) Ordinance, Cap. 32, validating the “sale” of the flat, by which it means the transfer of legal title to the purchaser on completion of the transaction.  As is normal for such applications, the summons was served on the Official Receiver as well as the Petitioner.  The Official Receiver wrote to the Court on 25 August, as is the Official Receiver’s normal practice, commenting on the application.  The letter was copied to the parties.  The letter expresses the view that the sale and purchase agreement is specifically enforceable and that section 182 has no application to completion of the transaction which is unnecessary.  It is common ground between the Petitioner and the Company that the agreement is specifically enforceable.  I agree.

3.  It is well established, and agreed by the Petitioner and the Company, that section 182 has no application to completion of an agreement for the sale of land made prior to presentation of a winding‑up petition and which is specifically enforceable: see paragraph 10 of my judgment in Re Labour Buildings Limited [1] and the authorities referred to.  The reason is that an agreement made prior to presentation of a petition for the sale of land results in the transfer of the beneficial interest in land to the purchaser and the authorities establish that the reference in section 182 to “property of the company” is a reference to property in which the company has a beneficial interest.  Accordingly, both the Petitioner and the Company agree that section 182 has no application to the sale of the flat.  The reason why the application has come to be made by the Company and has been contested by the Petitioner is as follows.

4.  The solicitors of the purchaser of the flat have raised requisitions concerning the Petition. The Company is anxious to allay any concerns that the purchaser has concerning the affect of the Petition.  The Company’s lawyers have understood that a practice has developed which is endorsed by the Companies Court of validating transactions in these circumstances.  They have reached this conclusion on the strength of a judgment of Le Pichon J in which her Ladyship was dealing with an application made under section 44 of the Bankruptcy Ordinance, Cap. 6, which is the equivalent provision in the personal insolvency context to section 182. In paragraphs 6 to 8 of her judgment in Re Chan Woon Wing[2] Le Pichon J says this:

“6. The first question which arises is whether section 42 applies to completion of a pre-petition sale and purchase agreement. Counsel for the Company submitted that in view of subsection (6) of section 42, the court's consent is wholly unnecessary and for that reason, no consent should be given. Subsection (6) reads as follows:

‘A disposition of property is void under this section notwithstanding that the property is not or, as the case may be, would not be comprised in the bankrupt's estate; but nothing in this section affects any disposition made by a person of property held by him on trust for any other person.’

7. That question has previously been considered. The relevant authorities are set out in Re M.W. Lee & Sons Enterprises Ltd [1999] 2 HKC 686 at 691F to 692F. In Re French's (Wine Bar) Ltd[1987] BCLC 499, Vinelott J held that in the context of the equivalent of section 182 of the Companies Ordinance, the completion of an unconditional contract which was capable of being specifically enforced and which was entered into before the presentation of the petition was not a disposition of the property of the company. To similar effect is Re Margart Pty Ltd [1985] BCLC 314.

8. Whilst on the authorities it would appear that completion of a pre-petition contract which is unconditional and can be specifically enforced does not constitute a disposition of the property of the debtor, as a matter of practice and prudence, the court's consent is regularly obtained. If, as counsel for the Company submits, it is unnecessary for such consent to be obtained under section 42, then I cannot see any harm in making the order. The unsecured creditors would not be worse off if, in any event, the transaction does not involve any disposition within section 42.”

5.  There is a similar reference to the practice of seeking the court’s validation of a contract for the sale of land made prior to presentation of a petition in Re French’s (Wine Bar) Limited “unless a contract is quite plainly specifically enforceable”.  It is not, however, my experience that applications are routinely made in Hong Kong for validation orders in respect of agreements for the sale and purchase of land made prior to issue of a winding-up petition.  This may be because the situation is uncommon and, perhaps, because in recent years practitioners have come to appreciate that the legal position is sufficiently clear that they are not necessary.  Be that as it may, in my view the correct approach to such applications is to dismiss them on the grounds that section 182 is not engaged rather than grant a validation order.  My reasons are as follows.  Section 182 says this:

“In a winding up by the court, any disposition of the property of the company, including things in action, and any transfer of shares, or alterations in the status of the members of the company, made after the commencement of the winding up, shall unless the court otherwise orders, be void.”

The section only applies to a disposition after the commencement of the winding‑up which by virtue of section 184(2) is deemed to occur at the date of the presentation of the winding-up petition.  Necessarily if a disposition occurs before the presentation of the petition not only does it not need validating but to speak of validating it under section 182 is meaningless.  What the court is in substance doing when entertaining applications of the sort envisaged by Le Pichon J is giving a legal opinion that the transaction in question is not subject to section 182. It is well established that courts determine controversial issues and do not give opinions.

6.  The undesirability of entertaining applications of this sort is illustrated by the decision of Mr. Justice Anthony Chan in Re Super Speed Limited [3], which is apparently the reason why, despite accepting that section 182 has no application, the Petitioner initially contested the present application.  In Re Super Speed applications were made for the sale of certain offices premises by Super Speed and an associated company, which was the subject of another petition.  The sale and purchase agreements were both signed before the petitions were issued.  The parties appear to have agreed that section 182 did not apply and that even if an order were to be granted it would not prevent a liquidator attempting to impugn the transactions if he had some reason to think that they were in some way improper.  Mr. Justice Chan in paragraph 12 of his judgment questions, in my view quite correctly, the justification for making validation orders in such circumstances, but on the understanding that such a practice was well established went on to consider the reason why the petitioners contested the applications.  The reason the petitioners did so was because of their suspicions about the propriety of the transactions and, on the basis that he found the petitioners’ scepticism justified, as opposed to finding that impropriety had been proved, Mr. Justice Chan refused to make the orders.

7.  If the application in Re Super Speed had been dismissed on the grounds that section 182 was not engaged it would have been unnecessary for the court and the parties to expend time and resources dealing with the complaints about the propriety of the transaction.  It seems to me that if it is common ground, or clear to the court, that section 182 does not apply, the court should not spend time resolving a dispute that only arises if the artificial assumption is made that section 182 does apply.

8.  Applications such as that before me are in my view unnecessary and are to be discouraged.  The court cannot, however, stop applications being made, but for the reasons I have explained if the court is satisfied section 182 does not apply the application should be dismissed, not granted.

9.  I dismiss the present application and order, as the parties have agreed, that the costs be in the cause of the Petition.