BANQUE NATIONALE DE PARIS v. SAM WAH HING GARMENT FACTORY LTD AND OTHERS

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JUDGMENT

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Pleadings

1. The plaintiff, which carries on the business of banking in Hong Kong, seeks four declarations:-

2. The first defendant is in liquidation, by virtue of a Winding-up Order made by this court on 8th March, 1982, in consequence of a Winding-up petition presented on 8th February, 1982.  Thus the real first defendant is the Official Receiver, as liquidator of the first defendant, though the latter remains the nominal party.

3. The first defendant seeks a declaration that payments made by the first defendant into its account with the plaintiff from 9th November, 1981 to 8th February, 1982, amounting to $1,579,963.63 (as set out in the particulars to paragraph 8 of the amended Statement of Claim) are void against the Official Receiver as being fraudulent preferences; and an order that the plaintiff should repay that amount to the Official Receiver.

4. The second and third defendants, who were not represented at the trial, deny that any payments made by the first defendant to the plaintiff constituted a fraudulent preference and assert that the plaintiff is not entitled to any of the declarations sought.

Background to Claim.

5. In January 1980, the first defendant, a limited company, carrying on the business of manufacturing garments, applied to the plaintiff (B.N.P.) for banking facilities. The second and third defendants were directors and major shareholders of the company.

6. By an agreement in writing dated 6th March, 1980, it was provided that,  in consideration of B.N.P. granting banking facilities to the first defendant, (Sam Wah), the second and third defendants would guarantee payment to B.N.P. on demand of all monies and liabilities incurred to the plaintiff by the first defendant.

7. By a mortgage deed dated 20th March, 1980, the second and third defendants, in order to afford the plaintiff security for the performance by them of their obligations to the plaintiff under the guarantee, assigned to the plaintiff Flat 514 Joyful Villas, owned by the second defendant and Flat 13A, 109 Broadway, Mei Foo Sun Chuen, owned by the third defendant.

8. In April 1981, the plaintiff decided not to lend any more money to the first defendant in view of the parlous condition of its business. The second defendant, who was effectively in control of the first defendant, was informed verbally by an officer of the Tsuen Wan branch of B.N.P. that the bank was not prepared to extend further facilities and that the first defendant should find another banker by 31st October.

9. Early in November 1981, the first defendant asked the plaintiff for an extension of time to find an alternative banker, to which the plaintiff agreed, extending the time to the end of March 1982.

10. However, on 27th November, 1981, the plaintiff wrote to the first defendant, demanding payment of the latter's outstanding debt to B.N.P. of $1,221,518.61, plus interest on or before the 31st December, 1981, failing which "legal action may be taken against you without further notice".

11. The plaintiff wrote in similar terms to the second and third defendants on 21st December, 1981, demanding payment of $1,235,160.53 plus accrued interest, on or before 31st December, 1981, failing which legal proceedings would be instituted.  The letters stated that this sum was due to the plaintiff from the first defendant and that these letters were written in accordance with the terms of the guarantee of 6th March, 1980 and the mortgage deed of 20th March, 1980.

12. On 8th February, 1982, a winding-up petition was presented to the court.  The Official Receiver was appointed as provisional liquidator of the first defendant on 22nd February.A winding-up order against the first defendant was made by the High Court on 8th March, 1982.

13. On 5th March, 1982 the Official Receiver wrote to the plaintiff, asserting that all payments which had been made to the credit of the first defendant since the 22nd November were fraudulent preferences, in favour of the bank and asking for repayment of such sums.   The date referred to seems to have been wrong, since the period of three months during which a transaction may be treated as a fraudulent preference ends with the presentation of the petition, which was 8th February.

14. An examination of the first defendant's account with B.N.P. shows that, between 9th November, 1981 and 8th February, 1982, there were thirty payments to the credit of the first defendant amounting to $1,579,963.63. Of this amount $681,062.48 were the proceeds of letters of credit negotiated by B.N.P. as advising bank.

15. In view of the Official Receiveer's letter, B.N.P. did not reassign the properties mortgaged to them by the second and third defendants although, so far as it was concerned, the latter had no further liability to them.

16. There is a little dispute as to the facts. It is agreed that, on 9th November, 1981, the first defendant was indebted to creditors other than B.N.P. to the extent of $1,094,199.88.  The statement of accounts drawn up by the Official Receiver, and signed by the second and third defendants on behalf of the first defendant, shows that, on 8th March, 1982, the first defendant's debts amounted to $2,276,011.09

17. The first defendant's bank statement, which was produced in evidence, establishes that it owed $972,224.53 to the plaintiff, on 9th November.  This indebtedness had become a credit of $51.50 by 8th February, 1982.

18. The fact that, during the relevant period, the first defendant's indebtedness to the bank was wholly discharged and that its debts to other creditors increased from about $1.1 Million to $2.276 Million is evidence that the first defendant had been according preference to the repayment of its debts to the plaintiff, in the absence of explanation to the contrary effect. Indeed, the second defendant admitted that he put off other creditors while he was repaying the bank. I find as a fact that the first defendant was preferring B.N.P. to his other creditors between 9th November, 1981 and 8th February, 1982.

Evidence of second defendant

19. The main issue to be determined is whether the payments made to the credit of the first defendant's account with B.N.P. between 9th November, 1981 and 8th February, 1982 were fraudulent preferences, within the meaning of section 49(1) of the Bankruptcy Ordinance and so voidable by the Official Receiver, standing in the shoes of the first defendant.

20. It is clear, on the authority of Re Gray's Inn Construction Co. Ltd^.(1) that a customer who is overdrawn is a debtor of the bank for the amount of his overdraft. When he pays cash or a third party's cheque into the account, he discharges his debt to the bank to that extent and the bank makes a disposition on the customer's behalf in its own favour discharging the customer's liability on the overdraft.

21. The second defendant, who impressed me as an honest witness, on whose testimony I rely, was examined by Mr. Ho, an Assistant Registrar in the Official Receiver's Office, on 26th February, 1982.

22. In the course of this preliminary examination he agreed that the first defendant became insolvent in February 1981 and that. he was aware of this at that time.  He said that the. company's business continued thereafter because he hoped it would improve.

23. This examination also revealed that the company had another account with the Hongkong and Shanghai Bank.  In evidence, the second defendant said that this had been opened in November 1981, though he was unable to give any indication of how much had been paid out of it, since all the relevant documents were in the hands of the Official Receiver.   But since no evidence was produced before me about this account, I am obliged to ignore its existence for the purposes of this case.

24. According to Mr. Ho, as a result of the preliminary examination and of his interview with the second defendant, he drew up in English a declaration, which he gave to the second defendant to swear. This the latter did, after it had been translated to him by a court interpreter.  In passing, I suggest that it is the better practice, when someone under examination in bankruptcy proceedings does not understand English, for his answers to be recorded in the language in which he gives them.  If necessary, a translation can later be made for the benefit of those in the Official Receiver's Office who read only English.

25. Paragraph 3 of this declaration reads as follows -

"On 9th November 1981, the company owed to the bank HK$972,224.53. We knew since February 1981 that the company was insolvent (i.e. unable to pay its debts when they fell due). In order to avoid the first flat and second flat being sold by the bank, we with the agreement of the third director of the company, Madam Lau Wai Ping, managed to pay almost all the book debts of the company collected into the account of the company at the bank though we at all times wished to continue the business of the company. Besides those amounts collected by the bank regarding letters of credit, we estimated to have paid in the bank since 9th November 1981 HK$800,000 approximately representing the book debts of the company paid by cheque."

26. In cross-examination, Mr. Ho agreed that the second defendant told him that he hoped the company would continue in spite of its financial difficulties and that he wanted to keep it going. And that both the second and third defendants told him that, before the winding-up, they had meant to carry on if a bank would support them.

27. Mr. Ho was sure that what he put in the declaration was an accurate summary of what the two defendants had told him.

28. Mr. Sze in evidence confirmed that the answers recorded in the record of the preliminary examination were correct, as was the Statement of Account dated 16th August, 1982.

29. He agreed that in April 1981 he was asked by one of B.N.P's officials to find other bankers.

30. After he received the letter of 27th November, 1981, demanding repayment of the debt owed to the bank by the first defendant, he said that he hoped to save the company by finding another banker and that he tried to do so.

31. As any other bank would make enquiries of the former bank, the company wanted to retain the goodwill of B.N.P.

32. He negotiated with other creditors asking them not to present cheques, saying that he was seeking another bank to enable him to carryon his business.

33. "My main concern", he said in cross-examination, "was to keep the company going."

34. He paid the bank in order to keep going while he borrowed elsewhere. As B.N.P. had demanded repayment, he wanted to get back the two properties mortgaged to B.N.P., for use as security with another bank, since he knew that any other lender would require security.

                   "If B.N.P. was paid off, I would get them back and I could pledge them to another bank which might lend me money."

35. This explanation is supported by the evidence of Mr. Wilson Wang, then Branch Manager of the B.N.P. Tsuen Wan Branch, who said "We were trying to reduce the outstanding debt as much as possible. The client wanted to do this so as to get taken over by another bank."

36. When asked to explain the reference in paragraph 3 of the declaration to paying off the bank " in order to avoid the first flat and the second flat being sold," he explained that the declaration was incomplete in this respect, because it says nothing about him wanting to get the properties back so as to recharge them to another bank.  He did not tell Mr. Ho why he wanted to get them back because Mr. Ho did not ask him.

37. On the basis of the evidence of the second defendant, with which in essence Mr. Ho does not disagree, I find, as a matter of fact -

38. The remaining question is whether, in the light of the evidence, I am satisfied that the payments amounted to "fraudulent preferences" so as to be voidable in favour of the Official Receiver.

Fraudulent preference

39. Section 266(1) of the Companies Ordinance (Cap. 32) provided, at all relevant times-

"266. (1) Any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property which would, if made or done by or against an individual be deemed in his bankruptcy a fraudulent preference, shall, if made or done by or against a company, be deemed, in the event of its being wound up, a fraudulent preference of its creditors, and be invalid accordingly."

40. Section 49(1) of the Bankruptcy Ordinance deals with fraudulent preferences in these terms -

41. The crucial words of Section 49(1) are "with a view to giving such creditor, or any surety or guarantor for the debt due to such creditor, a preference over the other creditors".

42. Such a preference has become known as a "fraudulent" preference, though no element of dishonesty need be present and "fraudulent" can properly be interpreted as meaning no more than "undue", "unfair", or "voidable".

43. It is well-established that the onus lies on the person alleging a fraudulent preference to prove that the payments impugned were of such a nature - see Re Cutts^(2).

44. The burden which lies on the first defendant, therefore, is to establish that the relevant payments were made with "an intention to prefer", and that this intention must be the "dominant intent" - see In re M- Kushler Ltd. ⁽³⁾ This burden does not shift, even where it is shown that a voluntary payment has been made which in fact rives a creditor preference.

Nature of payments

45. Before a transaction can be a fraudulent preference, it must be established - see Re John Drage ⁽⁴⁾

46. As stated above in my summary of findings of fact, I am satisfied that the payment in issue were made by the first defendant when he was unable to meet his debts. And that the credits to the account with B.N.P. after 8th November did in fact prefer the plaintiff to other creditors.

Dominant intent

47. A payment does become voidable if there are other circumstances which establish that although the bankrupt has made a payment which in fact gives a creditor a preference, the transaction complained of was not done with the dominant intention to prefer but with some other intent.

48. It is the debtor's state of mind which is the paramount consideration.  This is a question of fact  to be derived from all the circumstances of the case.

49. In FLE Holding Ltd. ⁽⁵⁾, Pennyquick, J. held that there was no fraudulent preference where the dominant intention of the debtor was not to prefer the bank, which was the creditor concerned, but to benefit the debtor company by keeping on good terms with the bank in the hope of keeping the company a going concern.

50. The first defendant relied on Re F.P. & C.H. Matthews Ltd. ⁽⁶⁾ in which the Court of Appeal decided that the fact that the debtor hoped to be able to pay all his debts later on did not prevent the dominant motive of the debtor being to prefer.

51. It is hardly surprising that the Court of Appeal came to the conclusion that the mere belief of the debtor that he would be able to pay his creditors in the future was not sufficient to prevent a payment being fraudulent if a debtor, unable to pay his debts as they arise, pays one creditor in full.

52. I find that the dominant purpose of the first defendant, and of all the actions taken on its behalf by the second defendant, was to pay off the bank in order to preserve the company as a going concern.

53. The second defendant believed that it was essential, if the company was to survive, that it should pay off the bank -

54. Thus I conclude that, although the first defendant intended to pay off the bank in preference to other creditors, its dominant intention was to keep itself alive.  The repayment of the bank was seen by the first defendant, for the reasons given above, as the only means of achieving this objective.

Voluntary payments

55. In view of my finding as to the dominant intention of the first defendant, it is not strictly necessary for me to decide also whether the challenged payments to the bank were of a voluntary nature.  I will, however, do so in case I should be held to be wrong on that finding.

56. Re Cutts ⁽²⁾ decided that, even if payments were, prima facie, made with an intention to prefer, they will not be fraudulent within Section 49(1) if they were not 'voluntary'.

57. One of the ways of establishing that a transaction was not the voluntary act of the debtor is to show that it was the result of pressure brought on the debtor by a creditor or surety.

58. As Jenkins, L.J. observed in Re Custts ⁽²⁾ (at p.740) -

"Lastly, it is clearly established by the authorities that, inasmuch as preference implies selection and selection implies freedom of choice, a payment must in order to constitute a preference be voluntarily made, and that a payment made under pressure, e.g. in the shape of proceedings actual or threatened by the creditor concerned, or fear of such proceedings, is not for this purpose a voluntary payment."

59. The letter written by the plaintiff to the first defendant on 27th November, 1981 threatening legal proceedings unless the debt due was satisfied by 31st December, 1981 seems to me to amount to pressure of such a nature as to make the subsequent payments by the first defendant to the plaintiff involuntary.

60. Although there had been some pressure by the bank from April 1980 on the first defendant to find other bankers, it was not until 27th November that the bank took direct action to recover its debt. Indeed, it had continued to meet cheques dawn by the first defendant on its account up to 25th November.

61. I therefore consider that payments only become involuntary after 27th November. This would reduce the amount of "preferred" payments from $1,579, 963.63 by $321,928.46 to $1,258,035.17.

Conclusion

62. The plaintiff is entitled to the declarations sought in sub-paragraphs 1(i) and (ii) of its claim.

63. The question of the declarations sought in subparagraphs 2(i) and (ii) of the claim therefore does not arise.

64. The counterclaim of the first defendant fails.

(1) [1980] 1 All E.R. 814 C.A.

(2) [1956] 1 W.L.R,. 728 C.A.

(3) [1943] 1 Ch. 248 C. A.

(4) [1926] 134 L.T. 765

(5)[1967] 1 W.L.R. 1409.

(6) [1982] 1 All E.R. 338 C.A.