PERIWIN DEVELOPMENT LTD. v. GRANDFIELD PACIFIC HOTEL LTD.

HCCW 29/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 29 OF 2001

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J U D G M E N T

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1. I have before me a petition presented by Periwin Development Limited ("the petitioner") to wind up Grandfield Pacific Hotel Limited ("the Company") and a motion taken out by the Company on 6 March 2001 that the petition should be dismissed on the ground that there is a bona fide dispute over the debt. Alternatively, the Company seeks an order that all further proceedings in the petition should be stayed. On 23 May 2001, I made an order that the petition for winding-up and the Company's motion for dismissal were to be heard together and that the petition was to be heard after the motion. Both matters were heard by me on 20 November 2001.

2. Mr. Warren Chan, SC who appeared on behalf of the petitioner, put his case solely on the basis that a winding-up order should be made because the Company has failed to show a bona fide dispute of the debt on substantial grounds or that there is a genuine cross claim that is likely to produce a sum as great as such amount of the debt that is admitted or of which there can be no substantial dispute. It is common ground that if I should come to the view that there is no bona fide dispute of the debt on substantial grounds, the Company's motion should be dismissed, I should make an order to wind up the Company and I do not need to investigate any other matter. I should mention that at an earlier hearing, Mr. Chan had expressly abandoned the ground to wind up the Company on just and equitable ground based on the allegation that there is a complete breakdown of trust and confidence between the shareholders of the Company. Further, Mr. Chan and Mr. Robert Tang, SC who appeared for the Company, informed me that no point would be taken regarding the beneficial ownership of the shares of Bellington Associates Ltd. ("Bellington"), a 28% shareholder and a director of the Company, and the authority of the Company's directors to oppose the petition that had been made in the various affirmations on both sides.

3. The Company is controlled by Mr. Joseph Leung Kai Man, who is a director at all times. The only other director of the Company is Bellington. Mr. Leung was the managing director of the petitioner for over six years until he resigned on 9 October 1998. Hence, he was a common director for a significant part of the material time.

4. The petitioner is owned by Full Luxury Limited ("Full Luxury") and the latter is owned by the Foshan Municipal People's Government. The petitioner is the registered owner of a 24-storey building (excluding the 1st floor) at Nos.18, 20 and 22 Percival Street, Causeway Bay, Hong Kong ("the property"). The Company operated and managed the Grandfield Pacific Hotel ("the Hotel") in the property. The property is mortgaged to the Bank of China (Hong Kong) Limited ("the bank") in July 1996. When the petitioner defaulted under the general facilities granted by the bank, the bank brought a mortgage action against the petitioner on 19 November 1998 seeking possession of the property and money judgment. The Company intervened as an applicant and filed an affirmation by Mr. Leung in April 1999 alleging that the bank was estopped from evicting the Company from the property. The bank obtained a money judgment against the petitioner in April 1999 in the sum of HK$396,418,797.69 but the application for a possession order was adjourned sine die with liberty to restore.

5. On 26 August 1999, the bank appointed receivers under the legal charge. On 1 September 1999, the receivers' solicitors served a demand on the Company's solicitors for payment of all outstanding rent of the property under clause 5.1(b) of an agreement dated 22 November 1996 made between the petitioner and the Company ("the Agreement"). This was the first demand for rent ever served on the Company. I should mention that the petitioner and the Company did not enter into a lease of the property at any time, as envisaged in the Agreement. However, the Company has been operating the Hotel in the property without making any payment for the use and occupation up to present. According to the Company's documents, there was a "soft opening" of the Hotel on 28 November 1997 and on 1 September 1998 the Company had obtained a licence from the government authority to operate the Hotel in the property. The hotel licence has since been renewed.

6. Between September 1999 and November 2000, there was correspondence between the solicitors for the receivers and the solicitors for the Company. In summary, the Company alleged that the petitioner had not carried out the modification work to convert the property from an office building into a hotel to the standard as required, pursuant to clause 3 of the Agreement. As a result, insufficient revenue was generated by the Hotel to support the rental payment. Further, it was doubtful if there was in fact any "formal opening" of the Hotel for the contractual rent to be payable because of the alleged failure of the petitioner to carry out the work to the required standard. The Company accepted that it was liable to pay a reasonable amount to the petitioner for its use and occupation of the property but this amount would have to be negotiated. Besides, any payment to the petitioner would have to take into account the Company's claim for substantial damages against the petitioner for the alleged breach and other breaches under the Agreement. Notwithstanding that the receivers had made repeated requests to the Company's solicitors to be provided with particulars and supporting evidence of the Company's claim for damages, no information was given.

7. On 9 January 2001, the receivers as agent for the petitioner presented this petition to wind up the Company on the ground that it is unable to pay its debts. The debt relied on in the petition is the "guaranteed rent" under the Agreement for the period of 22 months from September 1998 to December 2000 in the total sum of HK$53 million. The Company's opposition is based on the lines I have summarised in the solicitors' correspondence. A substantial amount of evidence has been filed on both sides. Whether the dispute of the debt is a substantial dispute is the central issue I need to resolve.

The legal principles

8. The legal principles are not in dispute and I have been taken by both sides to much the same cases, including Re Safe Rich Industries Ltd. CACV No. 81 of 1994, 3 November 1994; the decision at first instance of Re ICS Computer Distribution Ltd. [1996] 3 HKC 440 and in HCCW No. 615 of 1995, 13 May 1996; the decision of Re ICS Computer Distribution Ltd. on appeal in CACV No. 95 of 1996, 8 November 1996; Re Honwell Holdings Ltd. HCCW No. 354 of 2000, 17 July 2001; Re a Company (1983) 1 BCC 98,901 (Vinelott J.); and Re Claybridge Shipping Co. SA [1997] 1 BCLC 572. Mr. Chan has impressed on me that it is incumbent on the Company to put forward "sufficiently precise factual evidence" to substantiate its allegations that the petitioner was in breach of the Agreement and that the breach had caused the loss allegedly suffered by the Company in an amount that would at least be equal to such amount of the debt either undisputed or is beyond reasonable dispute. I have borne this in mind in considering the evidence. I have also borne in mind the submission of Mr. Tang that I am not concerned to decide the dispute but only to determine whether a sufficient dispute exists. I should not try the dispute on affidavit.

9. On the guidance given by the authorities, this is how I have approached the matter.

10. I ask whether the evidence of the Company is believable. I caution myself about unsubstantiated and unparticularised assertions, particularly if there has been a history of information and supporting evidence sought by the other side. The Company's evidence should be looked at against so much of the background that is undisputed or is beyond reasonable dispute, in other words not with a wholly uncritical eye. I should look at the bona fides of the defence, to see whether it is obviously a "put-up job" (see Re Safe Rich Industries Ltd.; Re Claybridge Shipping Co. SA, supra. at 575g-h).

11. In an application for summary judgment, the defendant must show that he has a fair probability of establishing a bona fide defence to obtain leave to defend. To resist a petition, the company must show that it has a bona fide defence, not a fair probability of one. It is possible that a company might on an Order 14 application convince the court that it has a fair probability of a defence but at the petition stage it might not be able to establish it has a bona fide defence. The court must come to a conclusion in the winding-up petition whether there is or is not a bona fide defence. "The court does not dismiss a petition on the basis that a company might be able at some stage in the future to scrape together a case that might be arguable." If the court should refuse leave to defend in an application for summary judgment, that would be the end of the matter. But if a winding-up order is made, the company's claim against the petitioner may still be pursued by the liquidator as he thinks proper, so there is no injustice in adopting a higher threshold for the company requiring it to show that it has a bona fide defence, quite apart from the public policy considerations in a winding-up (see Re ICS Computer Distribution Ltd, supra. at 443G-444A and HCCW No. 615 of 1995, p. 5).

The issues in dispute

12. The issues in dispute raised by the Company may be stated as follows:

(1) On the construction of the Agreement, whether there are any terms to be satisfied for the contractual rent to become payable?

(2) If there are any such terms to be satisfied for the contractual rent to become payable, whether the petitioner is in breach of any term?

(3) Is the petitioner entitled to contractual rent or merely a reasonable sum for the Company's use and occupation of the property?

(4) If the petitioner is in breach of any term, whether the Company has suffered any loss and damage as a result and whether the amount of the Company's claim for damages against the petitioner would be equal to or exceed the undisputed part of the debt?

13. In summary, it is the Company's contention that on a proper construction of the Agreement, for the contractual rent to become payable, the petitioner has to show that it has converted the property into a "3-star hotel in accordance with international hotel standards (AAA-approved and rated)".

14. This is not the first time I have looked at the Company's case. I have done so earlier when the Company applied for discharge of the order appointing provisional liquidators. I granted that application and in the course of doing so, I had come to the "provisional view" that the petitioner has made out a good prima facie case for a winding-up order. I am looking at this afresh, in the light of the additional evidence filed and with the benefit of the new arguments addressed to me. I do not propose to repeat the background matters and the evidence that I have set out in pages 3 to 13 of the decision I gave on 12 March 2001.

Are there terms to be satisfied for the payment of contractual rent?

15. Mr. Chan's submission is that rent is payable as from "the First Month of Operation", pursuant to clause 5.1(b) of the Agreement. As a matter of common and commercial sense, the Hotel had started operation, the latest by 1 September 1998, when the hotel licence was issued. Hence, rent as provided in clause 5.1(b), has become payable and the total amount due as at the date of the petition is HK$53 million.

16. Mr. Tang has submitted that rent under clause 5.1(b) is payable from the date of the "formal opening" as defined in the Agreement and for the requirements to be fulfilled for there to be a "formal opening", one needs to look at various other provisions in the Agreement.

17. I set out the relevant provisions below for ease of reference:

"1. DEFINITION & INTERPRETATION

1.1 "Formal Opening" means the date on which the Hotel modified in accordance with Schedule I shall open for business to the public.

"Hotel" means the 3-star hotel and hotel related facilities to be provided by GPH [i.e the Company] at the Leased Property.

"Modification Work" means the work to be undertaken by Periwin [i.e. the petitioner] in accordance with clause 3 and as set out in the Schedule I hereto.

"Month of Operation" means full calendar month for the operation of the Hotel.

"Partial Month of Operation" means part of a calendar month of which the Formal Opening falls on a day other than the 1st day of a calendar month.

"Rent" means the rent payable by GPH to Periwin as provided in clause 5.1 hereof.

"Year of Operation" means a year for the operation of the Hotel the first of which shall commence on the date of Formal Opening.

2. PERIWIN'S OBLIGATION

2.1 Periwin and GPH shall enter into a Lease of the Leased Property upon the principal terms and conditions as set forth in this Agreement.

2.2 Periwin shall use its best endeavours to procure or perform the following:-

(A) to be responsible for and shall request and obtain, at its own cost and expense, within 6 months from the date hereof approval by the Building Authority and all other approvals, consents, orders, authorizations, permits and licenses required to be obtained from or given by competent government departments and authorities having jurisdiction over the Leased Property so as to use the Leased Property as a hotel and to permit the carrying out of the Modification Work provided if so required by Periwin, GPH shall serve as applicant for the Modification Work as the agent of Periwin and at Periwin's cost and expense.

(B) to obtain the consents and/or approvals within two months from the date hereof to be granted by the Bank of China as Legal Chargee and Mortgagee of the Leased Property for Periwin to modify and convert the Leased Property pursuant to Clause 3 and to lease the Leased Property to GPH.

...

3. MODIFICATION WORK

3.1 After the signing of this Agreement, Periwin shall carry out the Modification Work with a view to convert the Leased Property into a 3-star hotel in accordance with international hotel standards (AAA-approved and rated).

3.2 During the course of the Modification Work, GPH shall make frequent inspection at the Leased Property to satisfy themselves that the Modification Work is being carried out to meet the required standard and shall be deemed to have accepted that the Modification Work or any part thereof have been carried out and completed to meet the required standard unless GPH by a notice in writing points out to Periwin any substandard work or defects thereof which shall require remedy variation or modification within 14 days of receipt of Notice in writing by Periwin to GPH of completion of such part of Modification Work.

3.3 In due course Periwin shall procure that a Certificate of substantial completion be issued by the Authorised Person of the Modification Work and forthwith provide a copy of the said certificate to GPH.

4. FITTING AND DECORATION

4.1 Upon receipt of a copy of the Certificate of Substantial Completion GPH shall proceed to decorate the Hotel in accordance with the schedule of fitting and decoration work as contained in Schedule II hereto...

...

5. AGREEMENT TO LEASE

5.1 The principal terms of the Agreement to Lease shall be as follows:-

(a) Term: 10 years subject to sooner termination pursuant to the provisions hereunder including the Break-clause hereunder.

(b) Rent:

For Partial Month of Operation (if any): HK$1,000,000.00 x number of days of operation in that Partial Month of Operation)

For the First Month of Operation: HK$1,000,000.00

...

(c) Payment of Rent: within 30 days after the end of each Month of Operation or Partial Month of Operation during the currency of the Lease."

18. Schedule I to the Agreement related to the modification work for which the petitioner was responsible and it was provided that "interior furnishing to comply with three stars hotel standard". There followed 18 items of work that should be carried out by the petitioner. Schedule II to the Agreement set out 20 items of work for which the Company was responsible, being estimated fitting, decoration and start-up items.

19. It was submitted by Mr. Tang that in the provisions providing for rent and the payment of rent, the Company is obliged to pay rent starting from a "Partial Month of Operation" or "the First Month of Operation". When one looks at the definition of "Partial Month of Operation", it is clearly envisaged that there is to be a "Formal Opening" as defined in the Agreement. I am inclined to agree with this submission. I note that "Year of Operation" as defined would also start with a "Formal Opening". Likewise, it seems to me that the "First Month of Operation" must also start with a "Formal Opening".

20. For there to be a "Formal Opening", the modification work for which the petitioner is responsible must have been carried out in accordance with Schedule I. Further, the Hotel must have been open for business to the public. I do not think it is necessary for the petitioner to show that there is in existence a 3-star hotel for the Company to manage. Whether a hotel is a 3-star hotel would also depend on, inter alia, the "software" such as the facilities and services provided, not just the "hardware" as listed in Schedule I. In my view, it would suffice if the petitioner has carried out the modification work "with a view" to convert the property into a 3-star hotel in that the modification work should "comply with three stars hotel standard". This is one of the reasons why, in the exercise of my discretion, I have refused leave to the Company to put in a late affirmation to adduce a report, not by the American Automobile Association who is to give the rating and approval as stated in clause 3.1 of the Agreement, but by a hotel consultant who has given an opinion that the Hotel does not qualify as a 3-star hotel (strictly speaking it should be a 3-diamond hotel according to the rating system of the AAA). I do not think it would assist me to have the opinion of a hotel consultant based on his evaluation of the rating criteria of the AAA. Besides, the dispute is not about whether the Hotel is a 3-star or a 3-diamond hotel.

21. Even if I do not make a firm ruling on which construction of the Agreement is to be preferred, I am of the view that the Company has raised a substantial dispute that the obligation to pay rent under the Agreement would not just accrue once the Hotel was in operation and was open for business, as contended by the petitioner. I think there is at least a serious argument that there are conditions to be satisfied by the petitioner for this obligation to arise, on the lines as indicated above. On the premise that there are terms to be fulfilled, I go on to consider the Company's case that those terms have not been met so that the petitioner is not entitled to the contractual rent.

Has the petitioner satisfied the terms for rent to become payable?

22. First of all, it must be noted that according to clause 3.2 of the Agreement, the Company was obliged to make frequent inspection at the property to satisfy itself that the modification work was being carried out to meet the required standard and it "shall be deemed to have accepted that the Modification Work or any part thereof have been carried out and completed to meet the required standard" unless the Company has served a notice in writing to the petitioner pointing out any substandard work or defects within 14 days of receipt of a notice in writing by the petitioner to the Company of completion of such part of the modification work. Hence, it is not as if there must be an approval and rating of the AAA that the Hotel is a 3-diamond hotel for the modification work to be regarded as having complied with the standards in clause 3.1. It is also to be noted that clause 3.2 provided that in due course, the petitioner should procure that a certificate of substantial completion of the modification work was to be issued by the authorised person and provide a copy of it to the Company. It would appear from a letter of the Building Authority to the authorised person in the project, Lee Mark & Associates, dated 15 August 1998 that the authorised person had submitted Form BA14 to the Building Authority on 27 June 1998 certifying completion of the alteration and addition works in the property and that further information was submitted in June and August 1998. That letter was copied to the Company. In Mr. Leung's memorandum to Full Luxury dated 7 October 1998 (two days before his resignation as a director of the petitioner) seeking payment of his consultancy fees, he stated that he had executed his professional duties through the petitioner including professional services engaged with the authorised person, the resident site engineer and the quantity surveyor in carrying out the project and that this had been completed. There was no notice or complaint in writing from the Company of any defect in the modification work until 13 October 1998, which was shortly after Mr. Leung had ceased to be a common director of the petitioner and the Company.

23. It is not disputed that the total cost of the modification work carried out by the petitioner came up to approximately HK$33 million odd, that was accepted by the Company in its memorandum to the petitioner dated 13 October 1998. Mr. Leung has however alleged in his first affirmation that the value of the work done by the petitioner in late 1997 was only HK$23 million odd, and that the "enhanced value" of the works of more than HK$10 million as found by AG Wilkinson & Associates, the surveyors engaged by the receivers to prepare a report in these proceedings, was due to the "continuous rectification works and obligations performed by the Company on behalf of the Petitioner so as to make the hotel functionable". I find this unbelievable as this assertion is contrary to the admission of the Company in the memorandum I have mentioned and is difficult to accept in view of the expenses allegedly incurred by the Company for the rectification works as I shall come to. I should also mention that according to AG Wilkinson, they were of the opinion that on the assumption that the invoiced items of modification work had been carried out, the works in the value of HK$33 million would have been sufficient to convert an office building into a 3-star hotel in 1997.

24. Mr. Leung has alleged in his first affirmation there was failure to carry out the modification work in respect of the basement, the 3rd floor and the 4th floor and that the signage, which is item 7 in Schedule I, has not been installed. Further, he alleged that the modification work carried out in respect of the other floors were so defective that the Company had to commission its own construction and decoration workers to rectify the defects and HK$1.5 million was incurred by the Company. He stated that the invoices produced came up to the total sum of HK$1,282,350.00. As a matter of fact, invoices for the sum of HK$789,550.00 only were produced as the balance of HK$492,800.00 was for overtime labour cost allegedly paid to the staff of the Hotel for carrying out the rectification work (see the report of Ian Robinson dated 17 May 2001, paragraph 6.8.7.2). No documents have ever been produced showing that HK$492,800.00 had been paid to the Hotel staff and none of the experts engaged by the Company have verified the accuracy of HK$492,800.00 in respect of the time allegedly spent by the Hotel staff.

25. I turn to consider the evidence adduced by the Company in support of the above allegations.

The Company's memorandum dated 13 October 1998

26. This memorandum, which was addressed to the petitioner, was prepared by the management team of the Hotel on the instruction of the Company "to review the Agreement". It set out the obligations performed by the petitioner and the Company and the obligations that had not been performed. It stated that the renovation and building service installations being the petitioner's responsibility were commenced in March 1997 and "completed in principal" [sic] in September 1997 and the Company had purchased most of the items for use of the Hotel decoration between May 1997 to October 1997 and recruited staff between June 1997 to November 1997 so that there was a "soft opening" of the Hotel on 28 November 1997. The investment made by the petitioner to implement its obligations under the Agreement was around HK$30 million and the investment made by the Company to implement its obligations was HK$7 million. It was then stated that the petitioner had left behind obligations to be implemented for the Hotel to be operated as a 3-star hotel and they were listed as follows:

"a. Basement renovation

b. Partial area on Ground Floor and Lobby

c. Renovation on 3rd Floor

d. Renovation on 4th Floor

e. Renovation on Roof

f. Final touch-up on modification work after a series of inspection by Buildings Department, Fire Services Department and Home Affairs Department during the period from May 1997 to August 1998

g. Making good of all defects on building service systems

h. Other modification work such as external signage, etc. to be provided for the Hotel operation."

27. It was submitted by Mr. Chan for the petitioner that the Company has not put forward "sufficiently precise factual evidence" to show what the problems were in relation to the aforesaid parts of the building with reference to the petitioner's obligations under Schedule I. I agree. I consider that the Company should not have difficulty in giving details on the specific items of work that had not been carried out and the specific aspects in which the work done was defective or not up to the required standard, bearing in mind that under clause 3.2 of the Agreement the Company was obliged to make "frequent inspection at the Leased Property to satisfy themselves that the Modification Work is being carried out to meet the required standard", that Mr. Leung was a director of the petitioner until he resigned on 9 October 1998, and that he has the qualifications of an architect with considerable working experience although he is not an authorised person.

The Company's report dated 15 October 1998

28. This report was also prepared by the Hotel management team. It was stated that although the hotel license was issued in September 1998, "there are still many areas waiting to be finished" and a "renovation check list" was given as follows:

"1. Basement renovation

2. Closets for all "01" rooms

3. Wall of all "07" rooms

4. Ceiling of all rooms and floor corridors

5. Ceiling of lift lobby

6. Wall for covering Fire System in the lift lobby

7. Renovation on 3rd floor

8. Main Hotel Sign"

29. The report stated that "since there is a lot of problems on the rooms, the room tariff has been adjusted to below the standard" and some renovation was done by the hotel staff such as the wall of the "07" rooms. Photographs were annexed to the report. I note in this report that there was no mention of any problem with regard to the renovation on the 4th floor, unlike the memorandum dated 13 October 1998. For the reasons I have given earlier in relation to the memorandum, I do not think there is sufficiently precise factual evidence that one would expect, in a project of this size and with the amount invested, to show what exactly the problems were and in what respects the work was uncompleted or was not up to the required standard.

The letters from the Company

30. I have considered the letters written by the Company and its solicitors to the petitioner, the receivers, the bank and the receivers' solicitors dated 8 January 1999, 1 February 1999, 29 September 1999, 6 October 1999 and 14 December 1999. In none of these letters was evidence of a sufficiently precise nature given to lend credence to the allegation that the petitioner had not performed its obligation to carry out the modification work in Schedule I to the required standard.

The report of Albert So Surveyors Ltd dated 17 May 2001

31. This report has annexed to it a report of a building surveyor firm, Samson Wong & Associates Property Consultancy Ltd, giving the findings of an inspection carried out in April and May 2001 by a team led by a qualified building surveyor. It is to be noted that the expert was not provided with specifications and detailed drawings and there was no liaison with the authorised person, Lee Mark & Associates. The items of modification work set out in Schedule I to the Agreement were merely headings of a general nature. All that the expert had to guide him to establish the scope of the modification work were Schedule I and the approved plans, which are attached to his report. I do not think the documents made available to the expert would have given him sufficient information to come to a proper view of the precise scope of the modification work and in what respects the petitioner had failed to carry out the works to the required standard. A notable example of this drawback is that the expert has approached the matter on the basis that there was to be a business centre on the 3rd floor for which the petitioner had failed to carry out the appropriate renovation, when there was no mention in the business proposal of the Hotel in July 1996 that the 3rd floor was to be a business centre. On the contrary, it was expressly stated in the proposal that the hotel facilities would be "very limited", and that "the conversion, layout and decorative expenses to a 3 stars standard [would be] similar to [the] specification of New San Diego Hotel in Kowloon". Another example is the defects found by the expert being incomplete paintwork in various parts of the building. This was not the subject of any complaint in 1998 and no photographs of this defect were taken at that time. It would appear from the captions to some of the photographs in the expert's report in 2001 that the incomplete paintwork was due to work carried out subsequently when the air-conditioning ducts were installed.

32. It is stated in this report that no renovation work was carried out by the petitioner on the 5th floor and this floor was purposely left untouched to retain this as evidence to show its condition in September 1998. There was, however, no complaint in the Company's memorandum and report in October 1998 that renovation work had not been carried out on the 5th floor. No photographs of the 5th floor were annexed to the Company's report in 1998, if the intention was to leave this floor in its existing condition as evidence of the petitioner's breach. The report also stated that "minor works" had been carried out by the Hotel staff on the 5th floor as the Hotel has been using this as an office. This was not borne out by the schedule of rectification works carried out by the Hotel staff that was produced with the invoices for the rectification work done by the Company. It would appear from that schedule that rectification works were carried out to all the floors from the 5th to 23rd floors.

33. As for the photographs provided by the Company attached to the report, they merely show the conditions of the Hotel some three to four years after the modification work was done. There is no obligation of the petitioner to maintain the modification work that had been carried out. The petitioner is not responsible for the wear and tear to the installations it had provided.

34. The expert provided an opinion that if the Hotel was to be upgraded to the standard of a 3-star hotel in September 1998, extra modification costs of HK$20,930,000.00 would have to be spent. The upgrading work to be carried out does not appear to tally with the outstanding work and defective work as found by the expert. The estimated cost was given on the basis of the gross construction floor areas to be upgraded. From the breakdown of the cost estimate given, it would appear that all the areas are to be upgraded, even though no defect was found in some of them, such as the basement to the 2nd floor.

35. For the above reasons, I am unable to accept that this report or the other evidence adduced by the Company provide sufficiently precise factual evidence to support the Company's allegation that there is a substantial dispute the petitioner had not carried out the modification work in Schedule I to the required standard.

Is the petitioner entitled to the contractual rent or a reasonable sum for use and occupation?

36. As the Company has failed to raise a substantial dispute that the petitioner has not satisfied the terms in the Agreement for rent to become payable, it follows that the petitioner must be entitled to the contractual rent in the total sum of HK$53 million calculated up to December 2000 unless there are other valid grounds that the Company is not presently liable to pay rent. I look at the allegation of Mr. Leung that there is a "standstill agreement" which relieves the Company from the present liability to pay rent and the evidence he has adduced in support of this allegation.

37. According to Mr. Leung's first affirmation, on 9 June 1998, there was a meeting between him and Mr. Qiu Qin Ming of Full Luxury (Mr. Qiu was later appointed as a director of the petitioner on 17 September 1998) during which Mr. Qiu suggested that Mr. Leung should "accept off-setting loans to the Hotel". The affirmation went on to say that "as [Mr. Leung] had from time to time made various loans to the said Mr. Qiu and Periwin, Mr. Qiu was in fact suggesting that all loans or outstanding amounts including the 'rent' as stipulated under [the Agreement] between Periwin, Full Luxury and [Mr. Leung] should be dealt with by way of a set-off at a later stage." Mr. Leung would appear to suggest here that Mr. Qiu did not say in so many words that was the full effect of his suggestion that Mr. Leung should "accept off-setting loans to the Hotel", but that was how Mr. Leung had understood that was what Mr. Qiu was "in fact suggesting". Be that as it may, Mr. Leung then said in his affirmation that pursuant to this "standstill agreement", the petitioner had never demanded the Company to pay rent or mesne profit for occupying the property and "[Mr. Leung] and the Company have withheld both [Mr. Leung's] personal claim and the Company's claim for loss or damages against the petitioner." He produced a copy of the minute he had caused to be prepared of the meeting between him and Mr. Qiu on 9 June 1998.

38. Mr. Leung has also alleged that in or about January 1999, there was another "standstill agreement" between the petitioner and the Company that "there should not be cross-claims by [Mr. Leung] in [his] personal capacity, the Company and the petitioner against each other until later when the petitioner and the Company would be in a better financial position to solve this complicated matter" and that was also the background why the petitioner had never chased the Company for payment of rent. No document is produced by Mr. Leung for this second "standstill agreement".

39. When one looks at the minute of the 9 June 1998 meeting that Mr. Leung had caused to prepare, the first thing one notes is that the minute does not bear out what Mr. Leung has said in his affirmation of his understanding of what Mr. Qiu had "in fact" suggested at that meeting. What the minute stated was as follows:

"The estimate of profits distribution dated 3/6/1998 in connection with the two completed projects [one of them being the Hotel project] was tabled for endorsement.

Mr. Qiu again explained the present financing difficulty of Full Luxury and could not be able to pay the consultant fee and repeated his previous suggestion if Mr. Leung would accept off-setting loans to the Hotel."

40. The subject of rent or mesne profit payable by the Hotel was not mentioned at all. At that time, the licence was not issued by the government authority to operate the Hotel in the property. By no stretch of language could the "loans to the Hotel" be regarded as including the rent payable.

41. Further, there was clearly no standstill agreement in June 1998 or January 1999 even as regards Mr. Leung's alleged promise not to demand payment of his consultancy fee as Mr. Leung had issued a series of memoranda, invoices and reminders to Full Luxury dated 10 November 1998, 1 December 1998, 28 December 1998, 9 January 1999 and 7 April 1999 asking Full Luxury to expedite settlement of his consultancy fee in the sum of HK$15.6 million.

42. Mr. Leung's allegation of a standstill agreement is unbelievable. I do not think the Company has raised any substantial dispute that it is not under a present liability to pay the contractual rent.

43. I should mention for completeness that according to the report of Albert So Surveyors Ltd obtained by the Company in May 2001, the surveyors are of the opinion that the open market rental value of the property for hotel use, as at 1 September 1998, taking into account the then physical condition, and the findings in the report of Samson Wong & Associates Property Consultancy Ltd, was in the sum of HK$630,000.00 per month. Thus, on the Company's case, even if contractual rent of HK$53 million is not payable, the Company would still be liable to the petitioner for mesne profits of at least HK$13,860,000.00 for 22 months calculated up to December 2000.

If the Company has a genuine cross claim that would be equal to or exceed the petition debt?

44. Before I consider the individual heads of the cross claim that the Company has advanced, I make these general observations.

45. Firstly, the contemporaneous correspondence between the Company and the petitioner, and between the solicitors for the receivers and the solicitors for the Company, that I have summarised in the earlier part of this judgment do not inspire conviction that the Company has a genuine cross claim of the magnitude that it has put forward after the petition was presented. I do not attach significance to the fact that the Company had complained of defective work as early as 13 October 1998 because despite repeated requests, the Company had made no attempt of providing the receivers with any information or particulars of the size and nature of its cross claim or substantiation of the alleged breaches of the petitioner. This kind of conduct is consistent with one who is evading liability, not one who is seeking to set off a genuine and substantial loss against an admitted liability. I have grave doubts of the bona fides of the Company in raising such a massive cross claim.

46. Secondly, the Company has obtained an expert report provided by an accountant, Mr. Ian Robinson, in July 2001 giving a quantification of the Company's cross claim on four different scenarios based on the different dates from which the loss accrued with two variations depending on whether work was carried out by the petitioner to the basement. The loss quantified by Mr. Robinson ranged from HK$39 million to HK$90 million. I do not find the expert report particularly helpful. The expert has relied solely on the information and representations made to him by the Company and its solicitors and he gave his report on the basis that such information was reliable. He does not purport to give any view as to the appropriateness of the calculations he made. It is not for this expert to say if the loss and damage allegedly suffered by the Company was caused by any breach of the Agreement on the part of the petitioner.

47. Thirdly, even if the Company would have a valid cross claim against the petitioner for loss of income due to the petitioner's failure to carry out the modification work, any damages awarded would have to take into account that the Company would have a duty to take reasonable steps to mitigate its loss. It does not appear from the Company's evidence that any such steps have been taken, apart from the rectification work carried out by the Company for which it claims HK$1.2 million.

48. The different heads of claim advanced by the Company are as follows.

Damages for delay

49. It is alleged in the first affirmation of Mr. Leung that the petitioner and the Company had agreed that the Hotel should be ready for operation before July 1997 as hotel occupancy rate was expected to be at its peak during that period. It is not clear from the affirmation when the alleged agreement was entered into and the Chinese letter of the Company faxed to Full Luxury on 20 March 1997 produced by Mr. Leung does not bear out the assertion that there was an agreed deadline by which the Hotel must commence operation. Clause 2.2(A) of the Agreement provided that the petitioner "shall ... obtain ... within 6 months from the date hereof ... all other ... authorizations, permits and licenses required to be obtained from or given by competent government departments and authorities having jurisdiction over the Leased Property so as to use the Leased Property as a hotel and to permit the carrying out of the Modification Work..." It does not appear to me that the time limit of 6 months applies to the completion of the modification work. Besides, the obligations in clause 2.2(A) are qualified by the opening words that the petitioner "shall use its best endeavours". I also note that there was no complaint in the memorandum of the Company to the petitioner dated 13 October 1998 (which was prepared to "review the Agreement") that the Company was in breach of any obligation to complete the modification work so that the Hotel would be ready for operation before July 1997.

50. In my judgment, the Company has failed to show that the claim for damages for delay is made bona fide. Besides, there are difficulties whether the loss allegedly suffered was caused by the petitioner's breach, as I shall deal with in relation to the claim for reduced room rates and reduced occupancy rate.

Rectification work done by the Company

51. This claim is for the expenses incurred by the Company to rectify the defects of the modification work done by the petitioner. If one includes the schedule of the rectification work done by the Hotel staff produced with the other invoices, the amount of the claim as supported by documents would be HK$1,282,350.00. For this petition, I would treat this as a genuine cross claim that can be set off against the petition debt.

Maintenance charges paid for by the Company

52. Invoices in the sum of HK$1,604,181.50 were produced by the Company. It is alleged that these expenses were incurred on behalf of the petitioner. These payments were for water and electricity charges and maintenance, service and replacement carried out to the air-conditioning system, the lifts and the fire service installations. They are expenses of a recurrent nature. It does not appear to me that the Company has put forward a sufficient basis for holding the petitioner liable for these expenses. As I have mentioned earlier, there is no obligation under the Agreement for the petitioner to maintain the modification work in Schedule I.

Loss of income on reduced room rates and reduced occupancy rate

53. These are the biggest items of the Company's claim. Depending on when the loss is to be calculated, whether from 1 June 1997 (on the premise there is to be a claim for damages for delay), 15 November 1997 (around the time of the soft opening of the Hotel) or 1 September 1998 (when the license was issued), the claim for these items would range from HK$44 million to HK$24 million on Mr. Robinson's calculation. The claim for these losses is on the basis that the petitioner had failed to carry out some of the modification work and some of the work done was defective. I have dealt with the evidence put forward by the Company in this regard and have come to the view that the Company has failed to adduce sufficiently precise factual evidence to raise a substantial dispute that the petitioner was in breach of clause 3.1 of the Agreement.

54. There is another difficulty about these two heads of claim and that relates to causation. It has not been shown how the alleged breach would have brought about the reduced room rates or reduced occupancy rate across the board, bearing in mind that the property is a 24-storey building and the alleged defects in the Company's memorandum and report in October 1998 (assuming they were due to the petitioner's breach of the Agreement) would have affected a relatively small part of the building.

Loss of income from the signage, the 3rd floor and the basement

55. The Company claims HK$300,000.00 per month on the basis that the petitioner has failed to erect signage for the Hotel being one of the items of modification in Schedule I. If the loss is to be calculated from 1 September 1998 to December 2000, the total amount claimed is HK$8.4 million. The amount of HK$300,000.00 was taken from the business proposal of the Hotel in July 1996 which gave a projected income from the letting of the signage in that amount. In the Company's memorandum and report in October 1998, it would appear that the signage to be provided was "for the Hotel operation", not for the purpose of letting. Besides, even if damages are recoverable on the basis that it was contemplated that the Company would have let the signage, it was extremely doubtful if the signage could have been let at HK$300,000.00 a month when it is common knowledge that rentals have dropped substantially since the Asian financial crisis in the latter part of 1997. No evidence was put forward by the Company as to what the market rental would be if the signage had been let after September 1998.

56. Loss of income is claimed in respect of the 3rd floor which has not been fitted out as a business centre. I have dealt with this in the earlier part of this judgment. There is nothing in the documents to show that it was agreed that the 3rd floor should be used for this purpose. Even if there is to be a claim under this head, if loss is recoverable on the basis that the 3rd floor would have been let as guest rooms had the modification work been carried out properly, the total amount claimed as from 1 September 1998, on Mr. Robinson's calculation, is HK$2.7 million.

57. As for loss of income from the basement, I do not think the Company has adduced factual evidence that is sufficiently precise to show that it has a genuine claim under this head. I have dealt with this when I went through the Company's memorandum and report in October 1998. Besides, it is totally unrealistic to claim loss of income of HK$600,000.00 a month from the basement as this was based on the projected income in the July 1996 business proposal.

58. To conclude, it does not appear to me on the evidence that the Company has a genuine cross claim for many of the items of loss, and that it is unlikely that the amount recoverable would produce a sum as much as the petition debt of HK$53 million.

Insolvency of the Company

59. I have considered the financial position of the Company in my decision on 12 March 2001 at pages 14 to 16, with the benefit of the reports submitted by the provisional liquidators. The Company has been trading at a loss for some time even if no regard is to be made to its liability to pay rent to the petitioner. The Company is clearly insolvent.

Orders

60. As I am satisfied that the Company has failed to show a bona fide dispute of the debt on substantial grounds or that there is a genuine cross claim that would produce a sum as much as the debt of which there can be no substantial dispute, I dismiss the Company's motion to dismiss the petition and make an order to wind up the Company. I will hear the parties on costs and on any consequential order that I should make.