JOINT AND SEVERAL LIQUIDATORS OF HSIN CHONG CONSTRUCTION (ASIA) LTD v. WONG PO KEE LTD AND OTHERS

HCCW 316/2018

[2025] HKCFI 1020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 316 OF 2018

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______________________

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DECISION

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1.  This is an application of the Joint and Several Liquidators (“the liquidators”) of Hsin Chong Construction (Asia) Ltd (“the Company” or “the Main Contractor”) for:

(a)  a declaration that payments in the total sum of HKD54,436,000 (“the Relevant Payments”) made by Capital Court Ltd (“the Employer”) to Wong Po Kee Ltd, Pyrofoe Engineers Ltd and Keio Engineering Co Ltd (collectively the “Nominated Sub-Contractors” or “NSCs”) after the commencement of the Company’s winding up (5 November 2018) were void under s.182 Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 (“the Ordinance”); and

(b)    an order that each of the NSCs do return that part of the Relevant Payments that it has received.

2.  Section 182 provides, where relevant, as follows:

“Avoidance of dispositions of property, &c. after commencement of winding up

In a winding up by the court, any disposition of the property of the company, including things in action¹, ... made after the commencement of the winding up, shall, unless the court otherwise orders, be void”.

3.  The NSCs do not dispute that the Employer made the Relevant Payments to the NSCs after the date of commencement of the Company’s winding up.  Their defence is that as the result of an arrangement made before 5 November 2018 for direct payment from the Employer to the NSCs, the Company had no right to receive payment from the Employer, and so there was no “property of the company” that was caught by s.182.

Background facts

4.  The background facts may be summarised as follows.

5.  The Employer intended to develop a project, with the Company as the Main Contractor. 

6.  In August 2016, the Company sent a “letter of acceptance” to each of the NSCs stating that it has been instructed by the Architect to accept it as the nominated sub-contractor for specified works for the project.  Although the letter said that the sub-contract documents were being prepared by the consultant quantity surveyor, and drafts were subsequently circulated in February 2017, the sub-contracts were not in fact signed until 18 December 2018, after the commencement of the winding up of the Company.  The drafts were not altered notwithstanding the arrangement effected by the Supplementary Agreement relied upon by the NSCs (discussed below).

Main Contract

7.1  On 5 December 2016, the Employer and the Company had entered into an “Agreement & Schedule of Conditions of Building Contract for use in the Hong Kong Special Administrative Region” (“the Main Contract”).

7.2  Before the Supplementary Agreement referred to later, the normal course under the Main Contract² would be as follows: 

-  the Company as main contractor would apply to the Architect from time to time for certificates of payment for works³ done (including the total value of works done by the NSCs);

-  the Architect would then issue certificates stating the amount due to the Company from the Employer;

-  the amount of the certificates would be the estimated value of the works done, less any amount that may be retained by the Employer (the Employer may retain 10% of the total value of the works but excluding the amounts in respect of the NSCs’ works plus the retention fund held for the NSCs under the sub-contracts)⁴ and less any instalments already paid; 

-  the Employer would pay the Company within 28 days after presentation of the certificates, but it could deduct or set-off sums due from the Company to it.

7.3  Clause 30 of the Main Contract provided:

“(1) At the Period of Interim Certificates named in the appendix to these Conditions the Architect shall issue a certificate stating the amount due to the Main Contractor from the Employer, and the Main Contractor shall, on presenting any such certificate to the Employer, be entitled to payment therefor within the Period for Honouring Certificates named in the appendix to these Conditions. ...” (Emphasis added).

8.  Pausing here, it would be seen that the Employer would pay the Company as Main Contractor for works done, including works done by the NSCs.

9.  Clause 27 dealt with the position of Nominated Sub-Contractors as follows.

27  Nominated Sub-Contractors

...

“(a) Such sums shall be deemed to be nett (no discount allowed) and shall be expended in favour of such persons as the Architect shall instruct, and all specialists or others who are nominated by the Architect are hereby declared to be sub-contractors employed by the Main Contractor and are referred to in these Conditions as ‘Nominated Sub-Contractors’. Provided that the Architect shall not nominate any person as a sub-contractor against whom the Main Contractor shall make reasonable objection, or (save where the Architect and the Main Contractor shall otherwise agree) who will not enter into a sub-contract which provides (inter alia):

...

(viii) that the Main Contractor shall retain from the sum directed by the Architect as having been included in the calculation of the amount stated as due in any certificate issued under clause 30 of these Conditions in respect of the total value of work, materials or goods executed or supplied by the Nominated Sub-Contractor the percentage of such value named in the appendix to the Sub-Contract conditions (or, if there be none, in the appendix to these Conditions) as Percentage of Certified Value Retained up to the total amount specified in the appendix to the Sub-Contract Conditions as Limit of Retention Fund (or, if there be none, up to a total amount not exceeding a sum which shall bear the same proportion to the Sub-Contract Sum as the Limit under the Main Contract bears to the Main Contract Sum excluding all amounts included therein in respect of Nominated Sub-Contract works); and that the Main Contractor’s interest in any sums so retained (by whomsoever held) shall be fiduciary as trustee for the Nominated Sub-Contractor (but without obligation to invest) and that the Nominated Sub-Contractor’s beneficial interest in such sums shall be subject only to the right of the Main Contractor to have recourse thereto from time to time for payment of any amount which he is entitled under the sub-contract to deduct from any sum due or to become due to the Nominated Sub-Contractor; and that if and when such sums or any part thereof are released to the Nominated Sub-Contractor they shall be paid in full”. (Emphasis added).

...

(c) Before issuing any certificate under clause 30 or these Conditions, the Main Contractor shall furnish the Architect reasonable proof that all amounts (less due retentions) included in the calculation of the amount stated as due in previous certificates in respect of the total value of the work, materials or goods executed or supplied by any Nominated Sub-Contractor have been discharged, and if the Main Contractor fails to comply with the same and unless he shall produce to the Architect in writing

(i) reasonable cause for withholding or refusing to discharge such amounts as are due, and

(ii) reasonable proof that he has so informed such Nominated Sub-Contractor,

the Architect shall issue a certificate to that effect and thereupon the Employer may himself pay such amounts to any Nominated Sub-Contractor concerned and deduct the same from any sums due or to become due to the Main Contractor”. (Emphasis added).

...

(f) Neither the existence nor the exercise of the foregoing powers nor anything else contained in these Conditions shall render the Employer in any way liable to any Nominated Sub-Contractor”. (Emphasis added).

10.  Pausing here, it is noted that clause 27(c) which relates to direct payment from the Employer to the NSCs is subject to certain conditions and is couched in discretionary terms.  It has been held that this is an enabling provision, meaning that the employer was entitled, but not obliged, to make direct payments if the conditions were satisfied⁵.

11.  On 27 April 2017, one of the NSCs sent a letter to the Employer in these terms:

“According to our record the recent payment received from Main Contractor is being delayed in the past few months ... and with the news broadcasted of Main Contractor’s recent financial status, in order to protect both Client and our company’s interest, we would like to request your consideration of change the payment of our contract works into direct payment for the forthcoming payment.”

12.  There was no reply from the Employer to that NSC, nor was there any meeting between the Employer and any of the NSCs. 

13.  However, the Employer did discuss with the Main Contractor the question of direct payment to the NSCs.

Supplementary Agreement between the Employer and the Company

14.  On 12 May 2017, a Supplementary Agreement⁶ was entered into by deed between the Employer and the Company which was expressed to vary and supplement the terms of the Main Contract.  It contained the following relevant terms:

“(2) In consideration of the provisions stated in Clause (3) below, the Employer agrees to directly pay to all Nominated Sub-Contractors (commencing from and including the interim certificate No.13 by the Architect) and deduct the sums so paid from any sums due or become due to the Main Contractor (excluding the amounts payable or paid to the Nominated Sub-Contractors) (emphasis added).

(3) In consideration of the provisions stated in Clause (2) above, the Main Contractor agrees the following:

(i) Payment Mechanism

The payments in respect of any works, materials or goods under the Nominated Sub-Contracts shall be made in full amount based on the terms and conditions in the respective Nominated Sub-Contracts without any adjustments for charges, set-off, and the like between the Main Contractor and the Nominated Sub-Contractors.

After the Architect issues an interim certificate stating the amounts due to the respective Nominated Sub-Contractors, the Nominated Sub-Contractors should present the notification to the Employer, together with the written confirmation of payment to be received from the Employer, and be entitled to payment within 28 days from the presentation of the Certificate.

The Main Contractor agrees that the sums paid by the Employer directly to the Nominated Sub-Contractors shall be deemed to have been paid via the Main Contractor and waives any claims against the Employer that he has not received any amount in connection with the payments to the Nominated Sub-Contractors (emphasis added).

(3) ⁷In consideration of the provisions stated in Clause (2) above, the Main Contractor agrees the following : (Cont’d)

Except for the Main Contractor’s obligation regarding payments to the Nominated Sub-Contractors, such direct payment to the Nominated Sub-Contractors by the Employer shall not discharge the Main Contractor from any obligation to the Nominated Sub-Contractors under the Contract (emphasis added).

(4) This Supplementary Agreement shall be deemed to be in full compensation and satisfaction for any loss or injury sustained by the Main Contractor in respect of any matter or thing in connection with the implementation of this Supplementary Agreement ...

(5) Unless otherwise specified or provided by this Supplementary Agreement, this Supplementary Agreement will not affect or extinguish any existing rights of the Employer and the Main Contractor and is entered into by the parties without any prejudice to any of their existing rights.

...

(7) In the event of any ambiguity, discrepancy or conflict between this Supplementary Agreement and the Main Contract, the terms and conditions of this Supplementary Agreement shall prevail”.

Direct Payment letters from the Company to the NSCs

15.1  The NSCs were not parties to the Supplementary Agreement.  However on 15 May 2017, the Company issued letters to the NSCs⁸ headed “Employer’s Direct Payment to Nominated Sub-Contractors (Commencing from and including the Interim Certificate No.13) (“the Direct Payment letters”), which said:

“Further to our recent discussion with the Employer, we hereby write to inform you of the revised payment procedure as agreed and confirmed with the Employer as follows:

1. Starting with the interim certificate No.13, interim payments as certified by the Architect to the Nominated Sub-Contractors (NSCs) shall be made directly by the Employer to the NSCs;

2. After the Architect issues an interim certificate stating the amounts due to the respective NSCs, the NSCs should present the notification to the Employer, together with the written confirmation of payment to be received from the Employer, and be entitled to payment within 28 days from the presentation of the Certificate; and

3. The payments in respect of any works, materials or goods under the Nominated Sub-Contracts shall be made in full amount based on the terms and conditions in the respective Nominated Sub-Contracts without any adjustments for charges, set-off, and the like between the Main Contractor and the NSCs.

Please note that such direct payment to the NSCs by the Employer shall not discharge the NSCs from any obligation to the Main Contractor under the Nominated Sub-Contracts” (Emphasis added).

15.2  The Direct Payment letters were counter-signed “Agreed and accepted by” the NSCs.

16.  The terms of the Supplementary Agreement and the Direct Payment letters are material to the issue whether the Company thereby lost its right⁹ to receive the Relevant Payments from the Employer after the commencement of its winding up, and will be discussed below.

17.  On 2 October 2018, the Company completed construction of the project under the Main Contract.

Commencement of winding up

18.  On 5 November 2018, a winding up petition was presented against the Company, thereby commencing the winding up for the purposes of s.182¹⁰ (the winding up order was made on 1 June 2020).

Sub-Contracts

19.  On 18 December 2018, the NSCs signed the sub-contracts which contained the following provisions.  There was no reference (by incorporation or otherwise) to the Supplementary Agreement or the Direct Payment letters.  The following provisions are relevant.

Clause 11(a) -   the NSCs should provide details of the total value of their work to the Main Contractor, who shall then apply to the Architect for certificates of payment;

Clause 11(b) -   14 days after the Employer pays the Main Contractor, the Main Contractor shall pay the NSCs the total value certified, less Retention Money (ie the proportion attributable to the sub-contract works retained by the Employer in accordance with the Main Contract) and amounts previously paid;

Clause 11(c) -   14 days after the Main Contractor receives the Retention Money from the Employer against a certificate, the Main Contractor shall pay to the NSCs such part of it as is included in the certificate;

Clause 11(h) -   the Main Contractor’s interest in the Retention Money, whether it is included in the amounts retained by the Employer under the Main Contract and held by him or whether it is held by the Main Contractor, is fiduciary as trustee for the Sub-Contractor (without obligation to invest);

Clause 13 -  the Main Contractor shall notwithstanding anything in the Sub-Contract be entitled to deduct from or set off against any money from him to the Sub-Contractor (including any Retention Money) any sum or sums which the Sub-Contractor is liable to pay to the Main Contractor under this Sub-Contract.

Payments by the Employer to the NSCs

20.  Commencing on 7 November 2018 (i.e. after the date of commencement of winding up), the Employer made payments of retention monies and non-retention monies directly to the NSCs under Interim Payment Nos.IP31, 34, 36 and 37, as follows:

NSC	Dates of Payment	Retention Monies	Non-Retention Monies
1st Respondent	7.11.2018 to 30.9.2019	2,449,000	8,047,000
2nd Respondent	7.11.2018 to 17.8.2020	4,966,500	17,604,000
3rd Respondent	7.11.2018 to 17.8.2020	3,590,500	17,779,000

Proceedings

21.1  On 25 July 2023, solicitors for the Company’s liquidators issued letters of demand to the NSCs for return of the sums they received from the Employer after the commencement of the Company’s winding up.

21.2  The NSCs having refused to return the sums, the summons was issued on 10 July 2024.

Discussion

22.  It is clear that under normal contractual provisions, the employer would not make direct payments to NSCs except under the conditions prescribed in clause 27 (c) of the Main Contract, and even then, as a matter of discretion by the employer¹¹.  It was not argued before me by the NSCs that these conditions applied in the present case.

23.  Rather, the NSCs’ case is that the Supplementary Agreement and the Direct Payment letters gave them certain rights (discussed below) which entitled them, as opposed to the Company, to receive the Relevant Payments even though they were made by the Employer after the commencement of the Company’s winding up.  It is noted that the NSCs have not applied for a validation order under s.182.

24.1  Before discussing the NSCs’ submissions, it is important to note the principles underpinning s.182 as set out by the Court of Final Appeal in Re Hsin Chong Construction Co Ltd (“Hsin Chong CFA”)¹².  In that case, after a petition was presented to wind up a company, resulting in the freezing of its bank accounts, it entered into a supplementary agreement with its joint venture partner for the JV partner to acquire the company’s rights under the JV for a sum.  Under the supplementary agreement, the JV partner would pay the sum into an account of the company’s associate company for payment of the company’s staff wages and outstanding MPF contributions.

24.2  The JV partner then applied for, and was granted, a retrospective validation order under s.182.

24.3  The CFA set aside the validation order, holding that:

-  in deciding whether to grant a validation order, the interests of the company’s general body of creditors was of central importance [§32];

-  the court should focus on what was the relevant property which belonged to the company and what was the relevant disposition [§33];

-  the relevant property was the company’s rights under the JV agreement and the conversion of those rights into the sum payable under the supplementary agreement, being a chose in action [§34];

-  the relevant disposition was the performance of the supplementary agreement, the effect of which was that the company lost its right to receive the sum for distribution to its general body of creditors [§38];

-  if, as a result of the payment of the sum under the supplementary agreement, the company’s property was transferred, it did not matter that the transfer was “wrapped in contractual clothing” [§35]. Nor did it matter whether the parties had any ulterior motive or were involved in any breaches of duty before the disposition is rendered presumptively void [§40].  The sum did not go to the company to the prejudice of its unsecured creditors and was thus contrary to the pari passu¹³principle [§38].

25.  The focus is on the relevant property and its disposition.  It is true that in the authority above, the supplementary agreement was entered into after the commencement of the winding up.  However, as stated in Goode on Principles of Corporate Insolvency Law, §8-13:

“ ... the mere fact that a power to pay the sub-contractor has become exercisable prior to the winding up will not be sufficient; once liquidation supervenes, payment cannot be made to one creditor at the expense of others, even if the liability to make the payment was incurred before the commencement of the winding-up”. (Emphasis added)

26.1  This principle was illustrated in the Court of Appeal’s judgment in Chevalier (HK) Ltd and anor v The Joint Liquidators of Right Time Construction Co Ltd (in Liquidation)¹⁴.

26.2  In that case, on 29 April 1987 the main contractor sent a letter to the employer confirming (at the employer’s request), that it (the main contractor) had no objection to the employer paying direct to the NSCs as per an architect’s certificate of the previous day.  On the same day (29 April 1987), the employer drew cheques for two sums in favour of two NSCs.  The NSCs issued receipts bearing the same date.  On 1 May 1987, a petition for winding up the main contractor was presented, and as such was the day on which the winding up commenced.  On 25 May 1987, the cheques were cleared and the funds were received by the NSCs.

26.3  The Court of Appeal¹⁵ held that the payments were void under s.182.  It accepted that the payments to the NSCs had been made with the consent of the main contractor.  However, following the observation of Oliver J (as he then was) in In re Leslie Engineers Co Ltd¹⁶, the court held:

“ ... it is wholly immaterial so long as one is dealing with the company’s property, whether the purported disposition is made by the company or by a third party, or whether it is made directly or indirectly”¹⁷.

26.4  The court focused (as the CFA did in Hsin Chong CFA above) on the relevant property and its disposition. 

“Ignoring for the moment the effect of s.182, when [the employer] (with the authority of [the main contractor]) paid its own money to each [NSC], the position was that [the employer] was entitled to, and no doubt did, in its books, debit the [main contractor] account to the extent of the payments made to each of the [NSCs]. This reduction in the debt owed by [the employer] to [the main contractor] was a reduction made with the authority of [the main contractor] and amounted to a disposition of [the main contractor’s] property within the meaning of s.182.

Furthermore there was also a disposition of [the main contractor’s] property effected when [the employer] made the payments to each of the [NSCs] because, as between [the main contractor] and [the employer] on the one hand and each of the [NSCs] on the other hand, [the employer] has acted, in effect, as the agent of [the main contractor] and paid the sums of money to which [the main contractor] was entitled (under the main contract) to the [NSCs] in partial discharge of [the main contractor’s] debt to each of them.

Section 182 retrospectively renders both these dispositions void ...”¹⁸.

The court held that the liquidators were entitled to claim against the NSCs.

The NSCs’ contentions

27.1  The NSCs contended that even though the Relevant Payments were made after the commencement of the Company’s winding up, s.182 did not apply.  Their arguments can be summarised under the following heads:

(1)    Variation

(2)    Assignment

(3)    Novation

(4)    Estoppel by Convention

(5)    Trust over the Retention Monies.

27.2  I should add that the NSCs had originally argued that they had obtained an enforceable right by virtue of the Contacts (Rights of Third Parties) Ordinance Cap.623.  However, Mr Anson Wong SC¹⁹ clarified at the hearing that this was not a “stand-alone” argument, and only “buttressed” the other arguments.

(1) Variation

28.1  It was submitted on behalf of the NSCs that the Supplementary Agreement had the effect of disposing of the Company’s right to receive payments from the Employer in respect of the Sub-Contract works under the Main Contract.  They argued that this disposition was the result was a tri-partite agreement between the Employer, the Company and the NSCs, as in Golden Sand Marble Factory Ltd v Easy Success Enterprises Ltd and Anor²⁰.

28.2  In that case, after meetings were held in March 1995 among the employer, the main contractor and the NSC, it was agreed that all future payments in relation to the NSC’s works would be paid directly by the employer to the NSC and not through the main contractor.  In June 1996, the main contractor was wound up.  In May 1997, the architect settled the final account due in respect of the NSC’s works (including retention money).  The main contractor’s liquidators argued that they had the right to receive the sum. 

28.3  Findlay J held that the NSC was entitled to the whole sum.  He held that at the meetings of the employer, the main contractor and the NSC, there was an agreement that payments would be made directly to the NSC.

“So, whatever the position may be where there is a unilateral act under clause 27 (c), where there is an agreement such as here the sub-contractor acquires an enforceable right to have the payments made directly to him, and the main contractor loses any right under the main contract it might have had otherwise to insist that payment be made through it. Here, there is no question of the employer exercising a discretion to pay the nominated sub-contractor directly. It is a matter of rights under the agreement on March 1995”²¹. (Emphasis added)

28.4  The judge also held obiter that where an employer acted unilaterally under the main contract and paid an NSC directly and deducted this payment from money due to the main contractor, if the main contractor was liquidated before payment, then on principle, the right to receive the payment was still vested in the company at the time of winding up²².

29.  Findlay J’s decision was grounded on the basis that there had been an agreement among all three parties which he found had been made at the meetings²³.  In the present case however, there is no evidence of a tri-partite agreement.  Unlike the facts in Golden Sand, there were no meetings or evidence of other discussions among the three entities, i.e. the Employer, the Company and the NSCs.  And unlike the facts in Brican Fabrications Ltd v Merchant City Developments Ltd²⁴, there was no extant bilateral contract between the Employer and the NSCs.  The NSCs were not included as parties to the Supplementary Agreement, and apparently were not even aware of its terms as they had not been given a copy of it.

30.  More importantly, the terms of the Supplementary Agreement also do not support the NSCs’ contention that it thereby had the effect of disposing of the Company’s right to receive payments from the Employer in respect of the Sub-Contract works under the Main Contract.

31.1  The NSCs’ first contention was based on the wording in the Supplementary Agreement that [the NSCs] should “be entitled to payment within 28 days from the presentation of the certificate” (emphasis added). 

31.2  However, that must be understood against the rest of the document, in particular the following:

“the Main Contractor agrees that the sums paid by the Employer directly to the [NSCs] shall be deemed to have been paid via the Main Contractor and waives any claims against the Employer that he has not received any amount in connection with the payments to the [NSCs]” (emphasis added).

32.  In my view, the emphasized words preserve the position, as a matter of legal right, that it is the Main Contractor which is entitled to receive the moneys, even though, as a matter of physical mechanism, the moneys did not go through its bank account. 

33.  The “entitlement” of the NSCs referred to the implementation of this mechanism for payment.  This was obviously of benefit to them, as payments so made by the Employer and received by them before the Company’s winding up would directly provide the NSCs with liquid funds. 

34.  The NSCs also asked rhetorically that if the Main Contractor was still entitled as a matter of legal right to payment from the Employer, what then is the variation to the Main Contract?  The answer, in my view, is that it added an alternative route to direct payment, in addition to clause 27(c).  Without these routes, an employer has no right to by-pass a main contractor to make payment directly to sub- contractors²⁵.

35.  The NSCs’ second contention was that the payments ceased to be the property of the Company because it was stated in the Supplementary Agreement that they would be “without any adjustments for charges, set-off and the like between” the Company and the NSCs.

36.1  I do not consider that these words support the NSCs’ case.  On the contrary, they show that the direct payment was simply a mechanism for funds to be paid quickly, as the Employer would not be aware of (or wish to be involved in disputes over) any charges or set-off that the Company had against the NSCs.  Under this payment mechanism, the Employer would simply pay the NSCs the face value of the certificates first, and leave it to the Company to, as it were, “settle accounts” with the NSCs later. 

36.2  To suggest that a company which was in financial difficulty would agree to abandon all its rights of charge or set-off against its sub-contractors defies commercial sense, and the court should be very cautious before accepting any interpretation that would achieve such a result.

37.  The NSCs’ third contention²⁶ based on “the other clauses in Clauses (2) and (3)” of the Supplementary Agreement is not understood. 

38.  Clause (2) states, where material:

“ ... the Employer agrees to directly pay to all [NSCs] ... and deduct the sums so paid from any sums due or become due to the main contractor (excluding the amounts payable or paid to the [NSCs])” (emphasis added).

In my view, this is consistent with the position that the Employer remained liable to pay the Main Contractor.  Otherwise, the Employer would be separately liable to (1) the NSCs and (2) the Main Contractor for two distinct sums.  There would be no question of “deducting” (1) the sums paid to the NSCs from (2) the sums due to the Main Contractor.  In making payment to the Main Contractor, the Employer would exclude the sums payable or paid to the NSCs, otherwise the Employer would be paying twice for the same works.

39.  Clause 3(i) states, where material:

“The Main Contractor agrees that the sums paid by the Employer directly to the [NSCs] shall be deemed to have been paid via the Main Contractor and waives any claims against the Employer that he has not received any amount in connection with the payments to the Nominated Sub-Contractors ...”.

40.  Again this is consistent, in my view, with the position that the Employer remained liable to pay the Main Contractor for sub-contract works.  If the Employer had entered into a separate obligation to pay the NSCs, with the Main Contractor simply “dropping out of the picture”, it would not have been necessary to expressly specify that the sums so paid should be treated as having been paid through the Main Contractor, and the reference to “waives any claims” presupposed that the Main Contractor would have claims for the sums. 

41.  The NSC’s fourth contention was based on the context from which the Supplementary Agreement arose. 

42.  The NSCs submitted that the Employer wished to ensure that the NSCs would carry on works at the project as usual. That is a reasonable assumption, but it does not lead to the conclusion that the Employer thereby entered into a new, direct contractual relationship with the NSCs, with the Main Contractor abrogating its rights under the Main Contract.  As mentioned earlier, with the implementation of the direct payment mechanism, the NSCs did benefit from the direct payment of funds from the Employer.  This lasted for 18 months before the commencement of winding up. The liquid funds satisfied the commercial objective of ensuring the sub-contract works would proceed, as in fact they did.

43.  The NSCs’ fifth contention was based on the Third Party Ordinance.  This ordinance deals with the right to sue.  In light of the clarification by their leading counsel that this was not a stand-alone point, and as I have found that the other four contentions are insupportable, I will not further lengthen this Decision by discussing this fifth contention.  

(2) Assignment

44.  The NSCs argued that the Direct Payment letters had the effect of an assignment by the Company to the NSCs of its rights to payment from the Employer. 

45.1  In my view, there was no assignment in the present case.  A mere mandate or authority is not enough²⁷.  For there to be an assignment, it must be plain that the assignor (the Company) intends to divest itself of the chose and vest it in the assignee (the NSCs).  For the reasons discussed above in the section on Variation, it is clear from the terms of the Supplementary Agreement that the Company did not intend to divest itself of the right to payment from the Employer.  What it intended to effect was a “payment mechanism”, as per the specific heading of the Supplementary Agreement, or a “revised payment procedure”, as per the Direct Payment letters, and that was what the NSCs were only “entitled” to. 

45.2  Re French’s (Wine Bar) Ltd²⁸ does not assist the NSCs, as in that case, there was an unconditional, specifically enforceable contract entered into between the company and the purchaser of the wine bar, for which the deposit was paid, and the purchaser let into possession, all before the presentation of the petition for the company’s winding up.

(3) Novation

46.  This can be dealt with shortly.  It is accepted by the NSCs that a novation occurs only where there is consent by all three parties.  Again for the reasons discussed under the section on Variation, it is clear there was no intention on the part of the Employer and the Company that the latter’s right to payment from the former under the Main Contract (the Company’s chose) would be extinguished, and replaced by a newly created right acquired by the NSCs against the Employer, between whom there were not even discussions, let alone an agreement.

(4) Estoppel by convention

47.  The NSCs also argued that the Company is estopped from arguing that it has the right to the Relevant Payments made after commencement of the winding up.

48.  This argument ignores the public policy underpinning s.182 as explained by the CFA in Hsin Chong CFA and illustrated in Chevalier.  When a statute is enacted on grounds of general public policy, an estoppel cannot be asserted against it, at least not in circumstances where a validation order would not be granted²⁹.  As noted above, the NSCs have not sought a validation order in the present case.

49.1  In conclusion (subject to the discrete issue of Retention Monies discussed below), applying the principles set out by the CFA in Hsin Chong CFA and by the Court of Appeal in Chevalier to the present case, it is clear that the making by the Employer of the Relevant Payments to the NSCs after the commencement of winding up is caught by s.182.

49.2  The relevant property was first, the right (a chose in action) that the Company had to receive money from the Employer, including money for works done by the NSCs, which right was converted into the funds in the Relevant Payments.  

49.3  The relevant disposition was the making of the Relevant Payments to the NSCs at a time when the Company’s winding up had commenced.  The fact that the Company had authorised it before the commencement of winding up³⁰, that it may have been made under contract³¹, and the Company’s motive when so agreeing³², were immaterial.

(5)  Retention monies

50.  As noted above, the liquidators sought the return from the NSCs of both Retention Monies and Non-Retention Monies paid by the Employer. 

51.  The NSCs contended that, irrespective of their other arguments, the liquidators were not entitled to the return of the Retention Monies, as the Company’s interest in “any sums so retained (by whomsoever held) shall be fiduciary as trustee for the [NSC]” as stipulated in clause 27(a)(viii) of the Main Contract and clause 11(h) of the Sub-Contracts.

52.1  In Re Tout & Finch Ld ³³a company which was the main contractor went into voluntary liquidation.  The sub-contractors made an application to the court to determine first, to whom the employer should make payment, and secondly, whether the main contractor company was trustee of the retention money, so that when the retention money became payable, it should be paid directly to the sub-contractors, or if it came to the liquidator’s hands, he was bound to immediately pay it over to the sub-contractors.

52.2  The court held that on the construction of the contract documents, which were similar to those in the present case, the main contractor company had an interest in the retention money held by the employer which it (the company) could make the subject of a valid equitable assignment, and such an assignment had been effectively made by clause 11(h) of the sub-contract³⁴.  Accordingly the company was a trustee and was bound to pay the retention money over to the sub-contractors.

52.3  The court held that a trust existed notwithstanding the provision in the sub-contract that the main contractor shall be entitled to make deductions or set-offs from any sums, including any retention money, which he may be liable to pay to the sub-contractor.  It was held to be

“a perfectly normal and perfectly sensible provision to make, namely, that against what the company may owe to the applicant [sub-contractor] as trustee, the company may set off moneys which may be owing by the sub-contractor to the company”³⁵.

53.1  This analysis was followed by the Court of Appeal in Re Hsin Chong Construction Co Ltd (Provisional Liquidators: Application for Directions) (“Hsin Chong CA”)³⁶.  In that case, the employer engaged a company as main contractor to construct some buildings.  The company entered into sub-contracts with NSCs.  The terms of the main contract and sub-contracts were not identical to those in the present case.

53.2  A winding up petition was presented against the main contractor company, after which the architect issued final certificates stating a final sum was due from the employer.  The liquidators applied for directions from the court as to whether they should make any payments to the sub-contractors out of funds received from the employer.

53.3  The Court of Appeal held, adopting the trust analysis in Re Tout and Finch Ld, that the retention monies should be released to the NSCs and the non-retention monies were part of the company’s estate for distribution to unsecured creditors³⁷.  The question arose “whether the retention monies had been sufficiently segregated such that a trust had been created”.  This was rejected for the reason (among others) that the employer had adopted a stringent project accounting system, the retention monies having been set aside in the payable account since the commencement of the project, and the retention monies could be easily ascertained.  There was no question of any NSCs’ money being mixed with the company’s money.

54.1  In the present case, the liquidators have again argued that no trust arose because they were informed by the Company’s retained staff that:

“Where the Company received funds of a construction project that consist of (i) retention monies that may be held by the Company on behalf of sub-contractors and (ii) non-retention monies, the Company would not segregate the fund accordingly (by separating the two of them into separate bank accounts or otherwise). As such, the respective amounts of retention monies and non-retention monies received by the Company would not be ascertainable solely with reference to bank records”³⁸.

54.2  On that basis, the liquidators argued that since the practice of the Company was not to segregate retention monies when received from the Employer, there were no identified assets impressed with the trust, such as to constitute a separate trust fund prior to insolvency.

55.  I do not think that the evidence of the Company’s practice when it used to receive moneys (including retention monies) in its bank accounts assists the liquidators in the present case.  Here, the Retention Monies were retained by the Employer and paid to the NSCs. The monies did not pass into the Company’s bank account where it might have been commingled with its own funds.  There is no evidence that the Employer had commingled funds.

56.  Having said that, I note that the liquidators claim that the Company is entitled to set-off against the Retention Monies a portion of the liquidated damages and contra-charges claimed by the Employer in respect of works done by the NSCs³⁹. 

57.1  In Mr Arab’s 8^th affirmation, he said the Company was not yet in a position to ascertain and finalise the quantum of set-offs due to “technical and practical difficulties in ascertaining the exact amount of the set-offs” but he said that, based on existing estimations made by the Company’s retained staff, “the estimated quantum of set-offs (which is as high as HK$61 million in total) has well exceeded the total amount of Retention Monies (i.e. around HK$11 million)”.⁴⁰

57.2  In the affirmation filed on behalf of each of the NSCs, the deponent said he was not able to “consider and respond to the liquidators’ assertions” as Mr Arab did not break down the alleged liquidated damages and contra charges as between the respective NSCs⁴¹.

57.3  Mr Arab said in his affirmation in reply that the exact quantum of the set-off may crystalize only after the final account for the project are finalised between the liquidators and the Employer⁴².  He did not indicate an approximate date.

58.  As noted above, it is well-established that as a matter of principle, a trust may co-exist with a trustee’s right of set-off ⁴³. In the present case however, the amount of set-off remains to be determined. In the circumstances, I think the proper order to make is as follows.

Order

59.  (1)    A declaration that the payment to:

-  the 1^st Respondent of HKD8,047,000

-  the 2^nd Respondent of HKD17,604,000 and

-  the 3^rd Respondent of  HKD17,779,000

made by Capital Court Ltd after the commencement of winding up of Hsin Chong Construction (Asia) Ltd were void under s.182 Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32;

(2)    An order that each respondent do pay to the applicants its respective sum above within 28 days⁴⁴ from the date of the Order herein;

(3)    An order that within 28 days of the date of the Order,

-  the 1^st Respondent do pay the sum of HKD2,449,000

-  the 2^nd Respondent do pay the sum of HKD4,966,500 and

-  the 3^rd Respondent do pay the sum of HKD3,590,500

to the applicants to be held by the applicants in a separate trust account for each respondent pending finalization of the final account between Capital Court Ltd and Hsin Chong Construction (Asia) Ltd in respect of the Hong Kong Ocean Park Marriott Hotel project and any consequential set-off;

(4)    Liberty to apply.

60.  Finally as to costs, the parties have agreed that costs should follow the event.  As the applicants have succeeded on most of the issues, I would order that the respondents pay 75% of the costs to be taxed if not agreed.  The parties have agreed that there should be certificate for two counsel.