JOINT AND SEVERAL PROVISIONAL LIQUIDATORS OF HSIN CHONG CONSTRUCTION CO LTD (PROVISIONAL LIQUIDATORS APPOINTED) v. THE CHINESE UNIVERSITY OF HONG KONG AND OTHERS

HCCW 239/2018

[2020] HKCFI 2434

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 239 OF 2018

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REASONS FOR DECISION

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1.  At the hearing on 8 September 2020, I dismissed the summons issued on 2 July 2020 (“Summons”) by the joint and several provisional liquidators (“PLs”) of Hsin Chong Construction Company Limited (provisional liquidators appointed) (“Company”) under section 200(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”) and inherent jurisdiction of the Court. These are the reasons for my decision.

2.  The Summons was listed for hearing with 30 minutes reserved.  In the Summons, the PLs seek:

“Directions as to whether the [PLs] should make any distributions to the 2^nd to 7^th Respondents (being the Nominated Sub-Contractors (the ‘NSCs’)) (if so, to whom and the amount of each payment) out of the funds received from the 1^st Respondent, The Chinese University of Hong Kong, on 24 February 2020 in the total sum of HK$1,965,434.66 (the particulars of which have been stated in the Schedule hereto))”

3.  On 27 August 2018, the petition in these proceedings was presented by a creditor, who seeks a winding up order against the Company on the ground that it is insolvent and unable to pay its debts.  Upon the ex parte application made by a contributory, on 18 January 2019, Mr Justice Harris appointed the PLs over the Company (“Appointment Order”).

4.  The PLs named 7 respondents to the Summons.  The 1^st respondent is Chinese University of Hong Kong (“CUHK”), which was the “Employer” under a building contract whereby the Company was engaged as the main contractor to undertake the construction of student hostels at Site A and Site B (“Main Contract”).  The 2^nd to 7^th respondents were nominated sub-contractors engaged by the Company to perform certain works under the Main Contract (collectively “NSCs”) and, for that purpose, the Company entered into a sub-contract, in identical terms, with each of the NSC (“Sub-Contract”).

5.  Under the Main Contract, the works involved were substantially completed by December 2012, and all defects rectifications were completed by September 2018 in that:

(1)  For Site A, on 21 October 2011, the Architect (appointed by CUHK) certified that the works were “practically completed” on 17 October 2011 and the defects liability would expire on 17 October 2012.  Further, on 27 November 2018, the Architect certified that the Company had completed all items of works and satisfactorily rectified all defects on 21 September 2018.

(2)  For Site B, on 16 January 2013, the Architect certified that the works were “substantially completed” on 19 December 2012 and the defects liability period would expire on 19 December 2013. Further, on 27 November 2018, the Architect certified that the Company had completed all items of works and satisfactorily rectified all defects on 21 August 2018.

6.  Thereafter, the Architect issued 2 final certificates to the Company dated 20 January 2020 (in respect of Site B) and 20 February 2020 (in respect of Site A) (together “Final Certificates”), stating that HK$5,025,227.26 and HK$3,073,210.06 were due from CUHK (“Final Sum”).  Attached to the Final Certificates were breakdown on how the Final Sum was arrived at, including the amounts attributable to the NSCs, which were HK$72,214,301.42 (in respect of Site A) and HK$49,054,625.13 (in respect of Site B).  It appears that the details on each NSC’s entitlement were set out in Annex No 1 thereto, and reproduced in §16 of the PLs’ affirmation.  The Final Certificates are, by virtue of clause 33.9 of the Sub-Contract, “conclusive evidence” as between the Company and the Sub-Contractor in any proceedings arising out of the Sub-Contract in the absence of fraud, dishonesty or fraudulent concealment. 

7.  It was clearly stated in the Final Certificates that the Final Sum consisted of 4 parts:

(1)  Retention monies payable to the Company: HK$1,245,000 for Site A and HK$3,639,102.13 for Site B;

(2)  Non-retention monies payable to the Company: HK$1,248,900.53 for Site A;

(3)  Retention monies payable to NSCs: HK$261.26 for Site A and HK$1,121,000 for Site B (together “Retention Monies”); and

(4)  Non-retention monies payable to NSCs: HK$579,048.27 for Site A and HK$265,125.13 for Site B (together “Non-Retention Monies”). 

8.  If the Company is being wound up by the Court, the commencement date of the winding up would be 27 August 2018 (the date of the petition).  By that date, the Company and the NSCs had already completed the works under the Main Contract and the Sub-Contracts for 6 years, subject only to the expiry of the “Defects Liability Period” and the obligations on the part of the Company and NSCs to undertake rectification works during such Period.  Viewed from this fact, one would have thought that unless the PLs can identify a basis for contending that the Retention Monies and Non-Retention Monies are the Company’s assets, there would be no basis for them to ask CUHK to pay over such Monies to the Company. 

9.  That, however, was not the approach taken by the PLs.  As soon as they learnt that CUHK proposed to make direct payments to the NSCs, the PLs, through Messrs Wilkinson & Grist’s (“W&G”) letter of 11 November 2019 (“Letter”), demanded CUHK to close the final account and settle all payments due to the Company under the Main Contract including the sums payable to the NSCs under the Sub-Contracts, on the following grounds:

(1)  Retention Monies: Although clause 32.5(1) of the Main Contract and clause 33.5(1) of the Sub-Contract both provide that they “shall be held upon trust by [CUHK] for the [NSC]”, it is “indisputable” that CUHK is entitled to deduct any amount due from the Company or the NSCs against any retention monies under such clauses, and “the presence of the set-off mechanism would likely negate the existence of any trust arrangement in respect of any retention monies held either by the employer or the main contractor”, citing Yew Sang Hong Ltd v Hong Kong Housing Authority [2008] 3 HKC 290. 

(2)  Non-Retention Monies: it is clear that clause 29.8(3) of the Main Contract and clause 33.1(8) of the Sub-Contract, which allow CUHK to make direct payment to the NSCs, are “ineffective” after the Company “is put into liquidation” as it falls foul of the pari passu principle and anti-deprivation principle.

10.  In compliance with the PLs’ demand, on 24 February 2020, CUHK paid the Final Sum to the Company. 

11.  Having insisted that the Final Sum should be paid to the Company for the reasons stated in the Letter, the PLs then changed their stance and said in the affirmation filed in support of the Summons that they had been advised by W&G that the “various legal issues” arising from the Summons “remain unsettled to date” and, therefore, whilst they remain “neutral” to the Summons, they request the Court “to determine the matters highlighted in the affirmation and to give directions as to whether the PLs should make any distributions to the NSCs (if so, to whom and the amount of each payment) out of the Funds”.

12.  Not surprisingly, neither CUHK nor the NSCs have filed any evidence in opposition to the Summons, not least because the amounts involved are not substantial.  At the hearing, only Huns Engineering Company Limited (“Huns”), one of the NSCs, appears and is represented by counsel.  His submissions and the conclusions are essentially the same as those advanced on behalf of the PLs. 

13.  Mr John Hui, counsel for the PLs, in his 22-page skeleton, emphasises that the PLs are “neutral” to the application and the submissions are made to “assist the Court” to determine the issues raised in the affirmation.  In summary, Mr Hui submits that:

(1)  The contractual provisions created an express trust over the Retention Monies;

(2)  The existence of a set-off mechanism in those provisions does not negate the existence of a trust, citing Re Tout and Finch Ltd [1954] 1 All ER 127.  Although the Court of Appeal in Yew Sang Hong Ltd v Hong Kong Housing Authority [2008] 3 HKC 290, at §§54-58, seems to suggest that the existence of set-off mechanism may preclude a finding that the relevant retention monies were trust monies, it is distinguishable, given that there was no provision in the main contract or the sub-contract which expressly subject the retention monies to a trust.  In any event, the mere existence of a set-off mechanism is not incompatible with the existence of a trust, as before exercising a right of set-off over the trust monies, the employer must have claims which can be established (Concorde Construction Co Ltd v Colgan Co Ltd [1984] HKC 241, at 244C-D and 249H). 

(3)  CUHK must show that it has segregated the Retention Monies prior to the Company’s “provisional liquidation in order to hold the monies on trust for the NSC”, citing Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Ltd and ors (Financial Services Authority intervening) [2012] Bus LR 667 at §2; Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 30 at 37; MacJordan Construction Ltd v Brookmount Erostin Ltd [1994] CLC 581 at 587.

(4)  In the absence of any clause creating an express trust or conferring any proprietary interest over the Non-Retention Monies in favour of the NSCs, the Non-Retention Monies should form part of the assets of the Company (Dawnays Ltd v FG Minter Ltd & Trollope & Colls Ltd [1971] 1 WLR 1205, at 1208H, 1209B-D).

(5)  The direct payment clauses under the Main Contract and the Sub-Contracts are “ineffective” as being contrary to the pari passu principle (B Mullan & Sons Contractors Ltd v Ross (1996) 54 ConLR 163 at 176-177, 185).   In any event, CUHK can only pay the NSCs directly if the Company fails to satisfy the prescribed requirements for withholding amounts due to the NSCs and the clause “appears to apply only to payments withheld which are certified in the Interim Certificates”.

14.  In my view, there was no justification for the PLs to issue the Summons for the following reasons. 

15.  First, as a matter of principle, the provision under section 200(3) is concerned with action which is future at the time of application being heard and it provides an administrative non-adversary proceedings (Re JW Murphy & P.C. Allen (1996) 19 ACSR 569).  There is a further limit to such application in that the liquidator cannot ask the Court to make a commercial decision for them or to seek directions on matters which fall within their discretion where the intention is to enable the liquidators to be absolved of responsibility for making a difficult commercial decision (Shiraz Nominees (in liq) v Collinson (1985) 3 ACLC 706).  As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 10 ACLC 1742 at 1744-1745:

“… [i]t is generally not appropriate in an application for directions to make the liquidator’s commercial decisions for him where he has full power to act … and the liquidator should not seek directions as a kind of insurance that he has made the right commercial decision.”

16.  In the present case, the PLs had prior to issuing the Letter already decided that the Retention Monies and Non-Retention Monies are assets of the Company and should be paid by CUHK to the Company.  The tenor of the Letter makes it clear that far from having any difficulty or uncertainty, the PLs were of the firm view that the Retention Monies and Non-Retention Monies should be paid to the Company.  As discussed further below, if the PLs subsequently come to a different view, the proper course should be for them to set out their new position and provide it (together with reasons) to the interested parties to see if there is any real dispute.   

17.  Second, an application for “directions” under section 200(3) should not lightly be made.  This is because liquidator and provisional liquidator (with prior sanction of the Court) are entitled to engage solicitors or counsel to advise them whenever they need legal advice.  They can then consider the advice and decide what is the appropriate course without having to incur time and costs in making an application to the Court.  This is particularly so when it is within their power to make the decision and carry out what they consider to be necessary for the protection of the Company’s assets.   

18.  Third, where, as here, provisional liquidators have been appointed over the company pending determination of the petition, an application under section 200(3) should not be made without the prior sanction of the Court.  This is because the powers of the provisional liquidators are prescribed by the order appointing them, which invariably require the provisional liquidators to seek prior sanction of the Court before they commence or defend proceedings (or do other acts such as to borrow money, enter into compromise or arrangement with other parties or dispose of the company’s assets). Under §4(f) of the Appointment Order (which continues to date), there is a specific limit on the PLs’ power to engage in proceedings:

“With the prior sanction of the Court, to bring or defend any action or other proceedings (whether court proceedings, arbitration or otherwise) or to take out any steps in existing actions or proceedings, whether within or outside the jurisdiction, in the name of and on behalf of the Company or to take such other action as may be considered by the Provisional Liquidators to be necessary for the protection of the Assets.” (underlined added)

19.  The limit in part mirrors the effect of section 186 of the Ordinance, which provides that when a provisional liquidator has been appointed, “no action or proceeding shall be proceeded with or commenced against the company except by leave of the court, and subject to such terms as the court may impose”.  The wordings “such other action as may be considered by the [PLs] to be necessary for the protection of the Assets” cover proceedings brought in the names of the PLs, given that the PLs are prima facie entitled to be indemnified of their costs (including adverse costs payable by them) out of the Company’s assets under Order 62 rule 6(2) of the Rules of the High Court. The purpose of imposing such limit is to ensure that the Company’s assets will not be wasted in pursuing or defending any proceedings unless they are necessary or in the best interests of the Company to do so, as it is generally undesirable for the provisional liquidators to incur costs in litigation at the time when the status of the company has not been determined.   

20.  In the materials before the Court, it appears that no such sanction has ever been sought or obtained by the PLs in respect of the Summons.   

21.  Fourth, an application under section 200(3) is reserved to cases where a genuine difficulty arises in the course of the liquidation, as where the liquidator or provisional liquidator’s proposed decision is being criticised by a creditor as being unreasonable or evidence of bad faith or that they have been confronted with charges of acting unreasonably (see Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357 at 363; Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115).

22.  As is clear from the materials before the Court, prior to issuing the Summons, no one has criticised the PLs’ decision nor intimated that it will take step to  challenge their decision over the payment of the Total Sum.  This is particularly so after the PLs have changed their stance and no longer maintain that the Retention Monies are or should be regarded as the Company’s assets.  As for the Non-Retention Monies, the PLs put forward a number of reasons as to why they should be regarded as the Company’s assets, and neither CUHK nor any of the NSCs have expressed any disagreement over their view.  It does not appear that the PLs have taken any step to communicate with CUHK or the NSCs as to their latest stance and the reasons therefor including the relevant legal authorities.  Had they taken the obvious step to communicate their revised view with reasons to CUHK and the NSCs, the latter would have been able to take legal advice and decide not to object to the PLs’ revised view, which is what happened at the hearing. 

23.  Fifth, when one examines the so-called “unclear legal position” over the NSCs’ entitlement to receive the Retention Monies, it can readily be seen that neither of the 2 matters identified by the PLs applies to the Retention Monies.   

(1)  As regards CUHK’s right to set-off the amount of its claim against the Retention Monies, it is irrelevant as CUHK never suggests that it has any claim against the NSCs, let alone a substantiated claim. 

(2)  As for the need to segregate the Retention Monies in CUHK’s funds, it is misconceived.  The requirement of segregation, as discussed in Lehman, Rayack and MacJordan, was in the context of the companies holding the trust monies which had been put into liquidation.  The principle has no application to CUHK as it is not in liquidation.  In any event, even if there is any basis to transpose the requirement of segregation to CUHK, it is clear from the Final Certificates that CUHK has not mixed the Retention Monies with its own funds or the monies to which the Company was entitled.  I do not think it is open to the PLs to rely on the fact that CUHK has paid the Final Sum to it as the basis for suggesting that the Retention Monies have mixed with the Company’s funds, as it would be tantamount to allowing the PLs to rely on their own wrong (in making the demand) so as to justify their act in taking away the Retention Monies which have all along been held by CUHK on trust for the NSCs. 

24.  I have ordered the costs of and occasioned by the Summons to be paid by the PLs to Huns, to be assessed by way of gross sum assessment.  As stated at the hearing, it seems to me that this is a case where the Court should consider depriving the PLs of their right to receive remuneration and to recover the costs (including the adverse costs payable by them) from the estate of the Company, whether under §8 of the Appointment Order and Order 62 rule 6(2) of the Rules of the High Court, on the basis that it is unnecessary and unreasonable for the PLs to issue the Summons.  I allow the PLs to show cause as to why the Court should not make such an order by way of written submissions, if so advised, to be lodged within 7 days of the handing down of these Reasons.