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 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 © 2016