RE KITCHEN CABINETS ENGINEERING CO LTD

HCCW 425/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 425 OF 2008

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J U D G M E N T

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1.  This is a creditor’s petition to wind up Standard Kitchen Cabinets Engineering Company Limited (“the Company”).  The petitioner is Toptech Company Limited.  On 29 July 2008, a demand under section 178(1)(a) of the Companies Ordinance, Cap. 32 was served on the Company.  The petition was presented on 12 September 2008.

2.  The petition was founded on amounts due under twelve invoices issued by the petitioner between 30 March 2006 and 24 April 2008 in respect of work done and materials supplied by the petitioner to the Company at the Company’s request and associated charges, in the total sum of $897,853.83.

3.  The twelve invoices were issued under two contracts between the Company and the petitioner, for a project entitled “TWTL 398 Tai Ho Road/Yeung Uk Road, Tsuen Wan, New Territories” (“the Tsuen Wan Sub-sub-contract”) and a project entitled “Proposed development at Ma On Shan Area 77, STTL No. 487” (“the Ma On Shan Sub-sub-contract”).

4.  Of the twelve invoices, three were not disputed by the Company in its evidence in opposition.  In the submission of its counsel, Mr. Ivan Cheung, it was indicated that a further two invoices would not be disputed.  These five invoices were for the sums of $6,132, $36,455.88, $1,350, $1,098.49 and $936.70, making up a total amount not in dispute of $45,973.07.

5.  The Company asserted there is a bona fide dispute on substantial grounds in respect of the remaining seven invoices.  Further, it raised cross claims which greatly exceeded the amount of the petitioning debt.  The total amount of the cross claims that have been quantified is $11,147,165.99, made up of claims under the Tsuen Wan Sub-sub-contract of $171,729.28, and claims under the Ma On Shan Sub-sub-contract of $10,975,436.71.  In addition, there is an unliquidated claim for loss and damage to be assessed based on such sums to be further imposed by the main contractor under the Tsuen Wan Sub-sub-contract.

6.  The legal principles on the approach of the court where the debt in the petition is disputed are not in issue.  The onus is on the company to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds (Re ICS Computer Distribution Limited [1996] 3 HKC 440 at 444B to C).  This burden is not discharged by raising a cloud of suspicions.

7.  Where a cross claim not less than the amount of the petitioning debt is raised as a ground for dismissing or staying a petition by invoking the principles in Re Bayoil SA [1999] 1 WLR 147, the court must be satisfied that the cross claim is genuine and serious and one of substance.  The onus is again on the company to adduce sufficiently precise factual evidence to satisfy the court that is the case (Re Keen Lloyd Resources Limited [2004] 2 HKC 33).

8.  Mr Timon Shum submitted on behalf of the petitioner that the cross claim under the Ma On Shan Sub-sub-contract of $10 million odd should not be taken into account as the Company is not entitled to set off this cross claim, which arose out of a separate contract, against the amount due under the Tsuen Wan Sub-sub-contract.  I think this submission is misconceived.  The authorities he cited are concerned with what orders should be made in an application for summary judgment where a set-off or counterclaim is raised by a defendant, whether judgment should be entered subject to a stay pending trial of the counterclaim, or whether there should be unconditional leave to defend.  I not concerned with that situation.  For the principles in Re Bayoil SA to apply, it is not necessary this should involve a right of set-off.  A cross claim or cross demand would suffice, even though it arose out of a separate transaction, as in the case of Re LHF Wools Limited [1970] Ch 27, as long as there is mutuality in that the parties involved in the cross claim must be the same as the parties in the claim which founded the petition (Re The Sun’s Group Limited [2004] 3 HKLRD 65).

9.  With this, I turn to consider the evidence adduced by the Company and the petitioner.  I will first consider the disputes raised by the Company concerning the remaining seven invoices.

Invoice Nos. BPE0038/0069/07, BPHKJI000262/07 and BPHKJI000263/07

10.  Invoice No. BPE0038/0069/07 for $12,500 related to additional works for the dismantling and re-installation of kitchen worktops for five flats.  Invoice No. BPHKJI000262/07 for $6,000 related to the supply, fabrication and installation of worktops for one flat.  Invoice No. BPHKJI000263/07 for $7,000 related to the supply, fabrication and installation of worktops for one flat.  The total amount of these three invoices came up to $25,500.

11.  The Company contended the replacement works mentioned in these three invoices were required only because the petitioner had failed to carry out works in accordance with the requirements in the first place, so the petitioner should not be entitled to any additional payments on account of this.

12.  The difficulty with this contention is that in respect of the additional works covered by each of the invoices, there was a letter of agreement signed by the Company stating in clear terms the amount agreed upon for the works and when payment was due.  These letters of agreement were dated 26 January 2007, 1 August 2007 and 10 August 2007.

13.  Mr Cheung submitted on behalf of the Company that notwithstanding these letters of agreement, there was no consideration for the services rendered.  I reject this submission without hesitation.  If the Company had really no legal obligation to pay for the works covered by the invoices for the reason now advanced in the Company’s affirmation in opposition, there was no reason why the Company should sign the letters of agreement in the first place.  The ground for disputing liability is incredible, it is contrary to contemporaneous documents.

Invoice No. BPHKJI000303/07

14.  The amount claimed under this invoice was $793,274.17, being the balance of the amount due to the petitioner in respect of interim payment under the Tsuen Wan Sub-sub-contract.

15.  The petitioner has produced a letter dated 22 October 2007 from Tony Ng, the managing director of the Company, to Prime Harvest Development Limited (“Prime Harvest”), the agent for the employer.  This letter referred to a meeting on the same day of the representatives of Prime Harvest, the quantity surveyor KPK Quantity Surveyors (HK) Limited, the petitioner and the Company regarding the discussion of the settlement of outstanding interim payment to the petitioner in the sum of $1,389,987.  The Company confirmed in the letter that the petitioner had completed all the works for the project and that the total outstanding interim payment of $1,389,987 should be paid to the petitioner.  The Company agreed and requested approval from the employer’s agent to instruct the main contractor to pay the petitioner $800,000 directly in the coming payment to be certified by the main contractor and expected this sum to be released to the petitioner as soon as possible.  As for the remaining portion, the Company also agreed and requested the main contractor to pay the petitioner directly, according to the amounts to be certified in the coming months until the outstanding interim payment had been fully satisfied.

16.  Out of total sum of $1,389,987, the Company had effected payment of $596,712.83, leaving the balance outstanding of $793,274.17, which is the amount due under the invoice as claimed in the statutory demand and the petition.

17.  On the Company’s part, it was alleged in Tony Ng’s affirmation that the amount claimed by the petitioner of $793,274.17 had never been agreed between the parties as the final amount due to the petitioner.  Tony Ng asserted that the amount claimed was solely for interim payment purpose only, subject to final valuation of the works and there were discussions between the petitioner and the Company until early 2008 about the final account of the sub-sub-contract, and no agreement had been reached.

18.  It was further submitted by Mr Cheung that the petitioner has not adduced any notification of the quantity surveyor certifying the value of the works carried out by the petitioner, so the petitioner is not able to show that the amount claimed is immediately due and payable.  I note that a representative of the quantity surveyor had attended the meeting on 22 October 2007, during which agreement was reached that the petitioner should be paid the outstanding interim payment.

19.  The assertion in the affirmation of Tony Ng and the submission by Mr Cheung are contrary to the clear admission in the Company’s letter of 22 October 2007 that the Company had agreed the outstanding interim payment of $1,389,987 should be paid to the petitioner immediately.  There is no bona fide dispute regarding this claim for the balance of the outstanding sum.

Invoice No. MIBP001007

20.  The petitioner claimed handling fee for the letter of credit charged by the bank of $3,106.58 under the invoice.

21.  The Company paid for the goods supplied by the petitioner under the Ma On Shan Sub-sub-contract by way of a letter of credit.  It was asserted there was a common trade practice that each party was to bear its own handling fee charged by its own bank.

22.  In Tony Ng’s affirmation, he alleged that he had emphasised to the petitioner that payment under thissub-sub-contract would be settled by various means including by a letter of credit and there should be no claim for any handling fee charged by the bank and that the petitioner had agreed.  He pointed to the provision in paragraph 10(a) of the petitioner’s quotation dated 16 August 2007 which provided for payment of “95% of total contract value by irrevocable letter of credit at 30 days sight upon material delivery on site or to [the Company’s] godown”.

23.  For the above reasons, it was contended that the petitioner was not entitled to claim handling fee for the letter of credit charged by its bank.

24.  The petitioner has produced a letter dated 31 August 2007 by which it was agreed between the parties that the Company should bear the bank charges in clear terms.

25.  I reject the contention of the Company which is contrary to the clear terms of the agreement entered into by the Company.  There is no bona fide dispute for this invoice.

Invoice Nos MIBP000707 and MIBP000907

26.  These two invoices were for $15,000 each, being off-site storage charges.

27.  According to the petitioner, an agreement between the parties was reached by telephone, and was evidenced in a letter of agreement dated 24 July 2007 signed by them.  The terms of the letter were clear.  Tony Ng said in his affirmation he signed the letter based on his wrong belief that the petitioner was contractually correct to do so under the sub-sub-contract.

28.  There is no legal basis for this contention of mistake.

29.  I reject also the submission of Mr Cheung that the Company should not be liable for the storage charges of a full month but only for 28 days being the actual number of days for which the storage facilities were used.  It was stated in the agreement signed by the Company that storage charges would be $5,000 for each container a month and that three containers were required.  There is no basis to support his contention why the Company should not be liable for a full month’s charges in the event of under utilisation.

Conclusion on the disputed invoices

30.  For the reasons given above, I am of view there is no bona fide dispute of the petitioning debt, being the amount claimed under the twelve invoices, in the total sum of $897,853.83.

31.  I turn to consider the cross claims.  I propose to consider the cross claims under the Ma On Shan Sub-sub-contract first, in the substantial sum of $10,975,436.71.

Cross claims under the Ma On Shan Sub-sub-contract

32.  The cross claims are made up of three heads of claim as follows:

(1)  the claim of the main contractor Hien Lee Engineering Company Limited (“Hien Lee”) against the Company of $6,184,167.52, being the loss or damage allegedly suffered by Hien Lee as a result of the Company’s breach of itssub-contract with Hien Lee (“the Ma On Shan Sub-contract”) and is the subject of the action brought by Hien Lee against the Company in HCA No. 2591 of 2007, which subsequently became a consolidated action in HCCT No. 29 of 2008; 

(2)  the loss suffered by the Company as a result of the determination of the Ma On Shan Sub-contract by Hien Lee in that the Company had been prevented from earning its expected overheads and profits which it would otherwise have earned, in the sum of$3,506,404.66; and

(3)  deposits forfeited by suppliers under the Ma On Shan Sub-contract as a result of the determination of the Sub-contract, in the sum of$1,284,864.53.

33.  All these claims allegedly flowed from the termination of the Ma On Shan Sub-contract by Hien Lee.  It is the Company’s case the petitioner should be held responsible for the termination of the Sub-contract and it should indemnify the Company for the losses arising thereunder, as it was the petitioner’s failure or refusal to supply the kitchen worktops at reasonable and proper times and to carry out and complete installation of the same regularly and diligently under the Ma On Shan Sub-sub-contract that led to the determination of employment of the Company by Hien Lee.

34.  I have examined the evidence adduced on both sides.  I am of the view the cross claims are not genuine or of substance.

35.  In the affirmation of Tony Ng, he alleged there was delay of the petitioner in delivering the worktops in accordance with schedules and that materials were not delivered to the site until on or about 8 October 2007.  The petitioner adduced evidence to show that was factually incorrect as materials were delivered to the site on 24 September 2007, as could be seen from a cargo receipt.

36.  It was then submitted by Mr Cheung that delivery on 24 September 2007 was late nonetheless, as the Company had provided a letter of credit dated 23 August 2007 and he deduced from that there was one month’s delay.  He argued the delay was critical and would have a knock-on effect on the overall performance of the Company to catch up with the progress of the construction so as to avoid the determination of the Sub-contract by the main contractor.

37.  The submission of counsel is speculative and has no factual support.  The Company has not discharged its obligation to adduce sufficiently precise factual evidence in support of its contention there are genuine cross claims of substance.

38.  I note further that the contentions of the Company would appear to be contrary to the allegations made by Hien Lee against the Company in the statement of claim in the consolidated action.  The main contract works should have been completed on or before 26 June 2007.  According to the statement of claim, as at 20 July 2007, only about 4% of the Sub-contract works had been completed by the Company and the first default notice was issued by the main contractor on the Company on 30 July 2007.  Further, the Company admitted in its letter dated 10 August 2007 it had serious financial problems since the early stage of the Sub-contract and throughout the Sub-contract period.

39.  The Sub-sub-contract with the petitioner provided that work was to commence end of August 2007 and was to be completed by end December 2007.  By the time work was to commence under the Sub-sub-contract, there was already much delay in the Sub-contract works according to the statement of claim.  It was further provided in the Sub-sub-contract that the petitioner should complete the works according to the agreed programme but if there should be delay caused by other parties, the petitioner would not be held responsible.

40.  I am not satisfied on the evidence an adequate case has been made out of any delay on the petitioner’s part.  Even assuming there was some delay of the petitioner, it was not demonstrated how any such delay had caused or had contributed significantly to the Company’s delay in carrying out the Sub-contract works, which in turn led to the termination of the Sub-contract by the main contractor. 

41.  Furthermore, there was a letter of the Company to the petitioner dated 15 November 2007.  Following the termination by Hien Lee on 12 November 2007, the Company issued this follow-up letter to the petitioner stating that the Sub-sub-contract should come to an end as well, and requested the petitioner to submit payment application for the completion of works within three days.  It also apologised for any loss caused to the petitioner.  At no point in time did the Company ever issue or make any demand by letter to the petitioner claiming any of the sums in the affirmation of Tony Ng in which the substantial claim of $10,975,436.71 was made, notwithstanding Hien Lee had issued a writ against the Company in the High Court Action claiming $6,184,167.52 in December 2007.

42.  The other two heads of cross claim, in the sums of $3,506,404.66 and $1,284,864.53, were not properly supported by evidence, as submitted by Mr Shum.  There was no document showing how the figures for the claim of $3.5 million odd were arrived at, and no document was adduced showing that any of the deposits paid to suppliers was forfeited as alleged.

43.  For the above reasons, I am of the view that none of the cross claims which made up the amount of $10 million odd are of substance so as to justify an exercise of the discretion in the Company’s favour to stay or dismiss the petition.

Cross claims under the Tsuen Wan Sub-sub-contract.

44.  The claims here are three-fold:

(1)  contra charges in the total sum of $75,129.28;

(2)  the amount withheld by the main contractor China Overseas Building Construction Limited (“COBC”) of $96,600 for crack defects in some of the kitchen worktops; and

(3)  unquantified loss and expenses that might be further imposed by COBC due to the petitioner’s failure or refusal to carry out rectification work for the crack defects.

45.  The claim under (3) appears to me to be speculative.  No further claim has in fact been made by the employer or COBC up to present.  I do not propose to take this into account.

46.  In respect of the claim in (1), the petitioner has admitted an amount of $22,339.28 and disputed the other four heads of claim that made up the contra charges.  I have considered the evidence put forward by the Company.  I am of the view that it has discharged its onus of establishing a genuine cross claim for the other four heads despite the petitioner’s denial.

47.  As for the claim in (2), being the claim arising out of the crack defects, I am also inclined to think that the Company has made out a serious cross claim here, notwithstanding the petitioner’s contention that the majority of the crack defects were caused by third parties and not due to quality or installation problems.

48.  My conclusion on these cross claims does not assist the Company, as the total amount of these cross claims is only $171,729.28, far less than the petitioning debt of $897,853.83.

If the Company is able to pay its debts

49.  It was asserted by Tony Ng in his affirmation that even if the dispute on the petitioning debt and the cross claims were rejected, the Company is able to pay the petitioning debt, as it would be receiving about $1 million from the Tsuen Wan Sub-contract and retention money of $452,000 from another sub-contract.

50.  I reject his assertion.  His affirmation was made in November 2008.  No payment has been made by the Company so far.  I have no evidence on the liabilities of the Company and no proper evidence on the financial position of the Company.  There is a claim against the Company to the extent of $7.4 million in the action brought by Hien Lee as mentioned earlier.

Orders

51.  I have rejected all of the grounds of opposition raised by the Company.  I make an order to wind up the Company.  The petitioner’s costs in these proceedings, including all costs reserved, are to be paid out of the Company’s assets.