In Super Speed Ltd (in liquidation) v Bank of Baroda CACV 184/2015 and Marshel Exports Limited (in liquidation) v Bank of Baroda CACV 185/2015 (date of judgement: 14 April 2015), the Court of Appeal confirmed that where a company has mortgaged its property to its full value to a bank, the bank’s further loans to the company after a winding-up petition has been presented are not void pursuant to s.182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”).

Background

Super Speed Limited (“SSL”) and Marshel Exports Limited (“MEL”) (collectively, the “Companies”) were customers of Bank of Baroda (the “Bank”).  The two bank accounts of the Companies were managed by the same director.

In 2008, MEL granted a mortgage over its property of two units in a commercial building (the “MEL Property”) in favour of the Bank to secure all monies obligations and liabilities owing or incurred by MEL.  In 2010, SSL also granted a legal charge/mortgage over its property of a unit in a commercial building (the “SSL Property”) in favour of the Bank to secure all monies in respect of general banking facilities and interest.

Two creditor’s winding-up Petitions against the Companies were presented on 3 August 2012 (the “Petition Date”). The Companies were subsequently wound up on 24 October 2012.  Prior to the making of the winding-up orders, the Bank was informed by the Companies’ solicitors that winding-up petitions had been presented.  Notwithstanding that the Bank was aware of the winding-up petitions against the Companies, the Bank continued to advance loans to the Companies after the Petition Date. 

The liquidators of the Companies (the “Liquidators”) contended that the post-petition loans reduced the equity in the mortgaged properties belonging to the Companies (i.e. the SSL Property and the MEL Property) and such reduction constituted dispositions under s.182 of CWUMPO.  The Liquidators applied to the Court to seek the following orders:

1.          Declarations that the loans made by the Bank to SSL and MEL after the Petition Date are void under s.182 of CWUMPO and be set aside; and

2.          Declarations that the charges or mortgages by reason of or resulting from the post-petition loans against the (i) SSL property and (ii) MEL property are void under s.182 of CWUMPO and be set aside.

 

Anthony Chan J dismissed the Liquidators’ applications.  His Lordship was satisfied that both the SSL Property and the MEL Property were at all material times charged to their full values when the post-petition loans were advanced by the Bank.  Thus, there could not be any reduction of the equity in the SSL Property and the MEL Property by reason of or resulting from the post-petition loans, and hence, there was no disposition within s.182 of CWUMPO.  The Liquidators appealed the decision of Anthony Chan J.

Issue before the Court of Appeal

s.182 of CWUMPO provides that any disposition of a company’s property made after the commencement of its winding-up is void unless the Court orders otherwise.  Pursuant to s.184(2) of CWUMPO, the winding-up of a company is deemed to commence at the time of the presentation of the petition for the winding-up.

The issue arising in the appeals before the Court of Appeal was whether the Bank’s post-petition loans to the Companies constituted dispositions of the Companies’ assets and were therefore invalidated by s.182 of CWUMPO.

Findings of the Court of Appeal

Kwan JA dismissed the Liquidators’ appeal and upheld the decision of Anthony Chan J.

Under normal circumstances, where a bank or an agent makes a payment (on behalf of the company) from the company’s account which is in credit, s.182 of CWUMPO invalidates both the disposition between the company and the payee as well as the debiting of the company’s account by the bank or the agent – this is because the reduction of the company’s indebtedness constitutes a disposition of the company’s assets. 

However, the present case is entirely distinguishable as the bank accounts of the Companies were overdrawn at all material times.  Furthermore, in advancing loans to the Companies, the Bank was disposing its own assets to the Companies and using its own assets to pay the third parties. 

As the SSL Property and the MEL Property had been charged to their full values at the time when the loan transactions on the overdrawn accounts were made, there was no disposition of the Companies’ assets, because the further advances would be no different from unsecured loans by the Bank.  In other words, the post-petition loans per se were not dispositions of the Companies’ assets and were not caught by s.182 of CWUMPO.

It was noted that s.182 of CWUMPO has no application where the disposition has no impact on the creditors’ benefit or interest.  It does not preclude a company from incurring liabilities – therefore, as in the present case, the Court of Appeal held that an increase in a company’s overdraft in the period between presentation of the petition and the making of the winding-up order is outside the ambit of s.182 of CWUMPO. 

One argument raised by the Liquidators was in respect of validation orders.  Given that the Bank had knowledge of the winding-up Petitions against the Companies, had it applied for a validation order, the Court would have frozen the Companies’ accounts to preserve the value of the charged properties and to prevent the Bank from enlarging the value of its security interest to the detriment of the general body of creditors.  Kwan JA found that this argument was irrelevant in the appeals and commented that since the post-petition loans were not dispositions caught by s.182 of CWUMPO, it was unnecessary for the Bank to seek a validation order.

Conculsion

The invalidation of dispositions of a company’s assets after the presentation of a winding-up petition under s.182 of CWUMPO is part of the statutory scheme designed to preserve the company’s assets for the benefit of the general body of creditors in the period pending the making of winding-up order.  However, it is noteworthy that not all post-petition transactions would be caught by s.182 of CWUMPO if the disposition has no impact on the creditors’ benefit or interest.  Liquidators should be aware and carefully consider whether a transaction results in a reduction of the company’s indebtedness or a reduction in the equity of the charged property of the Company to constitute a disposition of the company’s assets to be caught by s.182 of CWUMPO.

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

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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 cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2015