HOO CHEONG BUILDING CONSTRUCTION CO LTD v. JADE UNION INVESTMENT LTD

HCCW 400/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 400 OF 2003

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J U D G M E N T

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1. This is a petition to wind up Jade Union Investment Limited ("the company"), presented by Hoo Cheong Building Construction Company Limited ("the petitioner"), on the basis that the company is to be deemed to be insolvent, having failed to comply with a statutory demand served against it on behalf of the petitioner. The company is an oversea company, having been incorporated in the British Virgin Islands. However, Mr Harris, who appeared for the company, accepted that it is liable to be wound up under section 327 of the Companies Ordinance (Cap. 32), as it clearly carries on business in Hong Kong and has assets here. One of its assets is a property at 3 Goldsmith Road in Jardine's Lookout. This petition arises out of the development by the company of that property.

The background

2. On 31 March 1999, the company and the petitioner entered into a contract ("the contract") by which the company employed the petitioner as the main contractor for the construction of a single house at the property. Under the contract, the petitioner was to construct the shell, or superstructure, of the house, which would then be handed over to the company so that interior fitting out and decoration works could be carried out. According to the petitioner, the house, when completed, was intended to be the residence of Mr Joseph Lau, who is the chairman of the group of companies of which the company is a part. The contract incorporated the conditions of the Hong Kong Standard Form of Building Contract (With Quantities), subject to amendments contained in the specification preliminaries.

3. The debt on which the petitioner relies arises out of four interim payment certificates issued in favour or the petitioner by the architects employed by the company to supervise the works. These interim payment certificates were issued between August 2000 and September 2001, and were for a total sum of HK$14,987,000. The petitioner says that the company should have paid it the amounts certified as being due to it within 30 days of the issue of the relevant certificates, as provided for by the contract, but that the company has not done so. It is common ground that only a sum of HK$4,681,550 has been paid by the company to the petitioner in respect of these certificates, leaving a balance of HK$10,305,450 not paid to the petitioner.

4. Not having received any further payment in respect of these interim payment certificates, the Petitioner caused to be served on the Company a statutory demand dated 26 February 2003, demanding the payment of HK$5,841,450. This amount was arrived at by deducting from the outstanding balance of HK$10,305,450 a sum of HK$4,464,000 which was paid by the company directly to a nominated sub-contractor, M&G Contracting Limited ("M&G"). No payment having been received pursuant to the statutory demand, the petition was presented on 4 April 2003. In the petition, it was stated that the total sum due under the interim payment certificates was HK$10,305,450, and the failure to pay the amount demanded under the statutory demand was also relied upon.

The parties' respective positions

5. The company denies that it is liable to the petitioner, whether for HK$10,305,450 or for the lesser amount of HK$5,841,450. It says that it has settled part of this amount by making payment to a number of nominated sub-contractors (including M&G), and that it has set-offs or cross-claims against the company which exceed the amount of the debt relied upon in the petition. At the beginning of the hearing before me, these payments, set-offs and cross-claims totalled some HK$23,281,770.65, made up as follows:-

(1) Payments made directly to nominated sub-contractors HK$7,131,253.50;

(2) Claim for liquidated damages for delay HK$1,372,197;

(3) Defective builders works HK$154,982.97;

(4) Defective windows HK$844,100.68

(5) Defective stone cladding HK$1,880,000;

(6) Loss of rental HK$10,965,000; and

(7) Cost of employing clerk of works HK$935,263.50.

There was also an unquantified claim for damage allegedly caused by water seepage.

6. The petitioner's response was that, while it did not accept that the bulk of these claims were of substance or were advanced in good faith, once cross-claims were taken into consideration, it was necessary to go one step further and consider the overall relationship between the parties, taking account of any reverse cross-claims which the petitioner might have against the company. The petitioner contended that if this were done, the net result would be that the company would, notwithstanding the cross-claims asserted, still be a net debtor of the petitioner in an amount sufficient to support the winding up petition.

7. On the second day of the hearing, however, the company put forward a further claim in respect of the defective window works, claiming that the cost of rectification of the defects would be about HK$4,126,185.10. This would have the effect of increasing the total amount of the payments, set-offs and cross-claims to HK$27,407,955.75, on the footing that it represents an additional claim to that set out in paragraph 5(4) above. Even if this were not the case, however, the increase was still such that the company would no longer be a net debtor of the petitioner when all of the parties' claims against each other were taken into account.

The arbitration proceedings

8. It is also pertinent to note that shortly after the presentation of the petition, the petitioner commenced arbitration proceedings against the Company, by a notice of arbitration dated 11 April 2003. The arbitration was eventually stayed by consent pending the outcome of these winding up proceedings. It was commenced pursuant to the provisions of condition 35 of the contract, which provided that any dispute or difference between the petitioner and the company should be referred to arbitration.

9. The background to the arbitration was that, while practical completion of the works under the contract was certified by the architects as having been achieved on 12 April 2001, the defects liability period had ended on 11 April 2002, and a final defects list had been provided by the architects to the petitioner on 25 April 2002, no final certificate of the amount due to the petitioner under the contract was ever provided by the architects, notwithstanding that both the petitioner and the company's quantity surveyors had produced draft final accounts in respect of the contract. On 25 June 2002, the petitioner submitted its draft final accounts to the architects for agreement. These suggested that the final contract sum should be HK$82,856,234.48. It was copied to the company and to the quantity surveyors retained by the company. Subsequently, the quantity surveyors produced their own draft final accounts, the second draft of which, dated 9 December 2002, suggested that the final contract sum should be much lower than that claimed by the petitioner, at HK$60,227,602.27. The objective of the arbitration was to obtain a determination of the amount due to the petitioner, and payment of that amount to it. The notice of arbitration referred to the respective draft final accounts and went on to state that:

"... To date, [the petitioner] has only received payment of HK$36,855,550.00 in respect of the Contract. [The petitioner] considers that there is no basis to withhold the balance of HK$46,000,684.48 due to them. Despite numerous requests for payment, payment has not been made. In the circumstances, [the petitioner] reluctantly conclude[s] that they must resort to arbitration to enforce their rights and to this extent a "dispute" exists."

The applicable legal principles

10. It is well established that where a petition is based on a debt, it will be dismissed if the company is able to establish that the debt relied upon is genuinely disputed on substantial grounds. The burden of establishing this lies with the company. It is for the company to put forward sufficiently precise factual evidence to demonstrate the existence of such a dispute. While the court will not seek to resolve the dispute on the basis of affidavit evidence, it is concerned to see whether or not there is a genuine, or bona fide, dispute of substance. In doing this, it does not simply accept whatever evidence may be put forward by the company uncritically, but will examine that evidence against the background and other evidence which is not disputed or not capable of being disputed in good faith. If, having done so, the court is of the view that there is substance in the dispute raised by the company, it will dismiss the petition and leave the dispute to be resolved by other proceedings (see, e.g., Re ICS Computer Distribution Ltd [1996] 1 HKLR 181; Re Hong Kong Construction (Works) Ltd (unreported, CFI, Kwan J, 7 January 2003).

11. In the context of set-offs or cross-claims, the court will look at the evidence adduced by the company and reach a conclusion as to whether the set-offs or cross-claims relied upon by the company have substance. If it is satisfied that such set-offs or cross-claims have substance, and exceed the amount of the debt on which the petition is based, the court will ordinarily dismiss or stay the petition. It is arguable that there may be a further requirement in relation to cross-claims that the company should have been unable previously to litigate them, but even if that is a requirement, it was not suggested that it arises for consideration in this case. Further, where cross-claims are raised, it is open to the petitioner to put forward reverse cross-claims in order to neutralise the cross-claims relied upon by the company, provided that each reverse cross-claim is either a debt or is certain to become a debt because there is no realistic defence to it (see Montgomery v Wanda Modes Ltd [2002] 1 BCLC 289, 300; Re Keen Lloyd Resources Ltd (unreported, CFI, Kwan J, 23 July 2003, at para 19 of the judgment).

12. These principles were not challenged by either party. Although Mr Harris, for the company, submitted that the disputes raised by the company were all either set-offs or equitable set-offs (arising, as they did, out of the contract which was the source of the debt relied on by the petitioner) rather than cross-claims in the strict sense, I did not understand him to suggest that this affected the application of the principles which I have summarised above. In any case, I see no reason why they should, since it seems to me that the approach in the Montgomery and Keen Lloyd cases essentially involves a consideration of the overall relationship between the parties to see whether there is, at the end of the day, an undisputed or undisputable debt that is or will be due to the petitioner, so as to make it appropriate for the court to make a winding up order against the company. If that is right, it should not make any difference whether the matters relied upon by the company as grounds for disputing its liability to the petitioner are set-offs or cross-claims.

The relevance of the arbitration

13. Mr Harris submitted, however, that I should not concern myself with the question of whether or not there was a bona fide dispute of substance in relation to the debts relied upon by the petitioner, because of the existence of the arbitration clause in the contract. As I understood his submission, it had three strands:-

(1) The petitioner, by commencing the arbitration, referred to the arbitrator its claim for all outstanding payments (including those under the interim payment certificates), and thereby itself created a dispute in respect of the debt on which the petition is founded.

(2) Even if that was not right, once it is established that there is an arbitration clause, and the debt is not admitted, the Companies Court should not decide whether the debt is bona fide disputed on substantial grounds, in the light of article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration, which, by virtue of section 6 of the Arbitration Ordinance (Cap. 341) applies in respect of domestic arbitration agreements such as that constituted by clause 35 of the contract.

(3) In any event, even if the court is not prevented by Article 8(1) of the UNCITRAL Model Law from determining whether or not there is a bona fide dispute as to the debt on substantial grounds, the existence of an arbitration clause is a matter to which very great weight should be given when the court comes to exercise its discretion, and that the court should only embark on such a determination in very limited circumstances - Mr Harris suggested that for practical purposes, it would only be appropriate to do so where there was what he described as "evidence of actual insolvency".

14. Mr Harris submitted that any other approach would have the unsatisfactory result that a winding up petition might be presented in circumstances in which the petitioner, had it proceeded by way of action rather than a winding up petition, would not even have been able to obtain summary judgment, since the action would have been stayed to arbitration without any consideration by the court of as to whether or not a genuine dispute of substance existed between the parties.

15. I shall deal first with the second strand of this submission, which, in fairness to Mr Harris, was not strongly advanced before me, in the light of the decisions of this court in Hollmet AG v Meridian Success Metal Supplies Ltd [1997] 4 HKC 343 and Re Sky Datamann (Hong Kong) Ltd (unreported, CFI, Yuen J, 29 January 2002. In both of those cases, it was held that whereas in an ordinary action between parties, the effect of Article 8(1) of the UNCITRAL Model Law was that the court was precluded from considering whether or not there was a "dispute" between the parties which should be referred to arbitration (it having previously been the approach of the courts when faced with an application for a stay of proceedings in favour of arbitration to conduct an examination of the merits of the matter to the limited extent, at least, of considering whether or not there was an arguable defence to the claim), it did not have any such effect in relation to winding up petitions.

16. In the Hollmet case (supra), Rogers J (as he then was) put the position in this way (at p. 347A):-

"Very simply, it seems to me that the point taken by the company sets off on the wrong foot. Although in many instances, people may regard winding up petitions as a means of enforcing a contract, that is not what it is. The procedure of winding up is to wind up an insolvent company. What the court is concerned to see is whether or not the company is insolvent. ..."

He went on to say (at p. 347F) that the court's approach to a suggestion that a winding up petition should be stayed in order to enable the matter to be referred to arbitration should be as follows:-

"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. It cannot simply put up its hands and say: 'You, the Court, have no jurisdiction because of my contract'. That is not what the contract says, and the Companies Court is entitled to be satisfied that there is a proper dispute."

17. In the Sky Datamann case (supra), Yuen J (as she then was) pointed out Article 8(1) referred to "actions", and observed that a winding up petition, in which the petitioner invokes a class remedy, is not an "action" between "parties". She went on to say (at paragraph 12 of the judgment) that:-

"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."

18. I agree with these views. A petition for the winding up of a company is quite different from an action between parties, in which the parties seek the court's determination as to their respective rights and liabilities. By a winding up petition, a creditor invokes the court's jurisdiction under the Companies Ordinance to wind up a company on one or more of the grounds set out in section 177(1) of that Ordinance. In doing so, it exercises a class right available to all of the company's creditors. If a winding up order is made, the creditor will not necessarily have established any right to be paid, or to be admitted to proof in respect of, any particular amount. This is because it will not necessarily have obtained any adjudication from the court of its right to recover any particular amount from the company. It will still be obliged to submit a proof of debt, along with other creditors of the company, and following the adjudication of its proof by the liquidator, it will rank pari passu with all other creditors of the same class for a dividend to be paid out of the assets of the company.

19. That being so, it seems to me that the court, in exercising its winding up jurisdiction, in cases such as this, where the company asserts that the debt on which the petition is founded is disputed, is concerned first to determine whether or not the petitioner is to be regarded as a creditor of the company so that it is entitled to present the petition. This it does by considering whether or not the debt is bona fide disputed on substantial grounds. Neither the existence of an arbitration clause in a contract between the petitioner and the company, nor the existence of an arbitration commenced pursuant to it, of themselves demonstrate that the debt is in fact bona fide disputed on substantial grounds. It remains necessary for the company to discharge its burden of establishing this, by placing before the court the evidence from which the court can see that such a dispute exists. In both the Hollmet and Sky Datamann cases, this was in fact done, and the court was in each case satisfied, on the evidence adduced before it, that there was a bona fide dispute of substance in relation to the debt relied upon by the petitioner.

20. Where the court is satisfied that the debt relied upon is bona fide disputed on substantial grounds, it will, as I have said, leave it to the parties to resolve the dispute in whatever manner may be appropriate. Where the parties have agreed to refer their disputes to arbitration, this will mean leaving the dispute to be resolved by an arbitrator in due course.

21. This brings me to the third strand of Mr Harris' argument. I am afraid that I am unable to agree with it. If, having considered the evidence, the court concludes that there is no bona fide dispute of substance in relation to the debt relied upon by the petitioner, I see no good reason why the existence of an arbitration clause should be regarded nonetheless as somehow relevant to the court's exercise of its discretion as to whether or not to make a winding up order. There being, in the view of the court, no dispute of substance, the mechanism by which the parties may have resolved to resolve any disputes between themselves is neither here nor there. Moreover, the question of whether or not there is a dispute of substance would appear to be one which logically arises prior to the point at which the court is called upon to exercise its discretion as to whether or not to make a winding up order.

22. Further, it is difficult to see why the making of a winding up order in cases in which an arbitration clause exists in a contract between petitioner and company should, as a matter of discretion, be done only where there is evidence of "actual insolvency". By this expression, I understood Mr Harris to mean that the insolvency of the company should be proven by some means other than its failure to meet a statutory demand. Given that section 178(1)(a) of the Companies Ordinance deems a company which does not comply with a valid statutory demand to be insolvent, I see no warrant for requiring a petitioner whose contract with the company contains an arbitration clause to be deprived of the benefit of that provision and to be required to establish by positive evidence, which may seldom be available to it, that the company is insolvent.

23. None of this is, of course, to say that the court does not, having concluded that the debt is not bona fide disputed on grounds of substance, go on to consider whether or not it ought to exercise its discretion by making a winding up order in the particular case before it. It remains necessary to exercise this discretion, as Yuen J said, in the light of all the relevant circumstances.

24. That being so, I do not think that the first strand of Mr Harris' argument can stand without an examination of the circumstances leading up to the arbitration, in order to determine whether or not the petitioner has in fact put in dispute the debt on which it relies. Although the existence of the arbitration is undoubtedly indicative of disputes between the petitioner and the company, it does not follow that the disputes relate to the debt on which the petition is founded.

25. An examination of these circumstances shows that the arbitration which has been commenced does not throw the debts on which the petition is based into dispute. As I have noted, notwithstanding that practical completion of the works occurred on 12 April 2001, no final certificate as to the amount due to the petitioner under the contract was ever provided by the architect. This was despite the production by both the petitioner and the company's quantity surveyors of draft final accounts showing the amount which each contended should be payable to the petitioner. Given the delays which have arisen in relation to the issue of the final certificate, and the fact that the petitioner considers itself entitled to a sum in excess of HK$82 million, whereas the company's quantity surveyors have put forward a significantly lower sum (of slightly over HK$60 million), it is hardly surprising that the petitioner should have wished to take steps to have this matter resolved. However, given that only a total of HK$36 million odd has actually been paid to the petitioner, the petitioner is seeking certification of the amount due to it so that it can recover the balance due to it of between about HK$24 million (on the quantity surveyor's figures) and HK$46 million (on the petitioner's figures). Given that the amount of the unpaid balance of the interim payment certificates on which the petition is based is only some HK$10,305,450, it is clear that the petitioner has not put this amount in dispute by commencing the arbitration.

26. Finally, I should say that I do not consider that this approach has what Mr Harris described as the unsatisfactory result that a winding up petition may be presented in circumstances in which summary judgment could not be obtained, and thus to circumvent the provisions of the Arbitration Ordinance. In my view, to permit the presentation of a winding up petition in these circumstances does not have the effect of circumventing the provisions of that Ordinance, since the court considering the petition is not, as I have explained above, adjudicating on the parties rights as between themselves.

27. For all of these reasons, I do not consider that the existence of the arbitration clause, or of the arbitration itself, prevents me from considering whether or not the company has, in this case, established the existence of a bona fide dispute of substance in relation to the debt on which the petition is based.

The cross-claims and reverse cross-claims

28. As I have said, having regard to the fact that the company relies on set-offs and cross-claims, it is appropriate for the court to take into account any reverse cross-claims which the petitioner can assert, provided that they are either existing debts, or certain to become debts in due course given the absence of any realistic defence to them.

29. Here, the petitioner contends that if the overall relationship between it and the company is considered, it is clear that the company is or will be a debtor to it for an amount sufficient to support the bringing of a winding up petition against the company. The petitioner does this by reference to the second draft final accounts which the company's quantity surveyors had prepared on 9 December 2002. The petitioner has submitted that the amount shown in this document should be increased to a certain extent, having regard to the evidence before the court. The petitioner's case is that on the basis of this slightly increased amount (and leaving to one side its own claim to have the amount put forward by the company's quantity surveyors substantially increased through the arbitration which it has commenced) it is clear that the company is or will be indebted to it, notwithstanding the set-offs and cross-claims asserted by the company.

30. Initially, the petitioner's position was that the totality of these set-offs and cross-claims was insufficient to put the company in a position in which it was not a net debtor of the petitioner, regardless of whether or not the particular claims advanced were in fact bona fide claims of substance, so that it was not necessary to consider the quality of the set-offs and cross-claims asserted (although it was the petitioner's case that the great majority of such alleged set-offs and cross-claims were lacking in substance). However, as the result of the assertion by the company of the further claim referred to in paragraph 7 above, this is no longer the case. Ms Ismail, appearing for the petitioner, accepted that it would be necessary for me to look at the set-offs and cross-claims relied upon by the company, and come to a view as to whether or not they amount to bona fide claims of substance, on the basis of the evidence which has been placed before me.

31. Before doing this, however, it is necessary to deal with two further points made by Mr Harris.

32. The first was that, as a result of the terms of conditions 30 and 35 of the contract, a debt to the petitioner could only arise where there had been either a payment certificate (whether interim or final) issued by the architect, or an award by an arbitrator. Thus, said Mr Harris, despite the preparation of a draft final account by the company's quantity surveyors, there was no debt due to the petitioner in respect of any amount contained in it, since it had neither been certified by the architects, nor awarded by an arbitrator. I do not find this argument persuasive. Although it is no doubt right that there is not a present debt for the balance that might be due to the petitioner on the basis of the amount of the second draft final account, subject to such adjustments as may be called for having regard to the possible existence of some disputes of substance in respect of the company's asserted set-offs and cross-claims, I can see little basis for thinking that such a debt will not inevitably come into existence in due course if the set-offs and cross-claims relied upon (insofar as they are of substance) are insufficient to exhaust the difference between that amount and the sums so far actually paid to the company. Unless the company is able to point to further set-offs or cross-claims supported by the necessary evidence, or puts forward some other evidence to show that the amount of the final account put forward by its own quantity surveyors is incorrect, there would appear to be no basis on which further adjustments, beyond those already identified, should be made. In those circumstances, it seems to me that a debt to the petitioner will inevitably come into existence in due course, and as is made clear in the Wanda Mode and Keen Lloyd cases, it is sufficient that a debt will eventually come into existence, even if it is not presently due, when reverse cross-claims are brought into consideration.

33. Mr Harris also suggested that it could not be assumed that no further set-offs or cross-claims would emerge in the course of the arbitration, and pointed to the additional cross-claim which the company put forward during the course of the hearing as an example of just this situation arising. However, it seems to me that bearing in mind that the onus is on the company to advance sufficiently precise factual evidence of the set-offs and cross-claims on which it seeks to rely, this is not a matter to which I should accord any real weight. Further, having regard to the length of time that has elapsed since the practical completion of the works in April 2001, the compilation of the final defects list in April 2002 and the second draft final accounts prepared by the company's quantity surveyor in December 2002, it would seem unlikely that there would be further claims emerging that are of such magnitude as to make any appreciable difference to the position, having regard to my views as to the lack of substance in respect of the most substantial claim put forward by the company, which I deal with below. Even the latest claim put forward by the company does not appear to be a completely new area of complaint, but one which is related to, or similar in nature to, the complaint in respect of defective window works. Thus, even if this were a factor to be given some weight, such weight would, in my view, be minimal.

34. I turn therefore to consider whether or not, on the evidence before me, the company has established sufficient bona fide disputes of substance to neutralise the reverse cross-claims asserted by the petitioner.

Increases to the amount due to the petitioner

35. During the course of the hearing, Ms Ismail prepared a helpful schedule indicating the adjustments which, she said, should be made to the sum shown as being due to the petitioner in the second draft final accounts prepared on behalf of the company by its quantity surveyors. The starting point is the amount of HK$60,227,602.27 shown as being the final amount due to the petitioner under the contract by the second draft final accounts. This figure was arrived at by starting with the original contract sum, adding to it the original contract sums in respect of three sub-contracts (for stonework, lift installation and a filtration system) which were subsequently added to the scope of the petitioners works, deducting an amount for contingencies, and then bringing into account eight classes of variations, detailed breakdowns for which were contained in appendices to the second draft final accounts.

36. Ms Ismail submitted that this amount should be increased in respect of three of the variation items. I shall deal with each of these below.

37. The first of these was in respect of the fifth item under the variations, which was for "adjustment of profit and attendance in connection with nominated sub-contract works". This item stood at HK$234,537.13 in the second draft final accounts, a figure which was noted as being subject to the final contract sum in respect of the nominated sub-contract works. A breakdown of this item was provided in Appendix 1.5 to this draft of the final accounts, from which it appears that of this sum, HK$12,029.79 was in respect of the sub-contract for the installation of the swimming pool plant and filtration, and HK$19,000 was in respect of the sub-contract for the installation of a lift. These sums were made up of an allowance of 1% in each case for profit, and round sums of HK$9,000 and HK$10,000 respectively for attendance. However, it appeared from a letter from the quantity surveyors to the petitioner dated 16 May 2003, that a claim to a charge of 7.5% for profit and attendance in relation to each of these contracts was accepted. This would have the effect of raising the amount for profit and attendance in respect of the swimming pool plant and filtration sub-contract to HK$22,723.40, and the amount in respect of the lift installation sub-contract to HK$75,000. Mr Harris did not dispute these increases, which would result in an increase to the final amount due to the petitioner by HK$65,693.61.

38. Ms Ismail also suggested that item (f), in relation to "adjustment of prime cost sum" should be increased in two respects. This item stood at HK$5,696.946.52 in the draft final accounts, a figure which was again noted as being subject to the final contract sum in respect of the nominated sub-contractor works. A breakdown of this figure was provided in Appendix 1.6 to the draft final accounts, from which it appeared that the final contract sum in relation to the stone cladding installation sub-contract, which was to be carried out by M&G, was expected to be HK$27,646,467.90. However, a later draft of the final account for the M&G sub-contract dated 8 April 2003, also prepared by the quantity surveyors indicated that the final contract sum had increased to HK$28,290,911.11, an increase of HK$644,443.21. This increase was, again, not disputed by Mr Harris.

39. In addition, Ms Ismail pointed out that the 8 April 2003 draft of the M&G sub-contract final account included a deduction of HK$2,025,000 in respect of defective works, based on information provided by the company. However, she drew my attention to a later fax from the quantity surveyors dated 13 June 2003 which stated that the "cost estimate of the contract work value for the defective/outstanding stone cladding works is in the order of HK$1,880,000". On this basis, she suggested that there should be a further increase of HK$145,000 to take account of the fact that the M&G draft final account would be increased by this amount, as the deduction shown in it would be correspondingly reduced. Mr Harris did not agree that this further increase was appropriate. He drew my attention to paragraph 54(a) of Mr Li's third affirmation, which suggests that these two items are in fact in relation to different matters. Mr Li says that the HK$2,025,000 relates to parts of these works which were not included in the final defect list, whereas the HK$1,880,000 refers to parts which were included in the final defect list. Having considered the correspondence to which I was referred, I must confess that this supposed difference was far from apparent from its terms. The letter to which Mr Li refers (dated 29 March 2001) as indicating the defective work which was not included in the final defect list simply states that the intention was to deduct the value of the affected stonework from the payments to be made to M&G. The fax of 13 June 2003 does not in any way suggest that the stonework that is there referred to is anything different. Moreover, a comparison of drawings attached to the letter of 29 March 2001, and those attached to the final defect list reveal a considerable (although not complete) degree of overlap in respect of the allegedly defective stonework. In these circumstances, I am unable to accept that the bare assertion by Mr Li that these are different items is of substance, and would accept the further increase of HK$145,000 contended for by Ms Ismail.

40. The final item in respect of which Ms Ismail suggested that there should be an upward revision to the draft final accounts was item (h), which relates to "outstanding works and defect rectification works". This item stood as a deduction of HK$306,447.94 in the draft final accounts. It was submitted that this deduction should be reduced (and hence the final sum payable to the petitioner increased) by HK$44,754.23 to take account of certain items which were no longer claimed by the company, and also by a further small amount of HK$4,156.74 which Mr Li had accepted in paragraph 49 of his third affirmation as being an appropriate reduction to this claim. Mr Harris did not dispute either of these matters, and I would therefore accept that these adjustments can properly be made.

41. The total effect of the adjustments mentioned above is to result in an increase of the amount due to the petitioner on the second draft final accounts prepared by the quantity surveyors by some HK$904,047.78, to HK$61,131,649.27. As it was common ground that HK$36,855,550 had been paid by the company to the petitioner, this leaves a balance in favour of the petitioner of HK$24,276,099.27. This amount includes the outstanding balances under the interim payment certificates on which the petition was based.

Double counting of cross-claims

42. The next point that Ms Ismail made was that of the alleged set-offs and cross-claims which are listed at paragraph 5 above, at least two (those at paragraphs 5(3) and 5(5)) were in fact already taken into account in the draft final account, and so should not be taken account of again as set-offs or cross-claims, as they would otherwise be double-counted. The first of these items is the HK$154,982.97 in respect of the defective builders works, which are said to have been included in item (h) of the variations referred to in the draft final accounts prepared by the quantity surveyor. I did not understand Mr Harris to dispute this. The second of these items is the HK$1,880,000 in respect of the defective stone cladding. As to this, having regard to the views that I have expressed in paragraph 39 above, it would, I think, follow that Ms Ismail is right in saying that this too, has been taken into account in item (f) of the said variations. That being so, neither of these items assists the company in reducing what would appear to be the indisputable balance due to the petitioner under the draft final accounts prepared by its own quantity surveyor, regardless of the question of whether or not these matters amount to bona fide disputes of substance.

43. That leaves the remaining items set out in paragraph 5 above, and the further claim asserted in respect of watertightness or defective window works in the affirmation of Lai Chi Keung Ricky, filed on 9 December 2003, the second day of the hearing before me.

Liquidated damages

44. Ms Ismail accepted that the claim in respect of liquidated damages for delay, in the amount of HK$1,372,197 (mentioned in paragraph 5(2) above), was one which gave rise to a bona fide dispute of substance for present purposes. However, she contended that none of the other claims should be regarded as having any substance.

Direct payments to nominated sub-contractors

45. In respect of the claim that HK$7,131,253.50 had been paid directly by the company to sub-contractors of the petitioner, Ms Ismail, while not for present purposes disputing the fact of such payments, contended that they could not have the effect of discharging the company's liability to the petitioner under the contract, since the payments were made by the company to the sub-contractors concerned in breach of the contract (clause 27 of which permitted direct payment only in limited circumstances which are not applicable here) and without the consent or agreement of the petitioner. She drew my attention to the relevant terms of the contract, and to correspondence which on the face of it indicated that the petitioner had made clear its position that payments should not be made by the company to the sub-contractors concerned. It was also pointed out that such direct payments could have the effect of prejudicing the petitioner with respect to its position vis-a-vis the sub-contractor concerned, since there might be grounds on which the petitioner would be entitled to withhold payment from the relevant sub-contractor, and this means of self-protection would be lost where the employer paid the sub-contractors directly, in contravention of the terms of the contract.

46. Mr Harris acknowledged that ordinarily, in the absence of specific provision in the contract, direct payments to a sub-contractor would not extinguish the liability to pay the main contractor for such sums, but submitted that here, it was the company's case that there had been express agreement on the part of the petitioner to the making of such payments. Mr Harris pointed to the evidence of Mr Li, which indicated that members of the petitioner's staff had agreed to such direct payments, and to letters which were exhibited to Mr Li's affirmation which appeared to bear his evidence out, in support of this contention.

47. For the petitioner, there was affirmation evidence from its main witness, Mr Pang, and also from the staff members who were alleged to have agreed to such direct payments, in which they denied having so agreed. Both parties said that their files did not contain the letters which were said to have been sent to them by the other side.

48. Mr Harris also pointed to the fact that at least in relation to a substantial part of payments made directly by the company to M&G, the petitioner had originally given credit for such payments in calculating the amount demanded under the statutory demand which it had served on the company.

49. In my view, this is not a matter that can appropriately be dealt with in the context of a winding up petition, particularly having regard to the sharp conflict of affirmation evidence. I would therefore accept, for present purposes, that the company has demonstrated by its evidence that there is a bona fide and substantial dispute in relation to this item.

Defective window works

50. So far as the claim for defective window works is concerned (paragraph 5(4) above), this is in the amount of HK$844,100.86. Ms Ismail submitted that this should not be regarded as a dispute of any substance, having regard to the fact that despite the practical completion of the works in April 2001, the preparation of a final defect list shortly thereafter, the considerable amount of correspondence between the parties and the preparation of the respective draft final accounts and apparent discussions as to these, and the service of the statutory demand, no mention of this claim was made until it was raised, for the first time, in Mr Li's first affirmation made on 30 June 2003.

51. I would accept that this point has some force. However, it seems to me that such force as it has is reduced in the light of the fact that the evidence of Mr Pang in relation to this matter does not appear really to dispute the genuineness of the claim, but rather points out that there are still considerable payments due to the sub-contractor concerned which would suffice to cover the whole of this item. It seems to me that the sums due to this sub-contractor are reflected in the draft final accounts prepared by the quantity surveyors, and so form part of and are included in the final balance due to the petitioner. That being so, this argument does not add anything to the petitioner's contention that the cross-claims asserted should exceed the amount of the final balance due to it. In the light of the position taken by Mr Pang, I would accept this claim, too, as being of sufficient substance that it should be taken into account for present purposes.

Loss of rental

52. I turn next to the claim for loss of rental, which is put in the amount of HK$10,965,000. It was this claim that was subjected to the most forceful criticism by Ms Ismail. She pointed out that the claim was raised very late, being mentioned for the first time in Mr Li's first affirmation dated 30 June 2003, where he asserted that as a result of the extent of the defects in the work done by the petitioner under the contract, there had been considerable delay to the ability of the company to have the house fitted out and readied for occupation. On this basis, he said that there had been (or would be) a loss of rental for the period from the time when the fitting out works should have been completed (said to be some six months after the date of practical completion) until November 2003, when they were expected to in fact be completed. He exhibited a letter dated 26 June 2003 from a professional valuer estimating the rental value as at June 2003 of HK$430,000 per month. It is to be noted, however, that nowhere in this part of his affirmation does Mr Li actually state that the house, when completed was intended to be placed on the rental market. There is simply an assertion that there has been a loss of rental, leaving it to the reader to infer that it was the intention of the company to rent the house out at the end of the day.

53. In response, Mr Pang drew attention to the fact that according to some of the design drawings supplied to the petitioner during the course of the works, the house was described as the Lau Residence, and stated that the house was intended to be used by Mr Joseph Lau, the chairman of the group of companies of which the company was a member, as his residence. He also questioned the validity of the assertion by Mr Li that delays were due (or due wholly) to defaults on the part of the petitioner, drawing attention to the fact that the architect was (by clause 15(8) of the contract) not obliged to certify practical completion until the building was in all ways relevant to the contract ready for occupation and free from known omissions and defects. Thus, said Mr Pang, the fact of certification of practical completion contradicted the company's case that it was not in a position to progress to fitting out works. Moreover, Mr Pang drew attention to certain substantial works and alterations to the building that were undertaken after practical completion, which he said would have made it impossible to commence fitting out works immediately on practical completion being achieved.

54. Mr Li did not respond to any of these points in his third affirmation filed on 11 September 2003 in response to Mr Pang's evidence.

55. In my view, having regard to the evidence that the house was intended to be the residence of the group chairman, which has not been responded to, there would appear to be serious difficulties with the claim for loss of rental. The evidence of Mr Li does not in terms state that the property was intended to be placed on the rental market upon completion. The evidence of the property valuers does not take the matter any further, since it was clearly obtained for the purpose of putting a figure on the claim for loss of rental, and does not contain evidence of any existing intention on the part of the company to rent the house out. While it is conceivable that some rental might have been paid to the company by another group company for the use of the house, this was not the case advanced by the company. Moreover, the other points made by the petitioner would also appear to have real force. In these circumstances, I am far from satisfied that the company has met its obligation to demonstrate that this claim gives rise to a bona fide dispute of substance. The evidence which it has put forward in support of it is far from sufficient to demonstrate the existence of such a claim. I therefore conclude that this claim is not one which should be taken into account for present purposes.

Clerk of works

56. So far as the claim in respect of the salary of the clerk of works is concerned, this is put on the basis that the extent of the defects in the works carried out by the petitioner were such that it was necessary to employ or continue to employ a clerk of works for much longer than would otherwise have been the case. This claim is disputed by the petitioner, on the basis that the nature of the project, and in particular the substantial additional work done by way of modifications after practical completion had been achieved, and the scale of the interior fitting out works, would have required the employment of a clerk of works on the site in any event. Again, Mr Li did not respond to any of these points. In these circumstances, I am of the view that the company has failed to adduce sufficiently precise factual evidence to demonstrate that it has a claim of substance in this respect.

Further claim in respect of defective window works

57. I turn finally to consider the claim for an additional HK$4,126,185.10 in respect of the defective window works. Ms Ismail pointed out that this claim should be regarded with a substantial degree of skepticism, given that it only emerged at the hearing, at a point at which it was apparent that the totality of the company's set-offs and cross-claims were insufficient to exhaust the amount that would be due to the petitioner on the basis of the second draft final accounts. She also suggested that this item overlapped with the claim for HK$844,100.86, which was also in respect of defective window works. Having considered the documentation in support of this claim, it seems to me that it is arguable that it relates to matters other than those covered by the earlier claim. The earlier claim appears to relate to rectification works which were carried out in the period up to about June 2003, whereas this claim, on its face, relates to the rectification of water leakage or seepage problems that were said still to persist notwithstanding the carrying out of such works, and which apparently require the wholesale replacement of all the windows installed in the house.

58. I must confess that the claim is a somewhat startling one, both in its scope (extending to complete replacement of all the windows) and in its nature (it being said that the window system installed was not the one specified in the contract, although this would seem to have escaped the attention of the architects supervising the project). Moreover, it seems to me that on the basis of the material disclosed, the alleged problems and the manner in which they might be resolved were known to the company by August 2003, some time before Mr Li made his third affirmation responding to the petitioner's evidence (filed in August 2003), which made the petitioner's position, that the sum total of the asserted claims did not exceed the amounts which the company's own quantity surveyors had assessed as being due to the petitioner, clear. A first quotation for these works was available on 9 September 2003, just before Mr Li's third affirmation was made. No explanation is provided by Mr Li or by the deponent of the latest affirmation for the failure to have mentioned this further claim in Mr Li's third affirmation. Nor is there any explanation for the failure to put this forward in the three months between the making of that affirmation and the hearing of the petition. Finally, it is not made clear in the evidence which has been filed whether or not the quotation has been accepted and the work commenced. Having regard to all of these factors, I have come to the conclusion that this further claim by the company is also lacking in substance.

Conclusions

59. I therefore conclude that of the cross-claims asserted by the company, only those mentioned in paragraphs 5(1), (2) and (4) above are of substance and should be taken into account in offsetting the amount that is shown as being due to the petitioner in the second draft final accounts prepared by the company's quantity surveyors on its behalf. These total HK$9,347,551.36. In the circumstances, having regard to the balance due to the petitioner under the second draft final accounts, I am satisfied that there will at the end of the day be a debt due to the petitioner when all set-offs, cross-claims and reverse cross-claims asserted by the petitioner and the company against one another are taken into account. The company having failed to file any evidence as to its solvency, it follows that it is deemed to be insolvent by reason of its failure to meet the statutory demand served on it, and I shall make the usual winding up order with an order nisi for costs to be to the petitioner, to be taxed on the party and party basis if not agreed.

60. I would also add that, even if I had concluded that all of the claims put forward by the company were of substance, and dismissed the petition on that ground, I would have thought it right to make an order for costs in the petitioner's favour having regard to the very late stage at which evidence of the final claim, which would have been necessary to extinguish the balance due to the petitioner on the second draft final accounts, emerged.