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Osman Mohammed Arab And Wong Kwok Keung, The Joint And Several Liquidators Of Kam Toys & Novelty Manufacturing Ltd (In Creditors’ Voluntary Liquidation) v Cashbox Credit Services Ltd

Judgment Cited authorities 4 Cited in Precedent Map Related
Vincent
Judgment Date13 November 2017
Year2017
Judgement NumberCACV67/2017
Subject MatterCivil Appeal
CourtCourt of Appeal (Hong Kong)
CACV67/2017 OSMAN MOHAMMED ARAB AND WONG KWOK KEUNG, THE JOINT AND SEVERAL LIQUIDATORS OF KAM TOYS & NOVELTY MANUFACTURING LTD (IN CREDITORS’ VOLUNTARY LIQUIDATION) v. CASHBOX CREDIT SERVICES LTD

CACV 67/2017
HCMP 637/2017
(Heard Together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 67 OF 2017

(ON APPEAL FROM HCMP 1908 OF 2016)

AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 637 OF 2017

(ON AN INTENDED APPEAL FROM HCMP NO. 1908 OF 2016)

________________________

IN THE MATTER OF SECTIONS 266 AND 266B(1) OF THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE, CAP. 32, LAWS OF HONG KONG
AND
IN THE MATTER OF KAM TOYS & NOVELTY MANUFACTURING LIMITED (IN CREDITORS’ VOLUNTARY LIQUIDATION) (THE “COMPANY”)

________________________

BETWEEN
OSMAN MOHAMMED ARAB AND WONG KWOK KEUNG, THE JOINT AND SEVERAL LIQUIDATORS OF KAM TOYS & NOVELTY MANUFACTURING LIMITED (IN CREDITORS’ VOLUNTARY LIQUIDATION) Applicant
and
CASHBOX CREDIT SERVICES LIMITED”
(錢鉅財務有限公司) 		Respondent

________________________

(Heard Together)


Before: Hon Lam VP, Hon Yuen and Hon McWalters JJA in Court

Date of Hearing: 15 September 2017

Date of Judgment: 13 November 2017

________________________

J U D G M E N T

________________________


Hon Lam VP:

1. I agree with the judgment of Yuen JA.

Hon Yuen JA:

2. There are before this court two matters arising from a judgment of Anthony Chan J (“the judge”) given on 9 February 2017 (“the Judgment”).

3.1. In the Judgment, the learned judge:

(1) dismissed an application by the joint liquidators (“the liquidators”) of Kam Toys & Novelty Manufacturing Ltd (in Creditors’ Voluntary Liquidation) (“the Company”) for a declaration that the payment of a sum of $19.287 million by the Company to Cashbox Credit Services Ltd (“Cashbox”) on 9 January 2014 (“the Payment”) constituted an unfair preference under s.266 Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 (“C(WU)O”), and for an order that the sum be repaid to the estate of the Company; and

(2) made a costs order nisi that Cashbox is to have 2/3 of its costs of the proceedings to be paid by the Company.

3.2. No application was made to the judge to vary the costs order nisi within the 14 day period prescribed by the Rules of Court and hence the order became absolute.

Matters before this court

4.1. The first matter before this court is the liquidators’ appeal, filed on 8 March 2017, against the Judgment.

4.2. The second matter is Cashbox’s application to this court, filed on 21 March 2017, for leave to appeal the costsorder out of time. Such an application should have been made to the Court of First Instance and not directly to this court[1], but in the exercise of our discretion we considered the arguments de bene esse as counsel for both parties had provided the court with full submissions.

Factual background

5.1. The Company was controlled by Mr Lee Kwan Wah (“LKW”) and his family. LKW held 80% of the shares, and his wife and brother each held 10%. Prior to 28 January 2014, the three of them, together with Mr & Mrs LKW’s son Mr Lee Yuk Shan (“LYS”), were the Company’s directors. On that day, LKW, his wife and his brother resigned from the board, leaving LYS as the sole director.

5.2. On 6 March 2014, a director’s resolution was passed that the Company could not by reason of its liabilities continue its business, and a winding-up statement was delivered to the Registrar of Companies. The Company was thus put into creditors’ voluntary liquidation under s.228A, C(WU)O.

The Company’s financial position

6. Although the Company had been very successful in the past, it had been struggling financially for a few years. This is how the judge described the Company’s financial position:

“9. There can be no real question that at the time of the Payment the Company was insolvent based on the Cash Flow Test. The evidence demonstrates that the Company had not been in a position to pay its debts for some time before the Payment was made.

10. As at 6 July 2016, the [liquidators] had received 109 proof of debt claims amounting to HK$267,397,287.08 from various creditors, including trade creditors, and outstanding salaries and remuneration owed to 37 employees.

11. The Company’s trade debts almost entirely pre-date the date of the Payment. Many of these debts go back to 2012 and 2013, with the earliest [dating] from October 2011 ...”.

Dealings with properties

7. In 2013, the following financing transactions were taken in relation to landed properties owned by the Company or the persons controlling it.

Charges/Mortgages

- Black’s Link

(1) On 30 January 2013, a property at Black’s Link owned by the Company was charged to Lei Shing Hong Credit Ltd by way of a First Legal Charge to secure “all moneys” owed.

(2) On 6 February 2013, the Black’s Link property was made the subject of a Second Mortgage given to China Yinsheng Finance (Holdings) (“Yinsheng”).

(3) On 17 April 2013, the Black’s Link property was made the subject of a Third Mortgage given to Yinsheng.

- Taikoo Shing

(4) On 6 June 2013, a property at Taikoo Shing owned by Mr & Mrs LKW was charged to Lei Shing Hong by way of a First Legal Charge.

(5) On 10 June 2013, the Taikoo Shing property was made the subject of a Second Mortgage given to Yinsheng.

- Both properties

(6) On 29 August 2013, a company called Success Full Finance (HK) Ltd obtained a Third Mortgage over the Taikoo Shing property and a Fourth Mortgage over the Black’s Link property.

(7) On 30 September 2013, upon the discharge of Yinsheng’s mortgages, Success Full obtained Second Mortgages over both the Black’s Link and Taikoo Shing properties.

Agreements for sale

(8) On 15 November 2013, the Company entered into a provisional sale and purchase agreement to sell the Black’s Link property for $300 million, with completion to take place on 18 February 2014.

(9) On 1 December 2013, Mr and Mrs LKW entered into a provisional sale and purchase agreement to sell the Taikoo Shing property for $22 million, with completion to take place on 16 January 2014.

Deposit for Black’s Link property stakeheld by solicitors

8.1. A total deposit of $30 million (“the Deposit”) was paid by the purchaser of the Black’s Link property in November 2013 to the Company’s solicitors Tony Kan & Co (“the solicitors”) as stakeholders.

8.2. It was provided in the provisional sale and purchase agreement that the solicitors could only release the Deposit to the Company if the balance of the purchase price (ie $270 million) was sufficient “to discharge the existing charge/mortgage against the said premises”.

8.3. As boththe Lei Shing Hong and the Success Full mortgages were in existence at the time, that meant that the Deposit could only be released by the solicitors to the Company if and when the total sums due to both mortgagees (collectively “the Secured Debts”) were reduced to $270 million.

Amount of Secured Debts

9.1. The fact that the solicitors were stakeholding the Deposit in November 2013 showed that the Secured Debts must have exceeded $270 million, although it is not known exactly by how much, since this court was not provided by the liquidators with most of the Company’s relevant accounting documents[2].

9.2. However as an indication, the solicitors’ Statement of Account[3] prepared after completion of the sale of the Black’s Link property on 18 February 2014 showed redemption moneys paid to:

(1) Lei Shing Hong of $238,802,148.78 (this does not include the $16 million paid to it by Cashbox at the Company’s request as described below[4]); and

(2) Success Full of $28,477,260.00.

The Company’s approach to Cashbox

10. As matters stood in November 2013 therefore, the Company was not able to get its hands on the $30 million Deposit stakeheld by the solicitors.

11.1. In early December 2013 the Company approached Cashbox for a loan of $19 million for “no more than a month”[5].

11.2. Mr Mok Ka Fai, a director of Cashbox, said the following on affirmation:

(1) none of the directors or shareholders of Cashbox knew the Lees or had any business transactions with them or the Company;

(2) the Company had been introduced to Cashbox by an agent of Cashbox;

(3) Cashbox was given information about the Company’s business and the property transactions set out above;

(4) Cashbox was given extracts of the Directors’ Report and Financial Statements of the Company for the previous year, ending 31 March 2012;

(5) LKW informed him that of the proposed loan from Cashbox of $19 million, the Company intended to apply (a) $16 million to repay Lei Shing Hong and (b) the balance as working capital for the Company;

(6) LKW further said that the sum of $16 million “together with the final payment from the Black’s Link Property to be received on completion, would be sufficient to fully discharge the Company’s debts to Lei Shing Hong. Therefore, Lei Shing Hong would agree to the release of the HK$30 million deposit”[6];

(7) the Company never divulged that it was contemplating voluntary liquidation. If it had, Mr Mok would not have approved a loan to it because of the obvious risk that Cashbox would not be able to recover payment[7].

The Loan as leverage

12. It is clear from the Company’s plans for the use of the $16 million as disclosed above that it was leveraging the loan of $19 million[8] from Cashbox in order to obtain the release of the $30 million Deposit. Put another way, by borrowing $19 million[9] to reduce the Secured Debts to $270 million or less, the Company could immediately utilize the Deposit of $30 million which would otherwise be tied up by...

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