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HCCW000097/1987
CWU No. 97 of 1987
IN THE SUPREME COURT OF HONG KONG
HIGH COURT
COMPANIES WINDING UP
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IN THE MATTER OF THE COMPANIES ORDINANCE (CAP. 32)
IN THE MATTER OF RIGHT TIME CONSTRUCTION COMPANY LIMITED (In Liquidation)
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Coram: Hon. Jones, J. in Chambers
Date of hearing: 14 July 1988
Date of handing down judgment: 26 July 1988
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JUDGMENT
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1. I have before me an application by the joint liquidators (the liquidators) of Right Time Construction Company Limited (the company) for a declaration that two payments made to Wong Kwong Kee trading as Wong Kwong Kee (Engineering) (the respondent) on the 15th May 1987 and the 25th May 1987 constituted dispositions of the property of the company within the meaning of section 182 of the Companies Ordinance and are therefore void and, in the alternative, a declaration that the payments amounted to a fraudulent preference under section 266 of the Companies Ordinance.
2. A petition was presented by the Bank of Tokyo Limited on the 1st May 1987 to wind-up the company on the grounds that it was insolvent and unable to pay its debts. A winding-up order was made on the 2nd June 1987. Mr T. B. Stevenson, Mr W. K. Timso and Mr A. K. P. Yung of the firm of accountants Ernst & Whinney were appointed joint liquidators of the company on the 23rd July 1987.
3. Although a declaration is sought in the alternative that the payments amounted to a fraudulent preference, Mr Graham did not actively pursue this remedy. Section 182 of the Companies Ordinance provides:-
"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."
4. The commencement of the winding-up is at the date of the presentation of the petition.
5. The evidence for the liquidators was set out in affidavits of Mr Besanko, a manager in the Insolvency Department of Ernst & Whinney who has dealt with the day-to-day matters in connection with the liquidation of the company. He states that the major asset of the company was a debt due from what was believed to be a related company, Mantis Estate Limited (Mantis), in respect of a building, development in Castle Peak Road. A High Court action to recover a sum of $6. 4 m. later reduced to $5. 7 m. was instituted against Mantis on the 6th May 1987. By its defence Mantis contended that it had paid on behalf of the company a sum of over $1 m. to the company's sub-contractors who were working at the site of the Castle Peak Road project which it sought to set off against its indebtedness to the company. Mantis contended that the payments were made because the company was unable to pay wages or make payments when they fell due with the result that the sub-contractors had threatened to stop work if they did not receive payment. Summary judgment was obtained by the liquidators against Mantis on the 19th October 1987 for $2,794,156 whilst leave was granted to defend in respect of the balance which included a sum of $1,109,404.99 being the amount paid to the sub-contractors. A sum of $727,913.89 has been recovered under the judgment debt but as it is considered unlikely that any further movies will be recovered, proceedings for the balance have not been pursued.
6. It has been contended by the liquidators that the sum of $1,109,404.99 paid to the sub-contractors by Mantis, being an asset of the company, amounted to a disposition made after the commencement of the winding-up of the company, and is, therefore, void under section 182. The two payments made to the respondent were included in this sum. Payments were made to the respondent after the building had been completed.
7. In his affirmation, the respondent says that he was the sub-contractor for the company responsible for all the plumbing works, drains and pipes for grater supply, electricity supply and telephone wires. He was also responsible for the connection of all the pipes and to secure the fresh water supply to the building. The total of the respondent's sub-contract price was about $530,000, but up to the 23rd March 1997 he had only received $382,055. Towards the end of April 1987 he pressed the company for further payments but without success. Nevertheless, he continued with the work at the site. However, when he was doing work for the company at another site, he was informed that the company was in financial trouble and that he might not receive payment for his work. Accordingly he approached Mr Yeung of the company and asked him whether the company would pay him for the work that he had done but did not receive a direct answer. A few days later Mr Yeung telephoned the respondent and asked him to continue with the work for he wished to obtain the water supply connection certificate as soon as possible in order that the occupation permit could be issued. The respondent said that he would only continue to do the work if he was paid $208,781. He received a promise that he would be paid this sum within two or three days so he then recommenced work. The respondent received a cheque for $196,031 on the 15th May 1987 and another cheque for $12,750 on the 25th May 1987 which are the payments that have been challenged by the liquidators. The respondent disputed the liquidators' claim and seeks a retrospective order to validate the two payments on the grounds that they were necessary for the completion of the building and were payments made in the ordinary course of business.
8. Mr Graham, counsel for the liquidators, referred me to In re Gray's In Construction Co. Ltd. (1) where Buckley, L. J. set out the principles that should be taken into consideration by the court when deciding whether or not to make a validating order. He had this to say at pp. 717, 718:-
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"It is a basic concept of our law governing the liquidation of insolvent estates, whether in bankruptcy or under the Companies Acts, that the free assets of the insolvent at the commencement of the liquidation shall be distributed rateably amongst the insolvent's unsecured creditors as at that date. ........... In considering whether to make a validating order the court must always, in my opinion, do its best to ensure that the interests of the unsecured creditors will not be prejudiced. Where the application relates to a specific transaction this may be susceptible of positive proof. In a case of completion of a contract or project the proof may perhaps be less positive but nevertheless be cogent enough to satisfy the court hat the interests of the creditors the company should be enabled to proceed, or at any rate that proceeding in the manner proposed would not prejudice them in any respect.........
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Since the policy of the law is to procure so far as practicable rateable payments of the unsecured creditors' claims, it is, in my opinion, clear that the court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interests of the unsecured creditors as a body. If, for example, it were in the interests of the creditors generally that the company's business should be carried on, and this could only be achieved by paying for goods already supplied to the company when the petition is presented but not yet paid for, the court might think fit in the exercise of its discretion to validate payment for those goods.......
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It may not always he feasible, or desirable, that a validating order should be sought before the transaction in question is carried out. The parties may be unaware at the time when the transaction is entered into that a petition has been presented; or the need for speedy action may be such as to preclude an anticipatory application; or the beneficial character of the transaction may be so obvious that there is no real prospect of a liquidator seeking to set it aside, so that an application to the court would waste time, money and effort. But in any case in which the transaction is carried out without an anticipatory validating order the disponee is at risk of the court declining to validate the transaction. It follows, in my view, that the parties when entering into the transaction, if they are aware that it is liable to be invalidated by the section, should have in mind the sort of considerations which would influence the court's decision." |
9. Mr Chan for the respondent submitted that the work was carried out to complete the building and was for the benefit of the company in order to avoid claims by Mantis, and that it was carried out for the general benefit of the body of creditors. He also contended that the transaction was carried out bona fide in the ordinary course of business with the result that the payments to the respondent were justified. In those circumstances, he contended that the payments that were made should be the subject of a validation order.
10. It is abundantly clear that the company was insolvent and unable to pay its debts at the time the two payments were made to the respondent when he was aware of the parlous financial position of the company. He admits that he had applied pressure to obtain payment and would not have carried out the work without the promise made of payment. In exercising my discretion whether or not to make a validation order, I must have regard to the interests of the unsecured creditors and those of the respondent. While the court is likely to look favourably upon transfers that do not reduce the assets available for distribution amongst the unsecured creditors, the discretion should not be exercised where the result brings about a diminution of those assets. With knowledge of the company's financial position, the respondent continued to do work at the site and was paid after the commencement of the winding-up, the two sums out of a debt due to the company from Mantis. The payments were not made in the ordinary course of business nor was there any evidence adduced to show why the respondent should have been preferred to other creditors. The payments have diminished the assets available which is to the detriment of the unsecured creditors. There is no possible justification for making a validating order in favour of the respondent. I therefore hold that the payments made to the respondent are void.
11. Accordingly, the liquidators are entitled to the declaration sought in the summons with an order for payment of the sum of $208,781 received by the respondent. There will be an order nisi for the costs of the liquidators to be paid on a common fund basis.
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(B.L. Jones)
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Judge of the High Court
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Representation:
Mr P. Graham (Simmons & Simmons) for the Applicants/Joint Liquidators.
Mr Louis K. Y. Chan (Ng, Lie, Lai & Chan) for the Respondent.
(1) [1980] l W. L. R. 711.
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