Liquidator’s Investigations And Antecedent Transactions
Post Petition Payments (Otherwise Known As Void Dispositions)
Under the provisions of S.182 any payment after the presentation of the petition is void. In theory, it is therefore recoverable from the recipient. The principal authority on this section was, for a long time, the UK case of Re Grays Inn Construction Ltd. This case was decided in 1979 at which time the UK Court of Appeal decided that if the company’s bank allowed an account to continue to operate after it became aware of the presentation of the petition, it could be liable for dispositions of the company’s assets which passed through its bank account. In the Grays Inn case the liquidator eventually reached a compromise with the bank which was sanctioned by the Court. The effect of this compromise was that the bank concerned agreed to pay into the liquidation a sum representing the approximate amount of the trading losses incurred by the company between the advertisement of the petition in the London Gazette and the date of the winding up order.
The wording of S.182 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance is to all intents and purposes the same as the relevant provisions that are found in the UK Insolvency Act 1986. Over subsequent years, there have been a number of decided cases which have dealt with specific circumstances under which a Court would validate dispositions after the presentation of the petition and the application of this section to bank accounts which were in credit at all times. Meanwhile, a number of Australian authorities have developed and confirmed the view that it is the recipient, not the bank who should be liable to repay dispositions.
The most recent UK case is that of Bank of Ireland -v- Hollicourt the decision in which was handed down by the Court of Appeal in the UK. The Court has taken the view that the recipient of any payment after the presentation of the petition is the person against whom the liquidator should take action for recovery. The decision sided with the Australian authorities, which also take the view that it is the recipient who is liable to repay and not the bank. Liquidators’ Investigations.
It would seem that this decision, if followed in Hong Kong, will severely limit the ability of liquidators to recover payments made after the presentation of petition. In particular, it is likely that in the context of Hong Kong, where many companies trade with trading partners in other jurisdictions in South East Asia, it will be very difficult to effect recovery unless the recipient is based in Hong Kong.
S.221 Examinations
A Liquidator or Provisional Liquidator often comes into office knowing little or nothing about the company over which he has been appointed. In most situations, the liquidator can expect to receive cooperation from the directors and other officers of the company and to have access to the Company’s accounting records and other books and papers to assist him in his investigations. Unfortunately, sometimes he will get neither of the above and in such circumstances it is often necessary for the liquidator to invoke the provisions of section 221 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance.
See here for a wider discussion of the increased use of s.221 in recent years.
Unfair Preferences
Unfair preferences are covered by the provisions of S.266 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance. They were formerly called Fraudulent Preferences but the title was changed as a consequence of the introduction of the Bankruptcy (Amendment) Ordinance of 1998. In essence, an unfair preference occurs when a creditor in the liquidation is put in a better position than they would otherwise have been had the transaction not taken place.
Liquidators are empowered to go back six months to review such transactions. However, if it appears that the unfair preference has taken place in favour of a connected or associated person, the liquidator has the power to go back as far as two years. In such a case, the onus to show that a preference has not occurred is then placed on the recipient, not on the liquidator.
However, read on, as although the purpose behind the legislation is clear, because of deficiencies in the wording of the Ordinance, its implementation is fraught with difficulties. The problem is two fold. Firstly, the provisions which define what constitutes an associated person are, to put it mildly badly implemented. One of the more egregious effects of this is that a parent company, whilst it controls its subsidiary, is not deemed to be an associate of that same subsidiary. This has led to the nonsensical situation in Hong Kong whereby although a parent company, which obviously controls its subsidiary, can force the subsidiary to make payments to the parent, but is not deemed to be an associate for the purpose of this section and therefore it is difficult, if not impossible for such transactions to be attacked.
Connected and associated persons are defined as including any blood relative, spouse, partner, relative of spouse or partners, a company which the debtor controls either on his own or together with an associate, employer or employee. Click here to see the actual wording of the relevant section.
For a more detailed review of the difficulties in relation to unfair preference claims see here.
Voidable Floating Charges
A floating charge is invalid if it is created within twelve months of the commencement of the liquidation. However, it may be valid to the extent of any new money which is advanced either at the time of the creation of the charge or at some subsequent time. The period of twelve months can be extended to two years if the charge is granted in favour of a connected person.
The phrase “new money” can mean additional advances in its simplest terms. It can also be defined as when a company has an overdraft, pays money into the account thus reducing its debt to the bank and the bank then advances “new money” by allowing the company to draw against those receipts up to the limit of its overdraft.
This is known as “Clayton’s Rule”.