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Re K C K Garment Factory Ltd

Judgment Cited authorities 4 Cited in Precedent Map Related
Vincent
Judgment Date21 January 2019
Neutral Citation[2019] HKCFI 585
Judgement NumberHCCW300/2014
Subject MatterCompanies Winding-up Proceedings
CourtCourt of First Instance (Hong Kong)
HCCW300A/2014 RE K C K GARMENT FACTORY LTD HCCW300A/2014 RE K C K GARMENT FACTORY LTD RE K.C.K. GARMENT FACTORY LTD HCCW300A/2014 RE K C K GARMENT FACTORY LTD RE K.C.K. GARMENT FACTORY LTD HCCW300A/2014 RE K C K GARMENT FACTORY LTD RE K.C.K. GARMENT FACTORY LTD HCCW300A/2014 RE K C K GARMENT FACTORY LTD RE K.C.K. GARMENT FACTORY LTD

HCCW 300/2014

[2019] HKCFI 585

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 300 OF 2014

________________

IN THE MATTER of K C K Garment Factory Limited （立基製衣廠有限公司）
and
IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Chapter 32 of the Laws of Hong Kong

________________

Before: Hon Harris J in Chambers
Dates of Hearing: 15, 17 and 21 January 2019
Date of Decision: 21 January 2019

________________

D E C I S I O N

________________

1. On 20 January 2017, the liquidators (“Liquidators”) of K C K Garment Factory Ltd, (“the Company”) issued a summons under sections 266, 266A, 266B, and section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) seeking declarations that—

“1. … a payment in the sum of HK$10,246,575 made on 3 October 2014 by the Company to the 1st Respondent constituted an unfair preference pursuant to sections 266 and/or 266B(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32 (the ‘CWUMPO’) and is null and void;

2. … a payment in the sum of HK$241,667 made on 10 October 2014 by the Company to the 1st Respondent constituted an unfair preference pursuant to sections 266 and/or 266B(1) of the CWUMPO and is null and void;

3. … under section 276(1) of the CWUMPO that the 2nd, 3rd and 4th Respondents as directors of the Company at the material time were guilty of misfeasance and/or breach of duties and/or breach of trust in relation to the Company and be liable to contribute such sum to the assets of the Company by way of compensation as the Court thinks just;

4. An Order that the 1st, 2nd, 3rd and 4th Respondents do jointly and severally make payment to the Provisional Liquidators and/or contribute to the assets of the Company at such sums received by the 1st Respondent as stated in paragraphs 1 and 2 above or at such sums as the Court thinks just;

…”

2. A petition to wind up the Company was presented by the Company on 17 October 2014 and a successful application was made by it to appoint provisional liquidators, who are now the Liquidators, on the same day. The Company was wound up on 31 October 2016.

3. The 1st respondent, Hong Kong Construction Financing Limited, is a licensed money-lender. In August 2014, it was approached indirectly for a bridging loan of HK$20 million. The 1st respondent was provided with documents demonstrating the financial position of the Company, including a letter from Chong Hing Bank Ltd dated 6 August 2014 offering a finance facility of HK$160 million subject to satisfaction of various conditions. In addition, the Company offered joint and several personal guarantees by Eric Woo the 2nd respondent, who was a director of the Company and held an indirect beneficial interest of 33% in it, and Benson Lo, who was Eric Woo’s friend.

4. The 1st respondent granted two loans, each of HK$10 million for one month repayable on 3 October 2014. Towards the end of September 2014, the Company requested an extension. The 1st respondent agreed to extend the time for repayment of the principal under the 2nd loan if the Company repaid the principal of the 1st loan and the interest that had accrued on both loans; the Company agreed. On 3 October 2014, the amount of the principal and interest under the 1st loan was repaid. On 9 October 2014, the parties entered into a supplemental agreement in respect of the 2nd loan, providing that interest was to be repaid on 10 October 2014, and the principal was to be deferred for one month with interest. On 10 October 2014, the Company paid the amount of HK$241,667.00.

5. It is not contended by the Liquidators that the original agreement is not a genuine commercial transaction. What they argue is that the repayments were not made to satisfy a genuine commercial need of the Company in late September or early October 2014, but to reduce the liabilities of Eric Woo, in particular under his guarantees and also that of his friend Benson Lo.

6. It is not disputed by the 1st respondent that the Company was insolvent during the material period and that the payments to it and to Eric Woo had the effect of preferring him. Eric Woo did not take part in the proceedings against him. The 1st respondent defends the application against it on the basis that in order to succeed in the claim, the Liquidators have to show that the payments were made with an independent desire to prefer the 1st respondent, and this they have not, and cannot do.

7. I shall start by considering the applicable legal principles. The relevant statutory provisions provide:

“Cap. 32 Companies (Winding Up and Miscellaneous Provisions) Ordinance

266. Unfair preferences voidable in certain circumstances

…

(2) If the company has at a relevant time (within the meaning of section 266B) given an unfair preference to a person, the liquidator may apply to the court for an order under subsection (3).

(3) Subject to section 266C, on an application under subsection (2), the court may make an order that it thinks fit for restoring the position to what it would have been if the company had not given that unfair preference.

(4) The court must not make an order under subsection (3) unless the company was influenced, in deciding to give that unfair preference, by a desire to produce in relation to that person the effect mentioned in section 266A(1)(b).

…”

Cap. 6 Bankruptcy Ordinance

50. Unfair preferences

(1) Subject to this section and sections 51 and 51A, where a debtor is adjudged bankrupt and he has at a relevant time (defined in section 51) given an unfair preference to any person, the trustee may apply to the court for an order under this section.

…

(3) For the purposes of this section and sections 51 and 51A, a debtor gives an unfair preference to a person if—

(a) that person is one of the debtor’s creditors or a surety or guarantor for any of his debts or other liabilities; and

(b) the debtor does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the debtor’s bankruptcy, will be better than the position he would have been in if that thing had not been done.

(4) The court shall not make an order under this section in respect of an unfair preference given to any person unless the debtor who gave the unfair preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (3)(b).

…”

8. What is required to be proved to succeed with such a claim was explained by Millet J (as he then was) in Re MC Bacon Ltd:[1]

“ This is a completely different test. It involves at least two radical departures from the old law. It is no longer necessary to establish a dominant intention to prefer. It is sufficient that the decision was influenced by the requisite desire. That is the first change. The second is that it is no longer sufficient to establish an intention to prefer. There must be a desire to produce the effect mentioned in the subsection.

This second change is made necessary by the first, for without it it would be virtually impossible to uphold the validity of a security taken in exchange for the injection of fresh funds into a company in financial difficulties. A man is taken to intend the necessary consequences of his actions, so that an intention to grant a security to a creditor necessarily involves an intention to prefer that creditor in the event of insolvency. The need to...

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