YIU KA FUNG VINCENT t/a CONFIDENCE SERVICES CENTRE v. INFO-VANTAGE LTD AND ANOTHER

CACV 96/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 96 OF 2014

(ON APPEAL FROM HCA NO 1066 of 2013)

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J U D G M E N T

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Hon Zervos J (giving the Judgment of the Court):

Introduction

1.  This is an appeal from the judgment of Deputy High Court Judge B Chu (as she then was) ordering that the defendant elect between two alternative defences upon a determination of the 2^nd defendant’s application to amend its defence and the plaintiff’s application to strike out the original defence.  The basis of the judge’s order was that the two defences were based on inconsistent allegations of fact which there were no reasonable grounds to plead, even if pleaded in the alternative, as they were (in the judge’s view) mutually incompatible.  The judge did not make any order on the plaintiff’s application to strike out the 2^nd defendant’s original defence and that is therefore a matter that we have been asked by the plaintiff to consider in this appeal.

2.  At the conclusion of the hearing we indicated that we would hand down our judgment in due course and this we now do. 

The action between the parties

3.  The plaintiff’s claim against the 2^nd defendant is that the 2^nd defendant is a transferee of the 1^st defendant’s business of a Dymocks bookstore under the Transfer of Businesses (Protection of Creditors) Ordinance, Cap 49 (“the Ordinance”) and that it is therefore jointly and severally liable for the monies owed by the 1^st defendant to the plaintiff for books sold and delivered.  The total amount claimed is $1,272,633.75. 

4.  The 2^nd defendant by its defence pleaded that it was not a transferee of the business of the 1^st defendant and accordingly is not liable under the Ordinance for the 1^st defendant’s debt to the plaintiff and by its proposed amended defence sought to plead in the alternative that if it is a transferee, it has discharged any liability it had under the Ordinance by making a payment under section 8 of the Ordinance to the creditors of the 1^st defendant.

5.  The 2^nd defendant by this appeal seeks to overturn the order of the judge and amend its defence as proposed.  The plaintiff by its respondent’s notice seeks to strike out the 2^nd defendant’s defence that it is not a transferee under the Ordinance on the basis that no reasonable defence is disclosed in that respect, as the allegation is unarguable and bound to fail in light of the undisputed facts. 

6.  If the 2^nd defendant’s original defence should be struck out, as the plaintiff contends, no question of election would appear to arise.  The primary issue in this appeal therefore appears to us to be whether the 2^nd defendant can, at least arguably, contend that it is not a transferee under the Ordinance. The other main issue (which we will deal with first) is whether or not the judge was right to think that the alternative cases which the 2^nd defendant sought to advance could not properly be pleaded as inconsistent alternatives. 

The state of the evidence

7.  The plaintiff and the 2^nd defendant (through one of its directors) have each filed an affirmation setting out in detail the factual matters on which they rely as well as producing relevant documents.  As we explain below, it would appear that the court has all the relevant evidence before it and that it is most unlikely that any further material evidence will be forthcoming or elicited at trial.  It would also appear from such evidence that the key facts are not in dispute. 

8.  This is a matter of particular significance when considering the respective cases of the parties in the discussion to follow.

The background facts

9.  The plaintiff is a sole proprietor carrying on the business of a book supplier. 

10.  The 1^st defendant is a limited company incorporated in Hong Kong which was carrying on business as a bookstore under the name of “Dymocks Booksellers International Finance Centre” at premises in the mall of the International Finance Centre (“IFC”). 

11.  The 2^nd defendant is a limited company incorporated in Hong Kong which is a wholly-owned subsidiary of a British Virgin Islands company, New Trend International Ltd, which is 55% owned by Dymocks Holdings Pty Limited of Australia.  The 2^nd defendant is the registered proprietor in Hong Kong of the trademarks “Dymocks” and “Dymocks Booksellers”.

12.  Between 2 December 2011 and 19 November 2012, the 1^st defendant purchased a quantity of books from the plaintiff for a total outstanding sum of $1,272,633.75 which the 1^st defendant failed to pay.  On or about 5 December 2012, the 1^st defendant ceased to carry on its business as a bookstore under the name of “Dymocks Booksellers International Finance Centre” at the IFC, and on 6 December 2012, the 2^nd defendant commenced business at the address in the IFC under the name of “Dymocks Booksellers IFC”.

13.  It is the plaintiff’s case that the 2^nd defendant is the transferee of the 1^st defendant’s business for the purpose of section 3 of the Ordinance and that it is jointly and severally liable to the plaintiff in respect of the unpaid outstanding sum owed to him by the 1^st defendant.  The 1^st defendant does not contest the claim against it, whilst the 2^nd defendant does.

14.  It is the 2^nd defendant’s case that since its incorporation it had granted and supervised franchises for the business of booksellers under the name of “Dymocks” in Hong Kong.  The 2^nd defendant entered into a franchise agreement with the 1^st defendant on 7 June 2010 to operate the business at the premises in the IFC which were leased by the 2^nd defendant and sublet to the 1^st defendant. 

15.  It was not long before the 2^nd defendant was itself experiencing difficulties with the 1^st defendant and in about September 2011 the 1^st defendant began to default in payment of its franchise fees and advertising levies.  As a result, in about the middle of 2012, the 2^nd defendant issued breach and termination notices to the 1^st defendant, pursuant to the provisions of the franchise agreement. 

16.  On 5 July 2012, the 2^nd defendant entered into a deed of release with the 1^st defendant under which the breach and termination notices were withdrawn by the 2^nd defendant in exchange for the 1^st defendant’s agreement to fulfil certain obligations.  During this period the 2^nd defendant sought to assist the 1^st defendant to meet its financial obligations by proposing a number of repayment plans to facilitate payment of its debt to the 2^nd defendant. 

17.  The 1^st defendant continued to be delinquent under the repayment plans and deed of release, and as a result the 2^nd defendant on 8 October 2012 served on the 1^st defendant a notice of intention to terminate the franchise agreement.  This had no effect on the 1^st defendant which did not remedy the stipulated breaches, and accordingly the 2^nd defendant exercised its rights under the franchise agreement and the deed of release to terminate the franchise agreement by notice dated 3 December 2012.  Pursuant to the notice the 2^nd defendant took possession of the premises at the IFC and the chattels therein on and from 6 December 2012.  By this stage, the amount due to the 2^nd defendant by the 1^st defendant had grown to approximately $3.8 million.

18.  Upon termination of the franchise agreement, Clause 15.6 of the franchise agreement gave the 2^nd defendant the option to purchase the business assets of the 1^st defendant and Clause 7.2 of the deed of release gave the 2^nd defendant the right to take possession of the premises and the business.  Clause 7.2 is of particular relevance and we therefore set it out in full.  It states: 

“Where the Franchise Agreement is terminated by Dymocks, the Franchise Owner and Guarantor each convenant to Dymocks that they will not do any act or thing that would impede or otherwise interfere with the ability of Dymocks to exercise its rights to terminate the Franchise Agreement Owner and take possession of the Premises and the Business. Without limiting the preceding, the Franchise Owner and Guarantor agree that:

(1) they will accept the termination; and

(2) they will not make any Claim or seek any orders from any court or tribunal contesting the termination or Dymocks taking possession of the Business or Premises. This deed constitutes a bar to any proceedings commenced by the Franchise Owner or the Guarantor in respect of Claims or proceedings referred to in the preceding sentence; and

(3) they will cooperate with Dymocks in relation to the handover of the Business and Premises including by permitting the Dymocks Group to have access to the Premises, employees and creditors for the purpose of preparing for handover of the Business.”

19.  There were previous proceedings instituted by the plaintiff on 21 December 2012 but, for reasons which are not apparent, they were discontinued on 10 May 2013.  On 14 June 2013, the plaintiff issued the current writ of summons against the 1^st and 2^nd defendants which, as we have noted, the 1^st defendant is not contesting.  The 2^nd defendant, which does contest the proceedings, filed its defence on 30 July 2013. 

20.  After the institution of these proceedings, and shortly before filing its defence, the 2^nd defendant gave notice to creditors of the business of the 1^st defendant, including by way of publication of notices dated 12 July 2013, that it “took over” the business by way of set off of debts owed to it by the 1^st defendant, that it purchased certain chattels and that it made certain other payments to the 1^st defendant which it referred to as “Take Over Payments”.  In the notices, the 2^nd defendant stated that its position was that it was not a transferee of the 1^st defendant’s business and was not liable under the Ordinance for the debts of the 1^st defendant, but nonetheless, in case it was held to be such a transferee, intended, pursuant to section 8 of the Ordinance, to make pro-rata payments equal in total to the amount of the Take Over Payments to all creditors of the business as at 6 December 2012.

21.  The 2^nd defendant had earlier commissioned Vigers Appraisal and Consulting (International) Ltd (“Vigers”) to value the assets of the business as at 31 December 2012.  By a valuation report dated 4 January 2013, Vigers valued the assets of the business in the sum of $430,000.  As at 17 January 2013, the 2^nd defendant was one of the largest creditors of the 1^st defendant, with a debt of approximately $4.5 million owed to it. The 2^nd defendant paid the sum of $430,000 for the assets acquired from the 1^st defendant by way of set off of that sum against the debt due to it by the 1^st defendant.

22.  By letter dated 10 October 2013, the solicitors for the 2^nd defendant made payment to the plaintiff through his solicitors in the sum of $52,884.69 for the pro-rata amount of the purchase price which it claimed to have paid, explaining that it was calculated on the basis of a purchase price made up of the value of the chattels of the business at $430,000, payment in lieu of notice of certain employees totalling $55,000, and a further payment to round the total up to $500,000, and the total indebtedness of the 1^st defendant to creditors of the business as at 6 December 2012 in the amount of $12,054,015.66.

23.  Thereafter, there followed on 31 October 2013 a summons issued by the 2^nd defendant seeking leave to amend the defence by pleading an alternative defence which we describe in paragraph 28 below.  In response, on 5 November 2013 the plaintiff issued a summons to strike out paragraphs 7 to 9 of the defence in which the 2^nd defendant pleaded that it was not a transferee of the 1^st defendant’s business.

The pleaded cases

24.  On the issue of the transfer of business from the 1^st defendant to the 2^nd defendant, the plaintiff set out the following particulars in his statement of claim in support of his contention that the 2^nd defendant is the transferee of the business under section 3 of the Ordinance:

“(a) The 1^st Defendant and the 2^nd Defendant both carried on business as book sellers, at the same premises (i.e. the said IFC Address) under similar (if not identical) business names. As such, the 2^nd Defendant carried on business under the goodwill of the Business.

(b) At the said IFC Address, the 1^st Defendant and the 2^nd Defendant used the same fixtures, fittings and equipment for the carrying on of business.

(c) The 1^st Defendant and the 2^nd Defendant both carried on the Business by using the same personnel. In particular, at least 3 of the staff of the 1^st Defendant … were employed by the 2^nd Defendant.

(d) After the 2^nd Defendant commenced business at the said IFC Address, the 2^nd Defendant continued to order books from the Plaintiff on substantially the same terms as those agreed between the Plaintiff and the 1^st Defendant.  Accordingly, both the 1^st Defendant and the 2^nd Defendant used the same stock-in-trade.”

25.  At this juncture it is worthwhile noting that there is little, if any, dispute between the parties as to these facts.  Mr Douglas Clark, counsel for the 2^nd defendant, in submissions admitted that particular (a) was the case, but that, as this was a case involving a franchisor taking over his franchisee’s business, that would necessarily be the position.  He made one qualification, which was that the 2^nd defendant had not obtained a transfer of any goodwill of the business because the 1^st defendant never had any goodwill to transfer as the goodwill in the Dymock’s brand was licensed to it under the franchise agreement and whatever goodwill there may have been was lost when the franchise agreement was terminated.  He admitted that particulars (b) and (c) were the case but again emphasised that this was necessarily so where a franchisor took over a franchisee’s business.  He also admitted that particular (d) was the case but stressed that whatever stock-in-trade remained on the premises was paid for by the 2^nd defendant.  He stressed it was the 2^nd defendant’s case that there was no detriment to the creditors of the 1^st defendant which he said was a fundamental requirement which had not been established here. 

26.  For this latter point, Mr Clark relied on SMEloan Hong Kong Ltd v Wong Wing Cheung [2006] 4 HKLRD 757 which he argued was authority for the proposition that there must be a divesting of assets to the detriment of creditors for there to be a transfer of business under the Ordinance.

27.  It is appropriate now to consider the 2^nd defendant’s case as pleaded and as it is sought to be amended.  In paragraphs 7 to 9 of the amended defence the 2^nd defendant pleaded its original defence, that it is not a transferee under section 3 and is therefore not jointly and severally liable to the plaintiff for the debts of the 1^st defendant.  The 2^nd defendant set out the following matters in support of its case:

“(a) The 1^st Defendant did not transfer the Business to the 2^nd Defendant. The 2^nd Defendant took possession of the premises and certain chattels of Dymocks Booksellers IFC pursuant to contractual rights.

(b) By around mid-2012, the 1^st Defendant failed to meet its obligations under the Franchise Agreement, and the 2^nd Defendant issued breach notices and termination notices to the 1^st Defendant as provided for under the Franchise Agreement.

(c) By a deed of release dated 5 July 2012 (‘Deed of Release’), the breach and termination notices were withdrawn by the 2^nd Defendant in exchange for the 1^st Defendant’s agreement to fulfil certain obligations.

(d) On 6 December 2012, the 2^nd Defendant exercised its rights under the Franchise Agreement and the Deed of Release to take possession of the premises and certain chattels at the IFC Address due to breaches by the 1^st Defendant of its obligations under the Franchise Agreement and the Deed of Release.

(e) There was no assignment of the Business’ goodwill from the 1^st Defendant to the 2^nd Defendant. The Franchise Agreement provided that goodwill in the Dymocks trademarks and trade name enured for the exclusive benefit of the 2^nd Defendant. The 1^st Defendant’s right to use the Dymocks trademarks and trade name derived solely from the Franchise Agreement. The right to use the Dymocks trademarks and trade name was limited to operation of the Business in accordance with the Franchise Agreement.

(f) If the Business owned any goodwill at 5 December 2010 (which is denied) then that goodwill ceased to exist upon termination of the Franchise Agreement and the right of occupancy of the premises with the consequence that the 2^nd Defendant did not take over from the 1^st Defendant any goodwill or business.

(g) Under the Franchise Agreement, the 1^st Defendant was a sub-lessee of the IFC Address from the 2^nd Defendant. Upon termination of the Franchise Agreement and the right of occupancy conferred by the Deed of Release, the 1^st Defendant lost any right to use the Dymocks name or any right to trade from the IFC Address.

(h) The 2^nd Defendant purchased the chattels of the Business from the 1^st Defendant under the option provided for under the Franchise Agreement. The price of the chattels were valued by an independent valuer, Vigers Appraisal & Consulting Limited, as being worth HK$430,000 and were purchased by the 2^nd Defendant from the 1^st Defendant for that price (by way of set-off debts owed to the 2^nd Defendant) (the ‘Take Over Payment’).

(i) The 2^nd Defendant re-employed staff members who had been employed by the 1^st Defendant. The staff members terminated their employment with the 1^st Defendant and were re-employed under new contracts by the 2^nd Defendant. In order to allow these staff members to properly terminate their employment with the 1^st Defendant, the 2^nd Defendant paid (by way of set-off) on their behalf on months’ pay in lieu of notice.

(j) Books and magazines that were in the shop at the IFC Address when the 2^nd Defendant took over the premises were subject to Romalpa clauses. The 2^nd Defendant purchased these books and magazines from their original sellers (including the Plaintiff).

(k) The fact that the 2^nd Defendant took over certain chattels and the premises from the 1^st Defendant did not give rise to any detriment to the creditors of the 1^st Defendant.”

28.  In paragraphs 10 and 11 of the draft amended defence the 2^nd defendant seeks to plead in the alternative that if it is a transferee under section 3 of the Ordinance, it is not liable to the plaintiff as it had already made pro-rata payments to the creditors of the business of the 1^st defendant as at 6 December 2012, including the plaintiff, in good faith and without preference in accordance with section 8 of the Ordinance in a total amount equivalent to the consideration of $500,000 paid by the 2^nd defendant to the 1^st defendant in relation to the transfer.  In support of the alternative defence the 2^nd defendant pleaded the following facts and matters:

“(a) The 2^nd Defendant gave notice to creditors of the Business of the 1^st Defendant as at 6 December 2012, including by way of publication of notices in the Government of the HKSAR Gazette, the Wen Wei Po, the Ming Pao and the South China Morning Post on 12 July 2013, of its taking over of the Business and the 2^nd Defendant, inter alia, invited any creditor of the Business as at 6 December 2012 to notify the 2^nd Defendant of their names and addresses and details of amounts owed by the 1^st Defendant as at 6 December 2012 with supporting documentation.

(b) Thereon the 2^nd Defendant, without prejudice to its position that it is not a transferee of the Business under the Ordinance, made payments in good faith and without preference to the creditors of the Business as at 6 December 2012 of pro-rated amounts equal in total to the S.8 Payment upon receipt of notification/s from such creditors.

(c) With respect to the Plaintiff, under a letter dated 10 October 2013 from solicitors for the 2^nd Defendant to solicitors for the Plaintiff, the 2^nd Defendant made a pro-rated payment by cheque to the Plaintiff in the amount of HK$52,884.69.  Such sum was calculated on the basis of the total amount claimed by the Plaintiff divided by the total indebtedness of the 1^st Defendant to creditors of the Business as at 6 December 2012 multiplied by HK$500,000 (the S.8 Payment).”

The relevant legislative provisions

29.  It is necessary to examine the relevant legislation in some detail in order to address this appeal. 

30.  The Ordinance was enacted on 27 June 1980 and repealed the Fraudulent Transfers of Businesses Ordinance which sought to combat the fraudulent transfer of businesses that left creditors without assets against which to proceed.  It appears that the Ordinance was a response to certain criticisms of the previous legislation.  It has as its object to protect creditors on the transfer of businesses and to provide for the liability of transferees of business and the manner in which such liability may be avoided.  Fraud, however, is no longer required.

31.  The centrepiece of the Ordinance is section 3, which provides that, subject to the other provisions of the Ordinance, a person to whom a business is transferred shall be liable for all the debts and obligations arising out of the carrying on of the business by the transferor. This provision is subject to certain limitations and exemptions. 

32.  Before examining section 3 it is necessary to have an understanding of the definition of certain terms as provided under section 2.  For instance, “business” means a business, or any part thereof, consisting of a trade or occupation other than a profession, whether or not it is carried on with a view to profit, and “transfer” means the transfer or sale of a business, but does not include (a) the sale of the stock in trade of a business in the ordinary course of its trade; (b) the creation of a charge; (c) the transfer of land or any share or interest therein; and (d) the transfer of a vessel, other than certain specified exceptions.  The definitions are expressed in broad and general terms whereby a transfer is a transfer or sale of a business consisting of a trade or occupation.

33.  Section 3 reads:

“3. Transferee of business to be liable for liabilities of transferor

(1) Subject to this Ordinance, whenever any business is transferred, with or without the goodwill thereof, the transferee shall, notwithstanding any agreement to the contrary, become liable for all the debts and obligations, including liability for tax charged or chargeable under the Inland Revenue Ordinance (Cap.112), arising out of the carrying on of the business by the transferor.

(2) Notwithstanding subsection (1), where a part of a business is transferred (other than the goodwill thereof) and in any proceedings-

(a) the transferee would, but for this subsection, be adjudged liable under this Ordinance for any debts and obligations arising out of the carrying on of the business by the transferor; and

(b) it is shown to the satisfaction of the court hearing the proceedings that-

(i) the transferee purchased such part of the business in good faith and for value; and

(ii) at the date of transfer of such part of the business, the transferee had no knowledge (whether actual, constructive or imputed) that what he was acquiring formed part of a business,

the transferee shall not be liable under this Ordinance for the debts and obligations arising out of the carrying on of the business by the transferor.”

34.  There are three listed situations under the Ordinance where the liability pursuant to section 3 does not arise.

35.  First, by section 3(2)(b) where a part of a business is transferred other than its goodwill and a court is satisfied that it was purchased by the transferee in good faith and for value, not knowing that he was acquiring part of the business. 

36.  Secondly, by section 4 where public notice of the transfer in accordance with section 5 has been given not less than one month and not more than four months before the date of the completed transfer. 

37.  Thirdly, by section 10 where the transfer is effected by (a) the Official Receiver or a trustee in bankruptcy; (b) the liquidator of a company other than in voluntary liquidation; (c) the Financial Secretary Incorporated; (d) the Permanent Secretary for Education Incorporated; (e) the Director of Social Welfare Incorporated; (f) a person selling under or pursuant to a charge registered within 1 year at the date of transfer; (g) pursuant to any order or direction of a court; (h) an executor or administrator; or (i) operation of law. 

38.  We note that none of these situations apply to the present case where the 2^nd defendant as a franchisor had taken over or transferred to it the business of the franchisee.  Section 10 in particular does not exempt from the operation of this Ordinance a franchisor which has exercised rights it may have under a franchise agreement to take possession or have transferred to it a franchisee’s business.  In order to avoid the operation of the Ordinance on the 2^nd defendant, Mr Clark argued, as we have already noted, that there was a fundamental requirement, which he submitted was not satisfied here, that the transfer involved a divesting of assets to the detriment of creditors.  We will come back to this matter later in our judgment.

39.  Even when liability does arise pursuant to section 3, it can be limited where a payment is made in accordance with section 8 towards it in an amount which is equal to the value of the business acquired by him.  This is an important provision and one that is relied upon by the 2^nd defendant as part of its alternative defence.  To better understand the section it is necessary to set it out in full.  It reads:

“8. Limitation of liability of transferee

(1) A transferee who in good faith and without preference has paid in discharge or partial discharge of any liability for which he became liable under this Ordinance, and for which he would not otherwise have been liable, an amount which is equal to the value of the business acquired by him, at the date on which the transfer took effect, shall not be liable further under this Ordinance.

(2) The value of a business acquired by a transferee at the date on which the transfer takes effect shall, until the contrary is proved, be presumed to be an amount equal to the amount paid or agreed to be paid (whether in terms of money or by means of any other consideration) for the acquisition of the business.”

40.  We will examine section 8 in greater detail as it has been the subject of comment by the courts.

41.  Before leaving the Ordinance it is worthwhile noting the following additional matters in relation to the regime that has been enacted.  A party that wishes to recover any liability under the Ordinance is required by section 9 to institute proceedings for such liability within one year of the transfer.  Also section 7 provides that nothing in the Ordinance relieves a transferor or transferee from any liability to which he would otherwise be subject and section 6 gives a transferee an indemnity against a transferor for all amounts which the transferee becomes liable to pay under the Ordinance.

The relevant legal principles

42.  An understanding of the legislative provisions and framework under the Ordinance and a distillation of relevant legal principles has been helpfully provided by Deputy High Court Judge Reyes SC (as he then was) in BNP Paribas v GC Luckmate Trading Ltd [2002] 2 HKLRD 156 which was subsequently endorsed by the Court of Appeal: see [2003] 1 HKLRD 307.

43.  In his survey of the relevant authorities, the judge at paragraph 21 set out the following statements of principle relevant to the determination as to whether there had been a transfer of business within the Ordinance.   He referred to the Ordinance by reference to the initials TBO.  He said:

“(1) In deciding whether there has been a transfer of business under the TBO, the court objectively considers all surrounding circumstances. The fact that there is no document formally evidencing a transfer is not conclusive.

(2) A transfer of assets may indicate a transfer of business. But a transfer of assets does not of itself mean that there has been a transfer of business within the TBO.

(3) There may be a transfer where the alleged transferee can be shown to have gained some advantage from taking over the purported transferor’s business. Such advantage will often arise because the alleged transferee is shown to have taken over a “going concern”. But even where an entity is on the verge of bankruptcy, an alleged transferee may perceive a real benefit to be gained from assuming some or all aspects of that entity’s business.

(4) Factors indicating that a business has been transferred from one person to another include the following:

(a) Use of the same or similar name.

(b) Assignment of goodwill.

(c) Use of the same premises.

(d) Use of the same fixtures, fittings and equipment.

(e) Use of the same personnel.

(f) Use of the same stock-in-trade.

(g) Conduct of the same or similar type of business.

(h) Conduct of business in the same or similar manner.

(i) Servicing of the same customers.

Although the above may not be conclusive individually, the cumulative presence of a number of the foregoing factors can establish a transfer.”

44.  In that case the judge had to decide whether there had been a transfer under section 3 and if there had been whether section 8 applied where it was argued that the liability was limited to the value of the business at the time of the transfer which was nil or negligible.  He explained that whether or not there had been a transfer under section 3 was a question of fact.  He said at paragraph 34:

“… The court considers all surrounding circumstances objectively and draws an inference whether, on the balance of probability, there has been a transfer. As Huggins J more succinctly put it in Elson-Vernon Knitters Ltd v Sino-Indo-American Spinners Ltd [1972] HKLR 468, the court is ‘not concerned with the mechanics of the transfer but with the fact of transfer’.”

45.  The judge concluded on the facts of that case that there had been a transfer within the terms of the Ordinance but he was not persuaded that section 8 was applicable to the situation where a person had wrongly denied that there had been a transfer and had paid nothing at all in consideration for a transfer.  He said at paragraph 41:

“It seems to me that TBO s 8 was meant to apply where a transferee pays a valid consideration in good faith for a transferor’s business but omits to give notice of the transfer. In that circumstance, the transferee will not be liable for more than the consideration paid. Having discharged such liability, the transferee becomes entitled to an indemnity against the transferor under TBO s 6. Accordingly, where a transferee has paid the full amount of his consideration to a creditor of the transferor, the transferee can claim all his money back from the transferor.”

46.  In dismissing this case on appeal, the Court of Appeal held that as it was the defendant seeking to derive a benefit from section 8, the burden of proof lay on the defendant to establish that the provision was applicable, and section 8 was not available to the defendant because it could not prove that it had given true value consideration for the transferor’s business. 

47.  The court explained that the “payment” in subsection 8(1) by the transferee in discharge of liabilities under the Ordinance referred to payment by the transferee to the transferor’s creditors, whilst the amount “paid or agreed to be paid” in subsection 8(2) for the acquisition of the business referred to payment by the transferee to the transferor. 

48.  The court commented that in the circumstances of the case the defendant’s alternative contentions that there was no transfer of business and that the transferee was entitled to the limitation provided for in section 8 seemed to be mutually incompatible.  Mr Lee Tung Ming, counsel for the plaintiff, relied on the court’s comment to argue that as a matter of principle the 2^nd defendant’s two defences were mutually incompatible.  But we agree with Mr Clark that this comment needs to be analysed in context.

49.  The court found that the scheme in that case was designed to defeat the claims of the transferor’s creditors and that the transferee could not be said to be acting in good faith as required by section 8. The court then went on to comment at paragraph 26:

“It is also difficult to see how logically a case can be run in the alternative that there was no transfer of business and at the same time a transferee is entitled to the limitation provided for in s.8, which requires evidence of payment for the transfer. These contentions would seem to be mutually incompatible.”

50.  As already noted in that case no payment had been made under section 8, and yet the defendant had argued it could take advantage of that provision because the business transferred had no value and the issue that concerned the court was that it was necessary for there to be evidence of a payment having been made both to the transferor and to the creditors.

51.  It seems clear to us that the court made this comment in relation to the particular circumstances of that case and was not making a general statement of principle to the effect that it would never be possible for an alleged transferee to contend in the alternative, first that it was not, on the facts established, a transferee of a business within the meaning of the Ordinance, but that, if contrary to that contention it was such a transferee, it could nonetheless be entitled to the benefit of section 8 where it had complied with the requirements of that provision.

The judge’s decision

52.  The judge in the present case first considered the issue as to whether the 2^nd defendant in the circumstances of the case was a transferee.  She noted that according to the 2^nd defendant’s own case assets of the business had been divested to the 2^nd defendant and this would have made them unavailable to the 1^st defendant’s other creditors.  She then referred to the 2^nd defendant’s argument that the decision to terminate the franchise agreement was a step of last resort which it was contractually entitled to take but with the view of safeguarding the 2^nd defendant’s intellectual property and to avoid deterioration of the image and goodwill of its brand name as well as protecting the integrity and functional operation of its franchise business in Hong Kong. 

53.  It was submitted by the 2^nd defendant that this was not a case of a voluntary or collusive transfer but one in consequence of a franchisor exercising a contractual right under a franchise agreement terminating the agreement and there was an issue as to whether this would amount to a transfer of business under the Ordinance. 

54.  The judge found that it made no difference whether the transfer had been voluntary or not or in exercise of a contractual right under a franchise agreement or any other agreement with such provisions for taking over a business.  We agree with the judge in this respect.  The question whether a transfer of business for the purposes of the Ordinance has taken place requires the court to objectively consider all the surrounding circumstances and be so satisfied on a balance of probabilities.  It is not necessary for the transfer to be voluntary or collusive in order to attract the operation of the Ordinance.

55.  The judge then addressed the issue of the value of the business and the alternative pleading that the section 8 payment of $500,000 limited the 2^nd defendant’s liability to that sum.  In her analysis, she concluded that the two defences advanced by the 2^nd defendant, even though in the alternative, constituted inconsistent allegations of fact which could not reasonably be maintained simultaneously.  She found that it was not logical for the 2^nd defendant to run the alternative case and that it was incompatible and inconsistent with its original defence.  For this reason, the judge refused leave to amend, and instead directed the 2^nd defendant to make an election as to which defence it wished to pursue. 

56.  Having done this, the judge did not address the plaintiff’s application that the 2^nd defendant’s defence that it is not a transferee should be struck out.  The matter has, however, been pursued by the plaintiff in this appeal by way of its respondent’s notice, and we must therefore consider it. 

The appeal

57.  This leads us to the two issues in this appeal which we will address in turn.  The first issue we shall deal with is whether the 2^nd defendant was entitled to plead as an alternative the defence relating to section 8 of the Ordinance set out in paragraphs 10 and 11 of the amended defence.  The second issue is whether the 2^nd defendant’s original defence that it is not a transferee, set out in paragraphs 7 to 9 of the defence, should be struck out on the ground that it is obviously unsustainable.

Pleading alternative defences

58.  Under Order 18 rule 12A a party may plead inconsistent allegations of fact in the same pleading if the party has reasonable grounds for doing so and the allegations are made in the alternative.

59.  Mr Clark argued that the amended defence pleading the alternative case that the 2^nd defendant is (contrary to the primary case) a transferee but is entitled to the benefit of section 8 of the Ordinance was one which it was reasonable to plead in the alternative to the original defence that it is not a transferee for the purposes of the Ordinance.  He further argued that the 2^nd defendant’s legal position as a franchisor under the Ordinance was far from clear and whether it is a transferee was a legal consequence that arose from the various facts that needed to be objectively considered in all the circumstances of the case.  He contended that whether or not the 2^nd defendant is a transferee was not a simple and straightforward question of fact that the 2^nd defendant could determine for itself and plead accordingly.

60.  Mr Lee’s primary position was that the 2^nd defendant cannot plead it is not a transferee on the undisputed evidence – this was the subject of the striking out application, but in any event he argued that the 2^nd defendant cannot plead an alternative case involving the assertion that it is a transferee.  He submitted that the two defences are inconsistent and incompatible with each other. 

61.  We note however that whether the evidence points inevitably to the 2^nd defendant being a transferee is a different issue that we will address when dealing with the striking out application.  The issue in relation to this point is whether it is permissible for the 2^nd defendant to plead two alternative defences based on the same set of underlying facts.  This turns on whether there are reasonable grounds to advance the two alternative cases.   

62.  The problem with inconsistent alternative pleadings comes into sharp focus where they are based on different and inconsistent factual allegations.  The difficulty in verifying alternative pleadings in such circumstances was considered by Patten J in Clarke v Marlborough Fine Art Ltd [2002] 1 WLR 1731 at 1742 where he said:

“The purpose of the requirement that a party should verify the factual contents of his own pleadings was to eliminate as far as possible claims in which the party had no honest belief. … In relation to a pleading the claimant or other relevant party who puts the document forward as a statement of his case is required to certify that he believes the facts alleged are true. He is not required to vouch for the legal consequences which he seeks to attach to these facts. That is a matter for argument and ultimately for the decision of the court. The purpose of Part 22 is simply to exclude allegations which to the knowledge of the claimant or other party are untrue or which the party putting forward the pleading to the court is unable to say are true.”

63.  Cases may arise where the party has no personal knowledge of the facts, but has evidence pointing to alternative possibilities.  The pleading and verification of such alternative pleas is permissible as long as there is a reasonable basis for doing so on the evidence available.  In such circumstances, where a party puts forward a pleading with alternative and mutually inconsistent versions of the facts, because the facts as known to him admit of alternative interpretations, the pleading is permissible and verifiable on the basis that the party believes on the evidence available that the facts will ultimately correspond to one or other of the possibilities pleaded.  However, if the matters pleaded are matters which are plainly within that party’s knowledge, so that he must know which of the inconsistent alternatives is the correct one, then the pleading of inconsistent alternative cases is not permissible.

64.  The judge found that the 2^nd defendant’s amended defence was incompatible and inconsistent with its original defence.  Mr Clark challenged the judge’s decision on the following grounds.  First, the judge did not make clear her finding that there were no reasonable grounds for making the inconsistent allegations of fact.  Secondly, the judge erred in concluding that whether the 2^nd defendant was a transferee was a pure question of fact that the 2^nd defendant could determine for itself and admit or deny in its pleadings.  Mr Clark added that for a court to make an objective finding as to whether the 2^nd defendant is a transferee or not it must consider the evidence regarding all the surrounding circumstances, bearing in mind the context that this was a case of a franchise agreement.

65.  In our view, there is a distinction between advancing mutually inconsistent allegations of fact and advancing alternative positions based on the same underlying facts.  In the present case, the 2^nd defendant was not seeking to advance inconsistent allegations of fact but seeking to plead two alternatives based on the facts as alleged.  Put another way, all that the 2^nd defendant was seeking to do was to advance a fall-back position in law, in the event that it was held, contrary to its primary contention, to be a transferee of the 1^st defendant’s business.  The question ultimately is whether there were reasonable grounds for it to do so.  In our view, there was nothing unreasonable in the 2^nd defendant advancing the alternatives it wished to put forward.  It was, we think, open to it to contend that on the facts (which were not really in dispute), it was not a transferee, but if it was, it had properly invoked the provisions of section 8.

66.  This brings us to the issue in this case as to whether the original defence is sustainable.

Striking out the original defence

67.  It was contended by the plaintiff that on an objective evaluation of the circumstances of this case it is established beyond argument that the 2^nd defendant is a transferee of the 1^st defendant’s business so that the 2^nd defendant’s defence to the contrary cannot possibly succeed.  It is on this basis that the plaintiff submitted that the defence is frivolous and constitutes an abuse of the process of the court and should therefore be struck out. 

68.  The test for strike out applications has been succinctly stated by the Court of Appeal in Ha Francesca v Tsai Kut Kan & Ors (No.1) [1982] 1 HKC 382 at 392:

“… striking out should only be done in plain and obvious cases, there should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. The claim must be obviously unsustainable, the pleadings unarguably bad and that it be impossible, not just improbable, for the case to succeed before a court will strike out. If the court does not think the matter to be clear beyond doubt, or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then there should be no striking out. One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law in proceedings such as this.”

69.  Of particular relevance to this appeal are the court’s comments at 392 to 393:

“But that having been said, however difficult it may be, if the issue is plain, then, the court can accede to a striking out application. There lies a discretion in the judge which discretion must, of course, be exercised judicially, these proceedings being interlocutory but the discretion of the judge can be interfered with by an appeal court if he is shown to be wrong in principle or that he has not given the proper weight, or no weight, to considerations which should have been weighed with him or has allowed himself to be influenced by considerations which ought not to have weighed with him.”

70.  Mr Lee argued that looking at the matter objectively against the various factors which would establish a transfer as highlighted by relevant authority; it was beyond doubt that the 2^nd defendant is a transferee of the 1^st defendant’s business. 

71.  If this is so on the evidence as it stands, and there is no further evidence which could be adduced which would improve the position from the 2^nd defendant’s point of view, it would be open to the court to strike out this defence.  We are satisfied that we have all the relevant evidence before us and that no additional material of significance would be forthcoming before or at trial.  When we asked Mr Clark what additional material he expected to produce at trial, he mentioned various matters but in our view none of them would take the 2^nd defendant’s case any further. 

72.  The matters mentioned by Mr Clark were as follows.  First, evidence that the 1^st defendant called the police when the 2^nd defendant took possession of the premises on 6 December 2012.  This showed, Mr Clark said, that there was no voluntary transfer by the 1^st defendant to the 2^nd defendant and there was no collusion between them.  We would accept that this was not a voluntary transfer and that the 2^nd defendant was exercising its right to terminate the franchise agreement and take over the business in its own interests, but as we have pointed out, the Ordinance does not require that a transfer be of a voluntary or collusive nature in order for it to apply. 

73.  Secondly, evidence of attempts to sell the other book store operated under franchise by the 1^st defendant at Repulse Bay.  There is in the evidence communications between the parties to this effect.  But this does not assist the 2^nd defendant in relation to the question whether, by taking over the IFC bookstore in the circumstances in which it did, the 2^nd defendant was a transferee of the business previously operated by the 1^st defendant at those premises.

“Thirdly, expert evidence as to the value of the business. There is in the evidence a valuation of the assets of the business upon which the 2^nd defendant relies on. However, this is a matter that is only relevant to the alternative defence in relation to the section 8 payment, and not to the original defence that it was not a transferee in the first place.”

74.  Fourthly, evidence from other creditors that there was no detriment to them as a result of the 2^nd defendant taking over the business.  As will be apparent from what we say below, we are satisfied that there was detriment to the plaintiff (and other creditors of the 1^st defendant) arising out of the setting off of the purchase price of the assets of the business against the debt owed by the 1^st defendant to the 2^nd defendant.

75.  In our view, Mr Lee was right to say that there are no disputed matters between the parties that would have to be resolved at trial in relation to whether or not the 2^nd defendant was a transferee of the 1^st defendant’s business.  In other words, we had all the evidence and material before us to make a determination as to whether or not the 2^nd defendant’s original defence was obviously unsustainable.

76.  Before we do this, it is appropriate that we deal with the issue of detriment to the creditors which according to Mr Clark, is a fundamental requirement in order to invoke the provisions of the Ordinance.

77.  He relied on SMEloan as authority for this proposition.  In that case Recorder J Fok SC (as he then was) referred to the submission from counsel for the defendant that when seeking to determine whether there has been a transfer of a business within the Ordinance to keep in mind the mischief at which the Ordinance was aimed.  He also referred to the comments from cases concerned with the Fraudulent Transfer of Businesses Ordinance which counsel relied on where it was noted that the mischief that the legislation was aimed at was the debtor divesting himself of his business to the detriment of his creditors.  

78.  Recorder Fok at paragraphs 19 and 20 noted counsel’s submission that “there must be a divesting of assets to the detriment of creditors in order for there to be a transfer of a business within the meaning of the Ordinance” with which he agreed but subject to the qualification that the assets of a business may take many different forms and may include its goodwill.  He went on to explain that in determining the issue as to whether there was a transfer of the business he would apply the approach identified in the passages of BNP Paribas at paragraph 21 and Liu Hon Ying v Hua Xin State Enterprise (Hong Kong) Ltd & Anor [2003] 3 HKLRD 347 at paragraph 75, which seeks to identify factors indicating that a business has been transferred from one person to another. 

79.  Similar comments were made by the Court of Appeal in BNP Paribas at paragraphs 16 to 18 where it was noted that in the circumstances of that case the transfer of the business for a notional sum was designed to defeat the claims of the creditors and that this was exactly the mischief which the Ordinance was intended to prevent.  Apart from the mischief the Ordinance is aimed to prevent, it still remains that the court has to be satisfied that a transfer has occurred under the Ordinance.  That is exactly what Recorder Fok stated in SMEloan.

80.  It is clear in our view that there was detriment to creditors of the 1^st defendant’s business by way in which the 2^nd defendant took over the business and paid for it, in that payment for the assets of the business in the sum of $430,000 was set off by the 2^nd defendant against the monies owed to it by the 1^st defendant. As Mr Lee pointed out, the 2^nd defendant was thereby preferred to the other creditors to this extent, in that the 2^nd defendant received full value for this part of its indebtedness, while the other creditors lost the assets so transferred as a source of repayment, receiving nothing in return.

81.  Mr Clark also argued before the judge and before us that there was a question as to the application of the Ordinance to a franchise arrangement.  We have already discussed this matter and are of the view that the issue for the court to determine is whether a transfer under the Ordinance has taken place by an objective consideration of all the surrounding circumstances guided by the principles as summarised in BNP Paribas.  It matters not that the transfer was exercised by way of a contractual right under a franchise agreement or any other agreement with such provisions for taking over a business.  What matters is that a transfer of the business has taken place upon an objective consideration of the whole of the circumstances. 

82.  Mr Clark further suggested that no goodwill had been transferred by the 1^st defendant to the 2^nd defendant, and that this demonstrated that there had been no transfer of business between them.  This argument was based on the contention that no goodwill could have been transferred because the franchise agreement provided that the goodwill in the Dymocks brand remained throughout with the 2^nd defendant.  Whether or not this was so, goodwill is merely one asset of a business, and its absence cannot prevent what is otherwise clearly a transfer from being one.  As Reyes J made clear in BNP Paribas, the individual factors identified by him as matters to be considered when trying to determine whether or not there has been a transfer of business are, taken individually, neither necessary nor sufficient conditions that will lead to a particular conclusion.  The court considers the matter objectively in the light of all the circumstances, and the presence or absence of a particular factor will not be conclusive.  Thus, the absence of a transfer of goodwill will not prevent what would otherwise clearly be a transfer from being one.

83.  Here, Mr Lee enumerated a list of factors that we agree overwhelmingly established that the 2^nd defendant is a transferee of the 1^st defendant’s business.  We mention each in turn.

84.  First, the 2^nd defendant conducted the same type of business using virtually the same business name at the same premises.  Up to 5 December 2012, the 1^st defendant carried on the bookstore business under the name of “Dymocks Booksellers International Finance Centre” at the IFC address and on the next day, 6 December 2012, the 2^nd defendant commenced the same business under substantially the same business name of “Dymocks Booksellers IFC” at the same address.

85.  Secondly, the 2^nd defendant used the same fixtures, fittings and equipment as had been used by the 1^st defendant for its business, which according to the 2^nd defendant were the chattels of the business purchased by from the 1^st defendant under an option provided for under the franchise agreement which was paid by way of set off of debts owed to the 2^nd defendant.

86.  Thirdly, the 2^nd defendant engaged the same staff members as those who had been engaged by the 1^st defendant for its business.

87.  Fourthly, the 2^nd defendant used the same stock in trade by taking over the books and magazines left in the premises by the 1^st defendant and continuing to order books from the plaintiff, including orders placed by the 1^st defendant but not yet delivered by 5 December 2012 and made them available for sale at the premises.

88.  Fifthly, the 2^nd defendant conducted the business in the same or similar manner to the 1^st defendant’s business and this was consistent with the fact that the 1^st defendant’s business was to operate in a manner modus stipulated by the 2^nd defendant under the franchise agreement, which emphasised the need of uniform operation an image of all Dymocks stores.

89.  Sixthly, the 2^nd defendant was servicing the same group of customers.

90.  Seventhly, the 2^nd defendant by taking over the business operated at the premises was in effect taking over the goodwill of the business or as it stated took over the business to avoid deterioration of the image and goodwill of the Dymocks brand.

91.  Mr Lee submitted that it is the fact of the transfer that matters rather than the mechanics of it.  Here he was referring to the comments of Huggins J in Elson-Vernon Knitters Ltd v Sino-Indo-American Spinners Ltd [1972] HKLR 468 (Full Court) and Widgery J in Kenmir Ltd v Frizzell [1968] 1 WLR 329 at 335 where all that matters, on an objective appraisal of all the circumstances, is that a transfer has taken place.  To this end, Mr Lee referred to the franchise agreement which provided the 2^nd defendant with the right to terminate the sublease that it granted the 1^st defendant for the premises and the right to terminate the franchise agreement with the option to purchase all assets of the business and take possession of it.  Clause 7.2 of the deed of release gave the 2^nd defendant the right to take possession of the premises and the business with the obligation on the 1^st defendant that he would not interfere with the exercise of that right and that he would cooperate with the 2^nd defendant in the handover of the business and premises, including giving access to the premises, employees and creditors for the purpose of preparing for handover of the business.  Those provisions make it abundantly clear that the 1^st defendant was transferring its business and operations to the 2^nd defendant.  The fact that the 2^nd defendant continued the business without interruption puts the matter beyond doubt.

92.  Mr Lee submitted that the franchise agreement and the deed of release clearly contemplated and permitted a transfer of the business from the 1^st defendant to the 2^nd defendant.  He further submitted even on the 2^nd defendant’s own case, the 1^st defendant was divested of his business assets to the detriment of his creditors, whereas the 2^nd defendant had gained advantage from taking over the business and at the same time avoiding the responsibility for the liabilities of the 1^st defendant.  As Mr Lee put it that was exactly the mischief which the Ordinance is intended to prevent.

93.  There was very little that Mr Clark could say in response to Mr Lee’s submissions on this issue.  We are satisfied that it is plain and obvious that the original defence that the 2^nd defendant is not a transferee of the 1^st defendant’s business is unarguable and should be struck out.  It is obviously unsustainable on the undisputed evidence, and as we have indicated, Mr Clark was not able to suggest any respects in which the evidence might develop so as to improve the 2^nd defendant’s position. 

94.  We note also that to a large extent the 2^nd defendant’s own case strongly supports the conclusion that it is a transferee of the 1^st defendant’s business.  Whilst we can understand the 2^nd defendant taking action to deal with a delinquent franchisee in order to protect its brand name and franchise business, if by taking the steps that it did it transferred the 1^st defendant’s business to itself, it would thereby attract the operation of the provisions of the Ordinance.  We would also point out that the liability imposed under the Ordinance can be relatively easily avoided by the service of the requisite notices, or limited by the taking of the steps provided for in section 8, as the 2^nd defendant wishes by its proposed alternative case to say it has done.

Conclusion

95.  For the reasons we have given, we shall allow both the appeal and the cross-appeal to the extent of setting aside the orders made by the judge and in their place making the following orders:

(1) An order that paragraphs 7 to 9 of the 2^nd defendant’s defence be struck out.

(2) An order that, subject to paragraph (1) above, leave be given to the 2^nd defendant to amend its defence in the form of the draft amended defence attached to its summons seeking leave to amend, and to file and serve such amended defence within 14 days hereof.

(3) Leave will also be given to the plaintiff to file and serve an amended reply, if so advised, within 14 days thereafter.

So far as costs are concerned, the parties had indicated at the end of the hearing that costs should follow the event. However, as will be apparent from the foregoing, each party has succeeded to some extent in relation to the appeal, and we think that it would be appropriate in the circumstances for us to make an order nisi as to costs.  In our view, although each side has had a measure of success, the effect of our decision is that the plaintiff has been substantially the more successful party, in that the ultimate outcome is that it has succeeded in striking out paragraphs 7 to 9 of the defence, and the 2^nd defendant has not been permitted to advance both of the alternative cases that it wished to.  In addition, substantially more time was devoted to the striking out issue than the alternative defences issue.  We therefore think that the appropriate costs order, to reflect the parties’ relative success would be an order nisi that the 2^nd defendant should pay the plaintiff 50% of the plaintiff’s costs here and below, to be taxed on the party and party basis if not agreed.