Liquidators held personally liable for costs of an unsuccessful application seeking to void transactions

In Re Kin Ming Toy Manufactory Ltd (in liquidation), HCCW 402/2015 [2018] HKCFI 2057 and 2285, Harris J of the Court of First Instance dismissed an application under section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (the Ordinance), Cap. 32, brought by the liquidators of a company in liquidation seeking to void two payments made out of the company’s bank account after commencement of the winding up proceedings, and further ordered that the liquidators be held personally liable for the costs of the unsuccessful application. 

Key Facts

1. On 29 December 2015, a winding up petition was issued against the company. On 23 March 2016, the company was ordered to be wound up. By virtue of section 184 of the Ordinance, the commencement of the winding up took place on 29 December 2015.

2. On 4 January 2016, the company paid HK$1.1 million (1^st Payment) to the 1^st Respondent out of its bank account which was already in overdraft. As a result, the overdraft increased.

3. On 7 January 2016, the company paid HK$1.0 million (2^nd Payment) to the 1^st Respondent by way of cheque, drawn out of the same bank account, which had gone into credit due to the deposit of proceeds of sale of the company’s property charged to the 2^nd Respondent (a bank), agreed to be sold before commencement of the winding up.

Issue 

Whether the 1^st Payment and the 2^nd Payment made by the company after commencement of the winding up constitute disposition of the property of the company and should therefore be void.

Ruling

Dismissing the liquidators’ application, it was held that:

1. A post-petition payment out of the account of a company that was already in overdraft did not constitute a disposition of the property of the company and section 182 therefore did not apply. As to whether the use of an overdraft might give rise to a disposition where the bank held security for further advances, an increase in the overdraft automatically expanded the quantum of the bank’s security interest, and correspondingly reduced 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 (Super Speed Limited (in liquidation) v Bank of Baroda [2015] 2 HKLRD 965). 

2. It is possible that a payment which in itself does not constitute a disposition might cause a negative impact on the equity of redemption of the secured asset and in this sense constitute a disposition of the company’s property. It therefore remains necessary to identify what precisely the relevant disposition is.

3. The 1^st Payment, which was subject to a charge and was made out of the company’s bank account in overdraft, did not involve the disposition of the property of the company and s.182 of the Ordinance has no application. 

4. The 2^nd Payment, which came from the proceeds of sale of the charged property, did not involve the disposition of the property of the company either, because it was clear from the terms of the charge itself and at common law that both the charged property and the sale proceeds were subject to the same charge.

5. The Respondents’ costs of the liquidators’ application be paid personally by the liquidators with a certificate for counsel.  Harris J quoted Kam Toys & Novelty Manufacturing Limited (unreported, CACV 67/2017, 13 November 2017) and said that “if a liquidator initiates an application, which proves to be unsuccessful, the correct order is that the liquidator should be liable for costs personally. I can see no reason why on the facts of this case I should make any other order than that made in Kam Toys, a decision which binds me.”

Lessons learnt 

1. Post winding up petition payments out of an account of a company that was in overdraft would not constitute a disposition of the company’s property which shall be void under section 182 of the Ordinance, because such overdraft payments are not the company’s property; 

2. Even if post winding up petition payments increase the overdraft, and seemingly expand the quantum of the bank’s security interest and reduce the company’s equity in the charged assets, they will not be deemed as a disposition of the company’s property, as long as the assets were already charged to their full value at the time of further drawing on the account; and 

3. Liquidators may be found personally liable for costs of unsuccessful applications they initiated, but in the judgment of Kam Toys, the Court of Appeal remarked that the liquidators could protect themselves by obtaining financial support prior to the start of proceedings from the general body of creditors who would benefit from the proposed litigation.