KAZAN PROPERTIES AND INVESTMENT LTD v. KING'S DYEING AND WEAVING FACTORY LTD (IN LIQUIDATION)

IN THE COURT OF APPEAL

Civil Appeal

No. 13 of 1988

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REASONS FOR JUDGMENT

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Clough, J.A. (delivering the judgment of the court):

1. The two liquidators of King's Dyeing & Weaving Factory Limited ("King's"), a private limited company in compulsory liquidation, appealed by way of cross-appeal from that part of an order made by Jones J. in Chambers on the 5th January 1988 whereby he ordered a conditional stay of execution in respect of the relief granted on the liquidators' summons against Kazan Properties and Investments Limited ("Kazan"), a creditor of King's. The cross-appeal also sought relief concerning the judge's refusal to make any order regarding, security for the costs of Kazan's pending appeal against the relief granted to the liquidators by the judge's order. The judge had no jurisdiction to make any order for such security, but we are no longer concerned with that aspect of the cross-appeal because the parties came to terms and the matter was disposed of by a consent order.

2. On the 23rd March 1988 we allowed the liquidators' cross-appeal and, upon the liquidators undertaking not to dispose of the moneys paid to them under the judge's order until after the disposal of Kazan's pending appeal, we set aside the stay ordered by the judge. We indicated at the time that we would give our reasons for our decision later. These are our reasons.

3. King's is a family company incorporated in Hong Kong in 1965 for the purpose of manufacturing textiles. It was owned and controlled at all material times by members of the family of Mr. Wong Che-keung whose son Mr. Roger Wong was a principal witness for Kazan in the proceedings below. Kazan is also a family company of the Wong family. It was incorporated in about 1981 at the instigation of Mr. Wong Che-Keung for the purpose of providing finance for King's and at least one other private company of the Wong family. It was common ground below and on the cross-appeal that Mrs. Wong Che-keung beneficial owner of the equity in Kazan.

4. For some years there had been a running account operating between King's and Kazan which provided finance from time to time for King's by way of a cheque discounting scheme. It seems to have been common ground below that Kazan was really the convenient medium through which the Wong family, chiefly Mrs. Wong Che-keung, injected finance into King's when it was required. Kazan appears to have existed only as a conduit for such financing operations and such assets as it has derive from the Wong family whose instrument it is.

5. The affairs of King's have undergone exhaustive investigation by the liquidators. The affidavit and oral evidence in the proceedings below was voluminous. It suffices for the purposes of this cross-appeal to give a bare outline of the salient events which are helpfully set out in the judgment of Jones J. By 1985 King's was in grave financial, difficulties. By January 1986 the company's bankers, the Nanyang Commercal Bank Limited (" Nanyang") were unwilling to make further advances except on stringent terms.

6. Mr. Roger Wong, who had become the acting General Manager in about April 1986 consulted a solicitor, who was an insolvency specialist with a view to the restructuring of King's debts. He evidently advised, as might be expected, that a moratorium was required until additional finance could be obtained to save the company and that in the meantime the business, which was itself generating profits, should be kept as a going concern.

7. On the 2nd July 1986 a firm of accountants produced a report on the affairs of king's which was highly qualified in its terms (due to limitations of time and information) and intended to assist in persuading Nanyang and other creditors to agree to a restructuring, scheme to be followed by the obtaining of further finance. The report indicated inter alia that King's had current assets of about $87.6 million (this proved to be an over-estimate by $50 million) and liabilities in excess of $172.5 million.

8. In the event neither Nanyang nor the creditors could be persuaded to agree a restructuring scheme of the ailing company. The solicitor consulted by Mr. Roger Wong had evidently settled a draft debenture intended originally to provide the basis for further finance from Nanyang or some other bank or finance house after the acceptance of a restructuring scheme by King's creditors. In circumstances which go to the heart of Kazan's pending appeal the debenture instrument came to be executed in favour of Kazan instead of Nanyang.

9. The debenture was dated the 16th June 1986. For reasons given by the accountant who prepared the report and by, King's witnesses it was not mentioned at all in the accountants report and it was not registered until the 17th July 1986. It was expressed to create both fixed and floating charges in relation to both past and future indebtedness of King's to Kazan. At that time King's liability to Kazan was about $12.4 million. Thereafter, between the 17th June and the 24th July 1986 Kazan paid $9.530 million to King's who paid $11.267 million to Kazan during the same period.

10. On the 15th July 1986 a trade creditor presented a petition to wind up King's. On the 25th July 1986 the official Receiver was appointed provisional liquidator of the company with effect from the 23rd July 1986. On the 30th July 1986 two accountants, Messrs. Johnstone and Etches were appointed to be special managers. On the 26th August 1986 a compulsory winding up order was made against King's.

11. On the 2nd or the 4th September 1986 the official Receiver, in his capacity as provisional liquidator of King's, made an agreement with Kazan, evidenced by a letter dated the 4th September 1986, signed on behalf of both parties, whereby, in effect, it was agreed that the provisional liquidator might, within 10 days after the 4th September 1986, sell the assets of King's for not less than $11 million (in fact the sale raised $33 million on the 4th September 1986) and that Kazan's claim to security under the debenture should shift to $11 million of the proceeds of sale of the assets of King's.

12. Under the agreement the Official Receiver was required to pay $11 million of the proceeds of sale of King's assets into a special bank account within three days of the receipt of the proceeds of sale. This sum was to be withdrawn and paid by the Official Receiver to Kazan "within" 3 months of the date of the agreement but there was a proviso to the effect that the withdrawal was not to be made if, before the expiry of the three month period, any proceedings had been commenced by or on behalf of King's or Kazan in which inter alia the validity of the debenture might be called in question.

13. Under paragraph 7 of the letter evidencing the agreement it was agreed that the official Receiver should not withdraw any amount from the account comprising the relevant $11 million except in accordance with the agreement or any other agreement between the parties "or pursuant to or in accordance with any declaration or order by the court in relation to which the time for any appeal has expired without an appeal having been lodged."

14. The agreement contained a qualification to the effect that except to the extent expressly set out in the letter the rights of the parties were generally not to be prejudiced by the agreement.

15. On the 15th September 1986 a regulating order was made and the two special managers were-appointed to be liquidators of King's.

16. On the 14th November 1986 the liquidators issued their summons in the proceedings which, as amended on or about the 25th May 1987, led to the order of Jones, J. which is the subject of the pending appeal by Kazan and of this cross-appeal. After a lengthy hearing the relief sought by the liquidators under the amended summons was granted by the judge's order made on the 5th January 1988, the substance of the relief being:-

(1) A declaration under section 266 of the Companies Ordinance (Cap. 32) that the debenture constituted a fraudulent preference and was void accordingly.

(2) A declaration under section 267 of the Companies Ordinance that in as much as the debenture constituted a first floating charge over the assets of King's it was invalid in that it was created within 12 months of the commencement of the winding-up and it could not be proved that the company was solvent immediately after the creation of the charge.

(3) An order for the repayment of the sum of $1,567,000 by Kazan to the liquidators as monies paid, by King's to Kazan in excess of borrowings in the, period between the 17th June and the 15th July 1986 and declared by the judge's order to be void as constituting a fraudulent preference of Kazan.

(4) An order for the repayment of the sum of $550,000 by Kazan to King's, that sum being the total payments made by King's to Kazan after the 15th July 1986 (the date the petition to wind up King's was presented) which constituted dispositions of the property of King's which were declared by the judge's order to have been rendered void under section 182 of the Companies Ordinance.

(5) An order for the repayment of the sum of $760,361.66 by Kazan to King's, that sum being the amount of interest payments made by King's to Kazan between the 15th January and the 7th July 1986 which were declared by the judge's order to have been void as constituting a fraudulent preference of Kazan.

(6) An order that Kazan take all steps necessary to release to the liquidators the sum of $11 million with interest mentioned in the agreement dated the 4th September 1986 and made between the Official Receiver and kazan.

17. Under the judge's order the liquidators were awarded the costs of the application on a common fund basis save for the costs thrown away on one day due to an adjournment. The latter costs were awarded to Kazan on a party and party basis:

18. On the hearing of the cross-appeal we accepted that, as Kazan's appeal is fixed to be heard at the end of April, the only relief contained in the order which will be suspended to any mate vial effect by the stay is the making of the three payments mentioned at (3), (4) and (5) above. On any footing the terms of the agreement dated the 4th September 1986 themselves preclude any immediate requirement for compliance with the terms of the relief ordered at (6) pending the hearing of Kazan's appeal, and there could be no realistic contemplation of taxation of the liquidators' costs of their application before the appeal is disposed of.

19. The terms of the order directing the stay were as follows:-

"(9) There be a stay of execution of this order for 14 days conditional upon the Respondent filing a Notice of Appeal within that time."

20. If the judge only intended to grant a conditional 14-day stay that would be the end of the matter, because the 14 day period has long since expired and no application for an extension of the stay has been made to this court by Kazan. However we were assured by counsel for the liquidators, Mr. Graham, that both sides agreed that the judges intention was to grant an unlimited stay pending appeal, conditional upon Kazan filing a notice of appeal within 14 days from the date of the judge's order Graham informed the court that his instructing solicitors had applied to the judge's clerk to have the order rectified but that their application had been refused. In view of the assurances of counsel we dealt with the appeal on the footing that the judge's order had been incorrectly drafted and that it did not reflect the order actually pronounced, by the judge which was for an unlimited conditional stay. However we emphasise that it is always open to the parties to apply to the judge himself to speak to the terms of the order where difficulties arise. This should have been done in the present case.

21. The judge gave no reasons for granting the stay or for not imposing terms, apart from the condition that notice of appeal be filed within 14 days. This gave rise to difficulties because the parties had not subsequently asked him to state his reasons for the assistance of this court nor had counsel prepared an agreed note of the submissions which had preceded the judge's order directing a stay. Indeed Mr. Graham and Mr. J.J.E. Swaine, junior counsel for Kazan, had differing recollections of the submissions which had been made before the judge had directed a stay.

22. Mr. J.J.E. Swaine informed the court that he had addressed the judge extensively and reminded him of the agreement under which Kazan had given up its rights under its debenture in return for its right to claim security, for King 's indebtedness to it to the extent of $11 million against the same amount held by the Official Receiver in accordance with the terms of the agreement. He said that he had pointed out to the judge that Kazan was now required to pay about $2.8 million to the liquidators under his order and would have no security to recover this sum if Kazan's appeal succeeded. Mr. Graham did not accept that such arguments were advanced or that they were sound. His recollection was that the main thrust of the submissions on behalf of Kazan below had been that there was an appeal pending, and that nothing was said about the risk of dissipation by the liquidators of any payments received by them under the judge's order.

23. It was on this unsatisfactory basis that the court had to deal with the arguments on the cross-appeal which impugned the exercise of the judge's discretion in ordering a stay. The substance of Mr. Graham's argument in support of the appeal was that Kazan bad not shown any special circumstances below to justify, a stay and that any suggestion of risk of dissipation of payments received by the liquidators under the judge's order was unjustified and would immediately have been met by an offer to give an appropriate undertaking. In so far as such an undertaking might be considered necessary now he was instructed to offer it.

24. He went further and contended that there were special circumstances indicating that a stay should not have been granted. These were that Kazan was a Wong family company which existed for the sole purpose of injecting finance into King's and possibly other Wong family companies. It had no assets other than those fed into it by the family which had already lost heavily in the collapse of King's. The evidence showed that Mr. Roger Wong claimed that his father, who owed $8 million to King's, had no resources and that his mother had already lost heavily by financing King's from her personal resources through Kazan. Mr Graham contended that the family might be unwilling to throw good money after bad and that the stay aggravated the liquidators position because there might prove to be no funds in Kazan to make the payments required under the judge's order.

25. In resisting the cross-appeal Mr. John Swaine Q.C. made what he could of the fact that the liquidators' costs of the pending appeal by Kazan had been secured under the consent order made at the outset of the hearing of the cross-appeal and of the fact that Kazan's appeal was only a month away in time. He was nevertheless left with Mr. Graham's argument that the judge's order for a stay was not justified by special circumstances and that in any event the circumstances positively militated against the propriety of a stay.

26. Mr. Swaine's contention was that, in the absence of any undertaking from the liquidators, there was a risk of dissipation of any payments they might receive under the order if the stay were lifted, because the liquidators would feel bound in principle to pay out the money. There had, he said, been no indication below from the liquidators that the payments received by them under the order, if there were no stay, would be preserved by them, and the effect of the agreement by kazan with the Official Receiver was to limit kazan's security to $11 million which would not avail Kazan dissipated the payments.

27. Mr. Swaine also referred us to evidence relating to the liquidators' successful claim for the recovery of $1,567,000 referred to at (3) above and attacked the judge's finding in respect of that sum in favour of the liquidators. He relied on the notes on order 59 rule 13 in the Annual Practice Vol. I at paragraph 59/13/2 to the effect that, as regards the court's discretion to impose terms when granting a stay, one of the material factors is the chances of success in the appeal_.

28. It seemed to us that even if it were accepted that Mr. J.J.E. Swaine had advanced below the argument which he outlined to us on the lines indicated above, there was no basis for the granting of a stay in the present case and that the arguments in support of the stay advanced on appeal could not sustain the judge's order for a stay.

29. Order 59 rule 13(1) makes it clear that a stay is not granted as a matter of. course. It provides in terms that an appeal shall not operate as a stay of execution or of proceedings under the decision of the court below except so far as the court below or this court may otherwise direct. The court thus has a discretion in the matter.

30. The authorities cited in the Annual Practice Vol. 1, in the notes on Order 59 rule 13 make it clear that when exercising that discretion the court does not make a practice of depriving a successful litigant of the fruits of his litigation: Monk v, Bartram^(l) but that when a party appeals the court should see that the appeal, if successful should not be nugatory: Wilson v. Church (No. 2)⁽²⁾ at pp. 458-9. Hence it is well settled that a party seeking a stay must show special circumstances and that as a general rule the only ground for a stay where damages and_. costs have been ordered to be paid is affidavit evidence showing that if the money is paid. there will he no reasonable probability of recovering it even if the appeal succeeds: Barker v. Lavery⁽³⁾, applied in Atkins v. G.W. Railway⁽⁴⁾

31. Applying these principles to the present case it seemed to us that no special circumstances had been shown by Kazan below. Both Mr. J.J.E. and Mr. John Swaine's arguments stood or fell on their reliance on the alleged risk of dissipation of the total sum of about $2.87 million if there were no stay and the relevant payments, were made to the liquidators. There being no evidence of any imminent prospective dividend being contemplated by the liquidators who had been paid no less than $33 million for the assets of King's and were still involved in the investigation of the complex affairs of that company, we rejected as wholly unrealistic the suggestion that the liquidators, who are chartered accountants and partners in a leading firm of international standing, would contemplate paying out the $2.87 million if they were to receive it from Kazan under the judge's order. On the contrary we considered that common prudence would clearly prevail to cause the liquidators to retain the payment at least until the appeal of Kazan was finally disposed of.

32. The matter was put beyond the possibility of doubt by the liquidators' offer of an undertaking by their counsel. The fact that the question of such an undertaking was not canvassed below is not, in our Judgment, to beheld against the liquidators on the cross-appeal. The recollection of junior counsel on each side 'differs regarding what submissions were made below, but assuming that Mr. J.J. E. Swaine made the submissions outlined above, we cannot credit that the judge would have accepted, any more than we did on appeal, that the liquidators would even' contemplate dissipating the $2.8 million before the appeal of Kazan had been disposed of. We accepted the undertaking when it was offered, because it was offered, and not because we considered that it was a necessary pre-requisite to the lifting of the stay on the cross-appeal.

33. As to Mr. John Swaine's reliance on the strength of Kazan's grounds of appeal, Lord Esher, with whom Lindley and Lopes L.JJ. concurred, made it clear in Atkins v. G.W. Railway⁽4) that the fact that there were strong grounds for an appeal was no reason for granting a stay "... for no one ought to appeal without strong grounds for doing so." Therefore, assuming, without deciding, that Kazan does have strong grounds for appealing against the order below, that cannot avail it in seeking to sustain the stay that was granted.

34. In so far as the notes in the Annual Practice, Vol. I at p. 894 under the rubric "Terms on which a stay is ordered indicate that the chances of success in the appeal are material circumstances may be intended to convey that such circumstances are special circumstances of the kind which are material for consideration when the court is deciding whether to grant a stay at all they are in conflict with the dictum of Lord Esher cited above and must give way to it.

35. There was clearly force in Mr. Graham's contention that in any event a stay should have been refused because of the background facts concerning Kazan and the source of its assets. However we did not find it necessary to look beyond the reasons given above for our conclusion that the cross-appeal should be allowed because the stay had been granted below without Kazan having shown any special circumstances to justify such a course.

36. We make an order nisi that the liquidators are to have their costs of this cross-appeal. We have already indicated to the solicitors on the record that, if it is desired to make an application to vary that order, Thursday the 31st March at 9:30 a.m. would he a convenient time.

(1) [1891] 1 Q.B. 346 (C.A.)

(2) (1879) 12 Ch. D. 454 (C.A.)

(3) (1885) 14 Q.B.D. 769 (C.A.)

(4) (1886) 2 T.L.R. 400 (C.A.)