HCCW000019A/1975
IN THE SUPREME COURT OF HONG KONG
COMPANIES (WINDING-UP) NO. 19 OF 1975
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| | IN THE MATTER of the Companies Ordinance Cap. 32 |
| | and |
| | IN THE MATTER of Union (V-Tex) Shirts Factory Limited |
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Coram: McMullin, J.
Date of Judgment: 12th May, 1977.
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JUDGMENT
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1. Upon this application the Offical Receiver seeks directions of the court as to the disposal of certain funds at present held by him in his capacity as liquidator in the winding-up proceedings which are the subject matter of the petition in the present case. A petition to wind-up Union (V-Tex) Shirt Factory Ltd. (the defendant company) was filed on the 15th of March 1975 and the winding-up order was made by the court on the 18th of April in the same year. The petitioner is The Hong Kong & Shanghai Bank which also holds a debenture under which all the company's undertaking, property and assets present and future including its uncalled capital for the time being are charged to the Bank to secure general banking facilities made available to the defendant company. That debenture was dated the 11th of August 1967 but subsequent to that date certain properties of the company were made the subject of specific further charges to secure these facilities. Some difference of opinion appears upon the affidavits, and emerged also in the course of argument at the hearing, as to the exact extent of the company's indebtedness to the Hong Kong Bank under these various charges but I understand that it is common ground that the total indebtedness of the company to the bank thereunder amounts to a figure of not less than $10,000,000 at the present time.
2. Since the making of the winding-up order a sum of $6,818,000 has been realised through various dispositions of assets of the company. Of these funds a sum of $656,000 is the immediate subject matter of the present dispute. This sum represents the proceeds of several distraints executed against company's assets by three separate landlords of premises occupied by the company. These landlords are the other parties interested in the present application. Five separate sets of premises are involved. The three landlords are China Underwriters, Kim Tak Company Ltd. and Union (V-Tex) Realty, a company related to the defendant. Of these three only one Kim Tak Co. Ltd. has put in affidavits in the present application and I do not know therefore the identity of the premises, the rate of rent or the amount of arrears said to be outstanding in favour of the other two landlords, the China Underwriters and Union (V-Tex) Realty, who are represented before me by Mr. Rogers and Mr. Kotewall respectively. The points of principle to be decided however are fortunately not dependent upon this information and I am content to accept the situation as essentially one of contest between the several distrainors on the one hand and the bank on the other as to the proper disposition of the funds presently held in the hands of the Official Receiver as liquidator deriving from the sale of the chattels seized from these several premises and amounting to the sum mentioned $656,000.
3. There were in all five distraints. The dates and other details relevant thereto, though not the identity of the premises, are set forth in paragraph 4 of the affidavit of Mr. Fox filed on behalf of the Official Receiver on the 4th of October 1976 which reads as follows:
"4. Several warrants of distraint were executed against various premises tenanted by the company as below:
| | Distraint No. | Date Seized | Date Sold | Net Proceeds |
| | K298/75 | | 6/3/1975 | 13/3/1975 | 369,054.20 |
| | K460/75 | and | 11/4/1975 | 18/4/1975 | 148,503.20 |
| | K518/75 | | 17/4/1975 | | |
| | V164/75 | | 10/3/1975 | 17/3/1975 | 48,705.60 |
| | V197/75 | | 11/3/1975 | 18/3/1975 | 89,760.60 |
| | | | | | ----------- |
| | | | | | 656,023.60 |
| | | | | | ======== |
The 'distraint proceeds' in the sum of $656,023.60 have been remitted by the Court to the Official Receiver and Liquidator and are now being held by him."
It is common ground that these several distraints fall into three separate groups. So far as the first in the list is concerned (K298/75) it is conceded by Mr. Tong, who appears on behalf of the bank, that that was a valid distraint since the goods were both seized and sold prior to the commeneement of the winding-up proceedings by the presentation of a petition on the 15th of March 1975. He makes no claim therefore on behalf of his clients to the proceeds of that sale which, it will be seen, constitute what is by a considerable degree the largest part of the proceeds of all the distraints. Then come, in logical sequence, the distraints numbered V164/75 and V197/75 which are, I understand, those relating to the premises owned by the clients of Mr. Rogers and Mr. Kotewall. They share the common feature that whereas the goods were seized from these two premises before the presentation of the petition (i.e. the commencement of the winding-up proceedings) the goods were not actually sold until after the commencement of those proceedings. Finally there are the two distraints (K460/75 and K518/75) relating to the premises owned by Mr. Fung's clients, the kim Tak Co., and in their regard the goods were both seized and sold after the commencement of the winding-up proceedings. The Official Receiver as liquidator in the winding-up proceedings is in the neutral position of a stake-holder in respect of the funds which he holds arising from the proceeds of the distraints. The bank's basic position in relation to these funds is that since winding-up proceedings have been instituted the landlords who seek to hold and use the proceeds of their distraints but who are not in any sense to be regarded as secured still less as preferred creditors should come in with all other creditors and prove in the winding-up proceedings. Of this Mr. Rogers observes, not without point, that, so far as the relative and fundamental equities of the parties are concerned, the bank can scarcely pretend to be serving the interests of equitable principle unselfishly since it is patent that apart from a small quantum of preferred debts which will have priority it seems unlikely that any secured creditors will take precedence over the bank which, if the principle which it maintains is sustained, will take the rest of the $6,000,000 odd realised in the winding-up. He in his turn would maintain that, all other considerations apart, the enforcement of the mutual rights and obligations of landlord and tenant are in themselves a matter of such importance to the order and stability of society that the right to recover rent and the corresponding duty to see that it is paid possess a kind of moral priority which should serve as a point of departure and a fixed point of reference for the court in undertaking its survey of the several provisions of the law which are principally in point.
4. In this application, effectively a construction summons, the Official Receiver asks the court to consider the effect of sections 181, 182 and 183 of the Companies Ordinance and to say, firstly, whether the distraints or any of them are valid in the light of those sections; and, secondly, assuming the court finds the distraints to be valid or any of them to be valid to direct him, the Official Receiver, as to whether the preferred creditors are to be paid out of the property available to the debenture holders under the floating charge or out of the proceeds of the distraints, the relevant provisions for construction in this regard being section 265(3b), (5), and (5a) of the Companies Ordinance. As to the first category of disputed distraints, the goods seized by Mr. Rogers' clients prior to the commencement of the winding-up proceedings but not sold until after those proceedings had been commenced, Mr. Tong relies upon the provisions of section 182. As to Mr. Fung's clients he relies upon section 183.
5. Very different consideration arise in respect of these two classes of distrainors and I will deal first with the case of Mr. Fung's clients, since he proposes, for adoption, a single principle or proposition of a most absolute nature which, if it be correct, enures also to the benefit of the clients of Mr. Rogers. Mr. Tong relies upon section 183 as the simple answer to the claims of Mr. Fung's clients. That section is in the following terms:
"Where any company is being wound up by the court, any attachment, sequestration, distress, or execution put in force against the estate or effects of the company after the commencement of the winding up shall be void to all intents."
Mr. Fung concedes that section is effective to deprive a landlord of his right to proceed with a distress in respect of goods seized after the commencement of the winding-up but he says it does not apply to the case of his clients because at the date upon which the goods were seized pursuant to the distraints those goods were no longer part of the "estate or effects of the company". This is so because, subject to a disputed question of fact as to the real extent of the company's property, the evidence upon the affidavits shows that at the date of crystallisation of the floating charge the total assets of the company were insufficient in value to cover the claim of the debenture holders. The principle is succinctly stated in the latest edition of Halsbury at para. 1361 of Vol. 7 in the following terms:
"The landlord is allowed to distrain where the goods are mortgaged for more than their value, inasmuch as the property has ceased to be the estate or effects of the company and the liquidator has no interest...."
A comparable treatment of the principle will be found at page 728 of the 3rd Edition of Pennington's Company Law. In each of these authorities two cases are cited in support of the proposition. The first is In re New City Constitutional Club Company ex parte Purssell(1). The facts are summarised in the headnotes as follows:
| " | A company who were the lessees of a house where they carried on their business were ordered to be wound up, being indebted in an arrear of rent to their landlord. A scheme of reconstruction was sanctioned by the Court under which the lease was purchased by a new company; and the new company agreed with the landlord to pay him the arrears of rent and 'all subsequent rent accruing due under the lease in manner therein provided,' but no assignment of the lease to the new company was ever executed. |
| | The new company issued debentures charging all their property to a much larger amount than the value of the furniture in the house. |
| | The new company was also ordered to be wound up, a year's rent being due to the landlord." |
On the motion by Purssell(1) the landlord for leave to distrain upon the furniture for rent in arrears Kay, J. considered sections 87 and 163 of the Companies Act of 1862 which for all material purposes are in terms identical with sections 186 and 183 respectively of the Ordinance. The major part of his judgment is taken up with the consideration of a problem which does not arise in this case at all. He was of the opinion that where the landlord distrains upon goods of a company subject to process of liquidation in satisfaction of arrears of rent owed to him by his tenant who is not the company those sections of the English Act would not apply to avoid the distraint since there would be no privity of contract entitling him to prove for the arrears in the winding-up. He then went on to consider this same problem on the assumption - contrary to the facts of his case - that there were no debenture holders in the picture. He gave reasons for holding that since, on the facts of the case, the landlord would have had a right to prove in the winding-up he would have held, on that ground, that the landlord had no right to proceed with his distraint had it not been for the decision in the case of ex parte Clemence(2), which he took to be an authority binding on him, to the effect that a landlord may continue with his distraint even if he has a right to prove in the winding-up. All that part of his judgment, including his observations as to the effect of In re Clemence(2), - a decision which may fairly be regarded as overruled by later decisions - does not touch the substance of the present case. It is the earlier part of the judgment which Mr. Fung relies upon for there, although he makes no explicit declaration of principle, the learned judge gives the order sought upon the apparent assumption that since the goods of the company in liquidation were charged in favour of the debenture holders to a figure beyond their value, the assets of the company were to be regarded as no longer the property of the company so that the exercise of the right of distress was not blocked by either of the sections. That is certainly the understanding of that part of the decision which emerges from the judgments of Cotton, L.J. and Lindley, L.J. to whom the case went upon appeal. The principle, implicit in the judgment of Kay, J., is clearly stated and supported in those judgments, in which the appeal is dismissed.
6. The second case on which Mr. Fung relies in support of this principle, and which is cited by the academic authorities to which I have referred, is the case of In re Harpur's Cycle Fittings Co. (3). There once again a company in process of liquidation was in possession of premises into occupation of which it had gone after purchasing all the assets of a previous company including the lease but without taking an assignment of the lease. The company gave to the landlord bills of exchange in purported payment of rent but these were dishonoured. Thereafter the company went into voluntary liquidation and liquidators were appointed. After the commencement of the winding-up the landlord levied a distress on the goods which he found on the leasehold property. The company had issued debentures covering all the assets of the company which were not of sufficient value to pay the debenture holders in full. Counsel for the landlord relied upon the decision in ex parte Purssell(1). Wright, J. held that the dishonoured bills gave the landlord a right to prove in the winding-up. Had that been the only point in the case he would have granted the application before him - which was an application by the debenture holders to restrain the landlord from proceeding with his distress - for he explicitly departed from the decision in ex parte Clemence(2). But then he turned to consider the second point in the case, the point which had also arisen before Kay, J. in ex parte Purssell(1), and he said:
| " | The debenture-holders have a charge for an amount which exceeds the value of the company's assets, but they have not as yet obtained the appointment of a receiver. If they had done so, ex parte Purssell would have applied, and the liquidators would have had no right to intervene. |
| | Then does the fact that no receiver has been appointed make any difference? Having regard to the judgment of Lindley,L.J. it seems to me that it does not. He says: |
| ' | When we look at the facts of the case, it is clear that they' - the goods of the company -' were mortgaged to the debenture-holders for more than their value. Therefore, for all practical purposes, they were not the goods of the company. Consequently, as between the landlord and the debenture-holders the landlord is entitled to distrain.' |
| | That seems to be in point to shew that the company has no interest in the goods. It is true that Cotton L.J. mentions the fact that the debenture-holders had obtained a receiver, but I cannot say that his decision proceeded on that ground. |
| | I think, therefore, that I ought to follow Lindley L.J., and hold that the company has no interest in the property, and that the liquidators have no right to intervene. |
| | The motion, therefore, will be dismissed." |
Mr. Tong has, firstly, sought to distinguish these decisions from the circumstances before me. I do not think he succeeds. Although the facts are not identical with the circumstances before me, in their salient features these decisions seem to me to be directly in point. In those cases as in the present case we have a landlord who is said to have a right to come in with other creditors and prove his debt in the winding-up proceedings seeking, nevertheless, to exercise the right of distraint. In each of the two former cases he is permitted to do so on the basis that the equivalent of our section 183 does not avoid the distraint where the assets of the company are unequal to meet the debt owing to the debenture holders. The basis of those decisions is that what was formerly the property of the company has been, on crystallisation of the charge, passed effectively to the debenture holders.
7. Then, however, against these older decisions, Mr. Tong sets the judgments of the Court of Appeal in In re Barleycorn Enterprises Ltd. Mathias & Davis (A Firm) v. Down(4). In that case a firm of chartered accountants who had done certain work in a winding-up at the behest of the Official Receiver claimed a sum of £202 10s. for their work which had been sanctioned by the Official Receiver and asked that it be paid out of the assets of the company in the winding-up. The statement of affairs prepared by the accountants disclosed that there were preferential claims amounting to £3,000 in respect of money advanced to pay wages by a certain bank. The same bank held a debenture secured by a floating charge over the company's assets in the sum $6,972, including the moneys advanced for wages. The preferential claims exceeded the total assets of the company by $400. The liquidator contended that since the fees of the accountants ranked behind the preferential claims, and even the debenture, nothing would be available out of which to pay them. The court however unanimously held that the accountants' fees took priority over all other debts. In considering the relevant provisions of the legislation dealing with the priority of payments (sections 267,309,319 and of the Companies Act of 1948 and Rule 195 of the Companies Winding-Up Rules which correspond with sections 220,256, and 265 of the Ordinance and Rule 179 of our Winding-Up Rules respectively) the learned judges concurred in the view that a more or less revolutionary change had taken place in the law relating to these priorities at the end of the last century which had not been universally recognised either by the courts or by the authors of the standard textbooks. Sachs, L.J. said (page 475):
"The decision of this court in the present case will, I appreciate, have relatively far-reaching effects and will end a situation in which liquidators have in the past successfully taken a point which can be wholly destitute of merits, as was indeed conceded in the instant case, and one which can enure to the detriment of the public interest when there is a winding up order of the court. Nonetheless, being in full agreement with all that has fallen from my Lord, the Master of the Rolls in his judgment, I feel it only necessary to add but little."
Having paid a tribute to the counsel for their arguments he went on to say:
| " | In the end I am convinced by the admirable argument so lucidly expounded by Mr. Pill that there has been no full appreciation, either in any previous judgment or in the standard textbooks normally cited to this court, of the effect of the provisions of sections 2 and 3 of the Preferential Payments in Bankruptcy Amendment Act, 1897 (now reproduced in section 319(5)(b) and section 94 of the Companies Act, 1948) when read in conjunction with section 1 (2) and (3) of the Preferential Payments in Bankruptcy Act, 1888 (now reproduced in section 319(5)(a) and (6) respectively of the Act of 1948). The result of superimposing the Act of 1897 on the Act of 1888 was to make a serious inroad into the rights of debenture holders as previously held to exist by a series of authorities based on a line of reasoning favouring those holders. That line is perhaps best illustrated in the judgments of Jessel M.R. and James L.J. in re David Lloyd & Co. (1877) 6 Ch. D. 339, 343, 345 which make plain that in those days judgments on points such as those in issue before this court today were given upon the basis that when a winding-up order took effect the assets of the company changed to being assets of the debenture holders and could not be touched. |
| | When that line of reasoning continued to be followed in judicial decisions after the Act of 1888 and looked like frustrating to some degree the effect of that Act, the legislature stepped in and passed the Act of 1897. The combined effect of the two Acts produced changes greater than appear to have been noticed in the textbooks or otherwise despite the clear indication given by footnote 2 to form 22 (Statement of Affairs) reproduced in Buckley on the Companies Acts, 13th Edition (1957) p.1101." |
In the leading judgment the learned Master of the Rolls having referred to the fact that section 267 and 309 were formerly in the Companies Act of 1862 went on to say:
| " | The word 'assets' in these sections in 1862 was used as meaning only those free assets which were not the subject of a floating charge. In those days it was held that, when there was a debenture which gave the creditor a floating charge over the property of the company, then as soon as the charge crystallised on a winding up, the property did not belong to the company but to the debenture holder. It was, therefore, not included in the 'assets' of the company and was not available for any of the general costs of the winding-up. If the floating charge covered all the property, the debenture holder took it all, subject only to the costs of realising it, e.g., the auctioneer's charges: see In re Marine Mansions Co. (1867) L.R. 4 Eq. 601; In re Oriental Hotels Co. (1871) L.R. 12 Eq. 126, 133; and In re Regent's Canal Ironworks Co. (1875) 3 Ch. D. 411,427, per James L.J. |
| | In 1888 and 1897 Parliament began to use the word 'assets' in a different sense. It used the word 'assets' so as to include not only the free assets, but also all those assets which were subject to a floating charge. It used the word in this new sense in the statute which created, for the first time, 'preferential payments'. These were rates, taxes and wages. They took priority over a floating charge. This was done by section 1 of the Preferential Payments in Bankruptcy Act, 1888, as amended by section 2 of the Preferential Payments in Bankruptcy Amendment Act, 1897. The sections of the Acts of 1888 and 1897 were re-enacted in the Companies (Consolidation) Acts of 1908, 1929 and 1948." |
He then went on to consider the wording of the English section 319 which corresponds with section 265 subsection 1, subsections 3, and 3B and subsection 4 of the Ordinance. These are the provisions creating the class of preferred creditors, establishes their priorities inter se, their priorities over the holders of the debentures and the priority given to the costs and expenses of the winding-up. Lord Denning then goes on to say:
" Those sections show quite clearly that since 1897 a debenture holder, who holds a floating charge, can no longer sweep up all the company's property for his own benefit. Before he takes any of it, there have to be paid:
| | (i) | 'such sums as may be necessary for the costs and expenses of the winding-up' see section 319(6). |
| | (ii) | the preferential claims for rates, taxes, wages, and so forth. They are the 'foregoing debts' which are given priority over the floating charge: see section 319(5)(b). |
| | The sections also show that the legislature is using the word 'assets' in a different sense from what it did before 1897. When there is a floating charge, the legislature no longer regards the property as belonging wholly to the debenture holder. The property which is subject to the charge forms part of the 'assets' of the company which are to be applied first, in payment of the costs and expenses of the winding up, second, in payment of the preferential claims, and only third in payment of the debenture holder. |
| | The word 'assets' in sections 267 and 309, which go back to 1862, must, I think, be now interpreted in this new sense and not in the sense in which it was interpreted by the courts before 1897. So without changing the word, we have changed its meaning. It bears a different meaning now from what it did in 1862. This is unusual, but necessary in order to make sense of the legislation as a whole. Sections 267 and 309 now mean that, when there is a floating charge, the 'assets' include all the property which is subject to the charge. The costs of the winding up take priority, therefore, over the floating charge." |
Phillimore, L.J. concurring held that the word "assets" where it appears in the sections under survey did not mean merely free assets, that is to say, assets free of any of the floating charge but refers to all the assets including that under the floating charge, and he went on to say:
"The point is emphasised when one looks at section 319(5)(b), which is dealing with the position as between the preferred creditors and the debenture holders where there are no free assets to meet the claims of the preferential claimants; and it is provided that in the case of a company registered in England, so far as the 'assets of the company available for payment of general creditors' now, there is a phrase which clearly means free assets - 'are insufficient to meet the foregoing debts, they have priority over claims of holders of debentures' and so on. So there it is manifest that where Parliament means to designate those assets which are free of the floating charge, it uses special words to distinguish the position from that where the simple word 'assets' is used, as in the other sections to which I have referred, and in section 319(6) itself."
Mr. Fung maintains that there is no real collision between these decisions and the decisions in the cases of In re Harpur's Cycle Fittings Co.(3) and ex parte Purssell(1). They can, as he puts it, peacefully co-exist. In support he cites the significant fact that these two latter cases were never argued before the court in the Barleycorn Case(4) despite the fact one of the judges in that case was at pains to express the court's indebtedness to counsel for the argument presented. So far from those decisions being overruled, he says, they were simply ignored in the process of the argument in the Barleycorn Case(4) and that, he says, must be because the court and counsel saw no contradiction between those cases and the case they were dealing with. Secondly, he relies on the fact that the older cases continue to be cited by academic authors for the general proposition which has been quoted earlier in this judgment from Halsbury. Those are strong points and in order to avoid concluding that something fundamental has been overlooked by the academic writers, I have sought to read the judgment in the Barleycorn Case(4) as restricted to the special circumstances then before the court. It is true that the learned Master of the Rolls in discussing the changed meaning of the word "assets" was doing so principally in relation to sections 267 and 309 of the English Act which are not at the moment in point in this case. Nevertheless it is very difficult to conclude, in view of the strong expressions used by the judges in the passages quoted above, that a principle of general importance is not being announced. There is, if I may put it so, a distinct air of spring cleaning going on and the removal of nineteenth century lumber which is perhaps plainest in the judgment of Sachs, L.J. where he talks disapprovingly of the older decisions in which the courts had held that when a winding-up order took effect the assets of the company changed to being the assets of the debenture holders. In the end therefore, and notwithstanding the puzzling fact that neither of the older cases which have been discussed in this case were brought to the attention of the court in the Barleycorn Case(4), I have come to the conclusion that a principle of general application was adopted by the court in the Barleycorn Case(4) which cannot well stand with part at least of what was said in the earlier two cases. It will be remembered that the greater part of the judgment of Kay, J. in the Purssell Case(1) was devoted to a consideration of the situation as it would have been had there been no debenture holders with a claim upon the whole property of the company. He took the view that in such a case if the landlord had no right to prove in the winding-up he should not be deprived of his right to distrain and it was only in very doubtfully following the decision In re Clemence(2) that he thought that the landlord who had a right to prove in the winding-up might yet distrain. In the Harpur's Cycle Fittings Co. Case(3) the court approved the view that a landlord with a right to prove in the winding-up should be restrained from distraining and expressly departed from the decision in In re Clemence(2). Insofar as a valid general principle may still be said to be embodied in the older decisions I suggest that it is to the effect that where the circumstances disclose that the landlord seeking to distrain is a person who cannot prove in the winding-up his right is not to be avoided by section 183 even although the wording of that section is absolute in character and would seem on the face of it to apply to the case of every person who has put his distraint in motion after the commencement of the winding-up. In each of the older cases the right to prove was regarded as the touch-stone and would have been regarded as decisively against the landlord had the earlier courts not adopted the principle that the overcharging of the assets of the company effected a full alienation of the assets of the company to the debenture holders. I do not think that that opinion can now stand together with those expressed in the case of Barleycorn(4). Admittedly the judgments to which I have referred deal with what is said to have been the older law on the basis that by that law the assets of a company were said to go to the ownership of debenture holders upon crystallisation of a floating charge whether or not the debenture overtops the assets in amount, but the case their Lordships were dealing with was a case where the assets were unequal to the charge upon them. What that case seems to me to establish is that where there is a floating charge covering the whole property of the company, and even where it is greater in value than the assets available to meet it, then, although in one sense, those assets, upon crystallisation of the charge, may be regarded as the property of the debenture holders, yet they will continue to be regarded by the courts as the property of the company where there is any express reason deriving from the provisions of the companies legislation for doing so. The mortgage, that is to say, is subjected to certain rights and it is also protected from certain interests. The equities of the matter were of course obviously clearer in the Barleycorn Case(4) for there the court was considering provisions which, although they do not expressly spell out the priority of the professional auditors' claims over those of the debenture holders, are yet so worded in relation to those claims that the court was impressed with the need to find a reason for saying that they should come first. It might be argued that the respective equities tell the other way in the present case since the preferring of the Barleycorn(4) decision above the decisions in the earlier cases may result in defeating a case which might be thought to be of equal moral force with the claim of the accountants in the Barleycorn Case(4). But I think the answer to that is that the Legislature in this particular legislation is concerned to establish certain cut off points or closure dates which may fall arbitrarily upon the several rights of claimants but which are thought to be necessary to protect the integrity of property in the interest of claimants generally upon the occurrence of winding-up proceedings. What that means is that a landlord who moves too late and finds that the hammer has already fallen upon the company's property as a result of the commencement of the winding-up will find himself relegated to his rights, if any, as a creditor of the company whereas it may very well be that his right of distraint would not have been subordinated to his right as a creditor had he moved a matter of days, or it may be of hours, earlier.
8. Mr. Fung has sought to distinguish the decision in the Barleycorn Case(4) upon the further ground that the court in that case was considering the particular term "assets" whereas section 183 refers to the "estate or effects of the company" but I do not think that difference in language will save his position. Following the line of reasoning taken by Phillimore, L.J. in dealing with the word "assets" I must say that I find no reason, in the absence of qualifying words, to hold that "estate or effects" in section 183 is intended to apply only to the free assets of the company i.e. the property of the company not subject to the floating charge. I realise that we are to some extent in an area of refinements and technicalities where fate, as in a fable or a fairy tale, may fall very unequally upon the fortunes of two protagonists whose moral situations can scarcely be differentiated and whose circumstances are distinguished by slight differences only in time, place and performance. I must however take the law as I find it and I think it is fair to add that in any event there is a distinct artificiality to the concept for which Mr. Fung himself argues. If the question whether section 183 applies is to be resolved upon a consideration as to whether or not the assets of the company are found to be overcharged after crystallisation of the floating charge, there would not seem to be any great moral priority in the claim of a man who is protected from the destroying effect of section 183 by the fact that the value of the assets of the company is found to be some few tens of dollars in excess of the claim against them by the holders of the debenture, and the moral claim of a man who is prevented by section 183 from distraining by the fact that the available assets of the company fall short by a similar amount of the extent of the charge upon them. I have considered also the provisions of section 186 and the possibility that, even at this stage, there would be a discretion left to the court to consider whether or not these distraints should be permitted to continue. I think however Mr. Tong is right when he says that the effect of 183 is to render the whole proceeding void, as to those previously accrued arrears of rent. It is something which never had any force and it cannot now be given force ex post facto. So far as these distraints are concerned therefore my conclusion is that the proceeds thereof are to be regarded as part of the assets of the company available for payment to creditors in the process of liquidation generally. As to whether it is now open to Mr. Fung's distrainors to approach the court under section 186 and ask for leave to issue distress, which might perhaps be a way of validating what has been done already, it appears to me that the decision In re Coal Consumers Association(5) and North Yorkshire Iron Co.(6) show that the equivalent provisions in the English legislation only entitled a landlord, who had a right to prove in the winding-up, to approach the court in respect of rent accrued after the making of the winding-up order and not for the purposes of recouping himself for arrears of rent accrued prior to the commencement of the winding-up. I note also that under the legislation in England - in which a distinction is made between voluntary winding-up and compulsory winding-up which is not made in this part of our legislation - it has apparently been held that even in a case of compulsory winding-up, to which the provisions of the section equivalent to our section 183 would apply, and notwithstanding the absolute wording of the section, the court may allow an execution or distress to proceed. It certainly seems somewhat strange that a proceeding which is expressly avoided by statute could be held to be capable of re-instatement by the action of the court but at any rate this judicial legislation has obviously been held upon a tightrein. Although the courts in England have held on many occasions that the English equivalent of section 183 is governed by the English equivalent of section 186 (In re Exhall Coal Mining Company(7); In re Coal Consumers Association(5); In re Lancashire Cotton Spinning Co.(8); The Constellation and Others(9)) yet the rule has been observed that the court will only intervene to assist the landlord under those provisions where it appears that there are special circumstances showing something inequitable on the side of the company in claiming the protection of the statute in avoidance of the distraint. Even thus limited there cannot be many surviving lines of authority in the history of precedent which have attracted expressions of such frank misgiving from the very judges who were applying them. (In this regard see the judgments of all three judges in the Court of Appeal in the case of In re Lancashire Cotton Spinning Co.(8)) Furthermore in the Coal Consumers Case(5), Malins V.C. (p.628) appears to put it that this alleviation will be given to the landlord who has no right to prove in the winding-up and to him only in respect of rent accrued after the winding-up. In the same general vein it is said at page 723 in Pennington's Company Law that even in the case of a voluntary winding-up, to which the English equivalent of section 183 does not apply, the court will always make an order, on the liquidator's application, restraining an execution creditor (and presumably a distrainor) from proceeding with execution against goods seized after the commencement of the winding-up unless the execution creditor (or the landlord) can show exceptional circumstances as for example that he was fraudulently induced to defer levying execution (or distraining) until after the commencement of the winding-up, or unless the company is solvent so that other creditors will not be prejudiced by the execution or (distress). (The words bracketed in the passage immediately preceding do not appear in the text of the work to which I have referred). The learned author citing the case of re Dry Docks Corporation of London(10), a case concerning a distress for unpaid rates, says:
"Despite the wording of the Act it has been held the court may allow an execution or distress to proceed even in a compulsory winding-up and it would no doubt be influenced by the same considerations as in a voluntary winding-up in deciding whether to do so."
The statutory distinction which has thus been disregarded and the doubts expressed in some of the earlier cases may make these decisions of questionable authority in this territory where no such difference is observed. Be that as it may it is evident that nothing in the nature of such exceptional circumstances favouring the landlords exist in the present case and the rule so enunciated would seem to preclude these particular landlords from approaching the court under section 186 now. In view of what has been said it is unnecessary to consider Mr. Tong's contention that in any event the company is possessed of property in the form of certain choses in action which, added to its other assets, would overtop the amount of the charge and thus defeat the argument that its assets were not at the date of the distraints the company's property at all.
9. Quite different considerations affect the case of the distrainors under distraints Nos. V164/75 and V197/75 which concern the clients of Mr. Rogers and Mr. Kotewall. Here there is no question of the distraints being void ab initio under section 183. The goods were lawfully and validly seized but the complication in their case arises from the fact that prior to the selling of the goods seized the winding-up commenced and therefore the first question is: does the selling of the goods thereafter amount to such a disposition of the property of the company as would render the sale and realisation of the goods in money provisionally void under section 182. Mr. Rogers who bore the argument for himself and Mr. Kotewall seeks to persuade me that there has not been such a disposition. This is so, he says, because the nature of a distress is such that there is, in the absence of statutory provision, no duty laid upon the distraining landlord to sell the goods at all. The distress is complete on the seizure of the goods and any disposition of the company's property which may be said to result from distress is already completed upon the seizing of the goods. He acknowledges that the goods have been disposed of by sale but says that this has been done by the bailiff pursuant to the duty imposed upon the bailiff by the provisions of section 99 of the Landlord and Tenant Ordinance. He maintains that his clients are in the position of secured creditors whose rights are only to be defeated by explicit statutory provisions. In this connection he points to the provisions of section 269 of the Companies Ordinance which do indeed defeat the rights of a judgment creditor who has not completed execution prior to the commencement of the winding-up. As to this latter point I do not believe the counsel stands upon a very good ground. He cites paragraph 81/62 at page 920 of the 22nd edition of Palmer's Company Law where a definition of a secured creditor appears in the same terms as may be found in section 167 of the Bankruptcy Act of 1914. In both places "secured creditor" is defined as a person who holds a mortgage, charge or lien on the company's property or any part of it as a security for a debt due to him by the company. The same definition is said to apply in the winding-up of insolvent companies (footnote 1 to paragraph 1299 4th Edition of Halsbury citing in support re Lough Neagh Shipping Co. ex parte Thompson(11) and re Leinster Contract Corpn.(12)) On this point the judgment of Malins V.C. in re Coal Consumers Association(5) on which, Mr. Tong relies, said of this definition (page 629):
"It is quite clear that a landlord with a right of distress is not within this definition. Such a right is not a mortgage, charge, or lien; it is simply a right to resort to the chattels on the land in the occupation of the tenant. And until the landlord exercises that right he has no security whatever.
For my part, I am doubtful whether that final sentence means that where the goods have been seized the landlord thereby becomes a secured creditor in the eye of the law relating to the winding-up of companies. But even if it be so the mere fact that there is no statutory provision expressly depriving the distrainor of the value of his security qua distress does not promote his security to rank above earlier secured creditors, let alone the preferred creditors, in the winding-up and in view of the state of the assets the claim of these distrainors in those proceedings would be in no way be advanced even were that argument to succeed. The mere status of secured creditor would of itself confer no right to proceed to sale and appropriation of the proceeds. I must return to the decision In re Coal Consumers Association(5) later when I turn to deal with the authorities upon which Mr. Rogers cases the main part of his argument. What he seeks to maintain at the present point is that 182 has no application to his clients or to those of Mr. Kotewall because there has not been an improper disposition of the goods within the meaning of that section. The distress, he says, is complete upon seizure of the goods and that puts his clients on the right side of the date line deviding void from valid dispositions. The argument is not without its attractions but I do not think that it would be right to hold that merely because the common law right of distress entitles the landlord to hold on to goods indefinitely until his rent is paid coupled with the fact that the landlord's right to do so is only over-borne, as it were, by force majeure in the form of the obligation imposed upon the bailiff by section 99 of the Landlord And Tenant Ordinance renders this dealing with the company's property anything other than a disposition on the wrong side of the line. A landlord in these territories in seizing goods will know, whatever his immediate intentions are, that the ultimate result from seizure will be disposal by sale if his rent is not paid before the statutory period limited in section 99 of the Landlord And Tenant Ordinance. It would always be open to a landlord whose procedure upon the distress had failed to produce results up to the limit of that time to release his distress or to approach the court after the making of the winding-up order under section 186 for liberty to proceed to sell. No doubt Mr. Rogers is right in one sense to say that the distress is levied and complete upon the seizure of the goods but that does not as I see it in itself constitute the disposition of the goods. They are not thus "disposed of" but only held against payment. It is the sale of the goods thereafter which effectively disposes of them. It is true that the funds are now held in neutral hands and that they represent the goods but they are not the goods and it would be an unwarrantable subtlety to hold that the goods have not been disposed of merely because the funds have not yet been dispersed. It is this disposal of the goods that makes the one cardinal distinction between the present case and the three decisions upon which Mr. Rogers primarily relies. In re Roundwood Colliery Co.(13); Venner's Electrical Cooking & Heating Appliances Ltd. v. Thorpe(14); and Herbert Berry Associates Ltd.(15) the position was precisely the same as in the present case inasmuch as in each of those cases the goods had been seized in distress prior to the making of winding-up orders and emphatically different inasmuch as in none of those three cases had the goods been disposed of by sale when the matter came to be agitated before court. In each of those cases application was made to the court to restrain the sale of the goods, a course which is open to any interested party under the provision of section 181. But this difference does not mean that these authorities are of no use to Mr. Rogers. I think he is right when he says, alternatively to his argument that section 182 does not apply to his clients at all, that even if it does apply the worst it can do is to render the sale void and not the distress itself. This is in contradistinction to the provisions of section 183 which makes the distress itself void. Unlike the position of Mr. Fung's creditors under that section there is thus left something valid in existence upon which the court may exercise its discretion under section 182. Alternatively I would say that it is now open to the court to consider whether to exercise its discretion under section 186 in favour of the landlords and to permit them to appropriate the funds which, whether the goods were lawfully disposed of or not, are the product of a legitimate distress. Although therefore the present distrainors may be said colloquially to have "jumped the gun", all the necessary parties being now before the court, I think I am entitled by way of discretion to consider whether to avoid or to validate these sales, under section 182 or section 186 or else by a reading of those sections in combination. The principle upon which Mr. Rogers relies deriving from the three cases which I have mentioned is that where a distress has been levied prior to the commencement of the winding-up proceedings and application is made to the court, either by the opposing party to restrain the landlords or by the landlords to exercise the powers of sale, the court will always permit the distrainor to go ahead with his distress unless the opposing party establishes the existence of special reasons rendering it inequitable that he should be permitted to do so. (See judgment of Stirling,J. in In re Roundwood Colliery Co.(13) at page 381). Examples of the kind of reasons which might move the court to refuse the landlord's right to complete his distress are given in the judgment of Templeman, J. at page 211 of the report in the Herbert Berry Association Ltd. Case(15). Nothing remotely comparable to those circumstances can be said to exist here and the plain rule disclosed by these authorities is that the landlord will normally be permitted to do so. Certainly I can find nothing to support the contention that in cases of this kind the mere fact that the landlord may be entitled to come into a winding-up and prove his debt is a special reason to prevent him exercising his right of distraint. But Mr. Tong has mounted a bold and ingenious attack upon what he discerns as the root of this line of authority. That root he finds in the decision of the judgment of Turner, L.J. in the case of In re Great Ship Co.(16). It was indeed that decision upon which Stirling, J. relied so heavily in the Roundwood Colliery Co. Case(13) in that part of his judgment which was upheld by the Court of Appeal. What counsel proposes is that there is a radical misunderstanding in the judgment of Lord Justice Turner which vitiates that judgment as a source of authority. Indeed it is counsel's view, if he will pardon the excursion into metaphor, that if he can demonstrate that the Great Ship has all these years been unseaworthy a well directed argument may cause it now to founder, taking with it the three cases upon which Mr. Rogers hopes principally repose for they may be said to be contained in it. There is no doubt that Stirling, J. in Roundwood Colliery Co.(13) grounded his view as to the necessity for showing special reasons on the judgment of Turner L.J. in In re Great Ship Co.(16). But Mr. Tong points out that the case was one involving not distress but the execution of a judgment debt. Turner L.J. had taken the view that if in circumstances such as prevail in the present case a judgment creditor sought to execute his judgment and seized goods prior to the winding-up and then applied for leave to sell them leave would be given. If this is the root of the later decisions he says it is bad because of two considerations. Firstly, he points to section 269 of the Ordinance which provides that where this happens an execution creditor is expressly forbidden to have the fruits of his execution. Secondly, he points out that the decision in the Coal Consumers Case(5) was not cited to Turner L.J. He argues that the principle in that case is clear and that the learned Lord Justice in the later case would have been very unlikely to depart from it. As to the first of these propositions I do not think that Mr. Tong can derive much advantage from it. Indeed I think the weight of it goes the other way. It is conceded that at the time of the decision in the Great Ship Case(16) there was no provision in the English legislation comparable to section 269. Mr. Tong's argument went upon a borrowed premiss. That is the way the law regards the situation of an execution creditor to-day, he says, and if the Great Ship Case(16) were to be decided now it must inevitably go the other way. Even granted the premiss it does not mean that the case was wrongly decided. There is more force in Mr. Rogers' argument that the Legislature has now disclosed that it makes a distinction between the case of a distraining landlord and that of an execution creditor and that the distinction it makes favours the former. The contrast between the express removal of the right of the execution creditor to proceed and the silence of the law as to the case of the distrainor must be regarded as at least a vote in favour of the latter. The argument from the decision in the Coal Consumer Association Case(5) does not seem to me to fare much better. The case was not one concerning the seizure of goods prior to the commencement of a winding-up. Indeed it would seem that no goods were seized at all and the application before the court was an application by a landlord for leave to distrain in respect of rent accrued before and rent accrued after the winding-up. The point at issue was whether section 10 of the Judicature Act of 1875 was to be interpreted as so far assimilating the practice in winding-up and in bankruptcy that the statutory right given by section 34 of the Bankruptcy Act of 1865 to a landlord to distrain for one year's rent accrued before the bankruptcy - giving him thus the status of a statutory secured creditor for such rent - was in some way to be applied to the situation of a landlord attempting to distrain for arrears of rent in the winding-up of a company. The learned Vice-Chancellor, Malins, dealing with this suggestion says (page 630):
| " | Then the point is, whether this 10th section is intended to do more than to apply in a winding-up the same rule as to secured creditors which obtains in bankruptcy. I confess it appears to me that the section applies to that object only. There are many privileges attaching to the office of trustee in bankruptcy. Amongst other things he may surrender and give up a lease, and so get rid of his liability. But the provisions of the Companies Acts relating to winding-up confer no similar privilege on the official liquidator. Yet, if the object of the provisions of the 10th section of the Judicature Act were to assimilate the law in all respects in the case of winding-up to that in bankruptcy, I should have to hold that it included the right of giving up a lease. It seems very reasonable that these provisions should also be applied to a winding-up; but the Legislature has not yet effected this object. Therefore, I cannot look upon this section as a provision for extending to a landlord in the case of a winding-up all the rights which he would have as against his tenants in a bankruptcy." |
He concluded that section 10 did not give a landlord in the winding-up of a company a right to recover one year's arrears of rent by distress and that such a landlord can only come in and prove under the winding-up. I stress that the situation before him was similar to what one might call a section 183 situation, the position faced by Mr. Fung's clients but not by those of Mr. Kotewall and Mr. Rogers, inasmuch as although no goods had actually been seized, the application was an attempt to circumvent the ban imposed by the equivalent of section 183 by an approach to the court. I cannot read it as an argument against the need to show "special reasons" against the distrainors nor as a substantive ground of authority against the exercise of the court's discretion under section 182 in their favour.
10. As to Mr. Rogers' alternative argument, applying the analogy from proceedings in sequestration, I do not think I ought to propound upon it although I find it appealing. In view of what I have said already it does not fall to be decided. But in addition to what has already been said there is a further and a final consideration which draws me to the conclusion that the proceedings which commenced with the seizure of the goods and continued, rightly or wrongly, with the sale of them, and which are now in arrest, should be permitted to continue to conclusion by the appropriation of these funds to the use of the respective landlords and that is this: As Mr. Rogers points out the only irregularity, if it be such, is that the sale of the goods took place without consulting the court and getting an order therefrom. The seizure of the goods was valid and, had such an application been made, then, upon the principle in the cases to which I have referred, it seems clear that the order would have moved in favour of the landlords. Mr. Tong of course argues that the word "distrained" in subsection 5 can only mean "lawfully distrained" and that is true. But the distraint was valid and it was only the disposition of the goods which was without explicit legal sanction. The funds which are now in the hands of the Official Receiver as liquidator deriving from the sale of the company's property must be regarded as paid subject to the charge in favour of the preferred creditors created by section 265(5) of the Ordinance. Even if they had been insufficient to satisfy the claims of all the preferred creditors the claims of the distrainors would nevertheless have ranked in priority to creditors in the winding-up. Since, as I see it, section 182 does not place a destroying impediment in the way of these distraints, and since no special reasons have been shown against the distrainors, the only question left to consider is whether the Official Receiver as liquidator is to permit them to have the full fruits of their distraint forthwith. I do not see why these landlords should not be permitted to complete their proceedings in distress by appropriation of the necessary funds without further ado. There are ample funds available in the liquidator's hands to cover the claims of the preferred creditors. I think it would be unfair to postpone the applicants to their rights in the winding-up nor indeed does there seem to be any advantage to the preferred creditors in that course. I therefore express my decision in favour of the landlords and rule that the disposition of the goods shall not avoid their right to proceed forthwith to appropriate from the funds in the Official Receiver's hands the amounts of the outstanding rents.
| | (A.M. McMullin) |
| | Judge of the High Court. |
Representation:
R. Tong(J.S.M.) for Hong Kong and Shanghai Banking Corporation.
A. Rogers (Deacons) for China Underwritters.
P. Fung (Yung, Yu, Yuen & Co.) for Kim Tak Co. Ltd.
R. Kotewall & P. Lo (Woo, Kwan, Lee & Co.) for Union V-Tex Realty Ltd.
Fox for the Official Receiver.
(1) (1886-7) 34 Ch. D. 646.
(2) 23 Ch. D. 154.
(3) (1900) 2 Ch. D. 731.
(4) (1970) Ch. D. 465.
(5) (1876-7) 4 Ch. D. 625.
(6) (1877) 7 Ch. D. 661.
(7) 4 D.J. & S. 377.
(8) (1887) 35 Ch. D. 656.
(9) (1965) 3 All E.R. 873
(10) (1888) 39 Ch. D. 306.
(11) (1896) 1 I.R. 29.
(12) (1903) 1 I.R. 517.
(13) (1897) 1 Ch. D. 373.
(14) (1915) 2 Ch. D. 404.
(15) (1976) 3 All E.R. 207.
(16) 4 D.J. & S. 63.