In the recent decision of The Joint and Several Liquidators of Faith Dee Ltd v Yip Shu Chee and Others HCCW 237/2005 (“Faith Dee”), the Court of First Instance determined an important but previously undecided point of law as to the applicable limitation period in a liquidators’ action for an unfair preference action under s. 266B of the Companies Ordinance (Cap. 32) (“CO”).  In this newsletter, we consider the implication of Faith Dee on the applicable limitation period for a liquidators’ claim pursuant to s.182 of CO i.e. avoidance of disposition of property after commencement of winding up. 

s.182 of CO

s.182 of CO provides that “In a winding up by the court, any disposition of the property of the company, including things in action, and any transfer of shares, or alterations in the status of the members of the company, made after the commencement of the winding up, shall, unless the court otherwise orders, be void”

s.182 of CO covers a wide range of transactions, not only the tangible or intangible assets by sale, exchange, lease, charge, gift or loan but also any act which transfers value to another person in reducing or extinguishing the company’s rights in an asset. (Goode, 2011) Even disposition of property by debtors of a company after commencement of its winding up is caught by s.182.  In Chevalier (HK) Ltd v Joint Liquidators of Right Time Construction Co Ltd [1990] 1 HKC 35 involving parties in a building contract, it was held that payments made by the employer to sub-contractors after the main contractor was petitioned to be wound up amounted to the effect that the debts owed by the employer to the main contractor would be correspondingly reduced, and thus the payments were caught by s.182.

The purpose of this section is to support the principle of pari passu distribution to creditors and to prevent the dissipation of assets of the company which is in the process of winding up proceedings before a winding-up order is made or where there is no provisional liquidator appointed.  However, upon application, the Court has the discretion to make a validation order for any transactions involving disposal of the company’s assets but do not in any way diminish or dissipate the company’s net assets.  Such an order is usually required for the company to continue in its ordinary course of trading in the period between the date of presentation of a winding-up petition (i.e. the commencement of the winding up) and the date of the winding up order.

Limitation period under Limitation Ordinance (Cap. 347) (“LO”)

s.4(3) of LO provides that the limitation period to bring an action upon a specialty shall be 12 years from the date on which the cause of action accrued, but this subsection does not apply to actions for recovery of a sum for which LO prescribes a shorter limitation period. Under s.4(1)(d), if the action is to recover a sum recoverable by virtue of statute (other than a penalty or forfeiture), the limitation period shall be 6 years.

The look and see approach in Faith Dee

In deciding the applicable limitation period and whether the claims in Faith Dee are merely actions to recover a sum, DHCJ Marlene Ng adopted a “look and see” approach (Re Priory Garage (Walthamstow) Ltd [2001] BPIR 144; Giles v Rhind & anor (No 2) [2007] Bus LR 1470) to see what was the substance or essential nature of the relief truly sought by liquidators in their claims pursuant to s.266B CO; in other words, the court may look at the substance behind the pleadings. While the reliefs sought by the liquidators in Faith Dee was for (1) a declaration that properties transferred to the respondents were avoid, and (2)  return of payments made i.e. monetary remedy, DHCJ Marlene Ng was of the view that that the payments and transfer were part of a wider scheme and thus the ultimate relief sought by the liquidators was declaratory to the effect that the transactions were invalid as an unfair preference so that the transfers and payments could be unwound.

Application of “look and see” approach to s.182

Prior to the emergence of the “look and see” approach adopted in Re Priory Garage, Professor McGee considered the appropriate limitation period of s.127 of Insolvency Act 1986, being the equivalent of s.182 of CO, in a rather straightforward way. (Comp. Law. 2004, 25(4), 102-107). His view was that if the claim is in respect solely of a sum of money, or can only be measured or compensated by reference to a money sum (notwithstanding that the claims relate to disposition of actual properties), then the limitation period must be 6 years under s,9(1)  of the Limitation Act 1980 which is the equivalent of s.4(1)(d) of LO. Where the action is for the recovery of actual properties, then surely the recovery is not for a sum recoverable by virtue of statute and the limitation period should be 12 years under s.8(1) of the Limitation Act 1980 which is the equivalent of s.4(3) of LO. However, the “look and see” approach applied in Faith Dee could change such an interpretation of limitation period of s.182.

In light of Faith Dee, uncertainties could arise when the disposition concerns properties other than money e.g. real estate properties, where the properties disposed of can no longer be recovered and thus, what the liquidators would be able to recover for the company is only monetary relief. In accordance with the “look and see” approach, despite the fact that the reliefs are essentially recovery of a sum or can only be measured or compensated by reference to a money sum, such claims could be held to be declaratory to the effect that the a claim under s.182 was to invalidate the disposition transactions. Thus, the primary remedies claimed would be to unwind any transactions for disposition of properties and the ultimate monetary reliefs are only supplemental to the declaration of unwinding the transfers. Thereby, it could be argued that the 12 years limitation period under s.4(3) of LO applies.

Of course, claims under s.182 relating solely to payments of sums of money, including payments of cheques into and out of the company’s bank account, are subject to the limitation period of 6 years while claims relating to recovery of actual property, e.g. a flat or company’s shares, is subject to the limitation period of 12 years.

When does time start to accrue – Right to Sue

Although obiter, the decision in Faith Dee considered that a period of limitation runs from the date on which the ingredients of the cause of action are complete, that is the date when the action may be commenced. Thus, it was held that time starts to run when the liquidators were appointed as liquidators’ right of action cannot begin until they were appointed whilst the provisional liquidators did not have powers to commence any legal claim on behalf of the company in liquidation.

With regard to s.182, again, only liquidators have the right of action to commence legal proceedings to recover unlawful disposition of the company’s properties after the winding up order is made because provisional liquidator’s power is usually limited and restricted by court order without the right of action. Therefore, time should start to accrue when the liquidators acquire their right to sue i.e. when they are appointed.

Conclusion

While s.182 concerns dispositions of all kinds of assets of value to a company in liquidation, whether the remedies sought are to invalidate the transactions or to recover a sum of money depends on how the Court weighs various factors of the transactions under the “look and see” approach. To minimize the risk of being time barred, liquidators are advised to ensure proceedings are commenced within the shorter 6-year limitation period, given the possibility that a 6-year rather than a 12-year limitation period may apply in any particular case.