SHIRANNE HOLDINGS LTD v. NEW ASIA ASSOCIATES (HK) LTD

HCA 2125/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2125 OF 2008

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(Heard together)

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J U D G M E N T

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1.  Shiranne agreed to buy commercial properties from New Asia and Sky Fox respectively.  In each case it paid substantial deposits (totalling about $40 million), representing some 50% of the purchase price.  It did so because New Asia and Sky Fox intimated that they were in financial difficulty and were prepared to offer a good deal in return for a substantial deposit.  But New Asia and Sky Fox, both of which entered into creditors' voluntary liquidations, failed to complete.  Shiranne therefore commenced these proceedings for the return of the deposits paid.  The liquidators of New Asia and Sky Fox have applied for the proceedings to be stayed.  I have to decide whether to grant the stay.

2.  The law on the matter is clear.  New Asia and Sky Fox being in voluntary liquidations, there is no automatic stay of proceedings.  It is in the Court’s discretion whether or not to grant a stay. 

3.  Typically, the Court will follow the practice in applications for the compulsory winding-up of companies when deciding whether to grant a stay.  Thus, normally stays will be granted except where a plaintiff is a secured creditor.  In such circumstance, the plaintiff’s security is not part of a company’s assets.  There would be no good reason for a Court by the grant of a stay to hinder the plaintiff from realising his security.

4.  An exception to this general practice where secured creditors are involved is where a liquidator offers to give all that a secured creditor can obtain by his Court proceedings.  In that case, the Court may in its discretion grant a stay on condition that the liquidator abides by his offer.

5.  Here Shiranne is a secured creditor.  The payment of its deposits gave rise to a purchaser’s lien (that is, an equitable lien) over the properties.  Shiranne is thus entitled to enforce its security interest by seeking an order for the sale of the properties from the Court.

6.  However, Shiranne is not the only creditor having a security interest in the properties.  Shanghai Commercial Bank holds mortgages over both properties which rank ahead of Shiranne’s liens.  The monies due under the Bank’s mortgages may or may not exceed the current value of the properties.  The Bank has indicated to the liquidators that, following the Chinese New Year, it will exercise its powers of sale as mortgagee in respect of the properties. 

7.  The liquidators of New Asia and Sky Fox have offered to secure such interest as Shiranne may have in any surplus left over (after the sale of the properties by the Bank and payment of what is due to the Bank) through the payment of such surplus into an interest-bearing account.  The monies could then await determination either by the liquidators or by the Court (as appropriate) of Shiranne’s entitlement to the return of its deposits.

8.  The liquidators therefore argue that, in light of their offer, Shiranne will obtain all that it can secure by these proceedings.  It would (the liquidators suggest) be less costly for Shiranne’s claim for the return of the deposits to be determined by the liquidators and, in the event that the liquidators hold in Shiranne’s favour, the surplus paid into the interest-bearing account may be handed over to Shiranne.  There is then every reason (the liquidators contend) for the Court to grant a stay.

9.  I am not persuaded.  In order to establish its right to sell the property, Shiranne as the holder of an equitable lien needs a Court order.  Currently, the liquidators do not accept that Shiranne is entitled to anything.  They vaguely hint, in a highly unparticularised manner, that there is something fraudulent in Shiranne’s relationship with New Asia and Sky Fox.  Until the Court determines the dispute over Shiranne’s right to its deposits, Shiranne’s right of sale cannot be exercised.  It seems to me therefore that the offer falls short of what Shiranne is to achieve by these proceedings.

10.  Further, as a matter of first impression, on the present evidence, there is no basis for even hinting fraud on the part of Shiranne.  To the contrary, on the present evidence, it appears to be entitled to its deposits or to a realisation of its security subject to the Bank’s prior interest.  The matter appears to be straightforward and possibly susceptible to summary judgment.  I am consequently far from convinced that it would be less costly for the liquidators themselves to determine Shiranne’s entitlement to its deposits as part of the liquidation.

11.  I have not lost sight of the fact that nothing may be left over to Shiranne following the sale of the properties.  The Bank’s interest may exceed any sale proceeds obtained from the properties.  But whether that will or will not be the case is speculative at the moment in the absence of concrete evidence as to the value of the properties.

12.  Nor is it clear to me whether the Bank will fully proceed with the sale of the properties.  If for some reason at any stage the Bank decides not to proceed, it may be that Shiranne would wish to step in and sell the properties.  It would need a Court order to do so.

13.  For the foregoing reasons then, I do not think that it is appropriate to grant a stay.