The limitation period applicable to fraudulent trading claims under s.275 of the Companies Ordinance (Cap 32) (“CO”) is a complicated question depending on who the claimant is.

Section 275 of CO

In the course of winding up of a company, liquidators, Official Receivers or any creditor or contributory may bring proceedings for fraudulent trading under s.275, which is applicable to both compulsory and voluntary winding-up of a company. (s.275 of CO will become s.275 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance from 3 March 2014). It creates civil liability and criminal liability which makes the person carrying on the company’s business with intent to defraud creditors and knowing parties personally liable for all or any of the debts and liabilities of the company.

According to ADS v Brothers & Ors [2000] 1 HKC 511, claims under s.275 requires proof that someone carried on the business of the company with a fraudulent intent to defraud creditors and that the other directors sought to be held liable were knowingly party to his fraud. Whether the person carrying on the business was fraudulent was subjective in the sense that he personally must have been dishonest and whether a person carrying on the business was dishonest must depend upon an assessment of all the facts. A director could only be liable if there is to his knowledge no reasonable prospect to pay the debts when incurred. Actual dishonesty is required and the fact that the likelihood of repayment is objectively low is not inconsistent with honesty.

Limitation Period

Limitation Ordinance (“LO”)

Under s.4(3) of LO, the limitation period for an action upon a specialty is 12 years from the date on which the cause of action accrued, unless a shorter period of limitation is prescribed by the LO. Pursuant to s.4(1)(d), the limitation period for actions to recover any sum recoverable by virtue of statute (other than penalty or forfeiture) shall be 6 years only.

English Authorities

In Re Overnight Ltd (In Liquidation) [2009] EWHC 601 (Ch), in which the liquidators applied for a declaration for a contribution for fraudulent trading under s.213 of the Insolvency Act 1986 (“1986 Act”)^[1], it was conceded that the applicable limitation period is 6 years under s.9(1) of the Limitation Act 1980 (“1980 Act”)^[2], instead of a 12 years under s.8(1)^[3]. Such concession was based on Re Farmizer (Products) Ltd [1997] B.C.C. 655 (“Farmizer”), under which it was held that the liability to make a contribution under s.213 of the 1986 Act is in respect of a sum of money upon examination of the relevant statutory provisions^[4].

In particular, under s.215(2) of the 1986 Act ^[5], it is provided that where the court makes a declaration under s.213, to give effect to the declaration, it may “provide for the liability of any person under the declaration to be a charge on any debt or obligations due from the company to him”. It was held in Farmizer that such provision contemplates that the liability under the declaration is a liability that can be made the subject of a charge on a debt or obligation and that can only be a liability to pay a monetary sum. Thus, a 6-year limitation period under s.9(1) of 1980 Act applies, notwithstanding that the liquidators could accept property other than money to satisfy that liability.

Situation in Hong Kong

In The Joint and Several Liquidators of Faith Dee Ltd v Yip Shu Chee and Others HCCW 237/2005 (“Faith Dee”), upon adopting the “look and see” approach, it was held that the monetary reliefs sought due to unfair preference were merely a consequence of the application for a declaration to unwind transfers and payments and thus the 12-year limitation period applies. It might therefore be argued that by analogy, any recovery of sums of money under s.275 of CO is consequential upon a declaration that certain persons be personally responsible for the company’s debts or liabilities. However, the nature of fraudulent trading claims is different. Whilst one may seek a declaration to unwind transactions pursuant to s.266B of CO for unfair preference or s.182 of CO for avoidance of disposition of property, in a s.275 fraudulent trading claim, an applicant cannot seek a declaration to unwind the transactions defrauding creditors but a declaration to directly impose personal responsibilities on certain persons to be responsible for or contribute to the payment of all or any of those debts or liabilities incurred by the company. Thus, the Faith Dee analogy on limitation period is not directly applicable to s.275 of CO.

In view of the analysis in Farmizer, it is likely that a 6-year limitation period also applies to s.275 of CO. Although the wordings of s.275 of CO and s.213 of 1986 Act are different (whilst Hong Kong courts may declare certain persons to be personally responsible for all or any of the debts or other liabilities of the company, the English courts may declare liable persons to make such contributions to the company’s assets), the relevant statutory provisions examined in Farmizer case leading to the conclusion that  the applicable limitation period to fraudulent trading claims should be 6 years can also be found in Hong Kong’s CO, particularly s.275(2) being the equivalent of s.215(2) of 1986 Act mentioned above. Therefore, Hong Kong courts may draw the same conclusion as in Farmizer that fraudulent trading claims under s.275 of CO are in respect of a sum of money and thus a 6-year limitation period applies pursuant to s.4(1)(d) of LO.

Accrual of Time – Right to Sue

The general principle is that a period of limitation runs from the date on which the ingredients of the cause of action are complete^[6]. Further, as there may be no person at all at the start of the period if limitation time begins to run from the date of a transaction, Professor Andrew McGee is of the view that there may be different limitation periods in respect of different claimants^[7].

Claims under s.275 of CO may be brought by liquidators, Official Receivers, creditors and contributory of the company. If claims under s.275 are brought by the liquidator on behalf of the company, as discussed in Faith Dee, time starts to run on the date of his appointment when his right of action begins. For defrauded creditors, s.26 of LO may be relied on so that the period of limitation begins to run only when such creditors discovered the fraud or could have discovered it with reasonable diligence. For Official Receivers, contributory and other creditors, the accrual of time seems uncertain and fact-specific. Applying the general principle, time starts to run when the cause of action is complete i.e. all the facts necessary to prove can be pleaded.

Conclusion

To conclude, it is likely that the limitation period for fraudulent trading claims under s.275 of CO should be subject to a 6-year limitation period pursuant to s.4(1)(d) of LO because the nature of the claims is for recovery of a sum of money. Such period of limitation starts to run at different times depending on who the applicants are.

On another note, in respect of the “look and see” approach, the judge in Re Priory Garage (Walthamstow) Ltd [2001] BPIR 144, which Faith Dee relied on, found no difficulty in reconciling the judgment in Farmizer when determining the limitation period. It is because Farmizer in fact approved a “look and see” approach by stating that “when the statutory provision relied on for the recovery of a sum enables the court to make an order either to give monetary relief or relief in some other non-monetary form, one should look to what was actually being claimed in the proceedings” despite ruling that fraudulent trading claims are clearly for recovery of money.