BNP PARIBAS v. G C LUCKMATE TRADING LTD.

CACV 230/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 230 OF 2002

(ON APPEAL FROM HCA 12359 OF 1999)

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J U D G M E N T

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Hon Mayo VP (giving the judgment of the Court):

1. This is an appeal from a judgment of Deputy High Court Judge Reyes who entered judgment against the defendant in the sum of US$999,162.69.

2. The issue which had to be determined by the Judge was whether there had been a transfer of what was referred to as APT's business to the defendant within the terms of the Transfer of Business (Protection of Creditors) Ordinance Cap. 49 (the Ordinance) on or about 1 October 1998.

3. The Judge held that there had been.

4. The way that the case had been run before the Judge by the defendant was to deny that there had been any such transfer. However they argued in the alternative that if there had been a transfer they were entitled to invoke the provisions contained in section 8 of the Ordinance which entitles a transferee to cap its liability if certain requirements are met.

5. The defendant does not seek to appeal against the Judge's determination that there had been a transfer of the business. The appeal is confined to the issue as to whether the defendant was able to invoke the provisions contained in section 8.

6. Section 8 provides:

"Limitation of liability of transferee

(1) A transferee who in good faith and without preference has paid in discharge or partial discharge of any liability for which he became liable under this Ordinance, and for which he would not otherwise have been liable, an amount which is equal to the value of the business acquired by him, at the date on which the transfer took effect, shall not be liable further under this Ordinance.

(2) The value of a business acquired by a transferee at the date on which the transfer takes effect shall, until the contrary is proved, be presumed to be an amount equal to the amount paid or agreed to be paid (whether in terms of money or by means of any other consideration) for the acquisition of the business."

7. It is clear, upon an analysis of section 8(1) and section 8(2), that the "payment" in section 8(1) by the transferee in discharge of liabilities under the Ordinance refers to payment by the transferee to the transferor's creditors, whilst the amount "paid or agreed to be paid" in section 8(2) for the acquisition of the business refers to payment by the transferee to the transferor.

8. Mr Whitehead SC for the defendant argued that his client was able to meet all of the requirements referred to.

9. It was a transferee in good faith. The contrary had never been pleaded and there had been no secrecy attaching to the measures which had been taken to effect the transfer.

10. As no creditors had been paid, there was no question of any preferential payment arising.

11. Mr Whitehead went on to submit that as the liabilities of APT far exceeded its assets, the valuation of US$1 paid or agreed to be paid for APT's "company name and goodwill" was not unrealistic in the circumstances.

12. He also placed reliance upon the presumption in section 8(2) that the amount agreed to be paid for the acquisition of the business at the date when the transfer took place was presumed to be the correct value. This being the case the amount which the defendant was liable to pay to the creditors of APT was limited to US$1.

13. He argued that the burden of rebutting this presumption lay upon the plaintiff. It could have sought discovery of the financial records of APT and then sought to prove that the valuation was not well founded.

14. Mr Tong SC for the plaintiff contended that the interpretation of the section relied upon by Mr Whitehead was misconceived. He submitted that the note prepared by the Annotators of "The Annotated Ordinances of Hong Kong" (Butterworths) correctly interprets the meaning of the section:

"[8.01] General note

This section limits a transferee's liability under the Ordinance to the value of the business acquired by him. There is no such limitation in the repealed Fraudulent Transfers of Businesses Ordinance (Cap 49, 1964 Ed).

[8.02] Subsection (1): General note

The transferee only enjoys this limitation of liability, if he has discharged liabilities arising under the Ordinance 'in good faith and without preference'. If the transferee is ignorant of some creditors who have a claim, he may well inadvertently prefer other creditors who have similar claims. The transferee's intention seems irrelevant (cf Richards & Co Ltd v Lloyd (1933) 49 CLR 49) and it is arguable that the limitation on liability will not apply at all unless the transferee pays all creditors rateably up to the limit. If this is so, the protection offered by the subsection is extremely limited (see PG Willoughby & WJL Knight, 'Transfer of Businesses (Protection of Creditors) Ordinance' (1980) 10 HKLJ 348, p. 354)."

15. Mr Tong went on to argue that the critical point to consider in determining whether a transferee could avail itself of the provisions contained in the section was whether it had made, or had agreed to make, a real payment to the transferor and had paid an equal amount to creditors.

16. What had happened in the instant case was that a decision had been made by those in effective control of the situation that a purely notional figure should be placed upon the consideration for the right of the defendant to continue what was in practical terms APT's business and nothing was paid to the creditors.

17. In other words they were able to take advantage of the assets and goodwill of APT's business while at the same time shedding the responsibility for the liabilities of the company.

18. This was exactly the mischief which the Ordinance was intended to prevent.

19. In any event the Judge was satisfied that the defendant had obtained a benefit greatly in excess of the consideration of US$1 which it had paid or agreed to pay.

20. At p. 19 of his judgment he said:

"27. I am unable to accept Mr Whitehead's submission. As McMullin J eloquently stated in Burdett, a company on the verge of bankruptcy may yet be a going concern in the eyes of some potential purchaser. One person's 'laggard' may be another's Cinderella. I am not prepared to infer from the disparate elements which Mr Whitehead has skilfully woven together (e.g., trade over 14 months; an unaudited balance statement in March 1998; withdrawal of facilities by BNP in August 1998; the El Niño effect over an unidentified period of 1998; and a winding-up in December 1999) that as a matter of fact the assumption of APT's business in October 1998 held no attractions whatsoever for the defendant.

28. If anything, the evidence referred to by Mr Harris and listed above suggests that taking over the business of APT had an appeal for the Defendant. I am thinking especially of the statement in GCH's letter to BNP dated 21 July 1998 that 'taking over the trading team and personnel together with [Luckmate's] existing connection' would 'avoid any unnecessary red tape'. By taking over APT's existing operations, the defendant could hit the ground running, so to speak, and get right into the thick of business without delay. As for the suggestion that there was nothing in the fishmeal business because of El Niño there is the undeniable fact that the defendant must have seen some virtue in the trade because the defendant was at pains to avoid 'unnecessary red tape' and start in the animal meal business in October 1998."

21. So far as the valuation of the interest is concerned and the presumption contained in section 8(2) we have no doubt that Mr Tong was right in his submission that the burden of establishing that the provisions of section 8 were applicable lay upon the defendant and not the plaintiff.

22. This was on account of the fact that they were seeking to derive a benefit from the section.

23. As it transpired the defendant did not call any witnesses. From what has been said already it is manifest that the consideration for the transfer did not reflect the true value of what was being transferred.

24. We have no doubt that Mr Tong's analysis of the position is correct and that a transferee can only obtain the benefit of section 8 if it can prove that it has made or agreed to make a payment to the transferor and it has paid the creditors. The burden of establishing this must lie upon the transferee who is seeking to assert it.

25. While it is true to state that it had not specifically been pleaded that the defendant had acted mala fides and the Judge made no finding to this effect, it is nevertheless the case that this scheme was undoubtedly designed to defeat the claims of APT's creditors. As such it cannot be said that the defendant has been acting in good faith as is required by section 8(1).

26. It is also difficult to see how logically a case can be run in the alternative that there was no transfer of business and at the same time a transferee is entitled to the limitation provided for in section 8 which requires evidence of payment for the transfer. These contentions would seem to be mutually incompatible.

27. For all these reasons we are satisfied that this appeal must be dismissed and we make an order accordingly. We also make an order nisi that the plaintiff is to have the costs of the appeal.