OSMAN MOHAMMED ARAB AND WONG KWOK KEUNG, THE JOINT AND SEVERAL LIQUIDATORS OF KAM TOYS & NOVELTY MANUFACTURING LTD (IN CREDITORS’ VOLUNTARY LIQUIDATION) v. CASHBOX CREDIT SERVICES LTD

CACV 67/2017
HCMP 637/2017
(Heard Together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 67 OF 2017

(ON APPEAL FROM HCMP 1908 OF 2016)

AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 637 OF 2017

(ON AN INTENDED APPEAL FROM HCMP NO. 1908 OF 2016)

________________________

________________________

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(Heard Together)

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J U D G M E N T

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Hon Lam VP:

1.  I agree with the judgment of Yuen JA.

Hon Yuen JA:

2.  There are before this court two matters arising from a judgment of Anthony Chan J (“the judge”) given on 9 February 2017 (“the Judgment”). 

3.1.   In the Judgment, the learned judge:

(1) dismissed an application by the joint liquidators (“the liquidators”) of Kam Toys & Novelty Manufacturing Ltd (in Creditors’ Voluntary Liquidation) (“the Company”) for a declaration that the payment of a sum of $19.287 million by the Company to Cashbox Credit Services Ltd (“Cashbox”) on 9 January 2014 (“the Payment”) constituted an unfair preference under s.266 Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 (“C(WU)O”), and for an order that the sum be repaid to the estate of the Company; and

(2) made a costs order nisi that Cashbox is to have 2/3 of its costs of the proceedings to be paid by the Company. 

3.2.   No application was made to the judge to vary the costs order nisi within the 14 day period prescribed by the Rules of Court and hence the order became absolute.

Matters before this court

4.1.   The first matter before this court is the liquidators’ appeal, filed on 8 March 2017, against the Judgment. 

4.2.   The second matter is Cashbox’s application to this court, filed on 21 March 2017, for leave to appeal the costsorder out of time.  Such an application should have been made to the Court of First Instance and not directly to this court[1], but in the exercise of our discretion we considered the arguments de bene esse as counsel for both parties had provided the court with full submissions.

Factual background

5.1.   The Company was controlled by Mr Lee Kwan Wah (“LKW”) and his family.  LKW held 80% of the shares, and his wife and brother each held 10%. Prior to 28 January 2014, the three of them, together with Mr & Mrs LKW’s son Mr Lee Yuk Shan (“LYS”), were the Company’s directors.  On that day, LKW, his wife and his brother resigned from the board, leaving LYS as the sole director.

5.2.   On 6 March 2014, a director’s resolution was passed that the Company could not by reason of its liabilities continue its business, and a winding-up statement was delivered to the Registrar of Companies.  The Company was thus put into creditors’ voluntary liquidation under s.228A, C(WU)O.

The Company’s financial position

6.  Although the Company had been very successful in the past, it had been struggling financially for a few years.  This is how the judge described the Company’s financial position:

“9. There can be no real question that at the time of the Payment the Company was insolvent based on the Cash Flow Test. The evidence demonstrates that the Company had not been in a position to pay its debts for some time before the Payment was made.

10. As at 6 July 2016, the [liquidators] had received 109 proof of debt claims amounting to HK$267,397,287.08 from various creditors, including trade creditors, and outstanding salaries and remuneration owed to 37 employees.

11. The Company’s trade debts almost entirely pre-date the date of the Payment. Many of these debts go back to 2012 and 2013, with the earliest [dating] from October 2011 ...”.

Dealings with properties

7.  In 2013, the following financing transactions were taken in relation to landed properties owned by the Company or the persons controlling it. 

Charges/Mortgages

-   Black’s Link

(1) On 30 January 2013, a property at Black’s Link owned by the Company was charged to Lei Shing Hong Credit Ltd by way of a First Legal Charge to secure “all moneys” owed.

(2) On 6 February 2013, the Black’s Link property was made the subject of a Second Mortgage given to China Yinsheng Finance (Holdings) (“Yinsheng”).

(3) On 17 April 2013, the Black’s Link property was made the subject of a Third Mortgage given to Yinsheng.

-   Taikoo Shing

(4) On 6 June 2013, a property at Taikoo Shing owned by Mr & Mrs LKW was charged to Lei Shing Hong by way of a First Legal Charge.

(5) On 10 June 2013, the Taikoo Shing property was made the subject of a Second Mortgage given to Yinsheng.

-   Both properties

(6) On 29 August 2013, a company called Success Full Finance (HK) Ltd obtained a Third Mortgage over the Taikoo Shing property and a Fourth Mortgage over the Black’s Link property.

(7) On 30 September 2013, upon the discharge of Yinsheng’s mortgages, Success Full obtained Second Mortgages over both the Black’s Link and Taikoo Shing properties.

Agreements for sale

(8) On 15 November 2013, the Company entered into a provisional sale and purchase agreement to sell the Black’s Link property for $300 million, with completion to take place on 18 February 2014.

(9) On 1 December 2013, Mr and Mrs LKW entered into a provisional sale and purchase agreement to sell the Taikoo Shing property for $22 million, with completion to take place on 16 January 2014.

Deposit for Black’s Link property stakeheld by solicitors

8.1.   A total deposit of $30 million (“the Deposit”) was paid by the purchaser of the Black’s Link property in November 2013 to the Company’s solicitors Tony Kan & Co (“the solicitors”) as stakeholders. 

8.2.   It was provided in the provisional sale and purchase agreement that the solicitors could only release the Deposit to the Company if the balance of the purchase price (ie $270 million) was sufficient “to discharge the existing charge/mortgage against the said premises”. 

8.3.   As boththe Lei Shing Hong and the Success Full mortgages were in existence at the time, that meant that the Deposit could only be released by the solicitors to the Company if and when the total sums due to both mortgagees (collectively “the Secured Debts”) were reduced to $270 million. 

Amount of Secured Debts

9.1.   The fact that the solicitors were stakeholding the Deposit in November 2013 showed that the Secured Debts must have exceeded $270 million, although it is not known exactly by how much, since this court was not provided by the liquidators with most of the Company’s relevant accounting documents[2].

9.2.   However as an indication, the solicitors’ Statement of Account[3] prepared after completion of the sale of the Black’s Link property on 18 February 2014 showed redemption moneys paid to:  

(1) Lei Shing Hong of $238,802,148.78 (this does not include the $16 million paid to it by Cashbox at the Company’s request as described below[4]); and

(2) Success Full of $28,477,260.00.  

The Company’s approach to Cashbox

10.  As matters stood in November 2013 therefore, the Company was not able to get its hands on the $30 million Deposit stakeheld by the solicitors.

11.1.   In early December 2013 the Company approached Cashbox for a loan of $19 million for “no more than a month”[5]. 

11.2.   Mr Mok Ka Fai, a director of Cashbox, said the following on affirmation:

(1) none of the directors or shareholders of Cashbox knew the Lees or had any business transactions with them or the Company;

(2) the Company had been introduced to Cashbox by an agent of Cashbox;

(3) Cashbox was given information about the Company’s business and the property transactions set out above;

(4) Cashbox was given extracts of the Directors’ Report and Financial Statements of the Company for the previous year, ending 31 March 2012;

(5) LKW informed him that of the proposed loan from Cashbox of $19 million, the Company intended to apply (a) $16 million to repay Lei Shing Hong and (b) the balance as working capital for the Company;

(6) LKW further said that the sum of $16 million “together with the final payment from the Black’s Link Property to be received on completion, would be sufficient to fully discharge the Company’s debts to Lei Shing Hong.  Therefore, Lei Shing Hong would agree to the release of the HK$30 million deposit”[6];

(7) the Company never divulged that it was contemplating voluntary liquidation.  If it had, Mr Mok would not have approved a loan to it because of the obvious risk that Cashbox would not be able to recover payment[7].

The Loan as leverage

12.  It is clear from the Company’s plans for the use of the $16 million as disclosed above that it was leveraging the loan of $19 million[8] from Cashbox in order to obtain the release of the $30 million Deposit.  Put another way, by borrowing $19 million[9] to reduce the Secured Debts to $270 million or less, the Company could immediately utilize the Deposit of $30 million which would otherwise be tied up by the stakeholding arrangement.  On repaying the Cashbox loan of $19 million with interest of $278,000, the Company would still receive the balance of the Deposit of more than $10.7 million.

Arrangement for the loan

13.  It is important to note the arrangement pursuant to which the loan was made.

(1) On 20 December 2013, the Company’s directors passed a written resolution to give a Letter of Authorization to its solicitors.

(2) The Letter of Authorization of the same day was in these terms (where material):

“In consideration of the Lender [Cashbox] agreeing to advance a sum of HK$19,000,000.00 (‘the Loan’) to us, we hereby irrevocably instruct and authorize your firm to pay and release part of the deposit in the sum of $19,287,000.00 to the Lender being the Loan and the interest thereof and the remaining part of the deposit in the sum of $10,713,000.00 to our company within 2 working days after your firm have received confirmation[10] from the existing mortgagees of the above property that the balance of the purchase price payable by the purchaser ... is sufficient to discharge the existing legal charges and mortgages upon completion.

We hereby confirmed that the instructions to you to pay the sum of HK$19,287,000.00 to the Lender cannot be revoked unless with the written consent of the Lender”. (Emphasis added).

(3) On 23 December 2013,

(a) the solicitors confirmed the instructions set out in the Letter of Authorization;

(b) the Company and Cashbox signed a Loan Agreement (“the Loan Agreement”);

(c) Mr and Mrs LKW gave Cashbox a 3^rd legal charge over the Taikoo Shing property;

(d) LKW and LYS signed personal guarantees to Cashbox (“the Guarantees”); and

(e) Cashbox[11] paid the Company a sum of $2.514 million, being $3 million (“Tranche 1”) from which there was deducted a total of $475,000 for agents’ and solicitors’ fees.

(4) On 30 December 2013, the balance of the Cashbox loan, being $16 million (“Tranche 2”), was paid by Cashbox[12] directly to Lei Shing Hong, thereby reducing the sums owing to the mortgagees to $270 million or less.

Loan Agreement

14.  It is noted that according to the Loan Agreement, the date of repayment of both tranches was 13 January 2014, and the total interest of $287,000 was calculated on the assumption that the loan would be repaid on that date.

The Company’s use of the loan

15.  It would appear from an extract from the Company’s accounting ledgers[13] that:

(1) Tranche 1 was used to reduce amounts owed for the Company’s operating expenses[14];

(2) Tranche 2, which was paid by Cashbox[15] directly to Lei Shing Hong, was booked as payment of interest of $13,505,170.76 and part payment of principal in the sum of $2,494,829.24.

The (Re-)Payment to Cashbox

16.1.   As stated earlier[16], the Authorization Letter irrevocably authorized the solicitors to release the respective sums of $19.287 million to Cashbox and $10.713 million to the Company

“within 2 working days after [the solicitors] have received confirmation from the existing mortgagees of the [Black’s Link] property that the balance of the purchase price ... is sufficient to discharge the existing legal charges and mortgages on completion”.

16.2.   There is no evidence before the court as to when such confirmation was received.  I will return to this when considering the argument based on early repayment of the Loan later in this Judgment[17].  In any event, on or before 9 January 2014, the solicitors received the confirmation. 

16.3.   On that day (4 days before the repayment date stated in the Loan Agreement), the solicitors paid Cashbox $19.287 million as

“repayment of the loan and interest by [the Company] to [Cashbox] in pursuance to an Authorization Letter dated 20 December 2013 signed by [the Company]”.

This is the Payment the subject matter of the appeal.

The Company’s use of the balance of the Deposit

17.1.   On the same day, the solicitors paid the Company the balance ($10.713 million) of the $30 million Deposit. 

17.2.   It is noted that the liquidators have not provided any evidence[18] to this court as to how that balance of $10.713 million was applied.  I will discuss this later in this Judgment[19]. 

17.3.   As for the former directors, the liquidators have only said that “despite our efforts to arrange a meeting with LKW, no such meeting was confirmed by LKW’s solicitors”[20].  The liquidators have not stated whether they have also made any attempts to question the other former directors and the Company’s former accounting staff.

Post-Payment events

18.1.   Returning to the factual events, on 16 January 2014 the Taikoo Shing sale was completed.

18.2.   On 28 January 2014 Mr and Mrs LKW and LYW resigned from the board, leaving LYS as the sole director.

18.3.   On 18 February 2014, the sale of the Black’s Link property was completed. 

Liquidation

19.  As stated above[21], the Company adopted the s.228A procedure for insolvent liquidation on 6 March 2014.

20.  According to the liquidators, there were 109 proofs of debt amounting to $267.4 million. LKW was one of the largest creditors with a proof of debt in the sum of more than $168 million.

Originating Summons

21.  On 26 July 2016, the liquidators issued an Originating Summons (“OS”) for a declaration and order that

“the payment of $19,287,000 made on 9 January 2014 by the Company to [Cashbox] constituted an unfair preference contrary to sections 266 and 266B(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap.32, Laws of Hong Kong and is void”.

The OS was amended later to include a claim for payment of the said sum to the Company.

The Statute

22.1.   Section 266, C(WU)O provides (where material):

“(1) This section applies in relation to a company if the company goes into liquidation.

(2) If the company has at a relevant time[22] ... given an unfair preference to a person, the liquidator may apply to the court for an order under subsection (3).

(3) ... on an application under subsection (2), the court may make an order that it thinks fit for restoring the position to what it would have been if the company had not given that unfair preference.

(4) The court must not make an order under subsection (3) unless the company was influenced, in deciding to give that unfair preference, by a desire to produce in relation to that person the effect mentioned in section 266A(1)(b)”. (Emphasis added).

22.2.   Section 266A(1) provides (where material):

“(1) A company gives an unfair preference to a person if –

(a) that person is –

(i) one of the company’s creditors; ...

(ii) ...; and

(b) the company does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position that person would have been in if that thing had not been done”.

23.  The liquidators’ case is that by making the Payment (or to be precise, the repayment) to Cashbox on 9 January 2014 (within 6 months of insolvent liquidation on 6 March 2014), the Company has put Cashbox in a better position than if the Payment had not been made.  That effect is not disputed by Cashbox.  What is disputed is whether the liquidators have proved, as required by s.266(4), that when the Company decided to do so, it had been influenced by a desire to produce in relation to Cashbox the effect mentioned.  

The judge’s Judgment

24.1.   The judge found that requirement was not proved and dismissed the OS. 

24.2.   The judge bundled the liquidators’ submissions into 2 arguments: the 1^st argument being that the loan was “suspicious”[23], and the 2^nd argument being that the Company had a desire to unfairly prefer Cashbox.

The 1^st argument

24.3.   In relation to the 1^st argument, the judge was of the view that there was “considerable force in the submission” that the Loan was not a genuine commercial transaction.  Despite this, he held:

“35. However, the suspicious nature of the Loan does not turn the Payment into one made under the influence of a desire to prefer [Cashbox] ...”.

The 2^nd argument

24.4.   In relation to the 2^nd argument, the judge held that he did not see “any evidence to support the inference of a desire on the part of the directors to improve the position of [Cashbox] in the event of the Company’s insolvent liquidation”.  He said:

“39. All the indications from the evidence suggest that the Company was badly insolvent. The directors were probably indifferent as to which of the Company’s creditors would be better off in the event of liquidation. There is no evidence of any non-commercial relationship between the Company or its director(s) and [Cashbox] or its controller(s). I see no valid reason to believe that the decision to protect LKW and LYS from the liabilities under the Guarantee was in part influenced by a desire to prefer [Cashbox]”.

Appeal

25.  Although Mr Hughes for the liquidators stated that his “submissions in this appeal will focus primarily on the findings of the learned judge in §§38-41 of the Judgment”[24] (which paragraphs dealt with the 2^nd argument), the Notice of Appeal included grounds based on the 1^st argument[25] which Mr Hughes did not abandon explicitly.  Accordingly I will have to discuss the 1^st argument briefly.

Discussion of the 1^st argument

26.  The liquidators submitted, and the judge accepted[26], that the Cashbox Loan was suspicious mainly for the reason set out in §32 of the Judgment.

“32. Most importantly, the Loan (or the lion part of it) was required to secure Lei Shing Hong’s consent to the release of the Deposit. I agree with Mr Hughes that the simple solution would be for the Company to reach an agreement with Lei Shing Hong for the latter to provide the confirmation (that the balance of purchase price was sufficient to pay the First Legal Charge) required to release the Deposit on condition that HK$16 million thereof be paid to it. It would have been a solution which cost nothing. Instead, the Company took the course of borrowing a very expensive short term loan from another lender, with 2 directors having to provide their personal guarantee. It is difficult to see any sense in that decision by the Company ”. (Emphasis added).

27.1.   There are a number of issues with that reasoning.  First, the judge referred to the $16 million as being “required to secure Lei Shing Hong’s consent to the release of the Deposit”.  Although Mr Mok said that was what LKW had said[27], with respect, on legal analysis the judge’s reliance on such a requirement was not correct.

- The stakeholding arrangement was stipulated in the provisional sale and purchase agreement for the Black’s Link property, to which Lei Shing Hong was not a party. 

- The stakeholding arrangement was for the protection of the purchaser.  The mortgagees could neither consent nor object to the release of the Deposit.

- It has not been argued by the liquidators that the Company needed Lei Shing Hong’s consent to repay part of its debt.

27.2.   Therefore, it was not correct to say that the $16 million was required “to secure Lei Shing Hong’s consent to the release of the Deposit”.  

28.  Insofar as the judge meant that an alternative option was for the Company to ask Lei Shing Hong to provide a confirmation to the purchaser that, contingent upon payment to it of $16 million out of the stakeheld sum, the Company’s debt to it (together with the Company’s debt to Success Full) would be reduced to $270 million or less, there is no evidence that the purchaser was prepared to accept such a confirmation, which would have entailed a variation of the terms of the stakeholding arrangement contained in the provisional sale and purchase agreement.  There was no good reason for the purchaser to concern himself with the “alternative option” when he was adequately protected by the straightforward stakeholding arrangement.  The liquidators have not provided the court with any evidence that Lei Shing Hong and the purchaser were amenable to this alternative option. 

29.  Further, the Cashbox Loan also provided the Company with a sum of $3 million in late December 2013, which LKW said was needed as working capital.  The extract from the Company’s accounting ledgers shows that it was apparently used to reduce amounts then owed for the Company’s operating expenses.  Entries dated 31 December 2013 also show that the Company was still purchasing “materials” that month.  In other words, it was still trading during the month of December 2013. 

30.1.   Apart from the above reason, the judge also considered that the Loan was a “no risk transaction for [Cashbox]”[28]. 

30.2.   With respect, that may have been said with the benefit of hindsight.  Cashbox had no control over the Company or the extent of its borrowings from Lei Shing Hong and Success Full.  In other words, Cashbox could not ensure that the Secured Debts would be reduced to the degree required for the solicitors to release the Deposit from which the Company would repay it. 

30.3.   Of course Cashbox did obtain security in the form of a Third Legal Charge over the Taikoo Shing property and guarantees from LKW and LYS.  However, in relation to the Third Legal Charge, Lei Shing Hong and Success Full had priority as prior chargees.  As for the personal guarantees, there is no evidence that these persons were still worth powder and shot.

30.4.   Accordingly, although I would agree that the risk faced by Cashbox in making the bridging loan was relatively short-term (the overall period was 23 December 2013 to 9 January 2014), it cannot be said to be entirely free of risk.

31.1.   Finally, in finding that the Loan was of a suspicious nature, the judge referred to the fact that there was no reduction of interest despite repayment being made 4 days in advance of the repayment date in the Loan Agreement. 

31.2.   In this regard, the terms of the Authorization Letter which have been set out earlier in this Judgment[29] have to be examined. 

31.3.   In the way that it was drafted, it would seem that the solicitors were constrained to pay the exact sum of “$19,278,000” within the stated time of “2 working days” after their receipt of the relevant confirmation from the mortgagees.  It is certainly arguable that a partial payment (eg incorporating a smaller amount of interest) or a later payment (eg waiting until the repayment date stated in the Loan Agreement) would be in breach of the Authorization Letter as drafted[30].

31.4.   Accordingly it could not be said that the fact that the full sum was repaid before the stated repayment date in the Loan Agreement shows that the loan was of a suspicious nature.

Discussion of the 2^nd argument

32.  I turn now to the 2^nd argument.  Section 266(4), C(WU)O[31] is based on s.239(5) of the Insolvency Act 1986. 

33.1.   Re MC Bacon Ltd [1990] BCLC 324 was the first case under that Act.  In his judgment, Millett J (as he then was) provided guidance on the interpretation and application of that section.  His approach has been followed by this court in a bankruptcy case (Trustees of the property of Hau Po Man Stanley (in bankruptcy) v Hau Po Fun Ivy & anor)[32] and by Kwan J (now Kwan JA) and Barma J (now Barma JA) in two companies winding-up cases (Re Phantom Records Ltd & Anor [33]and Re Sweetmart Garment Works Ltd [34]). 

33.2.   The first point in MC Bacon was that the old law on unfair preference which dealt with “dominant intention to prefer” is no longer applicable. 

34.  Under the present legislation, the liquidators have to prove that:

(1) at the time of the company’s decision to pay the subject creditor[35] (which may be different from the time of actual payment[36]);

(2) the company’s decision to pay the subject creditor was “influenced” by a desire to produce the effect of putting that creditor into a better position (in the event of the company going into insolvent liquidation) than if the payment had not been made; and

(3) one of the factors[37] in the company’s mind was a “desire” (i.e. it positively wished) to improve the subject creditor’s position in that way.

35.  Understandably, the need to prove “desire” is likely to be the most difficult aspect of an unfair preference case.  It is important to note that “desire” goes beyond simply an intention to produce the effect of putting the subject creditor in the better position[38].  Nor can such a desire be proved by only showing that such an improvement in position must have followed from the payment.   As Millett J put it succinctly[39],

“Intention is objective, desire is subjective. A man can choose the lesser of two evils without desiring either.

... A man is not to be taken as desiring all the necessary consequences of his actions. Some consequences may be of advantage to him and be desired by him; others may not affect him and be matters of indifference to him; while still others may be positively disadvantageous to him and not be desired by him, but be regarded by him as the unavoidable price of obtaining the desired advantages. It will still be possible to provide assistance to a company in financial difficulties provided that the company is actuated only by proper commercial considerations. Under the new regime a transaction will not be set aside as a voidable preference unless the company positively wished to improve the creditor’s position in the event of its own insolvent liquidation”. (Emphasis added).

36.1.   On the question of the state of mind of the controlling minds of the company, direct evidence may not always be available[40], or be credible.  In the present case, the liquidators did not present any direct evidence from the directors. 

36.2.   In the absence of direct evidence, the court would have to see whether the requisite desire can be inferred by considering evidence of the relevant surrounding circumstances, such as how the company was running its business, how it dealt with funds, whether there was pressure (whether commercial or moral, formal or informal) from the subject creditor or other creditors, whether the company derived any benefit from paying the subject creditor, etc.

37.1.   The fact that the subject creditor held personal guarantees of the directors as security is a relevant circumstance, but is not conclusive.  This can be seen in the different results in Fairway Magazines Ltd, Fairbairn v Hartigan[41] and Re Agriplant Services Ltd[42].

37.2.   In both cases a director of the company had given a personal guarantee to the subject creditor for the company’s debt, and so enjoyed a personal benefit when the company’s payment to the subject creditor reduced that debt.

37.3.   In Fairway Magazines, the director obtained a floating charge for his advances to the company which were used to reduce its debt to the bank.  The judge found that the company’s decision to grant the floating charge was not an unfair preference.  The judge accepted the evidence that the director’s advances to the company were made to enable it to continue trading, and that the company’s decision to grant him that security for his advances was influenced by the need to raise money from a source other than the bank (which had an upper limit on the overdraft) in order to keep on trading[43].  Thus the director, even though he was a “connected person”, was able to rebut the presumption[44] of unfair preference.

37.4.   In Agriplant Services, S was the main director of the company.  The directors were advised by the company’s financial adviser at a meeting that the company was insolvent and that the company should make no further payments to creditors.  However they decided to delay passing a resolution to wind up, pending the possible receipt of some money due to the company.  The money was duly received, and it was paid to the subject creditor C.  The company then passed a resolution to wind up.  

37.5.   The judge held that the payment to C constituted a preference given to both C and S, for it had the effect of improving the position of both C as a creditor and S as a contingent creditor under his guarantee.  The judge found that as a result of the financial adviser’s advice at the meeting, S was aware that liquidation was inevitable.   During the interim period between the meeting and the payment, he instructed solicitors to ask C for a copy of his guarantee. The judge found[45] that in procuring the company to make the payment to C (despite the financial adviser’s advice), S had his own liability under the guarantee directly in mind.   

38.  In our case, there was no evidence from any of the directors, nor any documents of the Company, such as minutes of meetings, which might indicate the directors’ thinking in December 2013 with regard to the Company’s situation, ie whether the Company’s insolvent liquidation was inevitable, or whether it was trying to trade itself out of its cash flow difficulties.  According to Mr Mok, LKW said that $3 million of the Loan was for the Company’s working capital.  Taking that evidence at face value, that seems to indicate an intention to carry on as a going concern.  That is consistent also with the Company’s purchase of materials within that month.

39.  More importantly, the lion’s share of the Cashbox Loan ($16 million) enabled the Company to receive the net sum of nearly $11 million from the Deposit, which would otherwise have been tied up by the stakeholding arrangement until mid-February 2014.  The advantage to a cash-strapped company of having that sum of cash is obvious. 

40.  Mr Hughes informed this court from the Bar table that this sum (the $10.7 million) was not shown in the Company’s books and he asked the court to infer that these funds had not been applied to legitimate business uses.  I do not think it is appropriate for the court to make this serious inference from an omission, when the liquidators could have provided the court with positive evidence on the issue (eg if the funds went to pay the directors or were used to repay LKW who was one of the Company’s largest creditors).  The burden lies on the liquidators to prove that the directors did not intend to apply the $10.7 million for the benefit of the Company.  The liquidators have possession of the Company’s bank statements (amongst other documents), as well as wide investigative powers under the C(WU)O.  The liquidators should have been able to provide the court with evidence on the actual use of the funds by tracing the funds through the Company’s banking documents, and by making inquiries with the Company’s bank, directors and former staff.  As officers of the court they would be expected to inform the court of the results of their investigations, whether in their favour or not.  However there was no such evidence in the present case.

41.  In light of the above, once the idea of the “suspicious” nature of the loan is set aside, and the advantage to the Company of using the leveraging power of the $19 million loan for the release of the $30 million Deposit is recognized, it is easy to see why the Company decided in December 2013 to effect (re-)Payment by way of the Letter of Authorization to the solicitors (for that is the relevant time in deciding whether there was unfair preference).  I respectfully agree with the judge that the evidence does not point to the Company having a “positive wish” or “desire” to benefit Cashbox in the event of its insolvent liquidation.  The Company and Cashbox had no relationship with each other before this transaction.  It was an arms-length business deal.  The Company had no pre-existing indebtedness to Cashbox for which the directors were contingently liable under personal guarantees.  The guarantees were given as part and parcel of the Loan.  From the available evidence it is clear that the Company issued the Letter of Authorization (which gave rise to the Payment) because without it, the Company would simply not have obtained first, working capital of $3 million and subsequently, the leveraging sum of $16 million, with which it could obtain the Deposit without having to wait for completion.

Order on the liquidators’ appeal

42.  For the reasons discussed above, I would dismiss the liquidators’ appeal with costs.

Cashbox’s costs appeal

43.  As for Cashbox’s costs appeal, the judge had ordered that Cashbox should have its costs[46] paid by the Company.  Cashbox’s appeal is on the ground that the judge had erred in law in ordering that the costs be paid by the Company and not by the liquidators.

44.1.   Mr Leon Ho, counsel for Cashbox, referred us to a judgment in the New South Wales Supreme Court of Re Bonang Gold Mining Co Ltd[47] but more particularly to Re Wilson Lovatt & Sons Ltd where Oliver J held that where a liquidator had initiated proceedings which turned out to be unsuccessful, the correct order for costs as between him and the opponent should be that he pay the costs, and words such as “out of the assets of the company” should not be included.  In other words, vis-a-vis the opponent in the proceedings, the liquidator was not entitled to limit his responsibility for the costs to the company’s assets. 

44.2.   In Ho Yuk Lun Alan v Chan Yui Hang (Liquidator of Leco Watch Case Manufactory Ltd)[48], this court[49] referred to Re Wilson Lovatt & Sons Ltd but the reference was in relation to another holding, ie that the liquidator would prima facie be entitled to recoup from the company’s assets the costs that he had to pay[50].  In the event, the issue in Ho v Chan was decided by reference to legislation rather than the Common Law.  This court was also referred to some cases which only had a bearing on the recoupment issue.  

45.  It seems to me that approaching the issue of liability for costs on first principles, liquidators who fail in proceedings they have instituted should be liable for the costs.  Whatever may be the position of liquidators as defendants[51], a holding that unsuccessful plaintiff liquidators would not, as a general rule, be responsible for costs would be unfair to the other party.  The unfairness is obvious as the other party would not receive costs if he were successful but would have to pay costs if he were unsuccessful. A holding that liquidators who institute proceedings should pay the costs personally in the first instance if they lose would not hamper liquidators in the execution of their task to get in the assets of the company.  They could of course protect themselves (if there is a risk that the company’s assets are insufficient) by obtaining financial support, prior to the start of proceedings, from the general body of creditors who would benefit from the proposed litigation.

Order on the summons

46.1.   The parties having sensibly agreed that there should be a consent order for leave if Cashbox were to succeed on the merits of its costs appeal, I would make the following order:

(1) By consent, an order in terms of paras. 1 and 2 of the Summons filed on 21 March 2017;

(2) the Respondent’s appeal be allowed;

(3) the judge’s order as to costs be set aside, and in its place, there be an order that the Respondent be paid 2/3 of the costs of the Originating Summons proceedings by the Applicants personally[52], with certificate for counsel.

46.2.   As for the costs of the summons and the costs appeal, it is likely that the summons and costs appeal would not have been necessary had the Respondent applied to the judge to vary the costs order nisi below, referring the judge to the cases discussed above[53].  For that reason, I would make an order nisi that the Respondent pay the Applicants the costs of the summons, and that the Applicants pay the Respondent’s costs of the costs appeal personally[54] but to be taxed on the basis of an application by summons at first instance to vary a costs order nisi only, to be taxed if not agreed.

Hon McWalters JA:

47.  I agree with the judgment of Yuen JA.