RE PAUL Y. CONSTRUCTION COMPANY, LTD

HCCW 10/2025

[2025] HKCFI 1271

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 10 OF 2025

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REASONS FOR DECISION

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The application

1.  The Provisional Liquidators of the Company, Paul Y. Construction Company, Limited (“PLs”)  have issued a summons seeking determination of the following issue:

“Should the Court authorise the PLs, under para 4(6)  of the PL Order (defined below), to carry on the business of the Company regarding the performance of the Design-Build-Operate Contract dated 21 February 2021 for the Additional District Cooling Systems at the Kai Tak Development (‘KT Project’)  and the execution or completion of the works thereunder (‘KT Project Work’)?

2.  The purpose of the application is to allow the PLs to resume the KT Project Work, which requires payment of various on-going costs and existing debts owed to certain sub-contractors.  The need for the Court’s authorisation arises from para 4(6)  of the PL Order (defined below), which provides that the PLs have power to “[c]arry on the business of the Company so far as may be necessary for the purpose of preserving Assets and with the prior sanction of the Court, and for this purpose to pay or authorise payments of any monies in the ordinary course of the business of the Company...”(emphasis added).

3.  The evidence in support of the Summons is the 4^th Affirmation of So Man Chun dated 11 March 2025.

Factual background

4.  The Company is part of the Paul Y. Engineering Group, a long-established Hong Kong-based conglomerate specialising in construction, engineering, and related property services.  On 21 February 2025, upon the Company’s urgent application, Recorder Jin Pao SC made an order (“PL Order”)  appointing the PLs.  A key reason for the Company’s application for the PL Order was to ensure the Provisional Liquidators maintained sufficient oversight of the Company.  This management was necessary to guarantee projects would either be properly completed or novated in an orderly manner, thereby maximizing receivables and minimising potential liabilities.

5.  Among the Company’s various construction undertakings, the KT Project is a substantial design-build-operate contract awarded by Electrical and Mechanical Services Department (“Employer”)  to Paul Y.- Qianhai Joint Venture (“Contractor”), which is an unincorporated joint venture established under a joint venture agreement in March 2021 (“JV Agreement”)  between the Company and PYE General Contractors (Macau)  Limited on the one hand, and Qianhai (“JV Partner”)  on the other.  The KT Project involves supplying cooled water for important public infrastructure in the Kai Tak Development area, including the Kai Tak Sports Park.  The KT Project remains one of the few construction projects of the Company that is neither novated nor approaching completion.  Upon its targeted completion by the end of 2026, the project is forecasted to generate a profit of approximately HK$43.5 million for the Company.

6.  The KT Project Work halted in December 2024 due to the Company’s financial difficulties.  On 21 January 2025, the Contractor and the Employer entered into an 8^th supplementary agreement (“SA 8”), which extended certain completion dates and waived accrued liquidated damages. Following the appointment of the PLs on 21 February 2025, the Employer has indicated willingness to allow the Company to continue the KT Project Work, provided that:

(1)  the KT Project Work resumes no later than the week commencing 17 March 2025; and

(2)  the Company applies monies received from the Employer first to settle outstanding debts owing to those sub-contractors whose ongoing performance is essential for resumption and continuation of the KT Project Work (“Critical Subcontractors”).

7.  The PLs have identified seven Critical Subcontractors, of which three must resume their work in the week of 17 March 2025 for the KT Project Work to restart.  To secure these Critical Subcontractors’ cooperation, the Company needs to make upfront payments totalling approximately HK$2.2 million to settle part of the amounts currently owing to them.

8.  If the Summons is granted, the Employer has indicated it will pay approximately HK$7 million to the Contractor on or around 14 March 2025 for previously completed works (“First Payment”). The First Payment would be applied as follows:

(1)  Approximately HK$2.2 million to the three Critical Subcontractors;

(2)  Approximately HK$1.4 million to employees;

(3)  Approximately HK$3.4 million to certain third-party service providers essential for the Company’s operation of the KT Project.

9.  Thereafter, the Employer is expected to make further payments (“Subsequent Payments”)  on a biweekly basis, with each payment estimated between HK$7-9 million.  These funds will be used as follows:

(1)  Critical Subcontractors: Payments for work performed after 17 March 2025, ensuring operational continuity.

(2)   Employee Wages: Coverage of wages and entitlements for Company employees and those seconded from Paul Y. group companies.

(3)   Service Providers: Allocations to essential third-party service providers for the KT Project’s ongoing operation.

(4)   Past Debts: Up to 15% of payments directed toward settling outstanding liabilities owed to Critical Subcontractors.

(5)   Surplus Retention: Any remaining amounts retained in the Company’s estate, potentially increasing assets available for creditor distributions.

10.  The PLs do not intend to utilise any existing cash in the Company’s bank accounts or other current assets to fund the continuation of the KT Project.

Applicable principles

11.  The application is made under paragraph 4(6)  of the PL Order for the sanction of payments.  The paragraph provides that the PLs may:

“Carry on the business of the Company so far as may be necessary for the purpose of preserving Assets and with the prior sanction of the Court, and for this purpose to pay or authorise payments of any monies in the ordinary course of the business of the Company out of monies in the existing bank account or accounts of the Company or bank account or accounts opened or maintained by the Provisional Liquidators as hereinafter provided”

12.  The application is similar in character to an application for a validation order under section 182 of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32)  (“Validation Order”).

13.  It is well-established that, in deciding whether to grant a Validation Order, the Court needs to be satisfied that the transaction to be sanctioned will be beneficial and advantageous to the company and its creditors (see Re China Singyes Solar Technologies Holdings Ltd[1]). The Court of Final Appeal in Re Hsin Chong Construction Co Ltd[2] at [31] held that:

“The interests of the general body of creditors are determinative in deciding whether a disposition of the company’s property after commencement of the winding up should be validated… Validation orders may be made where the applicant shows that the disposition is likely to be or actually has been for the benefit of the unsecured creditors.”

14.  As regards the specific context of granting a Validation Order to allow a company to carry on its business, the principles are well-established:

(1)  In Re ALCO Holdings Ltd[3] at [11], Cheng J held:

“In the case of an insolvent company which is trading, it may be beneficial for the company and its creditors that the company should be permitted to carry on its business in the ordinary course pending the making of a winding-up order against it. The court must consider where the interests of the unsecured creditors lie. In general, the court will be more disposed to the making of a validation order in respect of an insolvent company where it is satisfied that the carrying on of the business is likely to generate net cash or net assets for the benefit of the creditors, and thus to reduce any deficiency that might otherwise exist on the winding up of the company…” (emphasis added).

(2)  In Express Electrical Distributors Ltd v Beavis[4] at [21], Sales LJ held:

“Sometimes the court may be justified in making a validation order where the making of a payment or the supply of assets by the company is a way of, say, fulfilling its obligations under a particularly profitable contract where the eventual profits will exceed the consumption of the company’s assets and will enure to the overall advantage of the general body of creditors… Sometimes the court may be justified in making a validation order simply to allow the company to carry on its business in the usual way; but … it will be more speculative whether this is really desirable in the interests of the general body of creditors and this will be likely to depend on whether a sale of the business as a going concern will probably be more beneficial than a break-up realisation of the company’s assets …” (internal quotation omitted).

15.  As regards the specific context of granting a Validation Order to pay off pre-petition debts for the purpose of allowing a company to carry on its business, the principles are also well-established, as summarised by DHCJ William Wong SC in Re China Singyes Solar Technologies Holdings Ltd[5] at [15(5)]:

“Whether it is desirable that the company should be enabled to carry on its business involves a certain degree of speculation. The Court has to carry out a balancing exercise. It should not, save in special circumstances, validate any transaction or transactions where the result might be that one or more pre-liquidation creditors get paid in full at the expense of other creditors, who will only receive a dividend, unless there are special circumstances making such a course in the best interests of the creditors generally.”

16.  An example of such a transaction would be the supply of part of a product prior to a petition being presented, which can only be used or sold-on if the remaining part is supplied.  The supplier declines (as it is contractually entitled to do)  to supply the remaining part unless it is paid for the part supplied prior to presentation of the petition (in respect of which it has a contractual right to be paid)  as well as the part the company wishes supplied after presentation.  The Company applies for a validation order approving the payments on the grounds that it result in the assets of company being increased either by use or sale of the product.  Although, this will result in an unsecured creditor receiving full payment for its pre-presentation debt, this will not prejudice other unsecured creditors if the total pool of assets available for distribution increases by an amount equal to the difference between what the supplier would receive if the transaction is not validated and what it receives if it is.

17.  In a case such as the present the situation is more complicated.  The PLs are of the view that continuing with the KT Project is beneficial to unsecured creditors, principally (as explained earlier)  because of the prospect of the contract being novated. There is, however, no certainty about this.  Although, the completion dates have been extended and, therefore, all else being equal even if the PLs cannot find a contractor interested in taking over the KT Project continuing with the KT Project for the immediate future will not increase the liability for liquidated damages, inevitably there is some uncertainty as to whether or not continuing with the works will ultimately increase or decrease the pool of assets available to unsecured creditors.  The KT Contract, as I expect is the case with most of the construction contracts entered into by the Group, is large and complicated.  It is not practical for the PLs to produce in the required time and economically a meaningful financial analysis of the possible asset/liability position if (A)  the Company is wound up and the KT Project terminated immediately, (B)  the possible position if the work continues and the contract is not novated, and alternatively (C)  the contract is novated and the KT Project completed by another contractor.  In determining whether or not permitting the PLs to continue with a particular project or, as in the case of the application determined in my decision of 7 March 2025, enter a new transaction, the Court has to be guided to a large extent by the professional and commercial judgment of the PLs.  That is not to say that the Court will not look critically at the evidence before it and question matters about which it has concerns or does not understand; but realistically the PLs assessment of what is likely to maximise the return to unsecured creditors has to be given considerable weight.

18.  The PLs submit that granting the Summons would serve creditors’ best interests and align with the underlying rationale for the PLs’ appointment because resuming the KT Project Work is necessary to preserve the Company’s assets for the following reasons.  First, continuing the KT Project will prevent immediate termination or determination of the Contractor’s employment, providing the PLs critical time to explore novation options.  A successful novation would yield multiple benefits:

(a)  The Company could receive monetary consideration for the novation;

(b)  The new contractor would assume all future obligations and liabilities, fully releasing the Company; and

(c)  A novation would shield the Company from claims related to delays, liquidated damages, and other potential liabilities.

19.  Second, project continuation will prevent the crystallisation of substantial claims that would significantly dilute recoveries for existing creditors in any subsequent liquidation, including:

(1)  The Employer’s claims for liquidated damages and associated costs;

(2)  Indemnity claims by the JV Partner under Article 3.7 of the JV Agreement; and

(3)  Termination payment claims from subcontractors.

20.  Third, allowing the KT Project to proceed will generate future cash flow, enabling the Company to discharge not only debts incurred after 17 March 2025, but also some existing debts owed to Critical Subcontractors, thereby reducing the overall claims against the Company’s estate.

21.  Fourth, the Company is expected to retain a small percentage of the Subsequent Payments received from the Employer, increasing the cash available in the Company’s estate for future distributions to creditors.  The retained amount could range from HK$500,000 to HK$1 million per Subsequent Payment.

22.  Fifth, if the KT Project continues to completion, it is projected to generate a profit of approximately HK$43.5 million for the Company.

23.  The PLs acknowledge that there are certain risks:

(1)  Due to ongoing winding-up petitions, there is a risk that the Company may be wound up before the KT Project is successfully novated.  This could increase net liabilities if the Company incurs new debts to Critical Subcontractors without receiving corresponding payments from the Employer due to the time lag in the payment cycle.

(2)  Even with the brief resumption of the KT Project Work, a winding-up order would likely still trigger contract termination and claim crystallisation.

24.  Notwithstanding these risks, the PLs maintain the view that continuing the KT Project is necessary for, and conducive to, the preservation of the Company’s assets, and, therefore, serves the best interests of the Company’s creditors.  This I accept.

Disposition

25.  I, therefore, made the following orders:

(1)  The Provisional Liquidators be authorised and shall have power to carry on the business of the Company, so far as may be necessary for the purpose of preserving the Assets, and insofar as such business comprises, or relates to, the performance of the Design-Build-Operate Contract dated 21 February 2021 for the Additional District Cooling Systems (DCS)  at the Kai Tak Development (KTD)  Hong Kong, entered into between the Government of the Hong Kong Special Administrative Region, Electrical and Mechanical Services Department (as “Employer”)  and Paul Y.- Qianhai Joint Venture (as “Contractor”)  (Contract No. 1002EM19A), as amended or supplemented from time to time (the “KT Project Contract”)  and/or the execution or completion of the works thereunder (the “KT Project Work”; and the business of the Company comprising, or related to, the KT Project Contract and/or the KT Project Work, the “KT Project Business”), and for this purpose:

  (a)  to pay or authorise payments of any monies to any persons in the ordinary course of the KT Project Business, out of monies received by or on behalf of the Company under or in connection with the KT Project Contract on or after the date of this Order (including, without prejudice to the generality of the foregoing, monies received by the Contractor from the Employer pursuant to the KT Project Contract, to which the Company is contractually entitled); and

  (b)  to incur new debts or liabilities of the Company in the ordinary course of the KT Project Business;

(2)  No disposition of the Company’s property, including any payment out of monies of the Company or monies to which the Company is entitled, by or with the authority of the Provisional Liquidators in carrying out their duties and function and the exercise of their powers under the Order, shall be avoided by virtue of the provisions of section 182 of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32);

(3)  There be liberty to apply; and

(4)  Costs of this application to be paid out of the assets of the Company.