CHINA STATE CONSTURCTION ENGINEERING (HONG KONG) LTD v. CHEERY CITY CONTRACTORS LTD

HCCT 7/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO. 7 OF 2003

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J U D G M E N T

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1. The 2nd Defendant ("Ho") appeals against the Order of Master S Cheung dated 16 February 2004 making absolute the Charging Order nisi granted by Master Ho on 28 November 2003.

2. Ho is the registered shareholder of all but 1 of the issued shares in the 1st Defendant ("Cheery City"). Ho accepts for the purposes of this appeal that the legal and beneficial interests in the 999,999 shares registered under his name are vested in him.

3. The Plaintiff ("China State") as main contractor engaged Cheery City as sub-contractor on a Government construction project in Lantau. China State terminated 2 sub-contracts with Cheery City. China State says that it had reason to do so. Cheery City disputes this and claims some $40 million against China State.

4. Cheery City is indebted to China State for $2,834,439, partly as a result of a judgment against Cheery City and partly as a result of statutory payments made by China State to Cheery City's employees. China State also has substantial claims against Cheery City which are the subject of a counterclaim in arbitrations commenced against China State by Cheery City.

5. China State stands as creditor to Cheery City for some $634,304.28 in respect of an unpaid costs order made by Master De Souza on 21 August 2003. That order was made in connection with an injunction application by China State to remove Cheery City and some of its employees from a work site.

6. On 15 August 2003 a sub-contractor of Cheery City presented a winding-up petition against Cheery City. Cheery City accepts that it has been and remains insolvent. China State is a supporting creditor under the petition. The hearing of the petition is ongoing. Cheery City has sought to introduce a scheme of arrangement for the restructuring of its debts. A meeting of creditors took place on 11 March 2004. At the meeting a majority voted in favour of the proposed scheme. But there is a dispute between China State and Cheery City on whether the meeting was validly convened and conducted. Mr Harris (appearing for Ho) says that a petition to obtain court sanction for the scheme will shortly be issued, subject to the outcome of the present hearing.

7. The Court's power to make a charging order is discretionary. High Court Ordinance (Cap. 4) s. 20 requires the Court to "consider all the circumstances of the case" when exercising its discretion. The wide discretion:-

"enable[s] the Court to ensure that practical justice is done, balancing on the one hand the right of judgment creditors to the fruits of money judgments they have obtained by making use of all execution procedures open to them and on the other, the rights or interest ... of other persons in connection with the relevant property".

See Bank of China (HK) Ltd v. Kanishi (Far East) Ltd and another HCMP 5045 of 2000, 18 December 2001 (Ma J), at §19.

8. Mr Harris essentially puts forward 1 ground for the Court to refuse to make the Charging Order absolute. He reasons as follows:-

(1) China State supports the petition and has not offered to pay the petitioner's claims.

(2) The scheme of arrangement which depends on Ho's shares being transferred to Concentric Construction Limited ("the Investor") for $1 in return for the Investor's commitment to inject money into Cheery City, will not materialise if the Charging Order is made absolute. If the scheme is abortive, Cheery City will be wound up.

(3) Ho's shares are valueless. In the circumstances of Cheery City's insolvency, China State can obtain no possible benefit from a charge over Ho's shares other than an illegitimate one. That ulterior motive is to stifle Cheery City's claims against China State in the arbitrations mentioned above. Under the scheme of arrangement, the Investor would be bound to advance interest free loans to Cheery City:-

"to meet disbursements relating to two arbitration proceedings between [Cheery City] and [China State] including without limitation costs and expenses of the arbitrator, translator, transcript services and hearing room rentals as and when required throughout the course of such proceedings until their conclusion."

If there is no scheme of arrangement, the Investor would not be bound to fund the arbitrations.

9. Mr Bartlett (appearing for China State) submits that Ho's shares are not valueless. The fact that the Investor is willing to invest $3 million in Cheery City on condition of the transfer of Ho's shares (Mr Bartlett says) speaks for itself that the shares have value. The value of the shares resides in Cheery City's construction project track record on the basis of which Cheery City can qualify for inclusion in the Government's List of Approved Contractors for Public Works in relation to port and site formation works. The value of that track record does not simply enure to the Company, but is reflected in the shares themselves.

10. Mr Bartlett points out that in any event there has been no satisfactory account provided to the Court of Cheery City's assets. For instance, in the winding up proceedings there have been no detailed particulars given of Cheery City's accounts receivables or its 50% shareholding in a related company Cheery Hua (HK) Ltd.

11. Mr Bartlett further submits that there is no basis for the Court to refuse an order absolute on account of Cheery City's creditors. Since the present case only concerns Ho's personal liability to China State, China State should be able to take all legitimate measures to enforce its judgment against Ho regardless of the interests of persons who are creditors of China State but not of Ho. See Credit Lyonnais v. SK Global Hong Kong Ltd [2003] 4 HKC 104 (CA), at §§4 and 25. On the other hand, insofar as persons are creditors both of Ho and Cheery City, there is no real evidence before the Court that such creditors would be unduly prejudiced by making the Charging Order absolute.

12. In respect of Mr Harris' contention that the scheme would not materialise if Ho's shares were made subject to a Charging Order absolute, Mr Bartlett says that is far from clear.

13. Mr Bartlett notes that by a Supplemental Agreement dated 7 January 2004 Cheery City, Ho and the Investor agreed (among other things) as follows:-

"Clause 1.1

In the event that any of the Shareholders is prohibited from transferring the shares under his or her name to the Investor by order of the Hong Kong Court, the Company [Cheery City] shall on or before the Effective Date subject to the Scheme being sanctioned by order of the High Court and upon request in writing within 14 days from such order from the Investor, restructure the Company's share capital by an increase of 3,000,000 new shares of par value of HK$1 each to the existing capital and issue the 3,000,000 new shares to the Investor as fully paid-up in consideration of the Scheme Investment in the sum of $3,000,000.

Clause 1.2

The Company shall convene the necessary meetings with its shareholders and pass the requisite resolutions as set out in the Company's Memorandum and Articles of Association for the purpose of increasing the Company's capital as well as the issue of the 3,000,000 new shares to the Investor."

14. It would seem (Mr Bartlett submits) that the Investor is prepared to go ahead with the scheme (subject to sanction by the Court) even if the Charging Order is made absolute. Thus, it is not self-evident that Cheery City's creditors will be prejudiced by any Charging Order absolute. Nor is it plain in light of the Supplemental Agreement that a Charging Order over Ho's shares would stifle Cheery City's arbitrations against China State.

15. I agree with Mr Bartlett's submissions. I would only add that, even if Cheery City were liquidated, it is not apparent to me that the liquidator could not assign Cheery City's claims against China State to others for valuable consideration. So that despite Mr Harris' contentions, I disagree that liquidation of Cheery City would necessarily mean the stifling of its claim against China State. I do not find Mr Harris' suggestion of an ulterior motive on the part of China State to be convincing.

16. Taking all things in consideration, I do not think that the circumstances here justify a refusal to make the Charging Order absolute. I therefore dismiss Ho's appeal.

17. I shall now hear the parties on costs.

Schedule 1

Defendants

(3) Luck Silk Development Ltd

(4) Hong Kong Dredging Ltd

(5) [omitted]

(6) Daily Active Ltd [as amended]

(7) Top Regal Investment Ltd

(8) [omitted]

(9) Multi-Strategic Investments Ltd [as amended]

(10) Wing Fat Motor Boat Tug Company [as amended]

(11) [omitted]

(12) Sin Shu Kei 冼樹基

(13) Lam Tak Po 林特波

(14) Wong Yuk Hei 黃玉喜

(15) Tsui Hei Kuen 徐悕權

(16) Peter, C. F. Chan 陳財發

(17) Gregory K. P. Wong 黃家鵬

(18) Wong Lam Lion 黃淦良

(19) Chung Kwok Ki 鍾國基

(20) Kok Wing Sum 郭永森

(21) Yeung Kwok Keung 楊國強

(22) Leung Koon Sing 梁冠星

(23) Lam Ling 林靈

(24) Leung Bing Chin 梁炳前

(25) Sumuwar, Raju

(26) Yeung Chi Wai 楊志偉

(27) Ng Mou Wa 吳茂華

(28) Lin Yuen Fai 連遠輝

(29) Tse Yik Man謝翼民

(30) Chan Yim 陳染

(31) Chui Yui Wo 徐銳戈

(32) Law Wai Hung 羅惠雄

(33) Chan Kin Shing 陳健誠

(34) Yeung Shu Ching 楊樹清

(35) Chan Chung Yin 陳仲賢

(36) Li Ting Yuen 李鼎元

(37) Luk Chi Ching 陸智禎

(38) Chan Sau Chu 陳秀珠

(39) Tsui Ka Kei 崔嘉冀

(40) Wong Fok Yau 黃福有

(41) Lee Wah Sun 李華新

(42) Ho Kam Mun 何金滿

(43) Chan Mok Shui 陳木水

(44) Cheng Ar Chu 鄭亞珠

(45) Chan Fok Chai 陳福仔

(46) Cheng Fok Loi 鄭福來

(47) Lo Yung Bo 羅容保

(48) Sin Chi Fai 冼志輝

(49) To Au Chai 杜牛仔

(50) Yeung Pak 楊北

(51) Wong Wah Geng 黃華根

(52) Leung Tai Hay 梁帶喜

(53) Chan Yung Hay 陳容喜

(54) Chan Kam Fok 陳金福

(55) Leung Wah Sing 梁華勝

(56) Leung Ka Fai 梁家輝

(57) Lai Yee 黎義

(58) Cheng Kam Tong 鄭錦棠

(59) Fan Sai Fok 樊細福

(60) Cheng Bak Hei 鄭北喜

(61) Lam Tai Shing 林帶勝

(62) Leung Chi Keung 梁志強

(63) Cheung Wah Ken 張華根

(64) Lai Wah Sing 黎華勝

(65) Lai For Sing 黎火勝

(66) Chan Yiu Wah 陳耀華

(67) Lai To 黎桃

(68) Leung Sin Ping 梁善平

(69) Leung Kam Sheung 梁錦常

(70) Yeung Wah Chai 楊華仔

(71) Kwok Wing Sum 郭永森

(72) Chan Hon Wing 陳漢榮

(73) Kwok See Lok 郭思樂

(74) Wong Sing 黃勝

(75) Ma Kam Tai 馬金帶

(76) Leung Ah Chung 梁亞祥

(77) Cheung Sai To 張世道

(78) Lai Tak Hong 黎得康

(79) Fong Kam Shui 馮金水

(80) Lai Mok Sing 黎木勝

(81) Cheung Hung Chai 張洪仔

(82) Wen Lo 溫佬

(83) Cheng To 鄭桃

(84) Ho Chi Kwong 何志光

(85) Yeung Mok Geng 楊木根