RE GOODWAY LTD

HCCW 162/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 162 OF 1998

----------------------

----------------------

----------------------

D E C I S I O N

----------------------

1.  This is a summons taken out by the Official Receiver who is the liquidator of Goodway Limited (“the Company”).  The first part of the application is not controversial.  The Official Receiver seeks an order under section 207(7) of the Companies Ordinance, Cap. 32 that the vacancy arising in the committee of inspection as a result of the resignation of a member, Messrs WK To & Co., on 29 May 2008 need not be filled.  There are 4 remaining members in the committee, the liquidation is almost finalised, the only outstanding matter is covered in the second part of this summons which I will come to.  The Official Receiver sees no need to fill the vacancy.  I make an order as sought in the summons.

2.  The other matter concerned in the summons is for directions under section 200(3) of Cap. 32.  The Official Receiver seeks the sanction of the court to refund $349,900 from the estate of the Company or such other sum as the court considers appropriate to Yook Tong Electric Company Limited (“Yook Tong”).  The reason for the refund is because the Official Receiver considers it appropriate, by applying the principle in Ex parte James (1874) 9 Ch App 609, to act according to the principles of equity as an officer of the court, as Yook Tong had paid $350,000 in consideration for the assignment of claims by the Company the majority of which were subsequently held by the Court of Appeal not to be assignable, so the consideration was paid under a mistake of law.

3.  The relevant background matters may be stated as follows.

4.  On 31 July 2000, the Official Receiver entered into a deed of assignment with Yook Tong to assign to the latter all rights of action and interests derived from the Company’s claims against Pirelli Cavi E Sistemi SPA (“Cavi”) for the consideration of $350,000.  Counsel’s advice had been sought and he was of the opinion there was strong merit in the claims.  He considered there were potential claims of approximately $32 million, of which $20 million was likely to be substantiated by evidence in the litigation.  The claims were comprised under 33 heads.  Under the assignment, Yook Tong agreed to remit 30% of any moneys received from the claims for division pari passu among the creditors of the Company.

5.  Action was then commenced by Yook Tong against Cavi in High Court Action No. 7882 of 2000.

6.  Cavi applied to court under Order 14A of the Rules of the High Court to challenge the validity of the assignment.  It failed at first instance but succeeded to a large extent on appeal (CACV No. 293 of 2003, 25 June 2004).

7.  The Court of Appeal held that by virtue of a restriction in the distribution agreement prohibiting assignment without consent of the other party, it was not permissible for the Company to assign to Yook Tong its claims against Cavi arising out of the distribution agreement without Cavi’s prior consent.  The Court of Appeal held that claims numbered 1 and 2, 5 to 26 could not be assigned to Yook Tong, and dismissed those claims of Yook Tong against Cavi.

8.  The remaining claims of Yook Tong in the High Court Action, being claims numbered 3, 4, 27 to 33, were worth potentially $8.3 million, but according to the advice of counsel, the amount of these claims likely to be substantiated was only about $1 million.

9.  Hence, the effect of the dismissal of a large part of the claims in the High Court action was that total claims originally thought to be worth $20 million were reduced to just $1 million.

10.  Since then, Yook Tong has made representations to the Official Receiver for refund of the consideration.  This was resisted by solicitors for Pirelli Cables Limited (now known as Prysmian Cables Limited; “Prysmian”), the biggest creditor of the Company and was at one time related to Cavi.

11.  Yook Tong claims to have incurred costs in excess of $1.45 million in defending the assignment.

12.  In December 2004, Cavi paid into court $386,206.80 in satisfaction of the remaining claims.  Under the terms of settlement proposed in March 2008, Yook Tong was to accept $341,036.40 of the sum paid into court, Cavi was to retain the balance of $45,170.40, in addition Yook Tong was to pay Cavi a further sum of $250,000 in respect of outstanding costs, and each party was to bear its own costs.  No final settlement has been reached as yet, until the issue of the refund now before this court has been resolved. 

13.  I have set out in extenso in my earlier judgment in Re Ng Shiu Fan, HCB No. 1201 of 1998, 23 July 2008 at paragraphs 68 to 75 relevant passages in a number of cases on the exposition of the principle in Ex parte James.  I do not propose to repeat them here.

14.  The application today is made by the Official Receiver ex parte, but members of the committee of inspection have been notified of the application and a draft report of the Official Receiver in support of the application has been served on all members of the committee for their comments.

15.  I have considered the opposing views put forward by the solicitors for Prysmian.  In their letters, they have made the following points:

(1) Yook Tong has no valid cause of action against the Official Receiver for a refund, as the Official Receiver had never made any representation or warranty regarding the value of the claims to be assigned in the assignment.

(2) Yook Tong has failed to provide satisfactory basis for valuing its remaining claims with a value of approximately $8.3 million in the statement of claim to be worth only $1 million.

(3) The mere fact that Yook Tong entered into a bad bargain and suffered loss in a commercial transaction at arm’s length should not justify a refund in equity.  On the contrary, the refund would unjustly grant Yook Tong a right to receive payment out of the Company’s estate in priority to claims of other creditors to the estate.

16.  It appears to me that the consideration paid by Yook Tong under the assignment was paid under a mistake of law that most, if not all, of the claims assigned to it by the Company were legally assignable.  The fact that Yook Tong may have no valid cause of action against the Official Receiver for refund of the consideration is beside the point.  Where the principle in Ex parte James applies, it matters not that there is no legal right of recovery against the liquidator.  As an officer of the court, the Official Receiver is obliged to act with scrupulous fairness and impartiality under that principle.  The question I should ask is whether it would be unfair and contrary to natural justice for the Official Receiver to retain the consideration paid by Yook Tong under a mistake of the law.  In my view, I consider it inequitable for the other creditors to benefit as a result of this mistake of law, as this would be taking an unfair advantage of Yook Tong.  What the Official Receiver has proposed is to refund $349,900 to Yook Tong, and retain $100 as consideration for the assignment of those heads of claim not declared invalid by the Court of Appeal.  There is no question of Yook Tong being compensated for the costs it had incurred in defending the assignment unsuccessfully.

17.  As for the contention that Yook Tong has not provided satisfactory basis in valuing its remaining claims to be worth only $1 million, I note that the amount paid into court by Cavi for these claims was only $386,206.80 and it was proposed in the terms of settlement that Yook Tong should receive $341,036.40 of the sum paid into court.  I see nothing in this point.

18.  I will ascribe a token value of $100 to the claims validly assigned to Yook Tong.  I give sanction to the Official Receiver to refund $349,900 to Yook Tong.  I make no order as to the costs for this application.