SUPER SPEED LTD (IN LIQUIDATION) v. BANK OF BARODA

HCCW 273/2012

COMPANIES (WINDING-UP) PROCEEDINGS NO. 273 OF 2012

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HCCW 274/2012

COMPANIES (WINDING-UP) PROCEEDINGS NO. 274 OF 2012

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[Consolidated by order of the Honourable Mr Justice Anthony Chan dated

the 9^th day of June 2015]

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D E C I S I O N
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1.  This is the Bank’s (the nomenclature employed in the decision herein dated 11 November 2015 (“Decision”) is adopted) application to vary part of the costs order nisi made in the Decision to the effect that the costs payable to the JSL by the Bank arising from its failed costs application be paid by GT, ie, the alternative Bullock order sought under para 1(b) of the Bank’s Summons dated 25 November 2015.

2.  I am not satisfied that the costs order in question should be varied, and my reasons are, briefly, as follows.  Firstly, The Bank took upon a difficulty application in trying to get its costs of the Summonses from the JSL (jointly and severally with GT) and lost.  Costs normally follow the event, and I am not convinced that there is good reason to add to the burden of GT with this additional costs.

3.  Secondly, I agree with Mr Fong, appearing for GT, that it would have been unnecessary for the Bank to make the costs application against the JSL (“Application”) had it protected itself with an application for security for costs (see the Decision, §68).

4.  Thirdly, I believe that the Application was partly motivated by vindictiveness on the part of the Bank (see the Decision, §§58 to 59).  I should add that it was alleged in a letter from the Bank’s solicitors dated 10 September 2015 that the JSL was “financially driven” in purusing the Summonses.

5.  Fourthly, the Bank had rejected the JSL’s offer to dispose of the Application on a drop hands basis.

6.  In the premises, the Bank’s Summons is dismissed.

[Submissions on costs of the application]

7.  There is no issue that the Bank should bear the costs of GT in this application and I so order.  As regards the costs of the JSL incurred today, it is regrettable that the ambiguity in the Bullock order sought by the Bank has not been resolved in correspondence thereby avoiding such costs.  However, in light of the ambiguity, I order that the costs of the JSL incurred today be paid by the Bank also.

HCCW 273/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 273 OF 2012

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HCCW 274/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 274 OF 2012

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[Consolidated by order of the Honourable Mr Justice Anthony Chan dated
the 9^th day of June 2015]

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DECISION
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1.  There are 2 applications by the Bank of Baroda (“Bank”) for, inter alia, an order that:

(a) Grand Tai Electronics (HK) Ltd (“GT”) and the joint and several liquidators (“JSL”) of Super Speed Ltd and Marshel Exports Ltd (“Companies”) be joined as parties to these proceedings for the purpose of costs only;

(b) Costs of and incidental to the Companies’ summonses dated 28 November 2013 (“Summonses”) be payable to the Bank by GT and JSL jointly and severally.

Background

2.  In short, the Summonses sought to challenge the validity of certain loans (“Post-Petition Loans”) made by the Bank to the Companies after the date of the winding-up petitions against them as void pursuant to s 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Cap 32”).

3.  The Summonses were heard by this court on 3 July 2014.  By a Decision dated 4 August 2014 (“Decision”), they were dismissed with costs to the Bank.  The relevant facts were summarised in paras 1 to 13 of the Decision.  For the present purpose, it is helpful to highlight the following facts, some of which took place after the Decision.

4.  GT was the 2nd petitioner in the winding-up petitions in HCCW 273 and 274 of 2012 against the Companies.  The petitions were based on, inter alia, a judgment debt in favour of GT in the sums of US$155,577.22 and HK$11,045 together with interest.  On 24 October 2012, the Companies were wound-up.

5.  JSL were appointed as the joint and several provisional liquidators of the Companies on 24 October 2012 and were subsequently appointed as joint and several liquidators of Marshel Exports Ltd on 25 January 2013 and of Super Ltd Speed on 3 April 2013.

6.  On 6 September 2013, before the Summonses were issued, JSL filed ex parte applications applying for leave to enter into a funding agreement with GT (“Funding Agreement”) and leave was granted on 27 September 2013.

7.  The relevant provisions of the Funding Agreement (dated 13 September 2013) are as follows :

(a) Under Recital (G), GT was desirous of entering into the Funding Agreement to facilitate JSL to make an application under ss 182 and 184 of Cap 32 for an order against the Bank that certain post-petition transactions were void and JSL agreed to do so upon GT entering into the Funding Agreement.

(b) Clause 1 provided that whatever the outcome of the legal proceedings against the Bank, GT agreed to be (i) responsible for and pay all legal costs charges and expenses (including counsel’s fees) incurred or to be incurred by JSL and the Companies or any of them and (ii) responsible for paying any adverse costs order including any costs ordered in favour of the Bank and should indemnify JSL in respect of any such costs orders and the assets of the Companies depleted as a result of any such costs orders together with the legal costs charges and expenses.

(c) Clause 3 provided that while JSL should have the sole and exclusive control and conduct of the legal proceedings against the Bank, GT was entitled to be kept informed of the progress unless it had breached the terms of the Funding Agreement.

(d) Clause 4 provided that if there was an order for security for costs against the Companies, GT should upon demand put up additional funds to comply with that order.

(e) Clause 5 provided that GT expressly reserved its right to make any application to court pursuant to s 265(5B)[1] of Cap 32.

(f) Clause 6 provided that if any order or judgment should be made or entered against the Companies or if JSL should be held personally liable for any costs damages or other liability arising out of the legal proceedings against the Bank, GT should upon demand fully pay and discharge such orders, judgments damages or other liabilities for the Companies and JSL.

(g) Clause 7 provided that without prejudice to GT’s other obligations under the Funding Agreement, it should always maintain an operation fund for the Companies of not less than HK$100,000 and should replenish the fund from time to time upon JSL’ demand save that the total funding of the operation fund should not exceed HK$300,000.

8.  After the Summonses were dismissed, on 5 September 2014, JSL filed Notices of Appeal (dated 29 August 2014) to appeal against such dismissal.

9.  On 17 September 2014, the Bank applied for security for costs of the appeals to be provided to the Bank by a source other than assets of the Companies.  JSL opposed the application.  On 22 January 2015, Mr Justice Barma JA granted the application and ordered the security in the sum of HK$280,000.

10.  On 17 March 2015, the Court of Appeal dismissed JSL’ appeals with costs.  The Reasons for Judgment (“Judgment”) were handed down on 14 April 2015.

11.  The present applications were issued on 28 May 2015, after the expiry of the deadline for any application for leave to appeal to the Court of Final Appeal. 

Jurisdiction and procedure

12.  The jurisdiction to order costs against a non-party is set out in s 52A(1) & (2) of the High Court Ordinance, Cap 4 :

“(1) Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.

(2) Without prejudice to the generality of subsection (1), the Court of Appeal or the Court of First Instance may, in accordance with rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if the Court of Appeal or the Court of First Instance, as the case may be, is satisfied that it is in the interests of justice to do so.”

13.  The procedure for dealing with the present applications is set out in O 62, r 6A(1) :

“(1) Where the Court is considering whether to exercise its power under section 52A or 52B of the Ordinance to make a costs order in favour of or against a person who is not a party to the relevant proceedings-

(a) that person must be joined as a party to the proceedings for the purposes of costs only; and

(b)  that person must be given a reasonable opportunity to attend a hearing at which the Court shall consider the matter further.”

14.  In Sun Focus Investment Ltd v Tang Shing Bor [2012] 5 HKLRD 853 at §§11-19, Mimmie Chan J, having reviewed and approved the relevant English authorities in this area, held that the procedure is a summary one divided into 2 stages, namely :

(a) At the first stage, the court considers whether the non-party should be joined for the purposes of costs.  The applicant would normally be expected to explain the nature of the claim against the non-party and the purpose to be served by joining that party.  The Court should refuse joinder only if it is plain and obvious that the application amounts to an abuse of process, by reason of delay or other misconduct on the part of the applicant, or because the application can be seen to be manifestly and fundamentally misconceived as to be an abuse by the applicant.

(b) If the court orders the non-party to be joined, the second stage involves giving that party a reasonable opportunity to file evidence and attend a hearing where the court considers whether to order that party to bear costs.  The overall consideration is always whether it would be in the interest of justice to make that order.

15.  I agree with Mr Chan, who appeared for the Bank, that there is no inflexible rule that there has to be 2 separate hearings, one for each stage.  I see no reason in principle why the court cannot, in an appropriate case where the evidence of the non-party has been filed, deal with both stages in a single hearing.  Such a course was adopted with the agreement of the parties in Chu Po Ling v Chung Chun Sing, unrep, DCCJ 32/2012 (24 November 2014) at §10 per Deputy District Judge Douglas Lam.

16.  In the present case, evidence has been filed by the parties and there is no disagreement that this court should deal with both stages in a single hearing.  Indeed, quite rightly, neither GT nor JSL sought to resist the joinder application (1^st stage).  As noted by Deputy District Judge Lam, the threshold to be met for the 1^st stage is a low one.  I shall deal with the order to be made at the end of this decision.

17.  Before considering the applicable principles on how this jurisdiction is to be exercised, one may bear in mind the summary nature of this jurisdiction : see Hong Kong Civil Procedure 2016, vol 1, p 1175, rubric 62/6A/6, § (6). 

Applicable principles

18.  There is no major disagreement between the parties on the applicable legal principles.  However, there is an area which is not entirely settled, and therefore the guiding authorities should be examined. 

19.  The legal principles guiding the exercise of the discretion to order costs against a non-party are set out in Lord Brown’s speech in Dymocks Franchise Systems (NSW) Pty Ltd v Todd& Ors [2004] 1 WLR 2807 at §§25-29 and 33 (Dymocks was cited with approval by the Court of Final Appeal in The Liberty Container (2007) 10 HKCFAR 256 at §§28-33).  In summary, it was held that :

(a) Although costs orders against non-parties are to be regarded as “exceptional”, exceptional in this context means no more than outside the ordinary run of cases where the parties pursue or defend claims for their own benefit and at their own expense.  The ultimate question in any such “exceptional” case is whether in all the circumstances it is just to make the order.  This is inevitably a fact-specific jurisdiction and there will often be a number of different considerations in play, some militating in favour of an order, some against (see Dymocks, §25(1)).

(b) Generally speaking, the discretion will not be exercised against “pure funders”, ie, those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course.  In their case, the court’s usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights (§25(2)).

(c) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs.  The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes.  He himself is “the real party” to the litigation (§25(3)).

(d) Perhaps the most difficult cases are those in which non-parties fund receivers or liquidators in litigation designed to advance the funder’s own financial interests.  After referring to the relevant case law, the Privy Council held that generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails.  However, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company than his own interests (§§25(4)-29).

(e) Whilst any impropriety or the pursuit of speculative litigation may of itself support the making of an order against a non-party, its absence does not preclude the making of such an order (§33).

20.  In respect of a case where the non-party against whom an order for costs is sought is not a funder but a liquidator of the insolvent company that is a party, the relevant principles were considered in detail by the English Court of Appeal in Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 (followed in Hong Kong in many cases, eg, in Re Estate of Ng Po Sum, CFI, [2014] 6 HKC 408 at §14 (upheld on appeal : [2015] 2 HKC 300) and Kong Lai Restaurant Ltd (in liquidation) v Swallow Kingdom PropertiesLtd,unrep, DCCJ 1332/2012, 23 January 2014, §40).  In Metalloy, the Court of Appeal allowed the liquidator’s appeal, overturning the costs order which had been made against him.  There were 2 judgments given by the Court.

21.  The first judgment was given by Waller LJ, who held as follows at 1617H and 1618C to H :

“We were not shown any case where a liquidator had prior to the order of the judge in this case been ordered as a non-party to pay costs personally as distinct from the case where the liquidator brings the proceedings in his own name …

I would myself prefer the approach that ordinarily in the case where a plaintiff is an insolvent company an order for security for costs should be the appropriate remedy. However there may, in any event, be a distinction between the position of receivers and the position of a liquidator. There is a further passage in the judgment of Lindsay J in Eastglen Ltd v Grafton, 12 March 1996 which refers to the public interest in liquidators being able to perform their duties. His statement is made in the context of not discouraging creditors from assisting the liquidator, it being a creditor who was the non-party being attacked in that case, but the public interest in relation to liquidators also demands that they should not be exposed to personal liability for costs simply where they act for insolvent companies. Certainly, as it seems to me, the primary remedy of a defendant facing a company in liquidation should be security for costs, and I can perhaps summarise my view on the authorities so far as the proper approach to the question whether a liquidator should be made personally liable for costs in the following way. I think (as the judge decided and as I read the notes the district judge also decided) that there is jurisdiction to order a liquidator as a non-party to pay the costs personally; but it will only be in exceptional cases that the jurisdiction will be exercised, and impropriety will be a necessary ingredient, particularly having regard to the fact that the normal remedy of obtaining an order for security for costs is available; the caution necessary in all cases where an attempt is being made to render a non-party liable for costs will be the greater in the case of a liquidator having regard to the public policy considerations.

The judge, as I see it, went wrong in the following respects. First, there is no indication that he considered that this was an exceptional case or that he had in mind the need for caution, particularly considering the public policy considerations. Second, he applied a test of “unreasonable” and did not consider whether there had been any impropriety in the conduct of the liquidator. Third, he considered that it was unreasonable to continue litigation when there were insufficient funds to cover the costs of the defendants if they should win. But the remedy of security for costs, if that can be justified, is available to cover that precise situation. If by chance an application for security fails, then a fortiori, it cannot be unreasonable for a liquidator to continue with an action in which he, bona fide, believes there is some prospect of recovery, whether by trial or settlement prior to trial. Fourthly, the judge did not appear to take any account of the lack of warning that the liquidator had in relation to the seeking of a costs order against him personally.”

22.  The second judgment was given by Millet LJ (as he then was), who expressed no disagreement with Waller LJ and said as follows at 1619H to 1620E and 1620G to H :

“It is not an abuse of the process of the court or in any way improper or unreasonable for an impecunious plaintiff to bring proceedings which are otherwise proper and bona fide while lacking the means to pay the defendant’s costs if they should fail. Litigants do it every day, with or without legal aid. If the plaintiff is an individual, the defendant’s only recourse is to threaten the plaintiff with bankruptcy. If the plaintiff is a limited company, the defendant may apply for security for costs and have the proceedings dismissed if the plaintiff fails to provide whatever security is ordered.

The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are bought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be make against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.

The position of a liquidator is a fortiori. Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. If he does so in his own name, he is personally liable for the costs in the ordinary way, though he may be entitled to an indemnity out of the assets of the company. If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. …

In the present case the only respects in which the liquidator is alleged to have acted unreasonably is in continuing the proceedings after the date on which the defendants asked for security for costs and in resisting the defendants’ application for security.  It is submitted that the liquidator ought to have thrown in the towel as soon as the defendant (sic) asked for security because (i) he knew that he would be unable to provide any security which might be ordered and (ii) he had insufficient funds in hand to pursue the case to trial if security was not ordered.  But the first is a ground on which the court may properly refuse to order security; while the second made it all the more important to the liquidator to defeat the application and obtain some bargaining power with a view to a settlement.  It is obviously risky for a plaintiff to begin proceedings which he cannot afford to finish, but it is not unreasonable, still less improper, for him to do so.” [emphasis added]

23.  Apart from identifying the applicable principles, I have cited the relevant parts of the judgments of Waller LJ and Millet LJ because there is a question over the threshold which has to be satisfied for an application of the present type where a liquidator has brought proceedings in the name of an insolvent company.  It is the submission of Mr Chan that Millett LJ held that a non-party liquidator may be ordered to pay costs personally where he has acted unreasonably.

24.  Further, Mr Chan, relying on a later English Court of Appeal authority of Dolphin Quays Developments Ltd v Mills& Ors [2008] 1 WLR 1829 at §§63-65, per Collins LJ, submitted that a finding that the liquidator has acted improperly or unreasonably is not a pre-requisite to ordering costs against him.  Impropriety or unreasonableness is merely an element to be considered by the court in the exercise of discretion.

25.  Before I go to Dolphin Quays, I should set out my understanding of the ratio of Metalloy.  It is reasonably clear that Waller LJ held that impropriety is a necessary ingredient to be satisfied before a non-party liquidator will be made liable for costs. The learned judge found that the first instance court had erred by applying the lower standard of “unreasonableness”.  The rationale is based on (a) the public interest in liquidators being able to perform their duties and (b) the party sued by the insolvent company can protect himself with an application for security for costs. 

26.  I respectfully suggest that there is an additional public interest element in encouraging a party sued by an insolvent company to apply for security for costs – expensive satellite litigation of the present type can thus be avoided. 

27.  Millet LJ had expressed no disagreement to the judgment of Waller LJ.  There are 2 references in his judgment to unreasonableness.  The first is at 1619H to 1620A, which was a general discussion about impecunious plaintiff.  The second at 1620G-H was made in addressing an argument against the liquidator that he had acted unreasonably. Hence, I do not agree that it was held by Millet LJ that unreasonable behaviour was sufficient to ground a non-party costs order against a liquidator (see para 23 above).  Indeed, that suggestion must be rejected in light of the dicta at 1620D (highlighted above).  To the contrary, Millet held that impropriety or bad faith is required for the present purpose.

28.  Finally, the agreement of Butler-Sloss LJ (1621A) must be understood as an agreement to both the judgments of Waller LJ and Millet LJ, and that the learned judge saw no inconsistency between the two. 

29.  This court’s understanding of Metalloy is consistent with that of the learned authors of Insolvency, Totty et al, rubric E2-52A (citing Metalloy) :

“Although the court has jurisdiction pursuant to s.51 of the Senior Courts Act 1981 to make an order that the liquidator should pay the costs of the litigation personally, this should only be invoked in an exceptional case, e.g. where the liquidator has been guilty of impropriety. The defendant may protect his position by applying for an order for security for costs… .”

30.  Dolphin Quays concerned an application for costs against receivers rather than liquidators, but the court considered the reasoning in Metalloy and found in the receivers’ favour[2].  Notably:

(a) The court confirmed that the availability of security for costs is an important factor in the exercise of the discretion, and that the discretion may be exercised more readily in favour of the successful litigant if security was not available at all, or where adequate security was not available (§§62 and 75, per Collins LJ; §§92-93 per Mummery LJ).

(b) The court considered that the decision in Metalloy did not require that before a costs order can be made against a liquidator or receiver there be impropriety or unreasonableness, but that these are elements in the discretion (Collins LJ at §§63 to 69 and 76).

(c) Para 65 of the judgment of Collins LJ stated as follows:

“I do not consider that this decision requires that before a costs order can be made against a liquidator or receiver that there be impropriety (Waller LJ) or unreasonableness (Millett LJ). On the facts Metalloy required impropriety or unreasonable behaviour because it was concerned with the personal liability of a liquidator where the costs would come out of his own pocket.”

(d) In paras 68 and 69, Collins LJ referred to 2 other decisions (1 of which was by the Court of Appeal) in support of the proposition that impropriety or bad faith is not an essential ingredient. However, they were not cases involving non-party liquidator.

31.  With greatest respect, my understanding of Metalloy, as stated above, is different to that of Collins LJ (whose judgment was agreed by Munby LJ and Mummery LJ).  In my humble view, at least insofar as a liquidator is concerned, Metalloy is inconsistent with Dolphin Quays.

32.  It may be that the court in the latter case was minded to assimilate the treatment of all non-parties and confine the consideration to one of judicial discretion (although it may be said that in the exercise of discretion different weight may be attached to different features).  However, it may be said that important public interest consideration, namely, not to discourage liquidators from discharging their duties, as recognised in Metalloy, has been relegated under Dolphin Quays.

33.  It is not suggested that Dolphin Quays has been approved by higher authority in Hong Kong.  In Hong Kong Civil Procedure 2016, only the first instance decision of case has been referred to (rubric 62/6A/14, p 1179). 

34.  This court is therefore uninhibited in preferring to follow Metalloy, and its intention is to do so.  However, it must be said that the decision in this case in respect of JSL does not hinge upon the ingredient of impropriety.

The case against JSL

35.  It is convenient to deal with the case against JSL first.  The main thrust of the Bank’s case is the allegation that JSL pursued a hopeless case against it.

36.  Further, it is said that such conduct constituted impropriety and unreasonableness.  In support, I have been referred by Mr Chan to Mead v Watson (2005) 23 ACLC 718 at §§11-15, 130-134, 155-160 and Bent v Gough (1992) 108 ALR 131 at 145-146.

37.  Mr Stock, who appeared for JSL, did not dispute the proposition that pursuing a hopeless case can constitute impropriety on the part of his lay clients.  I therefore turn to the question whether the case against the Bank was a hopeless one.

38.  To begin, I agree with Mr Stock that it is neither appropriate nor helpful for the parties to seek to re-argue the merits of Summonses.  Such an exercise is not consistent with the summary nature of the jurisdiction in question.  With the aid of the Decision and the Judgment, this court is in a position to form a view whether the Summonses were hopeless.

39.  The material facts on which the Summonses were based had been set out in paras 3 to 13 of the Decision.  I do not propose to repeat them here.

40.  As stated in paras 18 to 19 of the Decision, the kernel of JSL’ case against the Bank, which was heavily based on a passage found in Professor Goode’s book, was that the Post-Petition Loans were said to have “enlarged” the charges over 2 properties (“Properties”) (referred to in the Decision as “Super Property” and “Marshel Property”) which were mortgaged to the Bank thereby reducing pro tanto the respective equities of the securities.  According to JSL’ case, such reduction constituted disposition of the Companies’ assets.

41.  In the passage relied upon, Professor Goode argued that firstly, payment out of a company’s overdrawn account is never a disposition of its assets but secondly, there may be an exception where the bank holds security for future advances as an increase in the overdraft automatically expands the quantum of the bank’s security interest and correspondingly reduces the company’s equity in the charged assets unless these were already charged to their full value at the time of the further drawing on the account (“Goode’s Argument”).

42.  Mr Chan argued with some force that it was essential to support Goode’s Argument with evidence on the respective value of the Super Property and the Marshel Property to prove that they were not charged to their full at the material times.  Without such evidence, JSL would not be able to bring their case within Goode’s Argument.

43.  JSL did not obtain any expert valuation report in support of the Summonses.  Instead, their case rested on their own calculations based primarily upon an offer made to purchase the Properties set out in a letter dated 3 December 2013 (Decision, §§21 to 26).  Such evidence was rejected by the court in favour of the Bank’s valuation reports, notwithstanding that the latter was not entirely satisfactory due to the lack of supporting data (Decision, §27).

44.  On the other hand, Mr Stock submitted that it was only at the stage of filing evidence that the Bank first raised the argument that the “equity” in the Properties was exhausted, and the issue of valuation.  In any event, JSL did adduce evidence on the value of the Properties, based on the offer letter dated 3 December 2013.  The quality of the Bank’s valuation evidence was questionable, as found by the court. Accordingly, this was not a case where JSL failed to adduce any evidence on valuation at all.  The fact that the court ultimately preferred the Bank’s valuation evidence is insufficient to establish negligence or recklessness by JSL as alleged by the Bank.

45.  Apart from the issue of valuation evidence, there is another feature of this case which impacts upon the question whether the Summonses were hopeless.  In the Decision, the Summonses were dismissed on the basis of a comparison between the value of the Properties in August and September 2012, and the maximum daily total principal debts owed by the Companies to the Bank during the period of the Post-Petition Loans.  It was held that in light of the figures, it was plain that both Properties were at all material times charged to their full value, such that there was no reduction of the equity in the Properties and therefore no disposition falling within s 182 of Cap 32 (Decision, §§28-36 and 38). 

46.  However, there was another argument which was advanced before this court based on the repayments made to the Bank by the Companies.  Unfortunately, and with respect, this court was unable to understand that argument (Decision, §37).  In the circumstances, it would not be surprising if JSL took the view the arguments made on their behalf had not done justice to their case in full.

47.  It is apparent from the Judgment that when the matters went on appeal, the arguments took a somewhat different shape (the finding in favour of the Bank’s valuation evidence was not challenged).  It may be said that JSL’ arguments (including the one based on the repayments) were differently and better formulated with the aid of 2 tables (Judgment, §§30-31), which were reproduced as annexure A and B to the Judgment.  I agree with Mr Stock that before the Court of Appeal (“CA”), the Bank’s position as to the correct approach to evaluating whether the equity was used up was to some extent different to its approach before this court, although the Bank argued that given the figures the result was unaffected (Judgment, §32).  The Bank’s position prevailed before the CA (Judgment, §33-34).

48.  The CA expressed an obiter view that the Bank was incorrect to argue that Goode’s Argument was wrong (Judgment, §§35-42). 

49.  The CA made no comment which was critical of the stance taken or arguments made by the Companies.  I can find no suggestion that the Companies’ stance was unreasonable, unarguable or fundamentally misconceived.

50.  On the basis of the Decision and the Judgment, the suggestion that the Summonses were hopeless cannot be justified. 

51.  The criticisms over JSL’s valuation evidence have to be examined in the context identified by Mr Stock (see para 44 above). Good, poor or indifferent decisions are made every day by parties under the pressure of litigation.  At worst, the decision on valuation evidence was one of judgment made by JSL with the benefit of legal advice. 

52.  The Bank criticised JSL’s reliance on legal advice as “bare allegations”, citing Re North West Holdings plc [2001] 1 BCLC 468, §57.  Firstly, the receipt of legal advice from solicitors and counsel has been repeatedly stated in JSL’s evidence.  I see no reason to question the veracity of such evidence.  

53.  Secondly, bringing proceedings with the benefit of legal advice is clearly a relevant factor in the examination of the conduct of JSL : see Dolphin Quays, §17. 

54.  Thirdly, the decision in North West Holdings was based on the factual findings in that particular case, namely, that the defence was not conducted in the bona fide belief that it was in the companies’ interests, and that despite the director having received legal advice that there was a reasonable chance of defending the petitions, the court held that he did not give any serious consideration as to what was in the interests of the companies or their creditors, and had only his own and his wife’s interests in mind (see §§35 and 43).  With respect, it is therefore doubtful whether this decision gives rise to a general proposition that the court should consider the details of the advice (which is normally privileged) or how it was acted upon before giving it weight.

55.  In the circumstances, I am unable to see that a poor decision on the valuation in question can support the allegation that JSL had acted improperly or unreasonably as alleged.  I agree with Mr Stock that there was nothing exceptional in the actions taken by JSL. 

56.  Finally, Mr Stock relies upon the fact that the Bank should have, but failed to, protect itself with a security for costs application (such an application was made and granted in respect of the appeal by JSL : see para 9 above).  If such an application were made, GT would have put up the costs ordered pursuant to the terms of the Funding Agreement, failing which the Summonses would not have proceeded further. 

57.  Mr Chan submitted that security for costs is only 1 of the considerations for the court.  In light of the authorities, I have to say that this is a very important consideration in the context of an application against liquidator (see, eg, Dolphin Quays, §§62, 83, 86 and 92-93).  In the first instance judgment in that case(upheld on appeal), Sir Andrew Morritt C held (quoted in §21 of the report cited above) that :

“Fifthly, the hardship caused to Mr Mills by his inability to recover his costs from the company could have been avoided if he had pursued his remedy of security for costs from the company promptly or at all. Given the absence of any exceptional features or of any impropriety or unreasonableness on the part of the receivers or the bank, justice did not require that an order in his favour should now be made against the receivers. It was not possible to know how differently events might have turned out if Mr Mills had taken the steps commonly taken by a normally prudent litigant.”

58.  Mr Chan further submitted that JSL had been forewarned in correspondence on a number of occasions before the issuance of the Summonses that the Bank would seek a costs order against them personally. In this connection, I regret to note that the dealings between the Bank and JSL were highly acrimonious.  It is most unfortunate that the Bank’s solicitors had contributed to the state of affairs by making personal and acerbic accusations against JSL.  Such conduct resulted in a letter of regret sent by the Law Society to the responsible solicitor.  I should add that JSL’ investigations of the Post-Petition Loans had led to a complaint against the Bank lodged by them with the Hong Kong Monetary Authority. 

59.  The warnings of the Bank should be considered in the context of the hostile environment.  It would not be right for liquidators to be easily intimidated in the course of discharging their duties.  The real question is whether the warnings have the effect of counter-balancing the Bank’s failure to take out the application for security for costs. 

60.  On the evidence, the Bank’s failure to make a security for costs application was attributed to the legal advice it received.  However, Mr Chan accepted that such advice was erroneous.  I do not therefore see this as a relevant factor in favour of the Bank. 

61.  Mr Chan, relying on Ventris v Cashman (1998) 72 SASR 449 submitted that the reason why a lack of application for security for costs against an insolvent company may be a relevant factor in a subsequent application for a non-party costs order against its backers is that as a matter of fairness or justice, a party who intends to apply for a non-party costs order ought to either bring a timely application for security for costs or notify the backers of the intention to apply for non-party costs order so that they will not be lulled into a false sense of security and ambushed when it is too late for them to reflect (see pp 458 and 472-473).

62.  Mr Stock disagrees.  Firstly, Ventris was not a case about liquidator’s liability for non-party costs, and therefore the dicta relied upon are obiter.  Secondly, he submitted that the rationale which underpins the relevance of a security for costs application in the present context is that the potential injustice to the successful litigant would be removed by such an application.  Thirdly, the warnings of the Bank were of little relevance because under the Funding Agreement security for costs and adverse costs order against the Companies or JSL would be met by GT.

63.  I agree with Mr Stock. 

64.  Mr Chan has 2 further arguments.  Relying upon Deutsche Bank AG v Sebastian HoldingsInc [2014] 4 Costs LR 71, §56 it was submitted that the question whether or not an application for security has been made is of itself irrelevant as it is no more unjust to make the backers of an insolvent company liable for costs than it is to require them to provide security on its behalf.

65.  Deutsche Bank was concerned with costs order against directors instead of liquidators.  I agree with Mr Stock that the authority does not support the general proposition contended by the Bank.  Rather, §56 of that judgment confirms that the failure to apply for security is a relevant feature.  The failure to request security was held to carry very little weight in light of the particular circumstances of that case, inter alia : the company’s financial position appeared to be strong enough to meet costs orders for hundreds of thousands of pounds (§56); and the extensive findings of dishonesty made against the relevant director (§§72-74).

66.  Finally, Mr Chan submitted that even if security were ordered against JSL, it is unlikely that such security would fully cover the Bank’s costs entitlement.  Consequently, this application against JSL cannot be avoided.  I do not believe that it is right to speculate on what might have happened.  Further, I refer to §87 of Dolphin Quays :

“… The amount which the court orders by way of security is, of course, within the discretion of the court. But in such a case the court should be robust in its assessment of the amount of the security, amounting in appropriate cases to the full amount of the estimated standard costs. …”

67.  For completeness, it was not unreasonable for JSL to have disagreed with the Bank’s suggestion that security for costs should be provided in its favour, leaving the decision to the court (see Metalloy, p 1619F-G).

68.  In the premises, I see no good reason why the Bank should not have protected itself by making a security for costs application.  It is a matter which weighs heavily against its application against JSL. 

69.  The Bank’s application must fail whether on the basis that it has not made out a case of impropriety against JSL (Metalloy) or that it is not just to grant the application taking into account all relevant considerations (Dolphin Quays).

The case against GT

70.  The case against GT is reasonably straightforward.  In its case, there is no need to show impropriety before a non-party costs order can be made.

71.  Although I agree with Mr Fong, who appeared for GT, that the law does not tie the hands of the court in granting a costs order against a non-party funder who had an interest in the outcome of the proceedings, this court is bound by the Court of Final Appeal (“CFA”) decision of The Liberty Container where it was held that “justice will normally require that a self-interested funder whom the law can reach be ordered to pay the costs of the funded litigant’s successful opponent” (§33).

72.  In respect of the public interest in facilitating access to justice, I have been taken by Mr Fong to Eastglen Ltd v Grafton, ChD,[1996] BCC 900, at 911H to 912C.  However, that public interest element was considered by the CFA before arriving at the proposition quoted in the preceding paragraph (see §§30-31).

73.  Mr Fong seeks to rely on the failure by the Bank to apply for security for costs.  However, in my view, that failure is more than counter-balanced by the obligations assumed by GT under the Funding Agreement.

74.  It is difficult to see why it would not be just to grant the Bank’s application against GT in light of the Funding Agreement. The proposition that it is only an agreement between GT and JSL deserves little weight when the court is asked to consider the justice of the case.  Indeed, if GT had honoured its obligations under the Funding Agreement, these applications would not be necessary.

75.  Finally, I agree with Mr Chan that GT’s evidence that it is unable to pay the Bank’s costs is not properly supported by any financial information.  In any case, I am unable to see that it is a factor in favour of GT. 

76.  For these reasons, I grant the relief sought by the Bank against GT.

Conclusions

77.  In respect of the 2 summonses of the Bank both dated 28 May 2015, I make an order in terms of para 2 of those summonses (joinder).  I grant the costs order sought in para 3 only in relation to GT.  I make an order nisi that (a) the Bank’s costs in respect of its applications under these summonses against GT be paid by the latter and (b) JSL’ costs of and occasioned by the summonses be paid by the Bank.  Such costs be taxed if not agreed. 

78.  Last but not least, I am grateful to counsel for their able assistance.

HCCW 273/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 273 OF 2012

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D E C I S I O N

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1. There are 2 applications before the court made by the Joint and Several Liquidators (“Liquidators”) of Super Speed Ltd (“Super”) and Marshel Exports Ltd (“Marsel”) against Bank of Baroda (“Bank”) for :

(i)   Declarations that the loans made by the Bank to Super and Marshel after 3.8.2012^[1] (referred to by the Liquidators as “Post-Petition Loans”) are void under section 182 of the Companies (Winding Up and Miscellaneous) Ordinance, Cap 32 (“S 182”) and be set aside;

(ii)   Declarations that the charges/mortgages by reason of and/or resulting from the Post-Petition Loans against (a) Super’s property at Office No. 02 on 9^th Floor, Empress Plaza, Nos. 17-19, Chatham Road South, Kowloon, Hong Kong (“Super Property”) and (b) Marshel’s property at Office Nos. 01 and 08 on 9^th Floor, Empress Plaza, Nos. 17-19, Chatham Road South, Kowloon, Hong Kong (“Marshel Property”) are void under S 182 and be set aside.

Factual background

2. The facts are not in dispute and they can be briefly stated as follows.

3. Both Super and Marshel are the Bank’s customers.  Marshel opened its bank account with the Bank on 28.7.2007 whereas Super’s account was opened on 24.8.2007.  At all material times, Mr Sharma Nipun, a director of both companies, operated the 2 bank accounts on behalf of the 2 companies.

4. On 17.9.2007, Marshel granted a first mortgage over the Marshel Property in favour of Dah Sing Bank Limited to secure “all monies” in respect of general banking facilities and interest (“Dah Sing Mortgage”).  On 7.8.2008, Marshel granted a second mortgage over that property in favour of the Bank to secure all monies obligations and liabilities owing or incurred by Marshel (“Marshel Mortgage”).

5. On 25.10.2007, Super granted a mortgage over the Super Property in favour of the Bank to secure a term loan in the sum of HK$3,500,000.  In around October 2010, that mortgage was discharged and on 28.10.2010, Super granted a new legal charge/mortgage over the same property in favour of the Bank to secure “all monies” in respect of general banking facilities and interest (“Super Mortgage”).

6. On 3.8.2012, 2 creditor’s winding-up Petitions were issued, one against Super and the other against Marshel.  On 24.10,2012, both companies were wound-up.

7. Prior to the making of the winding-up orders, the Bank was informed by the solicitors acting for Super and Marshel on 11 September 2012 that winding-up Petitions were presented against them.

8. In January 2013, the Liquidators requested the Bank for information on the loans that the Bank had advanced to Super and Marshel.

9. On 8.7.2013, the Bank submitted proofs of debt in respect of both Super and Marshel to the Liquidators.  The sum due from Super was US$1,110,607.46 or HK$8,618,313.89 whereas the sum due from Marshel was US$1,665,338.03 or HK$12,923,023.12.

10. It is common ground that the Bank had advanced loans to both Super and Marshel after 3.8.2012.  Further, the Bank acknowledges that despite the fact that it became aware of the winding-up Petitions against Super and Marshel by 12.9.2012 (the Liquidators contend that the Bank had constructive knowledge of the Petitions on 24.8.2012 when they were gazetted), it nevertheless continued to advance further loans to the 2 companies.

11. In respect of Super, the Bank had advanced a total of US$743,534.74 (principal) to it between 24.8.2012 and 18.9.2012 :

Date of Loan	Principal Amount of Loan (US$)
24.8.2012	44,368.35
12.9.2012	97,464.90
13.9.2012	93,100.80
14.9.2012	34,320
14.9.2012	61,582.30
17.9.2012	59,157.80
17.9.2012	70,310.50
18.9.2012	68,370.90
18.9.2012	40,731.60
18.9.2012	66,673.75
19.9.2012	21,868.99
19.9.2012	85,584.85
Total:	743,534.74

12. As for Marshel, the Bank had advanced a total of US$1,655,671.03 (principal) to it between 23.8.2012 and 28.9.2012.

Date of Loan	Principal Amount of Loan (US$)
23.8.2012	41,467.03
24.8.2012	147,004
19.9.2012	105,120
20.9.2012	104,000
20.9.2012	103,200
21.9.2012	101,600
21.9.2012	100,800
21.9.2012	100,480
26.9.2012	124,000
26.9.2012	123,200
27.9.2012	122,400
27.9.2012	121,600
28.9.2012	120,960
28.9.2012	120,640
28.9.2012	119,200
Total:	1,655,671.03

13. On 28.11.2013, the Liquidators issued the Summonses in respect of the 2 applications that are before this court.

S 182

14. S 182 provides as follows :

“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.”

The arguments

15. With respect, the Liquidators’ arguments are quite difficult to understand.  In respect of the Post-Petition Loans, the Liquidators stated in their skeleton submissions that they are no longer pursuing the argument that those loans were dispositions of the 2 companies’ respective assets but they are maintaining that what they refer to as the “Post-Petition Charges”[2] were dispositions of the 2 companies’ assets. 

16. However, in their reply submissions, it was stated that the above concession is a mistake. 

17. As regards the Post-Petition Charges, what is contended by the Liquidators is that the Post-Petition Loans have reduced the equity in the mortgaged properties belonging to Super and Marshel and such reduction constituted dispositions for the purpose of S 182. 

18. Clearly, the Post-Petition Loans and Post-Petition Charges go hand-in-hand.  However, it is very difficult to see how the former can constitute dispositions of the assets of Super and Marshel when, in truth, assets were transferred to them by the Bank.  The kernel of the disputes in these applications concerns the “enlargement” of the charges over Super Property and Marshel Property as a result of the Post-Petition Loans.  Hence, the resolution of these applications will determine whether the Bank is a secured creditor in respect of the Post-Petition Loans.

19. The Liquidators’ case is heavily relied upon the view taken by Professor Goode set out in his book Principles of Corporate Insolvency Law, 4^th edn, at para 13-133 :

“My contention, then, is that s.127[3] can never apply solely by reason of the drawing on an overdrawn account. In Coutts & Co v Stock, Lightman J. entertained no doubt that an increase in the company’s overdraft fell outside s. 127. However, it does not follow that use of an overdraft can never give rise to a disposition of the company’s property. There appear to be at least three cases where it does. The first is where the bank holds security for future advances, for an increase in the overdraft automatically expands the quantum of the bank’s security interest, and correspondingly reduces the company’s equity in the charged assets, unless these were already charged to their full value at the time of the further drawing on the account. …”

20. The Bank’s response is, in gist, as follows :

(i)   Firstly, it is not necessary for this court to decide whether Professor Goode’s opinion is correct.  The reason being that on the evidence both the Super Property and the Marshel Property were already charged to their respective full value when each of the Post-Petition Loans was advanced.  Therefore, there could not have been any reduction in Super’s or Marshel’s equity in their Properties.

(ii)   Secondly, the Bank says that Professor Goode’s opinion is wrong in law.

Were the Super Property and Marshel Property charged to their full value?

21. I should say at the outset that the case of the Liquidators is greatly handicapped by the absence of any expert evidence on their side to counter that adduced by the Bank.

22. According to the expert evidence adduced by the Bank, Super Property is valued at HK$5,300,000 (US$679,487) as at 24.8.2012.  To work out the value of that property as at September 2012, Mr Chan, who appeared for the Bank, submitted that the said valuation should be increased by 7.4% to reflect the price increase between August and September 2012.  The price becomes US$729,769 with that adjustment.  The 7.4% comes from the statistics from the Rating and Valuation Department (“RVD”) produced by the Liquidators.

23. Instead of adducing their own expert evidence, what the Liquidators did was to extrapolate the price for the Super Property based, firstly, on an offer dated 3.12.2013 to purchase both the Super Property and the Marshel Property at HK$24,045,000.  Based on the respective gross floor area of the 2 properties, the Liquidators worked out that the offer price for the Super Property was HK$7,607,460 (US$975,000).  Secondly, the Liquidators rely upon the statistics from the RVD to show that the average prices for Grade B offices in the Tsim Sha Tsui area, to which the Super Property belongs, went up by 14.94% between August 2012 and August 2013.  With those data, the Liquidators then worked out the estimated value of the Super Property as at August 2012 to be US$848,543. 

24. Further, by making an upward adjustment of 7.4% the estimated value of the Super Property as at September 2012 becomes US$911,335.

25. In respect of the Marshel Property, the Bank’s valuation evidence is that it was worth HK$11,500,000 (US$1,474,359) as at 23.8.2012.  With the 7.4% increase, the value as at September 2012 becomes US$1,583,462.

26. With the same exercise, the valuations extrapolated by the Liquidators for the same property are US$1,833,458 as at August 2012 and US$1,969,134 as at September 2012.

27. Before I deal with the debts owed under the Super Mortgage and Marshel Mortgage, I should say that I am not inclined to accept the Liquidators’ valuation evidence in preference over the Bank’s expert evidence.  The latter is in the form of “abbreviated” valuation reports.  I do not find them entirely satisfactory because whilst they referred to a “Direct Comparison Approach” as the valuation method, there is no mention of any comparable which had been considered. However, the extrapolation exercises carried out by the Liquidators can, at best, only provide a rough idea on the market prices in question.  Therefore, and not without reluctance, I prefer the Bank’s evidence.

28. As regards the debts owed to the Bank, as at 3.8.2012 (date of Petition) the total principal sum due from Super to the Bank stood at US$2,231,878.22.

29. Between 23.8.2012 and 19.9.2012 (the period during which the Post-Petition Loans were advanced to Super), the daily total principal sum due from Super to the Bank fluctuated between US$1,167,597.54 (the lowest) and US$2,231,878.22 (the highest).

30. According to the Bank’s evidence, the total principal sum that remains due from Super to the Bank is US$1,092,942.53.

31. In the case of Marshel, as at 3.8.2012 the total principal sum due from Marshel to the Bank stood at US$2,904,287.03.

32. Between 22.8.2012 and 28.9.2012, the daily total principal sum due from Marshel to the Bank fluctuated between US$1,521,101.85 and US$2,726,895.

33. The current total principal sum due from Marshel to the Bank is US$1,655,777.44.

34. In addition, the outstanding principal and interest calculated up to 28.9.2012 due from Marshel to Dah Sing Bank, which was and is secured by the Dah Sing Mortgage, stood at HK$4,767,643.20 (US$611,236).

35. On the basis of the above figures, the lowest amount of the combined sum that Marshel owed to Dah Sing Bank and the Bank between 22.8.2012 and 28.9.2012 is in the region of US$2,132,337.85 (US$1,521,101.85 + US$611,236).

36. The above evidence of debts is not disputed.  In the light of those figures, it is quite plain that both the Super Property and Marshel Property were at all material times charged to their full value. 

37. Indeed, Mr Chung, who appeared for the Liquidators, recognised the difficulty of his case in this regard.  However, he sought to argue that there were substantial repayments which had been made by Super (and Marshel) to the Bank and those repayments have somehow changed the picture.  I regret to say that I am unable to understand the submission.  The repayments in the case of Super had been set out in a table at bundle A, pp 1068-1069).  Looking at that table, I cannot see how the repayments contradict the proposition that the Super Property was charged to its full value at all material times.  The same can be said for Marshel (see bundle C, pp 5069-5071).

38. In the premises, I am satisfied that there was no reduction of the equity in the Super Property and Marshel Property which belonged respectively to Super and Marshel, and therefore no disposition which fell within by S 182. 

39. It is unnecessary to deal with the arguments on the validity of Professor Goode’s opinion.

40. Accordingly, these applications are dismissed with costs to the Bank.

HCCW 273/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 273 OF 2012

____________

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________________

J U D G M E N T

________________

1.  There are two applications for validation order before me. They concern the disposition of property by two related companies which are now in liquidation, namely, Super Speed Ltd (“SS”) and Marshel Exports Ltd (“ME”) (collectively “Companies”).

2.  SS and ME were wound-up pursuant to the Petitions of their trade creditors (“Petitioners”) dated 3 August 2012.  The Petitions were unopposed and the winding-up orders were made on 24 October 2012. On that same day, the same Provisional Liquidators (“Liquidators”) were appointed for SS and ME.

3.  The dispositions in question are the sale of 3 office units situated in Tsimshatsui by SS (Office 02) and ME (Office 01 and 08) (“Properties”).  The Properties were sold to Citi Phone (Hong Kong) Ltd (“Purchaser”) and the two Provisional Agreements were signed on 23 May 2012.  Completion of the transactions was originally scheduled to take place on 5 October 2012.  No doubt due to the liquidation in question, that event has been postponed to 19 December 2012.

4.  The court has been informed that the Liquidators (one of them appeared at the hearing) are having difficulties in collecting the financial information of the Companies and they are therefore unable to assist in the determination of these applications.  These applications are prosecuted by the Purchaser and resisted by the Petitioners.  One of the Companies’ major creditors, Bank of Baroda, was also represented at the hearing but only as an observer.  It should be pointed out that Bank of Baroda is a secured creditor of the Companies.  The debts owed to it are secured by mortgages over the Properties as well as the personal guarantees of the directors of the Companies.

Applicable law

5.  Section 182 of the Companies Ordinance, Cap 32 provides as follows :

“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.”

6.  There is an interesting twist in these applications in that it is common ground between the Purchaser and the Petitioners that the dispositions in question are not caught by s 182.

7.  In Re French’s (Wine Bar) Ltd [1987] BCLC 499, it was held by Vinelott J that under the English provisions equivalent to s 182 such provisions did not apply to a case where a company had entered into an unconditional contract for the sale of property (a lease together with fixtures and fittings and the goodwill of a business) before the petition was presented which was specifically enforceable by the purchaser and the contract was duly completed in accordance with its terms after the petition was presented.

8.  However, it appears that the reason why the provisions were inapplicable was not, as submitted by Mr Sit and Ms Yung who appeared respectively for the Purchaser and the Petitioners, attributable solely to the timing of the sale.  The ratio is that after the sale the property was no longer something which the company was free to deal with.

9.  There is a further issue as to why the court should exercise its discretion in granting relief in a case where such relief is unnecessary.  In Re French’s (Wine Bar) Ltd, it was held that “in practice unless a contract is quite plainly specifically enforceable and there is no possible defence it may well be prudent to seek the approval of the court for the completion of the contract”.

10.  Further, I was referred by Mr Sit to the authority of Chan Woon Wing ex parte Lun Kee Poultry Ltd, unrep, HCB 144/00, para 8, where Le Pichon J (as she then was) recognised the practice of obtaining the court consent in circumstances such as those before this court as a matter of prudence.  It was further observed that the court could not see any harm in making the order and the unsecured creditors would not be worse off given that the transaction did not involve any disposition within section 42 of the Bankruptcy Ordinance, Cap 6 (which is similar to s 182).

11.  Before I express my own view on this interesting issue, I should say that it is also common ground between the Purchaser and the Petitioners that notwithstanding any validation order which may be granted in respect of the sale of the Properties, those transactions are liable to subsequent challenge by the Liquidators on their propriety.

12.  With respect, I am not altogether convinced that there is adequate justification in cases like the present to call for the court’s exercise of discretion.  This is particularly so when the result is liable to be nullified by a subsequent challenge by the Liquidators.  Why should the court be asked to provide a provisional stamp of approval for a transaction when such approval is unnecessary?  On the other hand, the practice of seeking the court’s approval appears to be well-established and, despite my reservation, I am not inclined to overturn it without full argument on the point.

13.  For purpose of deciding the exercise of discretion in question, the court should take into account first and foremost the interest of the Companies’ creditors.  In Re Century Group Ltd, unrep, HCCW 59/04 it was held at para 6 :

“It is well established that the basic principle of law in respect of liquidations is that the assets of the insolvent company should be distributed amongst its unsecured creditors pari passu. But it is also recognized that there are times when it will be for the benefit not only of the Company, but also of its unsecured creditors, that it should be able to dispose of some of its property after the petition has been presented but before the winding-up order is made.”

14.  Further, in Chan Woon Wing ex parte Lun Kee Poultry Ltd, para 15, it was held :

“It is tolerably clear that in the absence of the court’s consent under section 42, the transaction which is due for completion later this afternoon, would in all probability be derailed. As there is nothing irregular on the face of the transaction and no evidence of any impropriety or of suspicious circumstances (such as a sale to connected persons), a prima facie normal commercial transaction should be allowed to take effect and that it should not be upset by the withholding of consent unless there is good reason so to do. In the present case, there is none.”

15.  I shall be guided by the aforementioned dicta.

Merits of these applications

16.  I regret to say that there are suspicious circumstances surrounding these transactions.  I have been assisted by the chronology provided by Ms Yung.  It appears that shortly after the filing of the statement of claim in an action (“HCA 527/12”) by the Petitioners against the Companies and Mr Nipun trading as Marshel Exports (Mr Nipun was one of the directors of the Companies), the Properties were allegedly put on the market for sale.  On the day when default judgment was entered against the defendants in HCA 527/12, the provisional agreements to dispose of the Properties were entered into.

17.  I have an affirmation from Mr Nipun purporting to explain the reason for the disposition of the Properties.  First of all, he accepted that the Companies were in financial difficulties since around November 2011.  The Properties (on the evidence, they appear to be the main assets of the Companies) were mortgaged to, inter alia, Bank of Baroda and in light of the prospects of enforcement proceedings by the mortgagees, the directors of the Companies decided to dispose of the Properties with the view to obtaining better prices than those obtainable via public auction.

18.  However, the prices at which the Properties were sold were in fact lower than the acquisition prices in 2007.  Office 02 was purchased at HK$5,751,200 in 2007.  It was sold at HK$5,096,000.  Offices 01 and 08 were jointly acquired in 2007 at HK$12,426,700 and they were sold at HK$11,011,000.

19.  The evidence adduced by the Petitioners is that the dispositions were at undervalue.  Despite the dispute in the valuation evidence, I am inclined to accept that the purchase prices in question do not fully reflect the market value of the Properties.  I give due weight to the statistics produced by the Rating and Valuation Department that the average price for private office in Tsimshatsui has risen during the period between 2007 and 2012 by 37.14% to 120.61% depending on the grade of the office in question.

20.  Of course, any undervalued sale of the Companies’ asset is likely to be harmful to the interest of their creditors.

21.  I am alive to the evidence filed by the Purchaser and Mr Nipun that there is no connection between the Purchaser and the Companies, their shareholders and directors.  However, in light of the circumstances of the transactions, the court must maintain a healthy scepticism over such assertion.

22.  Taking all relevant matters into consideration, I am not satisfied that these are normal commercial transactions and I dismiss these applications with costs to the Petitioners to be borne by the Purchaser to be taxed if not agreed.