TAI WEALTHY ELECTRONICS (HK) LTD AND ANOTHER v. SUPER SPEED LTD

HCCW 273/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 273 OF 2012

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J U D G M E N T

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1.  There are two applications for validation order before me. They concern the disposition of property by two related companies which are now in liquidation, namely, Super Speed Ltd (“SS”) and Marshel Exports Ltd (“ME”) (collectively “Companies”).

2.  SS and ME were wound-up pursuant to the Petitions of their trade creditors (“Petitioners”) dated 3 August 2012.  The Petitions were unopposed and the winding-up orders were made on 24 October 2012. On that same day, the same Provisional Liquidators (“Liquidators”) were appointed for SS and ME.

3.  The dispositions in question are the sale of 3 office units situated in Tsimshatsui by SS (Office 02) and ME (Office 01 and 08) (“Properties”).  The Properties were sold to Citi Phone (Hong Kong) Ltd (“Purchaser”) and the two Provisional Agreements were signed on 23 May 2012.  Completion of the transactions was originally scheduled to take place on 5 October 2012.  No doubt due to the liquidation in question, that event has been postponed to 19 December 2012.

4.  The court has been informed that the Liquidators (one of them appeared at the hearing) are having difficulties in collecting the financial information of the Companies and they are therefore unable to assist in the determination of these applications.  These applications are prosecuted by the Purchaser and resisted by the Petitioners.  One of the Companies’ major creditors, Bank of Baroda, was also represented at the hearing but only as an observer.  It should be pointed out that Bank of Baroda is a secured creditor of the Companies.  The debts owed to it are secured by mortgages over the Properties as well as the personal guarantees of the directors of the Companies.

Applicable law

5.  Section 182 of the Companies Ordinance, Cap 32 provides as follows :

“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 alteration 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.”

6.  There is an interesting twist in these applications in that it is common ground between the Purchaser and the Petitioners that the dispositions in question are not caught by s 182.

7.  In Re French’s (Wine Bar) Ltd [1987] BCLC 499, it was held by Vinelott J that under the English provisions equivalent to s 182 such provisions did not apply to a case where a company had entered into an unconditional contract for the sale of property (a lease together with fixtures and fittings and the goodwill of a business) before the petition was presented which was specifically enforceable by the purchaser and the contract was duly completed in accordance with its terms after the petition was presented.

8.  However, it appears that the reason why the provisions were inapplicable was not, as submitted by Mr Sit and Ms Yung who appeared respectively for the Purchaser and the Petitioners, attributable solely to the timing of the sale.  The ratio is that after the sale the property was no longer something which the company was free to deal with.

9.  There is a further issue as to why the court should exercise its discretion in granting relief in a case where such relief is unnecessary.  In Re French’s (Wine Bar) Ltd, it was held that “in practice unless a contract is quite plainly specifically enforceable and there is no possible defence it may well be prudent to seek the approval of the court for the completion of the contract”.

10.  Further, I was referred by Mr Sit to the authority of Chan Woon Wing ex parte Lun Kee Poultry Ltd, unrep, HCB 144/00, para 8, where Le Pichon J (as she then was) recognised the practice of obtaining the court consent in circumstances such as those before this court as a matter of prudence.  It was further observed that the court could not see any harm in making the order and the unsecured creditors would not be worse off given that the transaction did not involve any disposition within section 42 of the Bankruptcy Ordinance, Cap 6 (which is similar to s 182).

11.  Before I express my own view on this interesting issue, I should say that it is also common ground between the Purchaser and the Petitioners that notwithstanding any validation order which may be granted in respect of the sale of the Properties, those transactions are liable to subsequent challenge by the Liquidators on their propriety.

12.  With respect, I am not altogether convinced that there is adequate justification in cases like the present to call for the court’s exercise of discretion.  This is particularly so when the result is liable to be nullified by a subsequent challenge by the Liquidators.  Why should the court be asked to provide a provisional stamp of approval for a transaction when such approval is unnecessary?  On the other hand, the practice of seeking the court’s approval appears to be well-established and, despite my reservation, I am not inclined to overturn it without full argument on the point.

13.  For purpose of deciding the exercise of discretion in question, the court should take into account first and foremost the interest of the Companies’ creditors.  In Re Century Group Ltd, unrep, HCCW 59/04 it was held at para 6 :

“It is well established that the basic principle of law in respect of liquidations is that the assets of the insolvent company should be distributed amongst its unsecured creditors pari passu. But it is also recognized that there are times when it will be for the benefit not only of the Company, but also of its unsecured creditors, that it should be able to dispose of some of its property after the petition has been presented but before the winding-up order is made.”

14.  Further, in Chan Woon Wing ex parte Lun Kee Poultry Ltd, para 15, it was held :

“It is tolerably clear that in the absence of the court’s consent under section 42, the transaction which is due for completion later this afternoon, would in all probability be derailed. As there is nothing irregular on the face of the transaction and no evidence of any impropriety or of suspicious circumstances (such as a sale to connected persons), a prima facie normal commercial transaction should be allowed to take effect and that it should not be upset by the withholding of consent unless there is good reason so to do. In the present case, there is none.”

15.  I shall be guided by the aforementioned dicta.

Merits of these applications

16.  I regret to say that there are suspicious circumstances surrounding these transactions.  I have been assisted by the chronology provided by Ms Yung.  It appears that shortly after the filing of the statement of claim in an action (“HCA 527/12”) by the Petitioners against the Companies and Mr Nipun trading as Marshel Exports (Mr Nipun was one of the directors of the Companies), the Properties were allegedly put on the market for sale.  On the day when default judgment was entered against the defendants in HCA 527/12, the provisional agreements to dispose of the Properties were entered into.

17.  I have an affirmation from Mr Nipun purporting to explain the reason for the disposition of the Properties.  First of all, he accepted that the Companies were in financial difficulties since around November 2011.  The Properties (on the evidence, they appear to be the main assets of the Companies) were mortgaged to, inter alia, Bank of Baroda and in light of the prospects of enforcement proceedings by the mortgagees, the directors of the Companies decided to dispose of the Properties with the view to obtaining better prices than those obtainable via public auction.

18.  However, the prices at which the Properties were sold were in fact lower than the acquisition prices in 2007.  Office 02 was purchased at HK$5,751,200 in 2007.  It was sold at HK$5,096,000.  Offices 01 and 08 were jointly acquired in 2007 at HK$12,426,700 and they were sold at HK$11,011,000.

19.  The evidence adduced by the Petitioners is that the dispositions were at undervalue.  Despite the dispute in the valuation evidence, I am inclined to accept that the purchase prices in question do not fully reflect the market value of the Properties.  I give due weight to the statistics produced by the Rating and Valuation Department that the average price for private office in Tsimshatsui has risen during the period between 2007 and 2012 by 37.14% to 120.61% depending on the grade of the office in question.

20.  Of course, any undervalued sale of the Companies’ asset is likely to be harmful to the interest of their creditors.

21.  I am alive to the evidence filed by the Purchaser and Mr Nipun that there is no connection between the Purchaser and the Companies, their shareholders and directors.  However, in light of the circumstances of the transactions, the court must maintain a healthy scepticism over such assertion.

22.  Taking all relevant matters into consideration, I am not satisfied that these are normal commercial transactions and I dismiss these applications with costs to the Petitioners to be borne by the Purchaser to be taxed if not agreed.