LIN ZHEN v. WANG KEE CONSTRUCTION CO LTD AND ANOTHER

HCA2269/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2269 OF 2007

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DECISION

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1. The 1^st defendant (“D1”) is an approved government contractor.  The 2^nd defendant (“D2”) is a director of D1.  The plaintiff (“P”) is a PRC businessman. 

2. In 2003 the parties formed a partnership, as alleged by D2, to carry out a construction contract.  P injected capital, D2 executed the works.  P had no construction knowledge or experience. 

3. In or about August 2007 the parties fell out.  They have had no direct communication since.  At the time of the fall out the works were progressing.  The main works had been completed but variation works remained to be done.  As at the date of this hearing the variation works are also progressing and are due to be completed in August 2008.  The original contract was worth $28 million.  With the variations the final contract price will be higher. 

4. As a result of the fall out P ceased to be a signatory to the sole contract bank account.  This happened because, according to D2, P had refused to sign cheques for contract expenses and so, in order to pay subcontractors, buy materials, etc., D2 was compelled to remove P’s name as a signatory. 

5. This, and other matters, has caused P to become concerned about his investment and the execution of the works over which he now has no control.  He has issued proceedings claiming, inter alia, the return of his investment and his share of the profit from the contract works. 

6. By this interlocutory summons P seeks the appointment of a receiver to manage the contract bank account and supervise and authorize all contract expenses.  P also seeks an injunction restraining D1 and D2 from withdrawing any money from the account save for expenses necessary for the continuation of the contract works. 

7. Through their solicitors and counsel the parties have attempted to agree terms which will ensure the continuation of the works on the one hand and allay P’s concerns on the other hand.  Those attempts have been unsuccessful. 

8. Both counsel have outlined the legal principles to be applied in the appointment of a receiver and the granting of an injunction. 

9. These principles are well settled and not in contention between the parties. 

10. It seems to me that the factors which are of particular significance in this matter are as follows :

(i)	Thus far, the contract works have not been disrupted by the argument between the parties.  Both the main works and the variations should be completed on time.
(ii)	P’s painstaking investigations and researches into the financial activities of D2 and/or D1 in relation to the contract account have produced only the barest evidence of any irregularities by D2.  It seems that the high water mark of P’s complaints is that an invoice for approximately $5,800 was paid out of the account when it should not have been.  D2 disagrees.  Also, that an invoice for $11,000 odd, in August 2007, was said to have been fabricated.  Again, D2’s version of this invoice payment strongly opposes P’s allegation.  All this in a $28 million contract.
(iii)	In any event there can be no trial of this matter until after the final account has been finalized.  One thing that the parties have in common is a desire to make a profit.  It is in everyone’s interest to ensure the smooth continuation of the contract works thereby, hopefully, maximizing the contract profit.
(iv)	P has made no cross undertaking as to damages on the injunction.
(v)	An injunction and, more particularly, the appointment of a receiver, are likely to have a disruptive effect on the contract works.  Every payment, purchase, invoice, application etc. would have to be placed before the receiver for his supervision and authorization.  There is a real risk that this will slow down the works.  Any deceleration risks dead lines not being met which, in turn, risks unnecessary additional expense and/or damages which P has not undertaken to meet.
(iv)	One particular hardship is already being faced by D2.  With P no longer a “partner” D2 has lost him as a source of capital.  In the absence of P, D2 is forced to approach the bank when short-term financial support is needed.  Banks are reluctant to grant loans to small companies who are embroiled in litigation.
(vii)	The test for the appointment of receiver is — is it “just and convenient” to do so?  Similarly, one of the tests in granting an injunction is the “balance of convenience”.  In my judgment, in both instances the “convenience” arguments must be answered in the defendants’ favour.

The defendants’ offer

11. I am satisfied that D2’s primary motivation is to get the job done satisfactorily and on time, so as to make a profit.  The profit sharing exercise may then commence. 

12. D1, through D2, and D2 have agreed to give an undertaking to the court to continue to use the company account for the sole purpose of meeting all necessary and reasonable expenses incurred in connection with the carrying out of the contract works.  D2 knows that a breach of such an undertaking to the court is a potential contempt of court. 

13. D2 is also willing to prepare and provide to P a monthly financial statement explaining all the transactions in the contract bank account and provide copy invoices. 

14. I am satisfied that this demonstrates sufficient good will and a genuine desire to get on with the job for the court to make no order on P’s application.  

15. My decision is therefore as follows. 

16. Upon D2’s undertaking made on his own behalf and on behalf of D1, through their counsel to :

(a)	utilize the monies in bank account no. 043-506-00047055 with the Nanyang Commercial Bank solely for reasonable and necessary costs arising out construction contract HK16/03 between D1 and the Government of the HKSAR; and
(b)	to prepare and provide to P every month until the completion of the works, commencing with a statement for January 2008, a financial statement particularizing all transactions in the said bank account and annexing copy invoices in support, save and except an allowance of $5,000 per month under the heading of “petty cash”;

no order is made on the plaintiff’s summons dated 17 November 2007.

17. The costs of this summons shall be to the defendants in any event save for the costs of the adjourned hearing on 17 January 2008 which shall be to the plaintiff in any event.