JAMES WARDELL AND JACKSON IP, Joint and Several Liquidators of KIN MING TOY MANUFACTORY LTD (In Liquidation) v. CHENG SHING KI AND ANOTHER

HCCW 402/2015

[2018] HKCFI 2057

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 402 OF 2015

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D E C I S I O N

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1.  I have before me a summons dated 14 March 2018 seeking declarations that a payment in the sum of HK$1,100,000 made on 4 January 2016 out of the bank account of the Company and a further payment of HK$1,000,000 made on 7 January 2016 out of the bank account of the Company are void pursuant to section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”). There is also a parasitic claim for a declaration under section 276(1) of the Ordinance seeking a finding that the 1^st respondent was guilty of misfeasance by virtue of his instruction to make those two payments to be made.

2.  The petition to wind up the Company was issued on the 29 December 2015.  The Company was wound up on 23 March 2016. Section 182 of the Ordinance provides:

“Avoidance of dispositions of property, &c. after commencement of winding up

In a winding up by the court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up, shall, unless the court otherwise orders, be void.”

3.  The first of the two impugned payments was made out of a bank account that was in overdraft on 4 January 2016.  The consequence of the payment was that the overdraft increased. 

4.  In Super Speed Limited (in liquidation) v Bank of Baroda [2015] 2 HKLRD 965, the Court of Appeal held that a post-petition payment out of the account of a company that was already in overdraft did not constitute a disposition of the property of the company and therefore section 182 did not apply.  The Court of Appeal left open the question of whether or not use of an overdraft might give rise to a disposition of a company’s property where the bank held security for future advances.  An increase in the overdraft automatically expanded the quantum of the bank’s security interest and correspondingly reduced the company’s equity in the charged assets unless these were already charged to their full value at the time of the further drawing on the account. (See headnote 2 and the passages in the judgment referred to in it.)

5.  Accepting, for present purposes, that it is possible that a payment which in itself does not constitute a disposition might cause a negative impact on the equity of redemption of the secured asset and in this sense constitute a disposition of the company’s property, it remains necessary to identify what precisely the relevant disposition is.

6.  Ms Chang, on behalf of the liquidator, argued in answer to my questions concerning this as follows:

First Payment

The disposition took place on 7 January 2016 when a payment was made in to the relevant account, taking it into credit as a consequence of the sale of a secured property, and the proceeds on completion of that sale being deposited into the bank account.

7.  The argument assumed that the proceeds of the sale of the property were not subject to a charge (which for reasons I shall explain later in this decision is incorrect) and that the quantification of the disposition is the difference between what was in the account after the deposit on 7 January 2016 and what should have been in the account if the payment on 4 January 2016 had not been made.

8.  The short answer to this is that what I have just described does not involve the disposition of the property of the Company and, therefore, section 182 has no application.

Second Payment

9.  The second suggested disposition on 7 January 2016 involved the payment to the 1^st respondent of a cheque for HK$1,000,000 out of an account which had by that time gone into credit as a result of the deposit of the sale proceeds which I have referred to above. 

10.  Both the bank and the 1^st respondent argued that the payment did not involve the disposition of the property of the Company as the proceeds of the sale were subject to the same charge as the property the realisation of which had made the monies available. 

11.  This, in my view, is correct for two reasons: The first is that the terms of the charge itself, in my view, extend to the proceeds of sale.  The charge is worded in the following fairly conventional form:

“3. CHARGE OF PROPERTY

3.01 In consideration of the premises and with the object and intent of affording to the Lender a security for the Secured Indebtedness and the due fulfilment by the Borrower of the agreements, covenants and conditions contained:–

(a) the Borrower as Beneficial owner HEREBY CHARGES the Property to the Lender, SUBJECT as is more particularly specified in the said Schedule and to and with the benefit of all leases, tenancies, rights, licences, covenants, conditions and other incidents of tenure affecting the Property; and

(b) the Borrower HEREBY ASSIGNS or agrees to assign unto the Lender the full benefit and all rights of all the terms and conditions more particularly specified in the said Schedule and of any payment, covenant, agreement, undertaking or indemnity contained in any sale and purchase agreement, Lease, or other document, agreement or undertaking whatsoever in respect of or relating to the Property now subsisting or to be created hereafter TO HOLD the same unto the Lender absolutely,

SUBJECT nevertheless to the proviso for redemption hereinafter contained.”

In my view it is quite clear, in particular from sub-clause (b), that the charge must have been intended to extend to the proceeds of the sale of the property. 

12.  In my view, this conclusion is entirely unsurprising.  As Arden LJ (as she then was) in Buhr v Barclays Bank [2002] BPIR 25 observes in [50] of her judgment:

“Professor Sir Roy Goode’s basic proposition – that security in an asset carries through to its proceeds – is also supported by common sense. If the judge’s conclusion is wrong there is a significant lacuna in the law of mortgages.”

The general position is described by Sir Roy Goodein Goode and Gullifer on Legal Problems of Credit and Security, 6^th ed, in [1.63]. 

13.  It, therefore, follows that even if my construction of the charge is incorrect, as a matter of common law, the proceeds of the sale would be treated as subject to the charge created over the underlying asset.  This being the case, it follows that the payment on 7 January 2016 was out of charged assets and, therefore, did not constitute a disposition of the property of the Company.  The application in respect of the second payment, therefore, also fails.

14.  I will, therefore, dismiss the summons and hear counsel on costs.