Hong Kong Court of Appeal
Departs
from
English
Authorities
and
Imposes
Stricter
Liabilities
on
Intermediaries Involved in
Post-Petition Transactions
Introduction
On 2 November 2016, the Hong Kong Court of Appeal in the case
of Osman Mohammed Arab Wong Tak Man Stephen, Joint and Several
Liquidators of AGI Logistics (Hong Kong) Ltd (in compulsory
liquidation) v Commissioner of Inland Revenue [2016] HKCA 524
clarified the effect of section 182 of the Companies (Winding
Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the
Laws of Hong Kong) (the “CWUMPO”) and departed from English
authorities on the meaning of such section, which provides
that any disposition of the property of the company is void
after a winding-up petition is presented.
Background
AGI Logistics (Hong Kong) (the “Company”) failed to file a tax
return for the 2008/9 year of assessment. As a result, the
Inland Revenue Department (the “IRD”) estimated the Company’s
tax liability and later re-assessed it on 6 January 2010 at
the Company’s request. On 8 December 2009, the IRD informed
the Company that a tax refund letter will be sent. However, on
the same day, the winding-up petition notice of the Company
was provided to the IRD. The director of the Company (Mr. Ke)
consequently informed the IRD that the Company no longer had a
bank account, and requested that the refund be made payable to
Careship International Transportation Limited (“Careship”), a
company in which Mr. Ke was also a director of. The IRD
complied with the request and on 27 January 2010, a cheque was
issued to Careship and it was cashed on the same day. On 10
February 2010, the Company was wound up and liquidators were
appointed.
The CIR’s arguments
The Commissioner of Inland Revenue (the “CIR”) appealed
against the judgment of Anthony Chan J dated 15 July 2015, in
which it was held that the tax refund due to the Company paid
by the IRD to Careship was void under section 182 as such
payment was made after the petition to wind up the Company was
presented. The CIR contended that:
1. the Court of Appeal should not follow the Court’s
previous decisions[1] on section 182, which held that a
company’s agent that acted at the direction of a company
could be liable for dispositions of the company’s
assets; and
2. the Court should adopt the decisions in the two English
cases of Hollicourt (Contracts) Ltd v Bank of Ireland
[2001] Ch 555 and Coutts & Co v Stock [2000] 1 WLR 906,
which held that the recipient, not the company’s agent,
should be liable to repay the dispositions.
Court of Appeal Decision
The Court of Appeal dismissed the appeal and held that the
previous decisions of the Court are not wrong and that they
are to be preferred to the English decisions. Harris J, giving
the judgment of the Court of Appeal, held as follows:
No qualification to section 182
Contrary to the English decisions, there is no basis for
reading section 182 to contain a qualification that the
deposition of a company presented with a winding-up petition
is only void if it has an impact on creditors. To do so would
make section 182 harder to apply, as it invites disputes over
at what point in time the “impact” is to be assessed and by
whom. It is more straightforward to proceed on the basis that
any disposition is caught.
Section 182 is intended to prevent the
reduction of the assets available to creditors
Section 182 is not limited to prevent dispositions made with
an improper motive. Rather, it is intended to prevent any
disposition that risks reducing the amount available for
creditors. The Court of Appeal came to this conclusion based
on the fact that a company is not stripped of its property
when a winding-up order is made; instead, it holds the
property on trust for its creditors and makes distribution in
accordance with the statutory regime found in the Companies
Ordinance.
The meaning of “disposition” includes
certain “intermediary functions”
The English decisions have developed the view that honouring
of cheques by banks does not involve a disposition of a
company’s property, as it merely constitutes an intermediary
function. The Court of Appeal disagreed with such analysis and
determined that a bank, in honouring a cheque, reduces the
company’s assets, and as such, it involves a “disposition”. If
only recipients were liable, it will severely limit the
ability of liquidators to recover payments made especially if,
for example, a company trades with trading partners in other
jurisdictions.
Conclusion
This is a significant decision in which the Court of Appeal
departed from English decisions on the meaning of section 182
and chose to uphold the previous decisions of Hong Kong
Courts. The scope of section 182 is also clarified. It is
important to note that, after a company is presented with a
winding-up petition, all dispositions, regardless of the
impact on creditors and whether it serves only an
“intermediary function”, will be caught by section 182. Since
there is no further appeal against this decision of the Court
of Appeal, its ruling would represent the law of Hong Kong.
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Important: The law and procedure on this subject are very specialised and
complicated. This article is just a very general outline for reference and
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or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2016
[1]
Bank of East Asia Ltd v Rogerio Sou Fung Lam [1988]
1 HKLR 181 and Chevalier (HK) Ltd v Joint Liquidators of Right
Time Construction Co Ltd [1990] 2 HKLR 223