RE Sky Datamann (HK) Ltd

HCCW 487/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 487 OF 2001

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D E C I S I O N

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1. This is an application by Sky Datamann (Hong Kong) Limited ("the Company") to strike out a petition presented against it by CCP Engineering Limited ("the Petitioner").

Petition

2. The Petition was presented on 21 May 2001. The Petitioner was engaged by the Company, pursuant to an agreement dated 11 August 2000 ("the Agreement"), to carry out mechanical, electrical and fitting-out works at premises to be used as a data centre.

3. Under the Agreement, the Petitioner was entitled to payment by the Company of such sum as may be certified by CCL International Ltd ("CCL"). In February 2001, CCL certified 3 sums as being payable, amounting to a total of $5.06m odd. A sum of $1m. was paid by a cheque drawn by previous management but presented after the acquisition of the Company by the present owners. The purpose of that payment was not clear, and it has not been suggested that the payment was a clear acknowledgment of the debt alleged in the petition.

Commencement of arbitration

4. The Petition was presented for non-payment of the balance of $4.06m. Shortly thereafter, the Company commenced arbitration pursuant to the terms of the Agreement.

Application to strike out petition

5. In December 2001, the Company issued a summons for an order to strike out the petition.

6. Counsel for the Company initially relied on two grounds for the application to strike out the petition:-

(i) that the question of the Petitioner's right to be paid the certified sums has been referred to arbitration, and so the Court must strike out the petition;

(ii) that in any event, there is a bona fide dispute in respect of the Petitioner's claim and the Court should strike out the petition.

Arbitration

7. In respect of the first ground, it was submitted by Mr Harris, counsel for the Company, that any claim arising out of a contract containing an arbitration clause is, unless there is an unequivocal admission of liability, "disputed" within the meaning of article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration and must, by virtue of s.6 Arbitration Ordinance (which applies the Model Law to domestic arbitrations), be determined by arbitration instead of the courts. I accept that this proposition has been established in cases of claims by way of action (Tai Hing Cotton Mill Ltd v Glencore Grain Rotterdam BV [1996] 1 HKC 363, 373 as applied in UDL Kenworth Engineering Ltd v Pollard Construction Company Ltd HCCT 121/1999, unrep.).

8. It was submitted by Mr Harris that this also applied to winding-up petitions, so that if the underlying debt in a winding-up petition arose from a contract which contained an arbitration clause, the matter must be determined by an arbitrator and not by the courts.

9. This issue was first considered in Holmet AG v Meridian Success Metal Supplies Ltd [1997] 4 HKC 343. At 347, Rogers J (as he then was) set out the approach that the court should take:-

"If a company wishes to obtain a stay of winding-up proceedings on the basis that the underlying debt upon which the statutory notice is founded is disputed, it must establish in the normal way that there is a bona fide dispute on substantial grounds.

If it has not satisfied the court as to the bona fides and substantial nature of its claim, it can only expect a short adjournment to enable it to commence the arbitration and then, if sufficient evidence to establish a genuine dispute is still absent, it can expect to have to give an undertaking to proceed with the arbitration with all due dispatch."

10. Mr Harris initially submitted that that approach was incorrect and that an arbitration clause took the matter out of the court's hands even before any arbitration is commenced. However, this submission was subsequently not pursued when it became apparent that the concept of a winding-up petition does not conform to the language of article 8(1) of the Model Law.

11. Article 8(1) provides: -

"A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed." (emphasis provided)

A winding-up petition, in which the petitioner invokes a class remedy, is not an "action" between "parties".

12. Accordingly, it is clear that the court is not obliged to strike out or stay a petition merely because the petitioner and the company had entered into a contract with an arbitration clause, or even if the company has commenced arbitration. It is a matter for the discretion of the court in each case. In exercising its discretion, the court will consider all relevant circumstances, including the financial position of the company, the existence of other creditors, and the position taken by them.

Bona fide dispute on substantial grounds

13. I then turn to the Company's second ground, i.e. that the debt is bona fide disputed on substantial grounds. I have in Shenhua Sheng Yu Coal and Energy Corp Ltd [2001] 2 HKLRD 452, 454 set out the principles to be applied in approaching such an issue and I shall not repeat them here.

14. In the present case, the Company claims that it is entitled to a set-off and/or counterclaim against the Petitioner by reason of the latter's breach of the Agreement arising from its installation of an emergency diesel generator with a steel enclosure on the roof of premises housing the data centre operated by the Company.

15. Clause 4(1) of the Agreement provided that the Petitioner (the Main Contractor) "shall comply with and give all notices required by any law or Ordinance of Government ... with regard to the Works ...". The scope of works in the Description and Scheduling of Works included (at cl. B4) "obtaining all necessary permits and licences from the Authorities to commence, complete and commission of the Works". At cl. C2, the Petitioner was required to "comply with all requirements for permits, licences, fees and codes. The Contractor at his expense shall obtain permits, licences, fees, inspections and arrangements required for the work required under the Contract, unless otherwise specified". The applicable standards and codes included the Buildings Ordinance.

16. The Petitioner installed on the roof a large diesel generator with a steel enclosure. According to the description of Mr Pun How Wai, the Company's expert, the generator set together with an oil tank is totally enclosed by a steel enclosure about 33 feet long, 9.5 feet wide at one end and 14.5 feet wide at the other, and more than 14 feet high. The steel enclosure is fixed to sit on several horizontal mild steel section beams running along the full length and width of the steel enclosure to receive and secure the weight of the steel enclosure. The steel section beams are fixed and embedded onto a concrete base which is fixed and built onto the roof slab of the building.

17. Mr Pun is an architect who had worked at the Architectural Office (now known as the Architectural Services Department) of the Government for 22 years, leaving as Chief Architect. His expertise has not been challenged for present purposes, and it is his opinion that the generator set affects the structure of the building, and that the installation of the generator together with the enclosure would have required the consent and approval of the Building Authority under s.14 of the Buildings Ordinance.

18. For present purposes, Mr Westbrook SC, counsel for the Petitioner has accepted that the issue that the Building Authority's approval was required is a substantial dispute.

19. It is common ground that no such approval was obtained. It is also not disputed that approval would not be given retrospectively and that works completed without approval may be liable to demolition.

20. The Company says that for this reason, it has not continued with the business of the data centre. The continuous supply of electricity is essential to operations at the data centre, and the emergency diesel generator was intended to provide back-up in case of a power break. An express warranty of back-up power has been included as a standard condition in the Company's contracts with its customers. Since the generator is liable to be dismantled for breach of the Buildings Ordinance, the Company has terminated the contracts with its customers and has not entered into new ones. Consequently, the Company alleges that it is entitled to a set-off and/or counterclaim against the Petitioner for the loss and damage it has suffered, which would be substantially greater than the balance of the sums certified.

21. Mr Westbrook accepts that on the language of the Agreement, the obligation to make applications for Building Authority approval rested with the Petitioner, although he has pointed out that the Petitioner was not in fact registered as a general building contractor or structural engineer. Be that as it may, the Petitioner has contracted in the terms set out in paragraph 15 above, and so has been fixed with those contractual duties. It has also not been disputed that there is a sufficient proximity between the debt and the counterclaim.

22. In reply to the Company's allegation of breach of agreement for failing to obtain Building Authority approval for the installation of the generator and enclosure on the roof, the Petitioner has alleged that the decision not to apply for approval from the Building Authority was made by the authorised person retained by the Company, Xylem Leung Shun Cheong of Creative Engineering Trading Co Ltd ("Creative"), and not the Petitioner.

23. However, considering the evidence discussed below, I find that the Company has shown adequately for present purposes that it has a bona fide dispute on substantial grounds, certainly in so far as the installation of the enclosure is concerned.

24. It is clear from a Feasibility Study Report dated 14 August 2000 and prepared by Creative that enclosure of the generator was not recommended. The Report stated that the maximum superimposed loading of the roof was 5 kPa. The loading of the generator was less than that, but if a plant room were to be built, the minimum loading would exceed 5 kPa. Creative concluded that the incorporation of a plant room on the roof would not be approved, but that if the generator was accommodated on the roof without providing any enclosures, it could be regarded as exempted works and Building Authority approval would not be required.

25. About a week later, on 22 August 2000, Creative sent to the Company certain calculations and construction details, which provided for "a support frame made up of universal section of I (beams)". There was no mention of any enclosure.

26. On 20 September 2000, CCL wrote to the Petitioner with instructions which were to "cover [Creative's] letter dated 22 August 2000 and subsequent meeting discussion on 11 September 2000 for your construction". There was still no reference to any enclosure.

27. On 31 October 2000, however, CCL wrote to the Petitioner asking it to submit "for approval detailed installation details of the enclosure". It also said "your installed enclosure is not complied to our design intent and your submission, so you are required to guarantee the weatherproof performance of the enclosure". It is not clear why CCL had to ask the Petitioner for details of the installation of the enclosure, nor has the Petitioner shown the court the instructions it had received for that work, if any. The calculations and construction details referred to in Creative's letter dated 22 August 2000 do not appear to be instructions for the installation of an enclosure.

28. In this respect, the Petitioner has exhibited a statutory declaration from Mr Shek Chung Ming, formerly a Vice-President of the Company with responsibilities for co-ordination with contractors in setting up the data centre and for management and operations. Mr Shek said that Creative had advised that without a plant room, the installation of the generator would be treated as exempted works and the Company had been persuaded by that advice not to apply for Building Authority approval. If approval had been thought to be needed, the Company would have instructed Creative to make the application, and the Petitioner had "not offered to be responsible for applying for Building Authority approval".

29. Whilst it was clear from the Feasibility Report that a plant room was not feasible, Mr Shek did not explain how that advice developed into the installation of the enclosure. In any event, even if the Petitioner had received specific instructions from the Company to install the enclosure, the question is not whether the Petitioner had "offered to be responsible for applying for Building Authority approval". Under the terms of the Agreement, it was the Petitioner's obligation to do so unless there was any waiver of that obligation from the Company, or unless the Company was estopped from asserting that obligation. The evidence so far falls short of any unequivocal waiver or estoppel regarding the installation of the enclosure. In the absence of any clear evidence of waiver or estoppel, it was for the Petitioner to satisfy itself under the terms of the Agreement what approvals it needed to get for the work that it was undertaking.

30. As for the installation of the generator itself, Mr Shek's evidence is clearer, but even then, the fact that the Company would have instructed Creative to apply for approval does not by itself amount to an unequivocal waiver by the Company of the Petitioner's contractual obligations to make the application or work an estoppel.

31. In the circumstances, I take the view that the Company has shown that it has a bona fide dispute on substantial grounds. It is inappropriate for the matter to continue by petition, especially when arbitration has commenced.

Order

32. There being no supporting creditors, I would order that the petition be struck out and would give an order nisi that the costs of the petition be to the Company.