In our preliminary analysis, the limitation period for an application to avoid floating charges would be 12 years, regardless of the nature of the property being charged.  Meanwhile, the cause of action thereunder accrues at different times depending on the circumstances of the applicant(s).

Introduction

Pursuant to section 267 of the Companies Ordinance (Cap. 32) (“section 267”), a floating charge on the undertaking or property of the company created within 12 months of the commencement of the winding up shall be invalid, unless it is proved that the company was solvent immediately after the creation of the charge, except to the amount of any cash paid to the company at the time of, or subsequently to the creation of, and in consideration for, the charge, together with interest on that amount.^[1]

This section is a tool to achieve pari passu distribution: it prohibits an initially unsecured creditor to turn its unsecured debts into secured ones upon the creation of a floating charge over such debts before the imminent liquidation of the company.  Notwithstanding this, sometimes it may take a long time before the liquidator notices that a floating charge may be invalidated and the liquidator may then become time-barred to make a section 267 application.  Similarly, other creditors may miss the limitation period to void floating charges that may otherwise have priority over their claims for unsecured debts.

This article seeks to examine the length of the limitation period applicable to a section 267 application, and when the cause of action under such application accrues to trigger the running of such limitation period.

Length of the Limitation Period

Limitation Ordinance

There are two sub-sections under the Limitation Ordinance (Cap. 347) (“LO”) which may apply in determining the length of the limitation period for a section 267 application.  The first is section 4(1)(d) of LO, which provides that actions to recover any sum recoverable by virtue of any Ordinance or imperial enactment, other than a penalty or forfeiture, shall not be brought after the expiration of 6 years from the date on which the cause of action accrued.  The other is section 4(3) of LO, which provides that an action upon a specialty shall not be brought after the expiration of 12 years from the date on which the cause of action accrued.  It goes without saying that section 267 is a part of an Ordinance.  But as any cause of action under section 267 derives only from that statute, a section 267 application should be regarded as an action upon a specialty as well.^[2]

Then which of the two sub-sections should govern the limitation period for a section 267 application?  One way to analyse the question is to first consider a section 267 application to avoid floating charges over non-monetary property, such as immovables, chattels, intellectual property rights, equities and derivatives.  The 6-year limitation period of section 4(1)(d) of LO would not apply in such an application, as the avoidance of floating charges over non-monetary property would not involve any monetary sums to recover.  The only applicable sub-section is section 4(3) of LO, which is for the 12-year limitation period.

How about an application to avoid floating charges over book debts and other monetary property?  Avoidance of such charges may enable the company in liquidation to “recover” sums paid to the floating chargees and the 6-year limitation period of section 4(1)(d) of LO would seem to apply. 

Faith Dee

The proper analysis would lie in applying the principles in The Joint and Several Liquidators of Faith Dee Ltd v Yip Shu Chee and Others, HCCW 237/2005 (“Faith Dee”).^[3]

The crux of the decision in Faith Dee is the “look and see” approach:  the Court should look at the substance or essential nature of the relief truly sought to determine the relevant limitation period.  When the applicant seeks to avoid the floating charges over book debts or other monetary property, the substance and the essential nature of the relief it is seeking is a declaration by the Court that the floating charges in question are invalid.  The recovery of monetary sums paid to the floating chargees is the result consequent to the relief and not the relief itself, which is of a declaratory nature.

In the premises, an application to avoid floating charges is not an action to recover sums recoverable and therefore the 6-year limitation period under section 4(1)(d) LO does not apply.  The applicable limitation period should be 12 years from the date of accrual of the cause of action, as prescribed under section 4(3) of the LO.

Accrual of the Cause of Action

It was mentioned in obiter in Faith Dee that the limitation period runs from the date on which the ingredients of the cause of action are complete.  Section 267 does not specify that the applicant has to be the Liquidator – thus any person who has an interest may apply.

Where the applicant is the liquidator, his power to commence legal proceedings is established upon his appointment as discussed in Faith Dee.  Therefore upon the liquidator’s appointment all ingredients of the cause of action under section 267 are complete and the limitation period starts to run there onwards.

But in the circumstance where the applicant is, say, a creditor whose position would be inferior to the floating chargee if the charge was not avoided, when would the limitation period start to run?  It seems that time starts when that creditor could establish its interest in the subject matter of a section 267 application; that is, when that creditor’s debts are due or when the company commences winding-up, whichever is the later.

Conclusion

The foregoing analysis demonstrates that the limitation period for a section 267 application would be 12 years from the date of accrual of the cause of action.  Nevertheless, as there are no English or Hong Kong authorities discussing on the length of the limitation period for a section 267 application, any conclusive interpretation in this regard would be premature.  As for the date of accrual of cause of action, this would depend on the circumstances and the identity of the applicant.