Re Wing Hong Woo Co. Ltd.

HCCW532/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP PROCEEDINGS NO.532 OF 1995

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J U D G M E N T

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1. Before me is an application by the liquidator of Woo Hing Hong Company Limited ("the Company") under section 266 of the Companies Ordinance for a declaration that net repayments made between 1 August 1995 and 3 November 1995 by the Company to Wing Hang Bank Limited ("the Bank") constituted and that each of them constitutes a fraudulence preference by the Company of the Bank over the other creditors and void and for consequential orders for repayment.

Background facts

2. In May 1968, Mak Ping Fai ("Mr Mak") commenced business under the name of Wing Hong Woo Company Limited ("WHW") which was a sole proprietorship in May 1968. In the early 80s, WHW started a banking relationship with the Bank and Tsang Cheuk Lau ("Mr Tsang") has throughout been the officer assigned by the Bank to handle WHW's accounts. Mr Mak caused the Company to be incorporated in February 1984 and opened a current account with the Bank. On 8 January 1987, Mr Mak's wife, Mrs Lee Yim Ping ("Mrs Mak"), gave a personal guarantee in respect of WHW's account with the Bank up to a principal amount of $9,350,000.

3. Mr and Mrs Mak owned a property in Australia ("the Australian property"). In 1991, they executed an all-monies legal mortgage over the Australian property in favour of the Bank. In December 1992, the Company entered into various financing arrangements with the Bank including a Running Trust Receipt Agreement.

4. It is relevant to mention that Mr Mak also carried on business under the name of Wing Cheong Laan ("WCL"). Its business was in the retailing of fresh fruit and vegetables. At some point Wing Cheong Laan Limited ("WCLL") was incorporated, the shareholders and directors being Mr Mak and his wife with Mr Mak holding a 70% interest. Although WCL ceased business on 31 March 1993, the retailing business continued to be carried on through WCLL.

5. By September 1993, the Bank was no longer the exclusive banker for Mr Mak's wholesale business. Other banks, namely, HSBC, Dah Sing Bank and Belgian Bank also financed that wholesale business which, at the time, was largely conducted through WHW.

6. By April 1994, much of the business came to be transacted through the Company rather than WHW. On 17 April 1994, the Company executed an all-monies legal charge of a property in Happy Valley registered in the Company's name ("the Happy Valley property") in favour of the Bank by way of additional security. On 20 April 1994, at the Company's request, the Bank opened a bills account ("the I/B account") and granted banking facilities up to $18 million for the opening of irrevocable letters of credit with a sub-limit of $14 million available for trust receipts up to 90 days to be utilized jointly with WHW. This was secured by WHW's unlimited guarantee and letter of set-off.

7. On 6 October 1994, the total banking facilities which the Company could enjoy through operating the current and I/B accounts were raised to $20,050,000. The bills facilities through the I/B account were increased to $20 million to be utilized jointly with WHW with a sub-limit of $16 million available for trust receipts up to 120 days. Overdraft facilities through the current account remained at $50,000.

8. It would appear that in early 1995 Mr Mak knew that his business began to collapse and that by mid-1995, Mr Mak knew that he could not save his business. That emerged from an examination of Mr Mak which took place in mid-1996 prior to his absconding from Hong Kong.

9. The six-month period for the purposes of section 266 commenced on 3 May 1995.

10. But what was the Bank's knowledge as at mid-1995? Mr Tsang's evidence was to the effect that from early to mid-1995, he began to receive discreet hints of financial difficulty on the part of the Company. Although the Company had not actually defaulted in the performance of its agreed obligations to the Bank, he became somewhat concerned by a number of matters : the Company's "persistent tendency" to exceed the limit of the bills facilities, the extension of a maturity period of the Company's trust receipts and import bills from 90 to 120 days and the full exploitation of such extended maturity periods since October 1994 when, to the Bank's knowledge, there was no corresponding lengthening of the credit period prevailing in the fresh food and vegetable wholesale trade. These factors were indicative of the Company's use of the receipts that should have been utilized to retire the corresponding inward bills and/or trust receipts to finance some other business activities which were unknown to the Bank.

11. In mid-June 1995, Mr Tsang approached Mr Mak for the reduction of the Company's indebtedness to the Bank. By this time, Mr Mak allegedly saw that it was impossible for him to save his business. However, there is no evidence that Mr Mak communicated his knowledge to the Bank.

12. Some two months later, on 23 August 1995, Mr Tsang, in a telephone conversation with Mr Mak, made it clear that unless the Company reduced its indebtedness to the Bank to a level acceptable to the Bank, the Bank might have to reduce the limit of the bills facilities or even revoke them altogether. It is to be noted that under the facilities letter, the Bank had an "overriding right" to revise the extent or terms of the facilities without the consent of or notification to the Company. The position taken by Mr Tsang apparently did not please Mr Mak who retorted by threatening to move the Company's accounts and securities elsewhere. Mr Tsang's response was that the Bank would only consider releasing the securities for these facilities if it received full payment. There is a contemporaneous letter from the Bank confirming the Bank's position which also set out the outstanding indebtedness of WHW and the Company aggregating some HK$20 million. On the following day, the Company proposed a partial release of the collaterals upon the indebtedness being reduced to "a level acceptable to the Bank".

The liquidator's claim

13. The table below summarizes the amount of net repayments which the liquidator seeks to set aside. At the hearing the liquidator conceded that of that net amount of approximately $19.5 million, the sum of $3.2 million received by the Bank on 8 September 1995 in return for the release of the Happy Valley property held by the Bank as security for the Company's debts could not have been preferential. Accordingly, the amount in issue was reduced to approximately $16.3 million :

($19,534,652.76) - $3,200,000.00 = ($16,334,652.76)

The revised amount claimed of $16.3 million includes the value of the unutilized portion of letters of credit that had been opened amounting to some $4.72 million.

Elements of fraudulent preference

14. The starting point is section 266(1) of the Companies Ordinance which provides :

"Any ... payment, ... made ... by ... a company within 6 months before the commencement of its winding-up which, had it been made ... by ... an individual within 6 months before the presentation of a bankruptcy petition on which he is adjudged bankrupt, would be deemed in his bankruptcy a fraudulent preference, shall in the event of the company being wound up deemed to be a fraudulent preference of its creditors and be invalid accordingly."

It is therefore necessary to refer to bankruptcy law relating to the fraudulent preference to ascertain the constituent elements of fraudulent preference. It is the old section 49 of the Bankruptcy Ordinance which applied prior to the enactment of the 1996 amendments to that Ordinance that are relevant. The old section 49(1) provided :

"... every payment made, ... by any person unable to pay his debts as they become due from his own money in favour of any creditor ..., 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, shall, if the person making, ... the same is adjudged bankrupt on a bankruptcy petition presented within 6 months, ..., after the date of making, ... the same, be deemed fraudulent and void as against the trustee in the bankruptcy."

15. Counsel for the Company submitted that to make out a case of fraudulent preference, it had to be established that :

(1) the payments sought to be avoided were made by the Company;

(2) the Bank or a surety or guarantor of the Company's indebtedness to the Bank was in fact or in effect preferred by such payments; and

(3) payments were made with a view to giving the Company or any surety or guarantor for the debts due to the Bank from the Company such a preference.

16. So far as the first requirement is concerned, the essence of what counsel for the Bank submitted was that assets out of which the payments were made had to be assets of the Company. Indeed, counsel for the Liquidator took issue on the question whether the funds had to belong to the bankrupt under section 49(1). Miss Cruden submitted that the phrase "from his own money" was not to be read as qualifying the payment made that was sought to be impugned; rather it was purely descriptive of the condition of the bankrupt at the time.

17. In my judgment, in construing section 49, one has to have regard to the purpose of the provision which is that creditors of the bankrupt should be treated equally and that none of them should be given preferential treatment. In ascertaining the rights and interest of the creditor, it is the assets of the bankrupt and their distribution that is determinative. So unless what was done favoured a particular creditor or creditors at the expense of the other creditors by reducing the amount available for distribution then it cannot be objectionable. On that basis, the phrase "from his own money" must necessarily be construed as qualifying the nature of the payment that is sought to be impugned.

18. As regards (2) above, it was submitted (in my view, also correctly) that the requirement of the fact or effect of a preference is implicit in that the spirit of the preference provisions is to restore the statutory order of priorities. Finally as regards (3) above, it is common ground that the intention to prefer must be shown to be the dominant intention, the onus being on those seeking to impugn the payments. Even where it is shown that the creditor in fact receives preference, the burden does not shift. See generally Peat v. Gresham Trust Ltd [1934] AC 252 (HL) at 260, Banque Nationale de Paris v. Sam Wah Hing Garment Factory Ltd & Ors [1985] 2 HKC 499 at 506F.

19. In the result, I agree that the essential elements are as stated by Miss Wong subject to this proviso, namely that as regards the first requirement, the payments made must be out of assets to which the Company is beneficially entitled so that any payment thereout would necessarily reduce the Company's estate available for its creditors.

The issues

20. The issues as agreed by the parties are as follows :

1. Whether, given the running account that existed between the Company and the Bank, the retirement of trust receipts by the Company between 1 August and 7 September 1995 (both days inclusive) could be regarded as preferential or potentially so.

2. Whether, in computing the Company's indebtedness to the Bank on any particular day, the value of letters of credit opened but against which no documents had yet been presented for payment, should be included.

3. Whether the sum of $7,000,000 paid to the Bank on 11 September 1995 was made by the Company given that it was paid by WCLL with the use of overdraft facilities granted by the Bank to WCLL.

4. Whether the sum of $2,772,982.91 paid to the Bank on 16 September 1995 was made by the Company given that it was paid by Mak out of the proceeds that he received from Mrs Mak from selling to Mrs Mak his half interest in the Australian property.

5. If there were any payments by the Company which resulted in a preference of the Bank to other creditors of the Company, whether the same were made with a dominant intention by the Company to prefer the Bank or its guarantor, Mrs Mak.

(1) The "running account" principle

21. Counsel for the Company relied on the so-called running account principle recognized in a number of Australian cases such as Re Weiss (1970) ALR 654, M & R Jones Shopfitting Co Pty Ltd v. The National Bank of Australasia Ltd (1983) 7 ACLR 445 and Ferrier & Another v. Civil Aviation Authority (1994) 127 ALR 472. There is a convenient summary of the elements of that principle in the judgment of Wootten J in M & R Jones Shopfitting Co Pty Ltd v. The National Bank of Australasia Ltd at 452-3 :

" 1. For the purpose of deciding whether a payment is void within s 95 of the Bankruptcy Act it is the effect in fact of the making of the payment that is decisive.

2. Where the payment forms part of a wider transaction or where it is sufficiently connected with other items in a running account, it is the effect of the whole transaction, of all the connected items, that has to be regarded.

3. The mere fact that a payment is in discharge of an existing or past indebtedness does not necessarily mean that its effect has to be considered in isolation.

4. In deciding whether payments are so integrally connected with counter payments that the ultimate effect of the course of dealings has to be considered to determine whether the payments are preferences, it is necessary to look at their business purpose or business character.

5. It is not necessary that a payment should have been made under express arrangements for the continuation of the relationship reflected in the running account eg, continuance of supply. It is enough if implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relation of debtor and creditor in the running account.

6. The mere fact that a payment is made on a running account does not protect it from scrutiny and if a point comes where payments are made with a view to terminating the running account, or greatly reducing the level of credit granted on the account, the effect of these payments may be a preference. It follows that the liquidator can choose any point during the statutory period in his endeavour to show that from that point on there was a preferential payment. However, this does not mean that the connection between such a payment and dealings prior to the chosen date is to be ignored."

Counsel for the liquidator accepted that a running account existed. That much is common ground. But the parties differed as to when the running account principle ceased to apply so as to require a close scrutiny of the account : for the liquidator, it was 1 August 1995, for the Company, it was 8 September 1995.

22. Set out below is a summary of the daily transactions commencing 1 August 1995 :

(It emerged in the course of the hearing that the figure shown in the daily summary as the closing balance for 1 August was in fact the opening balance because counsel for the Bank did not have details of the transactions for that day. The closing balance should in fact have been $16,497,553.77. Although the third column figures need adjustment, this does not affect the principle under consideration.) Having regard to those transactions, the Bank accepted that the course of dealings between the Company and the Bank under the I/B account changed but only after 7 September 1995. Accordingly, it submitted that 8 September 1995 rather than 1 August 1995 was the appropriate starting point of an examination of such an account.

23. The liquidator's position appeared to be that by August 1995, the point had come where payments were made with a view to terminating the running of the I/B account or at least to reduce the level of credit granted on that account. It was submitted that by mid-1995 the position had changed and that the Bank "had put its foot down" but nowhere was it explained why 1 August was selected, given the time lag of some six weeks between mid-June and 1 August. No particular event appeared to have occurred immediately prior to 1 August that might have precipitated a change in the course of dealings between the Company and the Bank.

24. Since 1 August was the key date as far as the liquidator was concerned, transactions in the I/B account prior to that date are obviously pertinent. But the only evidence of the pre-August transactions to which the court was referred was a schedule prepared by the liquidator from the general ledger of the Company showing the status of its I/B accounts with the Bank, HSBC, Dah Sing Bank and the Belgian Bank. Set out below is an extract from the schedule for the months of June, July and August 1995.

The schedule did not deal with detailed movements in each of the accounts but only gave a monthly summary. As I understand it, the liquidator relied on the fact that there was a significant increase in the amounts which the Bank received from the Company - from $5 million odd in July to almost $12 million in August and further that no payments were made by the Company in August to either HSBC or the Belgian Bank.

25. Dealing first with this latter point, it completely overlooked the fact that there were transactions during August with Dah Sing Bank. Whilst overall the amounts involved were smaller, in the context of transactions with Dah Sing Bank, it is to be noted that the value of the August transactions was twice the amounts shown for the preceding months. As to the first point, on closer consideration of the extract, it would appear that the amounts received by each of the four banks from the Company for any relevant month did not differ significantly from the amounts paid out by the relevant bank in respect of the relevant I/B account for those months. (Insofar as there were exceptions, they did not concern the Bank but affected Dah Sing Bank and the Belgian Bank. The two exceptions about which the liquidator has inexplicably not complained concerned the Dah Sing Bank I/B account for the month of July when it received nearly four times the amount it paid out and the Belgian Bank I/B account also for the month of July when it received almost $0.5 million but paid out nothing.) The fact that a close correlation existed between the amount of receipts and payments over the months in question is particularly significant as the value of payments made broadly counterbalanced the receipts and is entirely consistent with the running account relationship between the Bank and the Company. In my judgment, the increase in the value of receipts from the Company from $5 million in July to almost $12 million in August is not of itself a sufficient reason for selecting 1 August as the turning point.

26. The liquidator further submitted that there could not have been any mutual assumption by the parties that there would be a continuance of the relation of the debtor and creditor in the running account because by mid-1995 Mr Mak knew that it was impossible for him to save his business. I do not agree. Whilst Mr Mak might have known that it was not possible to save his business, it did not follow that the relation of debtor and creditor in the running account ceased. In actual fact, the Company did continue imports and utilized the I/B account notwithstanding Mr Mak's knowledge.

27. Counsel for the Bank submitted that for the period from 1 August up to and including 7 September 1995, there was no attempt to reduce the debit balance in the I/B account in any significant or meaningful sense. During this period, the fluctuation in the daily outstanding I/B loan which had a limit of $16 million ranged between $15.4 million and $17.7 million. During a significant portion of this period, the daily outstanding I/B loan exceeded $16 million. Miss Wong submitted that the relative values of retired and new trust receipts before 8 September is only consistent with the settlement of the I/B account before that date being intended to free up portions of the bill facilities to make way for new trust receipts for new purchases/shipments. In other words, such payments were made to enable the Company to carry on trading within the limit of the bill facilities and not to prefer the Bank.

28. Further, it is to be noted that despite a somewhat unpleasant telephone conversation between Mr Tsang and Mr Mak on 23 August to the effect that unless the Company reduced its indebtedness to the Bank to a level acceptable to the Bank, the Bank might have to reduce the limit of the bill facilities or even revoke the same altogether, there was no discernible change in the pattern of transactions until 8 September 1995.

29. In my judgment, the pattern of transactions do not support any inference, much less an inescapable inference that the retirement of trust receipts by the Company between 1 August and 7 September 1995 could be regarded as preferential or potentially so. Accordingly, I agree with counsel for the Bank that the appropriate starting point for scrutinizing the account is 8 September.

(2) Unutilized letters of credit

30. From time to time at the Company's request, the Bank would issue letters of credit. The Bank's obligation was to make payment against documents presented in accordance with the particular letter of credit. Whilst under an obligation to make payment as and when documents were presented for payment, no cash was actually advanced until the latter event occurred. The liquidator's approach was to treat the Bank's potential liability to make a payment under a letter of credit as having crystallized when in truth the advance had not been made, and indeed might never need be made. The $4.2 million claim against the Bank is of this nature.

31. Counsel for the liquidator was unable to refer me to any authority to support the liquidator's view. In my judgment, the claim flies in the face of common sense. The Bank never advanced any part of this $4.2 million. It follows that it was never in a position to submit a proof of debt in respect of this amount. The corollary must be that the Company was not indebted to the Bank in relation to letters of credit which had not been utilized.

(3) Repayments made on 11 and 16 September

32. It would be convenient to deal with the repayments of $7 million on 11 September and of approximately $2.77 million on 16 September together. The facts were as follows.

33. In early September 1995, the Bank began to threaten to enforce Mrs Mak's guarantee. The Bank indicated to Mrs Mak that she would have to come up with at least $7 million before the Bank would consider withholding the enforcement of the guarantee. At about that time, Mrs Mak agreed to acquire Mr Mak's half share in the Australian property at the price of AUD475,000 (equivalent to approximately HK$2.8 million).

34. On 8 September, the Bank entered into (a) a loan agreement with Mrs Mak whereby it agreed to lend Mrs Mak HK$2.8 million in consideration of her personal covenant to repay and a first legal charge over the Australian property after it had been conveyed in her sole name in favour of the Bank; and (b) a loan agreement with WCLL ("the WCLL loan agreement") whereby it agreed to grant WCLL banking facilities in consideration, inter alia, of a second legal charge over the Australian property. WCLL was at the time owned by Mrs Mak and one Pansy Wong Pik-ha, Mr Mak having on sold his 70% interest in WCLL to Madam Wong on 24 August 1995 for about $1.6 million.

35. On 11 September, Mrs Mak executed two mortgages in favour of the Bank : the first was a first mortgage over the Australian property to secure her indebtedness to the Bank, and the second was a second mortgage over the Australian property to secure WCLL's indebtedness to the Bank. On the same day, WCLL drew cheques totalling $7 million upon the WCLL current account and overdrew to the extent of $7,298,572.99. The WCLL cheques were deposited into the Company's current account and the Bank then debited that account for sums totalling $7 million to retire various trust receipts under the I/B account.

36. On 12 September, Mrs Mak's personal account was credited with $2.8 million by the Bank and Mrs Mak paid for her purchase of Mr Mak's half interest in the Australian property. On 16 September, the Bank received from Mr Mak through his solicitors $2,772,982.91 drawn in favour of the Bank by Mr Mak's solicitors upon its client's account with the Bank. This sum came from Mr Mak's net proceeds of selling his half interest in the Australian property. That sum was credited to the Company's current account and the Bank then debited that account for sums totalling $2,772,982.91 to retire various trust receipts under the I/B account.

37. In analyzing these repayments, it is important not to lose sight of the fact that since 1991 the Bank has had an all-monies legal charge ("the original mortgage") over the Australian property in its favour. This was replaced by the first and second mortgages executed by Mrs Mak as sole beneficial and legal owner of the Australian property after acquiring Mr Mak's half-share. At all material times when these arrangements were being made, the amount due to the Bank by the Company was some $20 million. The Australian property had an open market value of AUD950,000 or HK$5.6 million. Had the Bank chosen to enforce the original mortgage against the Australian property as it had done in respect of the Happy Valley property, no contention of fraudulent preference could have been raised. This is implicit from the liquidator's stance vis-à-vis the proceeds of the Happy Valley property. Given the extent of indebtedness to the Bank, the reality was that there was no remaining equity in the Australian property that could have been realized by Mr Mak.

38. It would appear that the Bank effected two circular transactions in relation to the two advances of $2.8 million and $7 million respectively, with the indebtedness resulting from both advances being secured by the first and second mortgages over the Australian property. The Bank financed the acquisition of Mr Mak's half-share by advancing the requisite purchase price to the purchaser viz Mrs Mak. It was a circular transaction, the Bank advancing the amount with which it was repaid. In the process, Mrs Mak increased her own indebtedness to the Bank by $2.8 million.

39. So far as the $7 million repayment is concerned, the net effect of the transaction was that WCLL borrowed $7 million from the Bank which was used to repay $7 million of the Company's indebtedness to the Bank. This payment also did not affect the balance sheet of the Company because the $7 million was a fresh loan from the Bank to WCLL which WCLL applied to repay some of the Company's indebtedness. As such, the $7 million came not from the Company's own assets but from an outside source.

40. The repayments appeared to be assets of the Company simply because as a matter of logistics, the repayments (made from advances to Mrs Mak and WCLL from the Bank) were channelled through the Company. The repayments could as well have been effected without going through the Company's bank account. Consequently neither of the two repayments diminished the estate of the Company available for creditors.

41. Although in the aggregate funds of $9.77 million odd were deposited into the Company's account with the Bank against which certain trust receipts were retired, in the final analysis, the funds were not assets of the Company. That being the case, the repayments of $2.77 million odd and $7 million cannot be impugned as fraudulent preferences by the Company to the Bank.

(4) Dominant intention

42. The remaining issue is whether, insofar as there were any payments by the Company which resulted in a preference of the Bank to other creditors of the Company, they were made with a dominant intention to prefer the Bank or its guarantor Mrs Mak.

43. In view of my conclusion as to the application of the running account principle, the transactions to be scrutinized are those commencing 8 September as shown in the daily summary set out above. The repayments made on 11 and 16 September have already been dealt with. The last payment can be disregarded since it was a payment made from the overdraft facility under the current account. Of the payment of $4.9 million made on 8 September, $3.2 million of that repayment has been accounted for, being the proceeds of the Happy Valley property. Effectively, there are only two unexplained payments : a payment of $1.7 million made on 8 September and a payment of $1.1 million made on 15 September. The issue is whether the liquidator has discharged his burden of demonstrating that the dominant intention of the Company at the time of making these payments was to prefer the Bank over its other creditors.

44. The Bank accepts that a limited company cannot have a view except so far as the views of the agents by which its acts are to be deemed to be the views of the Company. See per Lord Tomlin in Peat v. Gresham Trust Limited (supra) at 261. Where there is no direct evidence of the relevant state of mind, the correct approach appears from Lord Tomlin's speech (at 262) :

" It is contended on the appellant's behalf that once given the withdrawal and the consequences of the withdrawal, then in the absence of any other explanation the intent to prefer must be inferred, because a man is presumed to intend the natural consequences of his act. My Lords, I do not accept this contention. In my opinion in these cases the onus is on those who claim to avoid the transaction to establish what the debtor really intended, and that the real intention was to prefer. The onus is only discharged when the court upon a review of all the circumstances is satisfied that the dominant intent to prefer was present. That may be a matter of direct evidence or of inference, but where there is no direct evidence and there is room for more than one explanation it is not enough to say there being no direct evidence the intent to prefer must be inferred...."

In the later case of In re M. Kushler Limited [1943] 1 Ch 248 at 253, Lord Greene MR explained that he did not think that Lord Tomlin was laying down any general principle that where there was no direct evidence of a fraudulent preference, the court would not infer it if there was any other possible explanation of the facts proved. Nevertheless, as Lord Greene MR observed (at 252) :

"... the inference to be drawn is of something which has about it, at the least, a taint of dishonesty, and, in extreme cases, much more than a mere taint of dishonesty. The court is not in the habit of drawing inferences which involve dishonesty or something approaching dishonesty unless there are solid grounds for drawing them."

Moreover, where in any criminal or civil court, the person on whom the onus lies proves no more than a state of facts equally consistent with guilt or innocence, it is impossible to draw the inference of guilt. See per Lord Goddard LJ at 255.

45. The liquidator submitted that the requisite dominant intention may be inferred from the following matters. On 23 August, Mr Mak had requested the Bank to release the collateral and the Bank had informed him that release was subject to full settlement of the outstanding amounts due. Mr Mak then sought partial release of the collateral. At about that time, the Company transferred its importing business to WCLL. There is an internal bank document from the Credit and Marketing Department to the Loans Department dated 23 August 1995 referring to a corporate reorganization whereby WCLL would take over the business then traded under the name of the Company. It would also appear that Mr Mak worked for WCLL as from November 1995. The Bank was also in a position to enforce Mrs Mak's personal guarantee for $9.35 million. It was accordingly submitted that if the Company were to pay the sums due to the Bank, (1) the collateral could be released; (2) the business could continue to operate through WCLL; and (3) proceedings would not be brought against Mrs Mak to enforce her personal guarantee.

46. So far as Mrs Mak's position is concerned, the suggestion that she was preferred is not borne out by the evidence. Although the original mortgage was discharged, it was replaced by the first and second mortgages which contained identical covenants. The net result of the arrangements entered into for the advance of $2.8 million to Mrs Mak and the $7 million to WCLL was that Mrs Mak became personally indebted to the Bank for $2.8 million and was liable as guarantor of WCLL's indebtedness which exceeded $7 million. Her exposure under the new arrangements was greater than her exposure under her personal guarantee by at least $450,000. Accordingly, I agree with the submission of counsel for the Bank that Mrs Mak was not preferred and it could not have been intended that she be preferred.

47. Going back to the two payments in question, they cannot be viewed in isolation. As appears from the daily summary, the Bank granted new trust receipts on 8 and 14 September for the amounts of $722,109.73 and $877,451.73. Counsel for the Bank submitted that the timing of the two payments coincided with the creation of two sets of new import bills and trust receipts at the time when the parties were in the process of winding up the I/B account. Miss Wong submitted that it could reasonably be inferred that the Company made the two payments to obtain the release of shipping documents for the goods covered by the new sets of import bills and trust receipts.

48. The liquidator had advanced three matters to support the inference of a dominant intention to prefer. As explained above, neither the release of the collateral nor the net effect of the arrangements so far as Mrs Mak's personal exposure was concerned support an inference of preference. As to the remaining matter, if the continued operation of WCLL was dependent on the repayment of the outstanding amounts on the I/B account as was suggested by the liquidator, that cannot be reconciled with the creation of new trust receipts to the value of approximately $0.9 million on 14 September, several days after the $7 million repayment. In fact, the creation of new trust receipts on 8 and 14 September negate the suggested inference.

49. In those circumstances, there is no evidence to support the inference of a dominant intention other than the payment itself. The explanation proffered by counsel for the Bank for these two sets of payments is certainly a possible explanation. As there is no other fact that would support some taint of dishonesty, then applying the Peat v. Gresham principle as explained in In re Kushler, I find that the onus of proving a dominant intention has not been discharged.

Order

50. The liquidator's summons is dismissed. There is to be an order nisi for costs in favour of the Bank.