XTRNX CHIU WING HANG AND OTHERS v. B. G. LIGHTING CO. LTD. AND ANOTHER

English translation

HCLA 67/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL NO. 67 OF 1999

(On appeal from Labour Tribunal Claim

Nos 6409 and 6410 of 1998, 2163-2165 of 1999)

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JUDGMENT

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The Facts:

1. The appellants were the employers of the six respondents. Their business suffered a down turn in 1997/98 and the appellants fell into arrears with payment of wages to their employees. In mid-May 1998, the appellants reached agreement with their employees whereby the appellants would pay them partial wages at the rate of $1,000.00 per week. On 9 July 1998, the appellants further agreed to pay the wages for July by two instalments in mid-August and at the end of August in addition to the weekly payment of $1,000.00. This was an improvement over the May agreement. However, some of the employees were not satisfied and lodged a complaint with the Labour Department. On 3 August 1998, through the conciliation of the Labour Department and in the presence of a representative from an employees union, a verbal agreement was reached between the appellants and their employees, including the six respondents, confirming the agreement of 9 July 1998. However, on 24 August 1998, the six respondents absented themselves and claimed that they were constructively dismissed by the appellants. The presiding officer below held that the July agreement (The presiding officer referred to as the May agreement in her judgment which I assume was a typographical error) to defer payment of wages was void as not being supported by any valuable consideration. Accordingly, she held that the respondents were entitled to consider themselves as being constructively dismissed by the appellants under section 10A of the Employment Ordinance. She entered judgment in favour of the respondents in respect of their claim for arrears of wages, wages in lieu of notice and severance payment. The appellants appealed contending that the agreement was binding.

Point of Law for Appeal - The Consideration:

2. The point of law raised in this appeal is whether the presiding officer was right in finding that the July agreement was not supported by any valuable consideration. The appellants argued that by undertaking not to dismiss any employees and not to reduce any of their employment benefits which the appellants were entitled to do after due notice, they were suffering a detriment and that was the consideration which supported the employees' promise to defer payment of their wages. Such evidence has not been adduced at the hearing in the Labour Tribunal. Having read the statements of the witnesses, I have no doubt that this consideration was at the forefront of the employees' minds when they forebear suing for arrears of wages or terminating their contracts of employment and agreed to the terms of the May agreement and then the July agreement. Such inference could readily be drawn particularly when all these events happened at a time when some employers were dismissing employees and cutting back on wages and other employment benefits. Being able to keep one's employment and on similar terms is a consideration when employees are being threatened with loss of employment or benefits. Though it is open to me to remit the case back to the Labour Tribunal for further inquiry, I do not consider it appropriate, as the matter had taken far too long and a winding up petition against the appellants is now pending in March 2000. I shall consider I am bound by the lack of evidence of such undertaking.

3. Mr Lau, for the 1st, 3rd and 6th respondents, sought to support the decision of the presiding officer by relying on to the case of In re Sectmove Ltd, [1995] 1 WLR 474. In that case, the English Court of Appeal held that a company's promise to pay existing liabilities by instalments and future liabilities when they fell due could not constitute good consideration.

4. However, with respect to the presiding officer and Mr Lau, I think they failed to appreciate the significance that the May and July agreements were collective agreements, like a composition agreement with creditors, where the mutual agreement of the creditors to forgo part of their claim constitutes good consideration for them to accept a lesser payment as full satisfaction of the whole of their claims. Para. 833 of Halsbury Law of England, 4th ed. Vol. 3(2) has this to say:

5. Mr Lau referred me to the first sentence of the above passage from Halsbury. He submitted that the July agreement is not a composition agreement because it is not an agreement for payment of a smaller amount in satisfaction of a larger debt. He is correct that composition agreements usually involve creditors forgoing part of their debt in order to arrive at a more favourable settlement than liquidating the assets of the debtor. However, there are also agreements whereby creditors agree to payment of their debt in full, but by instalments. In my view, these latter type of agreements are also composition agreements. There is no reason why the principles commonly applied to the usual composition agreements are not applicable to a scheme of arrangement whereby creditors for their own benefit agree to have their debt paid orderly by instalments and perhaps following certain priorities. Even if the July agreement is not a composition agreement as such, I consider the law applicable to composition agreement applies equally to the July agreement.

6. It has long been a common practice for the creditors of an impecunious debtor to make an arrangement with him whereby each agrees to accept a stated percentage of his debt in full satisfaction. It would appear at first sight that payment of a smaller amount cannot be satisfaction of a greater debt as it had occurred to the presiding officer that payment by deferred instalment cannot be satisfactory discharge of the appellants' obligation to pay arrears of wages forthwith. However, the court is always ready to find a consideration to give effect to so reasonable an agreement which provides a practical solution to a real problem. An agreement to defer payment of wages and to be paid by instalments is far less objectionable than an agreement to accept part of a debt as full and final satisfaction of the entire debt.

7. The question of consideration in composition agreements always raise doctrinal difficulties. But the binding force of such agreements is well established and unquestionable. Para. 3-117 of Chitty on Contracts, Vol. 1, 28th ed. precisely summarised the state of the law as follows:

8. In Boothbey v. Sowden, (1812) 3 Camp 175, Lord Ellenborough suggested that the mutual agreement by each creditor to forgo part of his debt on the hypothesis that all the other creditors would do the same provided the consideration to support the composition agreement. The criticism that this approach offended the cardinal rule of the law that the consideration must move from the promisee is just academic. Invariably the debtor is made a party to the agreement so that the mechanism of partial payment could be effected. Also, as pointed out by the learned authors of Chitty on Contract, there are obvious advantage to the creditors collectively, in that all will get something rather than to run the risk of some getting all while others getting nothing. In reality, when one looks at these composition agreements, invariably, there are consideration given by the debtor or third parties and things to be gained by the creditors. Directors or shareholders or third parties may inject additional funds into the debtor company to keep it operating as a going concern. By keeping the debtor company alive, the creditors may get higher dividend than liquidating the debtor company.

9. In Wood v. Robarts, (1818), 1 Stark, 417, Lord Tenterden suggested that no creditor will be allowed to go behind the composition agreement, to the prejudice either of the other creditors or of the debtor himself, because this would be a fraud upon all the parties concerned. This approach was approved by Willes J, in Cook v. Lister, (1863), 13 CBNS 543, at 595 and applied by the Court of Appeal in Hirachand Punamchand v. Temple, [1911] 2 KB 330. In Couldery v. Bartrum, (1881) 19 Ch D, amid a sustained invective against the rule in Pinnel's Case, simply say no more than that the law "imports" a consideration to support the composition agreement. As stated in the above passages of Halsbury and Chitty on Contract, it is now well established that the mutual agreement among creditors to forbear is a good consideration to support a composition agreement.

10. In the case before me, obviously all employees agreed together to defer receiving their wages. This consideration would certainly support the agreement as among the employees. It is unfortunate that the presiding officer did not enquire if there was any other consideration moving from the appellants as she jumped far too readily, in my view, to the conclusion that there was none. Had she viewed the statements as I did, she would probably have found that keeping of their employment and on similar terms in the then prevailing market condition must have been forefront in the minds of, not only these respondents, but all the other 20 odd employees of the appellants. She would then have embarked on a course of inquiry, which will result in her finding that the appellants' promise not to dismiss their employees and not to reduce their employment benefit as the valuable consideration. However, as I have said, I shall consider myself bound by the absence of such evidence. I shall instead rely on the mutual agreement of the employees to defer payment of their wages as the consideration. It is certainly a good consideration in view of the then prevailing employment market condition. It is better to keep the goose that lays golden eggs (albeit smaller eggs than it did before) than to kill it for whatever is inside.

11. We are fortunate to be able to look back in the new millennium at what had happened in the intervening two years. The employers were in financial difficulties and had cash flow problems, a phenomemom which was so common in 1998/99. They acted responsibly and reasonably. They entered into the composition agreement with the employees. Apparently, they did not dismiss anybody which would have helped to save their operating costs. Apparently, they did not reduce the wages or other benefits of the employees. During these years, we have seen other employers taking the liberty to both dismiss employees and reduce the wages of those who remain. These employers have resorted to neither of these measures. They improved on the May agreement by accelerating payment of the arrears. In July, though the appellants were not able to pay wages in full, they were paying more than they had promised under the May agreement. The net result of the July agreement is that the arrears of wages would be cleared at the rate of $4,000.00 a month. This is not too unreasonable an agreement. Before 22 August when the respondents terminated their contracts of employment, the appellants were paying more than they had promised under the July agreement. They offered special consideration to employees who may have special needs for cash. Some employees have signed witness statements saying that they were happy with the composition agreement and the way it worked out and expressed disapproval of the conduct of the six respondents.

12. In my view, the whole transaction has to be looked at with commercial sense and not with self-interest. The July agreement kept the company alive so as to provide employment for all the 30 employees, and on unreduced terms. It offered a realistic scheme whereby the arrears would be cleared at $4,000.00 a month and possibly more if the condition permitted. It might not be as beneficial to those who were more competitive in the employment market who could find employment easily, or to those who were owed larger amounts or whose monthly wages were higher because it would take longer to clear their arrears. The 4th respondent submitted that the agreement was delaying their payment of wages and not beneficial and many employees have left. But generally speaking, it is beneficial to the 30 employees collectively. As things turned out, all the employees were paid their arrears, though the appellants are not out of trouble yet. But in fairness to the appellant employers, they have struggled on and so have the other employees who kept their promise of forbearance.

13. In the circumstances, it cannot be right and fair to say that there was no consideration moving from the appellants to support the composition agreement. The July agreement was confirmed by the parties in the presence of a Labour Officer and an union representative. In my view, the mutual agreement among the employees provided the valuable consideration needed to support the agreement. The courts have always realised commercial reality and practical convenience and adopt a very realistic approach and as in Couldery v. Bartrum, will "import" a consideration to support the composition agreement. I do not see why I should not do the same. In reaching my conclusion on this point of law, I relied on some very old authorities just to show that the view I take has been a time honoured one for two centuries and has been firmly established as part of our law.

14. The Labour Department conducts conciliation frequently. As a matter of reality, they help parties to reach similar composition agreements. It would be a real disaster if the court should by a broad brush declare such agreements void as not being supported by valuable consideration. Labour relations and labour disputes will come to a deadlock. If self motivated employees should be allowed to ignore these composition agreements, our commercial life will become very fragile and exceedingly vulnerable even to the slightest economic turbulence. Employers' and employees' confidence in the very useful services of the Labour Department will rapidly erode.

Effect of Section 70:

15. Mr Lau submitted that even if the July agreement is supported by consideration, it is void because of section 70 of the Employment Ordinance. His argument is that the respondents were monthly rated workers and were entitled to be paid their wages within 7 days of the last day of the wage period in accordance with section 23. The July agreement is void as it purports to take away the right to payment of wages within 7 days of the wage period. Section 70 provides:

The July agreement is not a term of a contract of employment. It therefore has no application to the July agreement. Wages were due 7 days after the last day of the wage period. They were due and outstanding at various times before the July agreement. It was only when they were due and liabilities accrued that the parties agreed to discharge that liability by the arrangements in the July agreement. The section therefore has no application to the July agreement, whether in relation to the employee's rights under section 23 or under section 10A which I shall next turn to.

Effect of Section 10A:

16. The more important consideration is the effect of section 10A on the July agreement. Section 10A provides:

17. At common law, an employee may accept an employer's failure to pay wages when due as the employer's repudiation of the contract of employment and terminate the contract of employment. In reality, it may be difficult to determine what delay in payment of wages amounts to repudiation. An employer may temporarily be out of funds for a short period and genuinely do not intend to repudiate the contract. An employee may not wish to accept the repudiation because he wishes to keep the employment alive because of the possibility of being repaid and the potential for future earning or because of difficulties in finding alternative employment. Section 10A is to relieve the employee of such predicament by giving him the right to terminate once wages are not paid within a month and seven days.

18. Section 10A(1) gives an employee the right to terminate his contract of employment if wages are not paid within one month and 7 days of the last day of the wage period and to deem it as if it were termination by the employer. The respondents may or may not exercise that right. It is their prerogative. In July 1998, they could have determinedly expressed their refusal to be parties to the agreement. Instead, they took advantage of that agreement, retained their employment, earned more wages, and more benefits accrued to them under the contract of employment which they kept alive, such as holiday pay, rights to long service payment or severance payment, provident fund contribution, etc. The July agreement provides for payment of arrears of wages as well as future wages by two instalments every month. It anticipates a continuation of the employment and not its termination. Of course, the appellants could only pay the arrears if they could continue to operate as a going concern with the help of the employees. By being parties to the July agreement, the inescapable conclusion is that the respondents consented to deferment in payment of their wages then due and owing and agreed to continue their employment with the appellants. It is therefore an implied term of the agreement that the employees' right to terminate the contracts of employment for non payment of wages then due and owing, whether under section 10A(1) or at common law will be held in abeyance during the subsistence of the July agreement. Any other conclusion would render the July agreement nugatory. The employees, of course, may nevertheless terminate their contracts of employment in accordance with the terms of the contract or under other provisions of the Employment Ordinance or at common law. They may even terminate under section 10A(1) in respect of wages earned after 1 August, if the repayment schedule is such that part of the wages earned after 1 August are not paid within 1 month and seven days of the wage period.

19. As events turned out, the appellants performed their part of the July agreement. They paid $1,000.00 per week. Without the July agreement, the wages for July would fall due on 7 August. In accordance with the July agreement, they paid half of the wages in mid August. Another half would have been paid in the end of August, but for the six respondents leaving their employment. If they had not left and if the appellants failed to pay the balance at the end of August, the appellants would be in breach of the July agreement. The respondents would be entitled to consider themselves discharged of the July agreement by the appellants' breach and exercise their rights under section 10A. Or if the default continued to 7 September the appellants would equally be entitled to exercise their rights under section 10A without arguing that the July agreement had been discharged by breach.

Conclusion:

20. As the July agreement is supported by a valuable consideration, it is binding on the respondents. The result is that the respondents may not terminate the contracts of employment by reason of the appellants' failure to pay them wages then due and owing before July 1998, whether under common law or under section 10A. Accordingly, they have not been dismissed by the appellants under section 7, their claim for wages in lieu of notice, year end bonus and severance pay must fail. On the other hand, as it was the respondents who terminated their contracts of employment without notice or without any reasonable grounds at common law, the appellants' claim for wages in lieu of notice must succeed. Accordingly, I allow the appeal to the extent that the award in favour of the respondents in respect of their claims for wages in lieu of notice, year end bonus and severance payments be set aside and judgment be entered for the appellants in respect of their counterclaim for wages in lieu of notice against each of the respondents. The respondents have to pay the appellant wages in lieu of notice as follow:

I make no order as to costs, while the 1st, 3rd and 6th respondents' own costs shall be taxed in accordance with Legal Aid Regulations.