6 years or 12 years?  The limitation period applicable to transaction avoidance actions is not an easy answer. The decision in The Joint and Several Liquidators of Faith Dee Ltd v Yip Shu Chee and Others HCCW 237/2005 shows that the Court will look and see what is the essential nature of the primary relief sought in the liquidators’ action for an unfair preference action under section 266B of the Companies Ordinance (Cap. 32) (“CO”) to determine the applicable limitation period.    

Transactions prior to commencement of winding-up

The company in liquidation, Faith Dee Limited (the “Company”), was a property holding company controlled by the first Respondent who also controlled the 2 other respondent companies.  The first Respondent was a director and shareholder of all 3 companies.  The Company was petitioned to be wound up by a bank creditor on 22 May 2005 and the Company was ordered to be wound up on 27 June 2005.    

In February and March 2005, that is within the 6 months period prior to commencement of the Company’s winding up, the Company disposed of 4 properties registered in its name (the “Properties”) to the 3 respondents for a total consideration of HK$1.94 million.  The Properties had been charged to secure a bank loan of HK$4.5 million for one of the 2 respondent companies in 1996.  The Properties were redeemed in December 2004 when the bank loan was repaid in full where the first Respondent claimed he paid some HK$2.69 million to the bank for such purpose (the “Discharge Sum”). 

Also in February and March 2005, the Company made payments to the first Respondent totalling HK$1,931,000 (the “Preference Payments”).  At the time the Properties were disposed and the Preference Payments were made, the Company was indebted to other creditors.

Recovery action by liquidators

On the making of the winding-up order, the Official Receiver (“OR”) was appointed as provisional liquidator of the Company.  On the same day, the OR appointed provisional liquidators under s.194(1A) CO who were later appointed as liquidators on 6 August 2007. In July 2010, the current liquidators were appointed to replace their predecessors.  In August 2011 (i.e., over 6 years after the Company was wound up), the liquidators wrote to the first Respondent to request details of the payments made to him by the Company.  The first Respondent’s response was that the Preference Payments was to settle a director/shareholder loan owing to him - the sale proceeds from the disposal of the Properties were used to settle his loan.

The liquidators claimed that the Preference Payments constituted unfair preference under s.266B CO and requested the first Respondent to repay the sum of HK$1.93 million to the Company so that the Company’s position would be restored to what it would have been if the Company had not given such unfair preference to him.  The first Respondent then replied that the Preference Payments were not merely repayments of the first Respondent’s shareholder loan but was made to perfect the title of the Properties and to remove encumbrances on them including the first Respondent’s proprietary interest by way of resulting trust.  The first Respondent claimed that because the Company’s discharge of the mortgage over the Properties was made with money financed by him (i.e. Discharge Sum), the first Respondent therefore had proprietary interest over the Properties. 

On 7 June 2012, the liquidators issued a summons against the first Respondent under s.266B CO seeking a declaration that the Preference Payments are unfair preference transactions and void and order that the first Respondent repay the Preference Payments to the Company (the “Payments Claim”).  The summons was amended on 18 June 2012 to seek a declaration that the disposal of the Properties to the 3 respondents are unfair preference transactions and void and order that the Properties be vested in the Liquidators (the “Properties Claim”). 

The respondents then sought to strike out the s.266B CO summons on, inter alia, the ground that the liquidators’ claims were time-barred (assuming a 6-year limitation period applied).   The issue before the Court was what was the applicable limitation period for the liquidators’ unfair preference claims – 12 years or 6 years? 

Period of limitation

Under s.4(3) of the Limitation Ordinance (Cap. 347) (“LO”), an action on a specialty (which includes a cause of action based on statute) shall be brought within 12 years from the date on which the cause of action accrued.  If such action on a specialty is for recovery of a sum recoverable by virtue of a statute (other than a penalty or forfeiture), the limitation period will be the shorter period of 6 years. 

Naturally the Respondents would argue that the liquidators’ claim is essentially a monetary claim for repayment of the Preference Payment, hence the 6 years period should apply; whilst the liquidators argue that the transfers of the Properties and the Preference Payments constituted a scheme that they sought to set aside, so that the period of 12 years should apply.

The respondents’ case

The Respondents argued that (1) in looking at the substance or essential nature of the relief truly sought, the Payments Claim was a monetary claim; (2) as to the Properties Claim, it was an alternative remedy ancillary to the main monetary Payments Claim and thus is in substance a monetary claim.  Thus the cause of action was always the recovery of preference repayments of director’s loans.  Also, even if the Properties Claim is successful, a re-vesting order is unlikely to be a sufficient remedy that the court would have to make a series of balancing adjustments to cover loss of rent, appreciation, etc.  So realistically the relief would still be monetary and hence the limitation period is kept short as 6 years to avoid uncertainties. 

The liquidators’ case

The liquidators however argued that section 4(1)(d) LO does not apply.  The claims were essentially declaratory to the effect that the transactions were invalid as an unfair preference and the main purpose was to unwind the transfers and the payments.  The consequent claim for repayments and re-vesting of the properties merely supplemented the declaratory relief in order to restore the position to what it would have been if the Company had not given the unfair preference.  The liquidators claimed that the net effect of the disposal of the Properties together with the Preference Payments to the first Respondent is that the Properties were transferred to the first Respondent and the 2 other respondent companies essentially for free (the “Scheme”).

The “look and see” approach

In determining the true nature of the claims, the Court adopted the principles in Re Priory Garage (Walthamstow) Ltd [2001] BPIR 144 and Giles v Rhind & anor (No 2) [2007] Bus LR 1470 that the court should look to see what the substance or essential nature of the relief truly sought is (i.e., the “look and see approach”).   In adopting a “look and see” approach, the Court found that the reliefs sought in respect of the Properties and Payments Claims are essentially declaratory to the effect that the Scheme was invalid as an unfair preference and the main purpose is to unwind the transfers and the payments.  In the circumstances, the monetary reliefs sought are merely a consequence of the application to invalidate the Scheme. 

As to the Respondents’ suggestion that a re-vesting order will be inadequate in that it has to be augmented by monetary reliefs to make balancing adjustments, the Court found that this only serves to highlight the fact that the primary remedies are the declarations for invalidating the transfers of the Properties and/or the Preference Payments, which will then be supplemented by monetary remedies in order to restore the position to what it would have been if the Company had not given the unfair preference.

In respect of the Payments Claim, the Court again found that it is a claim not so much about recovery of a sum as about invalidating the Scheme, and the monetary remedy is consequential upon the unwinding of the transactions.  Thus the 12‑year limitation period applies.

Date of accrual of cause of action

Having found that the applicable limitation period is 12 years whereby the Properties and Payments Claims are not time-barred, there was no need for the Court to consider the date of accrual of cause action.  As obiter, the Court considered that the limitation period for an unfair preference claim starts to run from when the liquidators were appointed, as their appointment was an essential element of the cause of action, and the liquidators’ right of action cannot begin until they are appointed.  In this case, provisional liquidators were appointed but the cause of action did not accrue on the provisional liquidators’ appointment because as the provisional liquidators they did not have powers to commence any legal claim on behalf of the company in liquidation.

Conclusion

The case of Faith Dee is the first decision in Hong Kong on the limitation of action for unfair preference claims under s.266B CO.  While it was held that a 12-year limitation period applies after the Court adopted the “look and see” approach and found that the reliefs sought in the Properties and Payments Claims are essentially declaratory with the effect that the transactions were invalid as an unfair preference and that the monetary reliefs are ancillary, it is submitted that for unfair preference claims relating solely to payments made by a company the shorter 6-year limitation period pursuant to s.4(1)(d) LO would apply.  Liquidators should heed the comments made in Re Priory Garage that the Respondents’ counsel referred to in Faith Dee:

“(5) Given the possibility that a 6-year, rather than a 12-year, limitation period may apply in any particular case, liquidators…… would be well advised to ensure that any such proceedings are commenced within this shorter 6-year period.  Those who allow such claim to drift past the first 6 years after accrual of the cause of action before commencing proceedings…… do so at the risk of finding either all, or possibly part, of their claim lost.”