RE KING'S DYEING AND WEAVING FACTORY LIMITED

1986 No. 217

IN THE HIGH COURT OF JUSTICE

HONG KONG

COMPANIES WINDING UP

_____________

___________

JUDGMENT

___________

1. I have before me four summonses that relate to a proposed action to be instituted by Winland Investment Limited ("the applicant") against King's Dyeing & weaving Factory Limited (in liquidation) ("the company"). By the principal summons issued on the 1st November, the applicant seeks leave under section 186 of the Companies Ordinance to commence proceedings against the company for possession of certain factory premises in Tsuen Wan together with other relief there relevant, section 186 provides:

"        When a winding-up order has been made, ……………….no action or proceeding shall be proceeded with or commenced against the company except by leave of the court, and subject to such terms as the court may impose. "

2. The issues for determination are set out in a draft statement of claim that has been exhibited to an affirmation dated the 5th December 1986 made by Mr Chow Sau Tung, a director of the applicant. By the statement of claim it is alleged that the applicant granted a lease to the company on the 24th December 1980, of the factory premises for a term of 10 years commencing on the 1st July 1983 at the rent provided in the lease. From April 1985 the company failed to pay any rent under the lease with the result that a demand for payment of arrears was made on the 9th June 1986. As no payment was made in response to the demand, the applicant on the 2nd July, purported to exercise its powers of re-entry, to forfeit the lease, and a deed of surrender was executed by the company on the 8th July.

3. On the 10th July, the applicant purported to execute a second lease for a monthly tenancy in favour of the company commencing on the lst July at the rent therein provided. The second lease contained a similar provision for re-entry to the one included in the first lease, but with an additional condition that prohibited any assignment by the lessee.

4. A petition was presented to wind-up the company on the 15th July 1986. The Official receiver was appointed to be the provisional liquidator on the 25th July with effect from the 23rd July whilst Mr E. Johnstone and Mr N.P. Etches were appointed special managers on the 30th July. The company was wound-up on the 26th August. The powers of the Official Receiver as provisional liquidator and those of the special managers were also continued on that date. Mr Johnstone and Mr Etches were appointed joint and several liquidators of the company on the 15th September.

5. Possession of the premises was retained by the provisional liquidator and special managers until the 4th September for the convenience of the liquidation. On the 28th July, the applicant gave to the Official Receiver as liquidator, notice of termination of the tenancy with the company. By an agreement dated the 4th September, the Official Receiver as provisional liquidator purported to assign the company's lease to Apesole Limited which company is named in the draft statement of claim as the 2nd defendant. This purported assignment was without the consent of the applicant.

6. It is contended by the applicant that the second lease was liable to forfeiture either by reason of non-payment of rent, or the liquidation of the company, or by the assignment to Apesole Limited. Alternative claims are set out in the draft statement of claim in the event that the applicant's argument with regard to the second lease is not correct. They include issues relating to the validity of the deed of surrender, and the two leases.

7. Miss Li, counsel for the liquidators submitted that the central issue concerns the validity of the first lease, whether it survived the surrender, and the validity of the assignment to Apesole Limited. It is the liquidators' case that in view of the common directorships of the applicant and the company, the deed of surrender and the second lease constituted a breach of fiduciary duty by the directors with the result that the disposition of the property amounted to a fraudulent preference with intent to defraud creditors. Miss Li conceded that these matters must be the subject matter of litigation, but contended that other issues such as the claims for arrears of rent and mesne profits, and as to the validity of notices given by the applicant to the company could be dealt with in the liquidation. She went on to say that if the company failed on the question of the surrender of the first lease, the other issues may then no longer be challenged by the liquidators.

8. The test to be adopted by the court in exercising its discretion whether leave should be granted is to decide what is right and fair in the circumstances - see In re Aro Co. Ltd.⁽¹⁾.

9. I am unable to agree with the submission of Miss Li that the court should isolate parts of the claim that might be suitable for determination in the winding-up or indeed to speculate what the liquidators may do if a certain issue is decided in a particular way. The proposed action must, as was submitted by Miss Eu who appeared on behalf of the applicant, be looked at as a whole.

10. There are substantial issues of fact that are in dispute whilst there are matters of law of complexity involving the construction of the first lease, the validity and effect of the surrender, and the validity of the second lease. These issues can only be properly decided by way of proceedings. I am therefore satisfied that the applicant is entitled to an order for leave to commence proceedings upon the undertaking that has been given not to enforce any judgment obtained against the company without the leave of the court.  A summons to amend certain particulars in the summons for leave was issued by the applicant on the 5th December, so that the order will incorporate those details with the deletion of the words in the first line "and special managers".

11. The third summons issued on behalf of the liquidators on the 4th December to dismiss the applicant's summons which came before me last week and was adjourned for hearing until today, will be dismissed. A fourth summons issued by the applicant on the 15th December to reamend the proof of debt filed with the liquidators on the 14th November was in my view, unnecessary, and will also be dismissed.

12. I will hear the parties as to costs.

(1) [1980] 1 Ch 196