MAN YEE(a firm) AND OTHERS v. CHI TAO ENTERPRISES CO LTD t/a KAM TAO RESTAURANT

HEADNOTE

                Transfer of Business (Protection of Creditors) Ordinance, Cap. 49. A consideration of the factors which have to be weighed to determine whether there has been a transfer of a business or merely a sale of various assets. In the present case held that there had been such a transfer.

1985, No. 1123

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. The four plaintiffs all supplied goods to a restaurant trading under the name, the Perennial Restaurant. In early December 1983 Perennial closed down and all of them were owed different sums of money for the goods which they had supplied on credit. There is no dispute in relation to the accounts which have been rendered for these goods. The amounts involved were not very large and the claims were made in the District Court. In the Particulars of Claim which were lodged by the plaintiffs, a claim is made that Perennial transferred the restaurant business to the defendants and no notice was given of the transfer according to the provisions contained in the Transfer of Business (Protection of Creditors) Ordinance, Cap. 49.  They accordingly claim that the defendants as transferees of the restaurant business have incurred liability for their claims.

2. The issue which is in dispute between the parties is whether the various transactions which were effected in late 1983 and the beginning of 1984 between Perennial of the one part and the defendants on the other part constituted a transfer of business of such a nature as to bring it within the scope of the Transfer of Business (Protection of Creditors) Ordinance.

3. The 2nd, 3rd and 4th plaintiffs all gave evidence. In each case the evidence given was brief and not seriously contested. I think that it could be summarised in its essential features by saying that they had all supplied the goods referred to in the claims. Also they had attended at the restaurant premises at 90-98 Ma Tau Chung Road, Kowloon where the restaurant conducted its business. In early December 1983 Perennial had closed its doors. In January 1984 the restaurant had been re-opened as the Kam Tao Restaurant. None of the plaintiffs claim that the new restaurant was identical to the old one. They accepted that there had been some refurbishing and redecoration of the premises and that the staff serving in the restaurant had changed. The plaintiffs who had attended at the new restaurant said that the food which was served was of a similar type to the food which had previously been served by the Perennial Restaurant.

4. The 4th plaintiff, Mr Kwan Kok Hung who himself had experience as a former proprietor of a restaurant gave evidence that in his opinion the defendants had not applied for and obtained a new licence to operate the restaurant and that there must have been an assignment or transfer of the existing licence held by Perpetual. He based his surmise upon the fact that air was extracted to the rear of the premises and no ducts had been installed to filter the air and extract it from the top of the premises as is required by the Urban Council under new regulations which were in force at the time of the transfer of business. This was not a live issue as during the course of her evidence Madam Lee Siu Ching a director of the defendant company, agreed that no new licence was obtained.

5. Madam Lee was the only witness to give evidence for the defendants. There was not much dispute concerning the factual evidence. The contest which arises between the parties relates to the interpretation which is to be placed upon the factual evidence.

6. Madam Lee said that she had been involved with the defendants and their associated companies for a period of approximately eight years. The companies run a successful chain of restaurants. There are presently 13 restaurants in this chain. During the early part of 1983 she came to learn that Perennial was experiencing financial difficulties.  She then realized that this might provide a good opportunity for the defendants to further expand their restaurants. Negotiations then proceeded and agreement was reached along the following lines. The defendants would purchase from the landlords of Perennial the restaurant premises for a consideration of 10.5 million dollars. At the same time the defendants would acquire a controlling interest in Perennial Restaurant Limited which is the company that operates Perennial. Perennial would then surrender the balance of the term of the ten-year lease it held of the premises which commenced in 1977 for no consideration. The defendants would then purchase various fixtures and fittings belonging to Perpetual for a consideration of $349,178.  These monies would then be applied to meet any claims the employees of Perpetual may have on the restaurant including severance pay and arrears of wages. At the conclusion of these transactions the defendants would be the owners of the restaurant premises, would have vacant possession thereof and thus be able to start their new restaurant business on the premises as soon as it had been redecorated. She claimed that the effect of all of this was that a new business was being started and accordingly there was no transfer of Perennial's business. All that had happened was that the defendants had purchased various fixtures and fittings of Perennial for $349,178.

7. It is necessary to analyze these transactions with some care. The agreements relating to the purchase of the said fittings and the payments to staff members of Perennial were both reduced to writing in Chinese characters. Mr Wei, who was representing the defendants, urged me to read these two agreements together. For the sake of convenience as the agreements are both short ones I will quote in full the English translations. The first agreement reads:

"It is now agreed to sell all the furnitures and equipment of trade, air-conditioners, refrigerators, electrical applicances, kitchen equipments, all air-conditioners, water-tanks, ceiling lamps, tables and chairs, uniform, etc. present at the premises godown and office of this Restaurant at Nos. 90-98 Ma Tau Chung Road, Ground Floor, First and Second Floor to Chi Tao Enterprises Company Ltd. at the price of HK$349,178.00. All the aforesaid goods will belong to Chi Tao Enterprises Company Ltd. after receipt of payment. All goods left behind by this restaurant and not listed shall also belong to Chi Tao Enterprises Ltd. (except the two air-conditioners which are still under hire-purchase are excluded from the sale). This restaurant consent to Chi Tao Enterprises Company Ltd.  to temporarily store the goods at this restaurant for a period of 90 days after purchase.  Make this as proof as verbal gives no evidence.

Assignor : Perennial Restaurant Limited
                                Directors : (sd.) Illegible.
                                                 (sd.) LI Shiu Ching.

Chop of Perennial Restaurant Limited
                Director

Witness : Lee Lit Hung, Tse Tak Lun

6th December 1983."

and the second agreement reads:

"Received from Chi Tao Enterprises Company Limited HK$349,178.00 for the purchase of one whole lot of furniture and equipments of trade of this restaurant by Hong Kong & Shanghai Banking Corporation cheque Nos. 347811 to 347815, 347817 to 347829, 347831 to 347837, 347885 to 347900, 347902 to 347915, 347917 to 347920. The aforesaid cheques amount to HK$349,178.00 subject to clearance. The sum is used for payment of the severance payments and arrears of salary of the staff of the restaurant each of them shall receive the same directly. The said payments are to be made under the supervision of the former Deputy General Manager Lee Lit Hung and Tse Tak Lun of Accounts Department and each member of staff dismissed shall sigh for receipt. This serves as proof.

Directors of Perennial Restaurant Ltd.

                (sd.) Illegible

                (sd.) Li Shiu Ching

                (Chop of Perennial Restaurant Limited)

Witness : (sd.) Lee Lit Hung
                               (sd.) Tee Tak Lun

6th December 1983."

Mr Lai for the plaintiffs subjected Madam Lee to a lengthy cross-examination. During the course of this, she admitted that ho attempt whatever had been made to prepare a valuation of the various fixtures, fittings and items of equipment the subject of the first agreement. Indeed she gave evidence that all of these items were essentially of no value to the defendants and that they had been disposed of for a nominal amount or for nothing at all. She said that the amount of the consideration had been fixed at the amount of the payments which would have to be made to the staff of Perennial. The reason she gave for making these payments was to ensure that there would not be a protracted dispute with the employees which would delay the defendants in obtaining vacant possession of the premises and enable the new business to start without delay. In effect Madam Lee agreed that the agreement for the purchase of the fittings and equipment constituted a sham.

8. Madam Lee was not prepared to accept that the payment of $349,178 amounted either to a purchase of the goodwill of Perennial or for the right to operate the Perennial Restaurant licence. She did however agree that if a party wanted to apply for a new restaurant licence it would take approximately 1 year to prepare the necessary plans, undertake the work required and obtain a licence from the Urban Council.  She agreed that the defendants had used Perennial's licence.

9. On the subject of goodwill she agreed that the restaurant premises were not situate in an area which was frequented by tourists. This being the case the large majority of restaurant's customers would be local Chinese people. She also agreed that if the new business was well conducted, it would take over many of Perennial's previous customers as the food it served was of a similar nature to Perpetual's. Mr Lai put it to Madam Lee that the reality of the situation was that the defendants had gained control of Perpetual then stripped it of its assets and started the business on the site. She did not dissent from this proposition. She put the matter in her own words as follows:

"We were feeling Perennial had run business so poorly. If we took it over and do things in our own way we could make profits out of it."

10. I will now consider the law on this subject. Section 3(1) of the Transfer of Business (Protection of Creditors) Ordinance provides

"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, arising out of the carrying on of business by the transferor."

The savings provisions in Section 3(2) would not appear to have any application to this case. There is also no dispute that the defendants did not comply with the requirements for giving notice under the Ordinance as it is their contention that there was no transfer of the business. Cap. 49 replaced the provisions of the Fraudulent Transfers of Businesses Ordinance of the same chapter number. I think that it is accurate to state that the new Ordinance was a modification of the old one and for the purposes of this case it is a valid exercise to seek guidance from cases arising out of the old Ordinance in interpreting its provisions. The essential question which I have to decide is whether or not there has been a transfer of business.

11. I am satisfied that the correct approach to adopt is to look at the situation as a whole. I have found support for this view from a passage from the judgment of Huggins, J. (as he then was) at p.474 of Elson-Vernon Knitters Ltd. v. Sino-Indo-American Spinners Ltd.⁽¹⁾

"With respect I do not think the cases do decide that a mere transfer of assets constitutes a transfer of the business and if they did I would not be prepared to follow them unless compelled to do so. A transfer of assets may be evidence indicative of a transfer of the business but it is not enough per se. In the present case we have a garment making business being carried on in the same premises, with the same machinery and under the same contrcl, the business starting with the same stock-in-trade. It is very different from the example given in argument of a proprietor selling off all his property and going to continue his own business elsewhere: Elson Knitting Factory Ltd. had discontinued its business and Mr Chan is working for the defendant, a company with a very similar name, as manager. In my view the learned judge applied the right test and applied it correctly. He looked to the circumstances as a whole and came to the conclusion that the business had been transferred to the defendant."

I have also derived much assistance from the judgment of McMullin, J. (as he then was) in Burdett v. Emsworth Ltd. ⁽²⁾ In his judgment McMullin, J. carefully analyzes a whole range of circumstances which may or may not constitute the transfer of a business. He provides a very exhaustive list. He also comes to a conclusion that it is often where a business is in financial difficulty that problems of this nature arise. There is a helpful passage on p.23

"It is precisely the case of the sick or dying company that the Ordinance especially purports to deal with. It is precisely the fact of impending bankruptcy which may drive a business concern to the disposal of its assets the very matter which the Ordinance seeks to control. The Ordinance imposes an exemplary caution on any one who purchases the assets of such a company with the idea of continuing in the same line of business. A company on the very verge of bankruptcy may yet be a going concern in the eyes of some potential purchaser. It is the circumstances as a whole to which one must pay regard in deciding whether what has been transferred is the assets only or the assets plus a business."

12. I will now endeavour to consider both the positive and the negative aspects of this case. It can be said in the defendants favour that the business is now operating under a different name. It can also be said that none of the previous staff of Perennial are working for the new restaurant. I also accept that all of the fixtures and fittings of the old company were removed and new ones installed in place thereof and that new menus have been prepared. I will now consider the factors tending to indicate that there has been a transfer of business. In the first place the same premises are being used. There is then the question of the restaurant's goodwill. I appreciate that there is much disagreement over the effect of the two Chinese agreements I have earlier cited. I have come to the conclusion that the combined effect of these documents when taken in conjunction with the fact that the defendants are operating under Perennial Restaurant licence is that there was an assignment of Perennial's goodwill. I find it necessary to ask myself the question what were the defendants paying for. Madam Lee agrees that she was not paying for the various fixtures and fittings referred to. If the arrangement is looked at as a whole what the defendants were paying for was the opportunity to be able to run a business from the same business premises as Perpetual. This view of the matter is fortified by Madam Lee's evidence that she accepted that many of Perennial's old customers would become customers of the new restaurant and that the food served would be similar. I do not think that the defendants are assisted by the fact that the monies which were purportedly paid for the fixtures were in fact applied to the satisfaction of any claims the employees of Perpetual may have on the restaurant. Indeed I think that it could be argued that it had an opposite effect. The defendants were discharging some of the liabilities of Perpetual. I do not see any reason in logic to distinguish between paying the claims of employees and paying the claims of other creditors.

13. In weighing all the factors which I consider to be relevant I have come to the conclusion that there was an assignment of the goodwill of Perennial to the defendants. When it is also seen that the new restaurant operates from the same premises and may have many customers in common and is operating under the same restaurant licence I find myself coming to the inescapable conclusion that there was a transfer of the business as provided in Section 3 of the Ordinance and not merely a transfer of some of the assets. This being the case the plaintiffs have all established their claims against the defendants and will be accordingly entitled to judgment. The plaintiffs also will have their costs.

(1) 1972 HKLR p.468

(2) (unreported) No. 3546 of 1977