RE KAM KUEN CONSTRUCTION CO. LTD.

HCCW 16/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 16 OF 2002

____________

____________

______________________________________

REASONS FOR JUDGMENT

______________________________________

1. This is a petition to wind up Kam Kuen Construction Co. Ltd. ("the Company") on the ground that it is unable to pay its debts. The petition was presented by Wong Po Kee Ltd.. On 5 December 2001, a statutory demand was served on the Company seeking payment of HK$2,559,649.83. This was made up of the principal sum of HK$2,285,084.31 with interest calculated up to 4 December 2001. According to the petitioner, the amount was due under an agreement in writing ("the settlement agreement") signed by the petitioner and the Company on 23 April 2001 and 10 May 2001 respectively in full and final settlement of all claims against each other in respect of construction work performed by the petitioner as a sub-contractor of the Company. The petition herein was presented on 4 January 2002 and the hearing was adjourned twice for the filing of further evidence.

2. Two creditors of the Company have given Notice of intention to appear to oppose the petition. They are Chi Wo Construction Co. Ltd. ("Chi Wo"), to whom is owed HK$4,827,180.58, and Wa Luen Engineering Co. ("Wa Luen"), to whom is owed HK$4,231,669.00.

3. At the conclusion of the hearing, I have made a winding-up order against the Company and these are the reasons for my judgment.

Matters not in dispute

4. The sub-contract between the Company and the petitioner was made in November 1995 as evidenced by a letter dated 10 November 1995 from the Company to the petitioner. It was for the installation of underground drainage pipe work (excluding concrete pipe work) for a building project known as C811 HACTL Superterminal No. 1 at Chek Lap Kok. The principal contractor was Gammon-Paul Y. Joint Venture ("GPY").

5. On 30 June 1998, the Company submitted to GPY three applications for interim payment in respect of work done under three sub-contracts. These sub-contracts related to excavation, underground drainage and temporary road and hardstanding. The total payment applied for by the Company for the three sub-contracts, up to the last application for interim payment in June 1998, amounted to HK$122,677,052.32.

6. A statement of final account in respect of each of the three sub-contracts was signed by the Company on 9 November 1998 and by GPY on 17 November 1998. In each statement, the Company agreed that the figures indicated in the account were correct and that payment of the amount indicated as outstanding balance represented full and final settlement of each sub-contract and that the Company would have no further claims whatsoever in respect of each sub-contract against GPY. The total amount of the outstanding balance on the three statements of final account, plus the payments previously made, represented the total value of work certified by GPY on the three sub-contracts and the grand total was HK$90,184,609.00. There was thus a difference between the total sum applied for by the Company for work done under the three sub-contracts and the total value of work certified by GPY in the sum of HK$32,492,443.32, and the Company was aware of this shortfall of over HK$32 million since November 1998.

7. It is not in dispute that the settlement agreement, which was headed "Agreement of Final Sub-Contract Sum", was signed by Mr Wong Kwok Keung on behalf of the petitioner on 23 April 2001 and by Mr Fung Wah Sang on behalf of the Company on 10 May 2001. Before Mr Fung signed the settlement agreement on behalf of the Company, the petitioner had sent a letter to the Company on 3 May 2001 marked for the attention of its managing director Mr Lau Ming Yin. It was stated in that letter that the petitioner had signed the settlement agreement on 23 April 2001 and had faxed it to Mr Fung but had received no reply from the Company. It was further stated that unless the Company was to respond with a repayment proposal by 10 May 2001, the petitioner would consider withdrawing its settlement agreement with the Company and take legal action immediately to recover all outstanding amounts for construction work with interest and that the letter was a final notification.

8. The settlement agreement identified the sub-contract works in question and gave a statement of final account made up of the total value of works executed less the total contra charge to arrive at the final sub-contract sum of HK$16,600,251.89. Previous payments were deducted from the final sub-contract sum to arrive at the final outstanding balance which was HK$2,285,084.31. The settlement agreement continued as follows:

"We hereby agree that the sum of HK$16,600,251.89 is the final sub-contract sum inclusive of all works and all claims that our company has or may have under the above stated sub-contract, and it is hereby confirmed that the final balance payment of HK$2,285,084.31 plus overdue interest (Overdue interest incurred due to late release of retention money, calculation of which is attached hereinafter. Up to 31 December 2000 a sum amounts to HK$164,241.06 has been incurred) is in full discharge and final settlement of all claims, and our company has no further claims against your company in respect of the said sub-contract."

9. On 25 May 2001, Mr Fung sent a fax on behalf of the Company to the petitioner and it was headed "Proposed Schedule of Repayment". In the schedule annexed to the covering sheet of the fax, it was stated that the "total outstanding balance" was HK$2,285,084.31, being the amount of final outstanding balance as stated in the settlement agreement. A sum of interest for late release of retention money was given (which was the amount as stated in the settlement agreement) and the sum of these two figures, which made up the total payment required, was given as HK$2,449,325.37. This figure was described as the "total outstanding final payment as agreed". There was then set out a proposed schedule of payment of 12 monthly instalments commencing from 28 September 2001 to 28 August 2002. The first instalment proposed was in the sum of HK$249,325.37 and the other 11 instalments were in the sum of HK$200,000.00 each. The petitioner denies that it had accepted the proposed schedule of repayment by instalments. This is disputed by the Company.

10. Two cheques dated 28 October 2001 were issued by the Company to the petitioner in the respective sums of HK$249,325.37 and HK$200,000.00, being the amounts of the first and second instalments according to the proposed schedule of repayment. Each was signed by Mr Lau and Mr Fung. The cheques were dishonoured when presented for payment due to insufficient funds. As mentioned earlier, the statutory demand was served by the petitioner for the sum of HK$2,559,649.83 on 5 December 2001.

Is there a bona fide dispute of the debt on substantial grounds

11. The Company has raised a number of grounds disputing the petitioner's debt. In the first affirmation of Mr Lau, he alleged that the settlement agreement was not binding because he did not sign it on behalf of the Company and it was only signed by Mr Fung. He alleged that there was an "established practice" among the construction contractors in Hong Kong that any agreement of final account must be signed by the same persons who had signed the sub-contract. As I understand Mr Lau's evidence, he does not dispute that Mr Fung is a person authorized to act for the Company but he has asserted that as it was he who had signed the sub-contract with the petitioner and not Mr Fung, the statement of final account must be signed by him to be binding on the Company, according to the alleged established practice.

12. Apart from being a director of the Company, Mr Fung was the contract manager of the project in question. He had signed a number of letters for the Company in its correspondence with the petitioner, GPY and other parties. It is not in dispute that he was involved in the negotiation of the sub-contract with the petitioner in October 1995. I agree with Mr Jonathan Wong, who appeared for the petitioner, that the alleged trade practice made on the bare assertion of Mr Lau does not accord with common sense. One could well envisage the situation of there being a change in personnel within the organization of a contracting party for a construction project that has taken several years to complete. If the person who had signed the sub-contract had left the organization and could not be located, it would not be possible for an agreement of final account to be signed, according to the trade practice alleged by Mr Lau. I have no hesitation in rejecting his allegation.

13. Mr Lau has also alleged in his first affirmation that he had refused to conclude any settlement agreement with the petitioner because the petitioner had failed and/or refused to admit liability for HK$36 million, being damages suffered by the Company due to the petitioner's late completion of the sub-contract work. In his second affirmation, he produced the Company's applications for interim payment to GPY and the three statements of final account signed between the Company and GPY that I have referred to earlier, showing that the Company had received HK$32,492,443.32 less from GPY. Mr Lau asserted that this shortfall was due to the delays which were "mainly caused" by the petitioner. I pause here to note that the sum of HK$36 million being damages allegedly suffered by the Company mentioned in the first affirmation was reduced to HK$32 million approximately in the second affirmation of Mr Lau. Further, it is apparent from the documents exhibited to his second affirmation that the shortfall of HK$32 million was in respect of three sub-contracts with GPY, for excavation work, underground drainage and temporary road and hardstanding. On the face of it, even if the Company has suffered loss and damage in respect of the value of the works certified by GPY in the statement of final account because of alleged delays on the part of the petitioner in the installation of underground drainage, I fail to see how and why the petitioner should be responsible for the loss and damage in relation to the sub-contract for excavation work or the sub-contract for temporary road and hardstanding. Even in the second affirmation of Mr Lau, he only went so far as to allege that the petitioner had an oral agreement with him that it would bear "part of the damages" occasioned by the GPY reduction in the final payment.

14. Above all, I must bear in mind that as earlier as November 1998, the Company was aware of the shortfall in payment it was to receive from GPY in the sum of approximately HK$32 million. If it had a genuine claim or cross-claim against the petitioner, there is absolutely no reason why it has failed to make any claim or demand in writing to the petitioner for payment of all or part of the damages allegedly suffered. It was confirmed by Mr Jimmy Kwong, who appeared on behalf of the Company, that there was no letter or other document from the Company to the petitioner making a claim or demand of that kind. For the above reasons, I am firmly of the view that the Company does not have any valid or genuine cross-claim against the petitioner, whether for the whole of HK$32 million or part thereof. I should also mention that the Company has not adduced any or any sufficient evidence to make out a case as to what part of the shortfall in payment of HK$32 million that the petitioner should be responsible for. It has clearly not discharged the onus of adducing sufficiently precise factual evidence for the court to find that it has a genuine and bona fide cross-claim against the petitioner.

15. Next, it was alleged by the Company that Mr Fung had signed the settlement agreement under duress, because of pressure applied by triad related debt-collectors engaged by the petitioner. The petitioner has denied that it had ever engaged such debt-collectors. What Mr Lau had stated in his first affirmation was merely this, that the petitioner "employed triad related debt-collectors to threaten and harass [his] staff continually for more than a year". Plainly, this is hardly sufficient to support the allegation of duress made by counsel on behalf of the Company when the petition was heard on 29 April 2002. On that occasion, the court adjourned the petition with directions for the parties to file further evidence. No further evidence was filed by Mr Lau or by Mr Fung regarding the allegation of duress. There is simply no substance in this.

16. It was also argued for the Company that the settlement agreement did not expressly provide that payment of the final outstanding balance in the sum of HK$2,285,084.31 was to be made immediately or within a reasonable time. There being no express provision as to when payment was to be made, there would be an implied term at law to give business efficacy to the agreement that the payment was to be made within a reasonable time. That would also appear to be the understanding of the Company, otherwise it would not have sent the petitioner a fax on 25 May 2001, proposing payment by instalments. On any view, when the statutory demand was issued in December 2001, a reasonable time for payment of the final outstanding balance in the settlement agreement must have elapsed.

17. Lastly, it was argued for the Company that "we" and "our company" in that paragraph in the settlement agreement that I have quoted above must have referred to the petitioner. Hence, it was only an agreement on the part of the petitioner confirming that the final balance payment under the sub-contract was the amount as stated in the settlement agreement, and the Company has not agreed to waive any claim it might have against the petitioner for damages for delay. Even if the settlement agreement should be construed in that light (I have reservations about this), and that the Company has not compromised any claim for damages it might have against the petitioner, for the reasons I have given above, I do not think the Company has any valid or genuine cross-claim against the petitioner. I agree with the petitioner's counsel that it does not accord with common sense that the Company should enter into the settlement agreement with the petitioner if the petitioner was indeed liable to the Company for an amount well in excess of the final balance payment of HK$2.2 million, or that the Company would have issued two cheques (which were dishonoured) to the petitioner in part payment of the final outstanding balance.

18. For the above reasons, the Company has failed to establish that it has a bona fide dispute of the debt on substantial grounds or that it has a valid or genuine cross-claim against the petitioner for an amount not less than the debt in the petition.

The wishes of the opposing creditors

19. Under section 287(1) of the Companies Ordinance Cap. 32, the Court may, as to all matters relating to the winding-up of a company, have regard to the wishes of the creditors. I turn to consider the evidence filed on behalf of Chi Wo and Wa Luen.

20. Chi Wo, the Company and Kam Kuen Engineering Ltd. ("Engineering") all share the same address as registered office. The Company and Engineering have common shareholders and directors. Engineering owns 50% of the shares in Chi Wo and it is a director of Chi Wo. According to the affirmation filed on behalf of Chi Wo, about 70% of its business came from the Company.

21. As for Wa Luen, it is a sole proprietorship owned by one Choi Hon Wa. The father of Mr Choi is a director of the Company. According to Mr Choi's affirmation, Wa Luen has relied heavily on the Company and he estimated that about 90% of its business came from the Company.

22. It does not appear to me that Chi Wo and Wa Luen could be regarded as truly independent creditors.

23. Although in section 287(2) of Cap. 32, I must have regard to the value of each creditor's debt, and that the combined value of the debts of the opposing creditors would greatly exceed the petitioner's debt, it does not mean that I am bound to follow the wishes of the majority in value of the creditors. In view of the relationship between Chi Wo, Wa Luen and the Company, I think it would be appropriate to inquire whether the opposing creditors would be influenced by matters which do not affect trade creditors and outside creditors of the Company. As stated by Buckley L. J. in In Re Southard & Co. [1979] 1 WLR 1199 at 1205E:

"Where a creditor has, or may have, reasons for wishing a particular course which are distinct from those considerations which are common to the general body of creditors, of which he is one, the court may have to consider, and I think should consider, what weight should be given to those reasons having regard to that particular relationship between [the particular creditor] and the company."

24. What then are the reasons of Chi Wo and Wa Luen in opposing the petition? Both entities, as I have stated, are heavily dependent on the Company for business. The debt owed to each is in the region of HK$4 million. These entities have filed affirmations stating that it is the strong belief of the respective deponents that the Company would settle their debts "in due course if the [Company] is a going concern". It is further stated that if the Company should be wound up, the asset realized after settling the existing liabilities would be far less than the cash that these creditors could generate if the Company should remain a going concern. Lastly, the deponents stated that it was their strong belief that if the Company were to be wound up, Chi Wo would go into liquidation soon and that Wa Luen would cease operation soon.

25. It does not appear to me that the opposing creditors have advanced any good reason why the Company should not be wound up. I have considered the financial statements of the Company for the year ended 31 March 2001, which has a qualified opinion from the auditors that consolidated financial statements have not been prepared and that such consolidated financial statements are necessary to give a true and fair view of the financial position of the group as a whole. The auditors have not been able to assess the carrying value of the Company's investment in the subsidiary which appeared in the balance sheet in the sum of HK$8.7 million. According to the balance sheet, the Company had net current liabilities of HK$717,386.43. Moreover, another creditor, Luen Ying Mechanical Engineering Co. Ltd., has obtained a judgment against the Company on 4 March 2002 in the sum of HK$1,268,733.00 and a garnishee order nisi was obtained for this judgment debt on 19 April 2002. I should mention that I attach little weight to the management account of the Company as of 31 March 2002 or to the forecast income and expense of the Company for the year ended 31 March 2003, in view of the qualified audited financial statement for the year ended March 2001. I am satisfied that the Company is unable to pay its debts as they fall due. In my view, the reason or reasons that the opposing creditors have in opposing the petition are due to their particular relationship with the Company and these reasons are not in common with other outside creditors of the Company. I do not propose to give weight to the wishes of the opposing creditors in this situation.

Orders

26. For the above reasons, I have made a winding-up order against the Company and ordered that the petitioner's costs be paid out of the Company's assets.