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

CAMP 206/2020

[2021] HKCA 1581

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 206 OF 2020

(ON AN INTENDED APPEAL FROM HCCW NO. 239 OF 2018)

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CACV 474/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 474 OF 2021

(ON APPEAL FROM HCCW NO. 239 OF 2018)

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J U D G M E N T

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Hon Cheung JA (giving the Judgment of the Court) :

I. Background

1.  The applicant in this proceedings is the Provisional Liquidators of Hsin Chong Construction Company Limited (‘the Company’).  The Company has been in liquidation since 27 August 2018. 

2.  Before the Company went into liquidation, the Chinese University of Hong Kong (‘CUHK’) appointed the Company as the main contractor to undertake construction of student hostels at two sites for CUHK.  CUHK as the employer and the Company as the main contractor entered into the Main Contract.  In turn, the Company entered into various Sub‑Contracts with the Nominated Sub‑Contractors (‘NSCs’) who are the 2^nd to 7^th respondents in this proceedings.

3.  As found by the Judge, the works under the Main Contract 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.

4.  Thereafter, the Architect issued two 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).  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. 

5.  It was stated in the Final Certificates that the Final Sum consisted of four 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’). 

6.  After the building works had been completed, in March 2019, CUHK proposed to the Provisional Liquidators that it intended to enter into supplementary agreements with the Company so that CUHK could make direct payments to the NSCs of the sums payable to the NSCs.  The Provisional Liquidators rejected this proposal on 11 November 2019.  Solicitors for the Provisional Liquidators, Messrs. Wilkinson & Grist (‘W&G’) issued a letter to CUHK demanded CUHK to settle all the payments due to the Company under the Main Contract (including all those sums payable by the Company to the NSCs).  W&G, however, stated that the Provisional Liquidators were prepared to set aside and earmark the funds and make an application to the Court for directions as to whether any part of the same should be paid to the NSCs, or should form part of the Company’s estates.

7.  CUHK then issued a cheque in the sum of HK$8,098,437.32 to the Provisional Liquidators which covered, inter alia, CUHK’s payments of the money payable to the NSCs in the amount of $1,965,434.66 (the ‘Fund’, see [10] below).

8.  The Provisional Liquidators then issued a Directions Summons pursuant to section 200(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (‘C(WUMP)O’), Cap. 32 and inherent jurisdiction to seek the Court’s directions on how to distribute the funds. Linda Chan J dismissed the Directions Summons and ordered the Provisional Liquidators to personally bear the costs of the application.  Leave to appeal was refused by the Judge.  The Provisional Liquidators now renews the application before this Court.  This Court directed a rolled up hearing to be held so that if the application for leave to appeal is granted, the Court will proceed to deal with the substantive appeal.  At the hearing, we granted leave to appeal.  The Provisional Liquidators have since filed and served the amended notice of appeal on the parties in compliance with the condition imposed by us for hearing the appeal.

9.  The directions that the Provisional Liquidators sought in the Direction Summons are :

‘ Directions as to whether the Provisional Liquidators 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).’

10.  The Schedule annexed to the Direction Summons is as follows : 

11.  The reason why the Provisional Liquidators said the directions are needed is because of the existence of three legal questions in respect of The Fund :

1)  Whether a set‑off mechanism negates a trust in respect of the Retention monies (the ‘Set‑Off Question’); 

2)  Whether the Retention monies have been sufficiently segregated such that a trust has been created (the ‘Segregation Question’); and

3)  Whether the Non‑Retention monies form part of the estate of the Company or can be distributed to the NSCs pursuant to the provisions on direct payment (the ‘Direct Payment Question’).

II.     The Judge’s decision

12.  The Judge rejected the application on the following grounds :

1)  The Provisional Liquidators 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.  W&G’s letter did not indicate any difficulty faced by the Provisional Liquidators.  On the contrary, they already had a firm view (subject to [12.4)] below) that the Fund should be paid to the Company.

2)  Application under section 200(3) should not be lightly made.

3)  The application should not be made without prior sanction of the Court.  The Court had not given any prior sanction in this case.

4)  An application under section 200(3) is reserved to cases where a genuinedifficulty arises in the course of the liquidation.  The Judge held :

‘ 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.’

5)     In respect of the Retention monies, the two legal questions posed by the Provisional Liquidators do not apply :

‘ 23. ...

(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.’

III.     Our view

1)     Seeking directions and prior sanction

13.  The starting point is that the Provisional Liquidators as officers of the Court have a duty to administer the assets of the Company in the interests of all stakeholders : Company Law in Hong Kong: Insolvency (2021) at [2.013].

14.  Section 200(3) of C(WUMP)O provides :

‘ (3) The liquidator may apply to the court in manner prescribed for directions in relation to any particular matter arising under the winding up.’

15.  The jurisdiction under section 200(3) is well established.  Harris J in Re a Company (Liquidators: Cowley and Lui) [2020] 3 HKLRD 96 stated :

‘ 22. A direction must require something other than a general endorsement of a proposed cause of action. Normally, it will require the formulation of a precise issue. The issue will commonly be legal and of significance. Even if the issue is not purely a question of law it must call for the exercise of some legal judgment. If it does not, then it will be a matter which a liquidator is able to decide himself and a court will be in no better position to express a view. In Re The Bell Group Ltd (in liq), Hasluck J (citing Re Newtronics Pty Ltd, ex p Steward) explains that it is role of the court to grant or deny approval to a liquidator’s proposal. I would put it slightly differently. The role of the court is to determine the issue raised by the direction that is sought.’

16.  McPherson’s Law of Company Liquidation (4^th Ed.) at [9‑046] citing Re Lemon Tree Passage & Districts RSL & Citizens Club Co‑Operative Ltd (1988) 6 ACLC 24 at 26 stated :

‘ If the court takes the view that an application is legitimate then some advice or direction should be provided so that the court does not leave one of its officers “floundering”. The liquidator bears the responsibility of making a full and fair disclosure to the court of the material facts and the court’s function is not to resolve factual conflicts.’

17.  The Judge is, of course, right when she said the liquidators should not seek to have the Court make a commercial decision for them or seek directions on matters which fall within the liquidators’ discretion where the intention is to absolve the liquidators of their responsibility when faced with a difficult commercial decision, but as McPherson pointed out at [9‑044] :

‘ Seeking assistance should not be seen as a sign of lack of ability or incompetence, necessarily. In fact, a liquidator has a duty to seek directions if there is a difficulty at any stage during the course of the administration.’

18.  The Judge held that prior sanction is required because in paragraph 4(f) of Harris J’s 18 January 2019 order appointing the Provisional Liquidators (‘the Appointment Order’), there is a specific limit on the Provisional Liquidators’ 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.’ (emphasis added)

19.  Under clause 9 of the Appointment Order, the Provisional Liquidators were granted leave to apply generally. 

20.  Confining ourselves specifically to section 200(3), we agree with Ms Eu SC (who only appeared in this appeal) and Mr Hui for the Provisional Liquidators that as a matter of plain language, paragraph 4(f) of the Appointment Order should only cover actions commenced by the Provisional Liquidators ‘in the name of and on behalf of the Company’ and not those commenced in the name of the liquidator as in the Direction Summons here.  Further, the words ‘such other action’ in paragraph 4(f) should be interpreted as referring to any action outside the existing winding up proceedings.  The Directions Summons is made in the same proceedings, i.e. HCCW 239/2018 where the Provisional Liquidators were appointed.  As the Provisional Liquidators are officers appointed by the Court, it will be both impractical and unnecessary to impose a prior requirement for the liquidators to seek leave before applying for directions from the Court that appointed them.  Loose & Griffiths on Liquidators (9^th Ed.) at [7.12] stated :

‘ 7.12 Related to the liquidator’s power to bring or defend proceedings is the power to apply to the court for directions. A voluntary liquidator may apply to the court to determine any question arising in the winding up of a company. ........Where a liquidator makes an application to the court under either of these sections it will be in his own name rather than in that of the company. There is obviously no need for him to obtain consent to make such application.’

21.  We hold that prior sanction is not required.

2)     The three questions

22.  Ultimately, the Provisional Liquidators’ summons stand or fall with whether the three questions are genuine legal questions.  Hence, we will go straight to this issue.  In our view, the questions are genuine legal questions which justify the Provisional Liquidators seeking directions from the Court.

(1)     The Set Off Question

23.  There is no dispute that CUHK is entitled to hold Retention monies due to the NSCs.  The question is said to arise because under the Main Contract and Sub‑Contracts, whilst CUHK holds the Retention monies on trust for the Company and the NSCs, it is at the same time entitled to make deductions from the Retention monies.

24.  Clause 32.5 of the Main Contract General Conditions provides :

‘ (1) The Retention shall be held upon trust by the Employer for the Contractor and for any Nominated Sub-Contractor or Nominated Supplier (without obligation to invest) subject to the rights of the Employer to have recourse to it for payment of any amount which he is entitled to under the Contract or at law or to deduct from it any sum owed to him by the Contractor, provided that the Employer gives notice to the Contractor in accordance with clause 32.1(6).’

25.  Clause 33.5 of the Nominated Sub‑Contractor General Conditions provides :

‘ (1) The Sub-Contract Retention shall be held upon trust by the Employer for the Sub‑Contractor (without obligation to invest) subject to the rights of the Employer to have recourse to it for payment of any amount which he is entitled to under the Sub‑Contract or at law or to deduct from it any sum owed to him by the Sub‑Contractor.’

26.  In Re Tout and Finch Ltd [1954] 1 All ER 127, the issue is how the provision for a trust of retention money under clause 11(h) of the building contract may be affected by the provision for set off in clause 13 thereof.  The two clauses are as follows :

‘ Clause 11 (h) If and to the extent that the amount retained by the employer in accordance with the main contract includes any retention money the contractor’s interest in such money is fiduciary as trustee for the sub contractor and if the contractor attempts or purports to mortgage or otherwise charge such interest or his interest in the whole of the amount retained as aforesaid (otherwise than by floating charge if the contractor is a limited company), the contractor shall thereupon immediately set aside and become a trustee for the sub contractor of a sum equivalent to the retention money and shall pay the same to the sub contractor on demand; provided that upon payment of the same to the sub contractor the amount due to the sub contractor upon final payment under this sub contract shall be reduced accordingly by the amount so paid.’

‘ Clause 13 The contractor shall notwithstanding anything in this sub contract contained be entitled to deduct from or set off against any money due from him to the sub contractor (including any retention money) and sum or sums which the sub contractor is liable to pay to the contractor under this sub contract.’

27.  Wynn‑Parry J held at page 134G :

‘ Bearing in mind that definition of retention money, I turn to cl. 11 (h). On the face of it there are clear words used which are apt to create a trust which will operate by way of an equitable assignment of assets described as the contractor’s interest in the retention money. It is said, first, that on a true construction of the document, which, of course, must be read as a whole, there is no trust, and nothing more than a running account. In support of that argument there is prayed in aid, for instance, cl. 13 of the sub contract, which provides that the contractor shall be entitled to make certain deductions or set offs from any sums, including any retention money, which he may be liable to pay to the sub contractor. But such a clause as that appears to me not to affect the matter one way or another. It cannot, in the least, be decisive, because it appears to me to be a perfectly normal and sensible provision to make, namely, that, against what the company [i.e. the main contractor] may owe to the applicants [i.e. the sub contractors] as trustee, the company may set off moneys which may be owing by the applicants to the company. ...’ (emphasis added)

28.  Difficulties arise in the present case because of what appears to be a contrary view held by this Court (Yuen JA and Reyes J) in Yew Sang Hong Ltd v. Hong Kong Housing Authority [2008] 3 HKC 290.  HA (the employer) had entered into a contract with the main contractor (‘Dickson’).  Dickson had a sub‑contract with a sub‑contractor (‘Yew Sang’).  Yew Sang sued HA for the retention money kept by HA.  HA successfully struck out the statement of claim of the plaintiff (‘Yew Sang’) on the ground that it discloses no reasonable cause of action.  Yew Sang relied on Quistclose trust and argued that the retention money was held on trust for it by HA.  Clause GCC 83 of the Main Contract gave HA the right to deduct from the retention money :

‘ 83. (1) All damages (including liquidated damages), costs, charges, expenses, debts or sums for which the Contractor is liable to the Employer under any provision of the Contract may be deducted by the Employer from monies due to the Contractor under the Contract including Retention Money and the Employer shall have the power to recover any balance not so deducted from monies due to the Contractor under any other contract between the Employer and the Contractor.

 (2)  All damages (including liquidated damages), costs, charges, expenses, debts or sums for which the Contractor is liable to the Employer under any provision of any other contract between the Contractor and the Employer may be deducted by the Employer from monies due to the Contract or under the Contract, including Retention Money.’  (Emphasis added)

29.  This clause can be found in the first instance decision of Burrell J (HCCT 79/2006 (unreported) 17 September 2007).

30.  The striking out order by Burrell J was affirmed by the Court of Appeal.

31.  Re Tout & Finch Ltd was relied upon by Yew Sangbut the Court of Appeal held that the case was of little assistance because of three crucial differences :

i)  The employer in that case wished to make direct payment to the nominated sub‑contractor;

ii)  There is no equivalent of clause 11(h) in Yew Sang’s case; and

iii)  There is not enough money to share anyway in Yew Sang’s case.

32.  What is more important is what Reyes J held in respect of Yew Sang’s argument that the retention money in the hands of the HA relating to Yew Sang’s works is subject to a Quistclose trust in favour of Yew Sang in that the money is to be payable to the main contractor subject to such trust and could not be used for any other purpose :

‘ 55. Nonetheless, assume that a fund can be identified.

56.   Even then it is not apparent why such fund should be subject to a trust.  In contrast to cl 11(h) in Tout, Mr Ng is unable to point to any clause in the Main Contract or Sub‑Contract which expressly subjects retention monies in respect of Yew Sang’s work to a trust.  There is nothing to suggest that the Authority is some sort of fiduciary of any retention monies in favour of Yew Sang.

57.   On the contrary, General Condition 83 of the Main Contract implies that there is no trust in Yew Sang’s favour.

58.   As Burrell J pointed out, GCC 83 allows the Authority to set-off all damages (liquidated or unliquidated), costs, charges, expenses, debts or sums due to the Authority from Dickson against all retention monies held by the Authority (whether in respect of Yew Sang’s work or otherwise).  If there were a trust in favour of Yew Sang, why should the Authority be so entitled to deduct even amounts due from Dickson against retention monies relating to Yew Sang?

59.   For the foregoing reasons, in my judgment, the claim based on trust is likewise bound to fail.’

33.  Reyes J’s view in [58] may seem to suggest that a right of set off relating to third party indebtedness is contrary to the existence of a trust.  We accept that there is a genuine legal question whether the Court of Appeal’s view in Yew Sang Hong Ltd that a set off provision is incompatible with existence of the trust challenges the view expressed in Re Tout & Finch Ltd. At the very least, this is a matter that the Provisional Liquidators in the proper exercise of their duty, may justifiably seek the Court’s guidance and directions.

34.  Ms Eu accepted that Re Tout & Finch Ltd is correctly decided but sought to suggest that it is distinguishable.  She argued, in that case, clause 13 of the Sub‑Contract only gave the contractor a right to deduct from or set off against the retention money any sum which the sub‑contractor was liable to pay to the contractor under the Sub‑Contract.  In short, the set off is only for same party indebtedness.  This explains why Wynn‑Parry J took the view that clause 13 did not affect the existence of the trust arrangement.  In the present case, CUHK’s right of set off is contrary to the essential requirement that a trust arrangement must be certain as to its subject matter. CUHK has a discretion to set off liabilities (both the Company’s and the NSCs’) against the Retention monies, and this leaves it uncertain as to the amount of the Retention monies that form the subject matter of the trusts for the Company and for the NSCs respectively.  Further, clause 13 was said to give rise to an equitable assignment.  This, however, does not arise in the present case.

35.  We do not accept this argument.  Like Re Tout & Finch Ltd the contracting parties here are CUHK and the Company only and the only sums that CUHK can deduct are those due from the Company.  This is so even though these sums may arise from works carried out by the NSCs because of privity of contract, the debt is that of the Company.  Further, GCC 83 does not impose any trust on the retention money, hence Yew Sang has to rely on a Quistclose trust.  In the present case, clause 32.5 expressly provides for a trust and one must give some meaning to these words.  In our view, the proper reconciliation is, as proffered by Re Tout & Finch Ltd, that the provision for deduction does not affect the trust and the two co‑exist side by side.  The issue of certainty of subject matter of a trust as argued by Ms Eu simply does not arise.  We do not regard the provision for equitable assignment carries the matter further. 

36.  In our view, Re Tout & Finch Ltd remains to be the authority in this area where the contract provides for the trust.  Read properly in its context, the judgment of Reyes J on set off is not intended to abrogate the existence of the trust which is expressly provided for in a contract.

37.  We do not consider the Judge’s view that CUHK had never suggested that it has any claim against the NSCs is correct because CUHK had, in fact, exercised a right of set off against the 2^nd respondent.  Further, the real issue is on the proper construction of contract and not whether set‑off has actually taken place or not.

38.  The original stand of the Provisional Liquidators as shown in the W&G’s letter of 11 November 2019 is that there is no trust in the Retention monies because of the decision in Yew Sang Hong Ltd.  They did change their mind in the Direction Summons.  Instead of a dogmatic assertion of their earlier position, they said there are two views on this issue.  While their position in the appeal may suggest a reversion to the original position, as Ms Eu submitted, she is duty bound to draw the difference to our attention.  We do not consider that the views taken by their legal representatives in the bid to assist the Court should preclude the Provisional Liquidators from bringing the application, bearing also in mind the express indication in the W&G’s letter that they would seek directions from the Court.

(2)     The Segregation Question

39.  The Provisional Liquidators submitted that the Judge failed to take into account the conflicting authorities on whether and to what extent segregation of funds was a necessary pre‑condition to a trust.

40.  Ms Eu submitted that according to the orthodox authorities, in order to create a trust, the three certainties must be satisfied, namely, there must be certainty as to the purported settlor’s intention to create a trust, certainty as to the objects of that trust, and certainty as to subject matter: see Lewin on Trusts (20^th Ed.) at [5-003].

41.  Ms Eu then referred to Lehman Brothers International (Europe) (in administration) v. CRC Credit Fund Ltd [2012] Bus LR 667 at [2] where Lord Hope explained that both segregation of money into a separate bank account and a declaration of trust are necessary to create a trust :

‘ 2. Under English law the mere segregation of money into separate bank accounts is not sufficient to establish a proprietary interest in those funds in anyone other than the account holder. A declaration of trust over the balances standing to the credit of the segregated accounts is needed to protect those funds in the event of the firm’s insolvency. Segregation on its own is not enough to provide that protection. Nor is a declaration of trust, in a case where the client’s money has been so mixed in with the firm’s money that it cannot be traced. So segregation is a necessary part of the system. When both elements are present they work together to give the complete protection against the risk of the firm’s insolvency that the client requires. That is why rule 14.1 of the Solicitors Regulation Authority Accounts Rules 2011 provides that client money must without delay be paid.’

42.  It is of note that although Lord Hope referred to segregation under the trust concept, as pointed out by Lord Clarke of Stone‑Cum‑Ebony JSC at [110] the questions raised by the issues in the appeal depend not on the ordinary law of trusts but on the construction of the wording of the rules of the Client Assets Source Book issued by the UK Financial Services Authority on client money received by financial institutions which is to be held on trust for the clients and the distribution of client money on the failure of the institutions.  Lord Clarke and two other Supreme Court Justices represented the majority view while Lord Hope and another Justice were in the minority.

43.  In Underhill & Hayton: Law of Trust and Trustees (19^th Ed.) at [8.7], the authors stated that ‘[a] requirement that transferred moneys are not to be at the free disposal of the recipient and so need to be kept separate for the benefit of another is vital if they are to be impressed with a trust’.

44.  In the context of building contract, in Rayack Construction Ltd v. Lampeter Meat Co Ltd (1979) 12 BLR 30, the employer was allowed to keep retention money by clause 30(4) of the conditions of a building contract :

‘ The amounts retained by virtue of sub-clause (3) of this Condition shall be subject to the following rules: (a) the Employer’s interest in any amounts so retained shall be fiduciary as trustee for the Contractor (but without obligation to invest) and the Contractor’s beneficial interest therein shall be subject only to the right of the Employer to have recourse thereto from time to time for payment of any amount which he is entitled under the provisions of this Contract to deduct from any sums due or to become due to the Contractor.’

45.  The contractor sought a declaration that the defendants were obliged to pay the sums retained into a separate bank account to be applied only in accordance with the trust specified in clause 30(4)(a) and appropriate injunctions to enforce that obligation.

46.  Vinelott J at 37 held that a duty to appropriate was imposed by condition 30(4) :

‘ In my judgment, condition 30(4), construed in the context of the articles of agreement as a whole, does impose an obligation on an employer to appropriate and set aside as a separate trust fund a sum equal to that part of the sum certified in any interim certificate as due in respect of work completed which the employer is entitled to retain during the defects liability period.  Unless condition 30(4) is construed as imposing such an obligation, it cannot, as I see it, have any practical operation.  Further, condition 30(4) refers to ‘the Contractor’s beneficial interest therein’, and the predicated beneficial interest could only subsist in a fund so appropriated and set aside.’

47.  This statement was accepted to be correct by Scott LJ in MacJordan Construction Ltd v. Brookmount Erostin Ltd [1994] CLC 581.  He held that for a trust to arise, the separate trust fund must be fully constituted prior to insolvency.  There, a building contract provided that the client would retain 3% of the contract price as trustee for the builder.  A separate retention fund was intended to be set up, but this never occurred.  The client became insolvent and the builder claimed that the money in the client’s bank account was held on trust.  However, as the client never established a separate retention fund from that account, the claim for the retention money failed.  Scott LJ explained at page 586 that :

‘ In the present case it is common ground that, pre the receivership, the retention fund had not been set aside and that there were, and are, no identifiable assets impressed with the trusts applicable to the retention fund.’

48.  Scott LJ’s reasoning was endorsed by the Privy Council in Re Goldcorp Exchange Ltd (not a building contract case) [1995] 1 AC 74 at 100.

49.  Ms Eu submitted that in Yew Sang Hong Ltd, an issue which prevented a finding of a trust was that at [54] ‘it is far from clear that there is any specific fund earmarked as retention monies’.

50.  Ms Eu argued that the Judge failed to appreciate that segregation of trust assets is arguably an independent requirement that has to be satisfied to constitute a trust in order to ensure certainty of the subject matter.  Whether CUHK is in liquidation is irrelevant to this question.  Unlike the ‘three certainties’, the solvency or insolvency of the trustee is not a requirement for creating a trust.

51.  On the other hand, there are authorities to the effect that so long as the entitlement to trust assets can be clearly identified, setting aside trust monies in a separate fund is not strictly required.  This begins with Re Kayford Ltd [1975] 1 All ER 604, where Megarry J held :

‘ Payment into a separate bank account is a useful (though by no means conclusive) indication of an intention to create a trust, but of course there is nothing to prevent the company from binding itself by a trust even if there are no effective banking arrangements.’

52.  Hunter v Moss [1994] chose not to follow MacJordan Construction Ltd.  In Hunter the defendant was registered as the holder of 950 shares in a company with an issued share capital of 1,000 shares.  He orally declared himself a trustee for the plaintiff of 5% of the company’s issued share capital, which the trial judge interpreted as meaning 50 of his 950 shares.  Both the judge and the Court of Appeal rejected the submission that such a trust must fail for want of appropriation of any specific shares out of the defendant’s holding to satisfy the plaintiff’s beneficial interest in 50 of them.  Dillion LJ held at page 459 :

‘ ... It was common ground in that case that, prior to the appointment of the receivers, there were no identifiable assets of Brookmount impressed with the trust applicable to the retention fund. At best, there was merely a general bank account.

... As I see it, however, we are not concerned in this case with a mere equitable charge over a mixed fund.  Just as a person can give, by will, a specified number of his shares of a certain class in a certain company, so equally, in my judgment, he can declare himself trustee of 50 of his ordinary shares in M.E.L. or whatever the company may be and that is effective to give a beneficial proprietary interest to the beneficiary under the trust.  No question of a blended fund thereafter arises and we are not in the field of equitable charge.’

53.  In the first instance decision of Re Lehman Brothers International (Europe) [2010] EWHC 2914 (Ch) at [225], Briggs J at [230]‑[231] commented on Hunter : 

‘ 230. .... Again, the precise basis for the distinction is not spelt out in Hunter v. Moss, but it is reasonably clear that the Court of Appeal thought that the defendant’s holding of 950 shares in a particular company was a sufficiently specific fund, separate from the defendant’s general assets, to resolve any issue as to certainty of subject matter, any further appropriation to the plaintiff’s specific interest being unnecessary.

231. Hunter v. Moss has not been without its academic and judicial critics, but its conclusion that there is no objection on the grounds of uncertainty to a trust of part of a shareholding of the trustee has been generally followed, in this country in Re Harvard Securities [1997] 2 BCLC 369, in Hong Kong in Re CA Pacific Finance Limited [2000] 1 BCLC 494, and in Australia in White v. Shortall [2006] NSW SC 1379.’

54.  In R v. Clowes (No. 2) [1994] 2 All ER 316 at 325, Watkins LJ held :

‘ As to segregation of funds the effect of the authorities seems to be that a requirement to keep money separate is normally an indicator that they are impressed with a trust, and that the absence of such a requirement, if there are no other indicators of a trust, normally negatives it. The fact that a transaction contemplates the mingling of funds is, therefore, not necessarily fatal to a trust.’

55.  This statement was cited by Evans‑Lombe J in Cooper v. PRG Powerhouse Ltd [2008] EWHC 498 (Ch) at [21].

56.  Moving to a jurisdiction closer to Hong Kong in Qimonda Malaysia v. Sediabena [2012] 3 MLJ 422, the Court of Appeal of Malaysia reviewed the conflicting English authorities such as Re Kayford Ltd and Rayack Construction Ltd and chose not to follow the latter :

‘ [28] The English Court in the Rayack Construction case has imposed an extremely high obligation upon the contractors to safeguard the retention funds during the performance of the contract, and more often than not, the proposition does not reflect the commercial reality of the construction industry, particularly in the Malaysian context. The reported case laws in Malaysia would reveal that there were only a handful of cases where a contractor had actually applied for the preservation of the retention monies during the pendency of the contract, and was done so after the defendant had gone into liquidation. There could be many reasons why the fund was not set aside; the obvious ones being that the contractor would not want to jeopardise the commercial relationship of the parties when the contract was still subsisting; the contractors would not really apply their minds to taking such action to preserve the retention funds especially when the employer was paying monies under the payment certificates; and so on.

[29] The Rayack Construction case also failed to consider the fact that a trust, once created, would survive the company’s liquidation. This is obvious—the monies held in trust were not it’s monies in the first place, and the status of the trust does not change by virtue of the company’s liquidation. Once it is found that the retention monies are trust monies, the question of preferential treatment to the respondents does not arise as the monies do not belong to the liquidation fund in the first place.’

57.  We would like to emphasis the often repeated words that context is everything in a case.  As pointed out by Mr. Fung (together with Mr. Li) for the 4^th respondent that CUHK adopted a stringent project accounting system and the retention money can be easily ascertained.  This is amply supported by the two emails issued by CUHK.  CUHK’s email of 31 August 2020 stated that this building project was approved and funded by the University Grants Committee whereupon CUHK set up a project account with the approved budget.  Once the Main Contract was awarded, capital commitment was created to set aside the relevant contract sum for future payment.  The capital commitment equals to the original contract sum, which essentially includes the retention money.  Net Payment (excluding the retention money) was settled and deducted from the capital commitment, with the retention money still maintained in the balance of the capital commitment.  In the financial year end of each year, the retention money (both under the Main Contract and the Nominated Sub‑Contracts) has been set aside in the payable account since the commencement of the project (i.e. September 2009 for Site A and April 2011 for Site B).

58.  CUHK’s email of 8 September 2020 further stated :

‘ Para 6: CUHK has employed the Quantity Surveying consultant to carry out the valuation of the Hsin Chong’s main contract and the nominated subcontracts. The work done and retention money of main contract and each nominated subcontracts were separately valuated as shown in each payment certificate. CUHK has kept clear and distinguishable record of individual contacts. The retention money of each nominated subcontract can be identified clearly anytime and will be released upon completion of making good defects.

Para 7:     The payable account refers to the “retention money payable accounts”, and it is correct to say that “the retention money payable account is then separated from the capital commitment account”, but ONLY at each financial year end.  This accounting reclassification is done for annual financial report purpose.  For day to day management, the retention money is included in capital commitment account, for future payments.’

59.  Further, the Provisional Liquidators have no dispute that they received from CUHK the exact amounts of final accounts payable to the Company and all the NSCs.  There is no question of any NSCs’ money mixed with the Company’s money, in the sense of unidentified assets as described in MacJordan Construction Ltd.

60.  As we are not provided with evidence of the practice of the Hong Kong building industry, we are not able to express an opinion on the industry practice on setting up of trust accounts on retention money.  This is a missed opportunity because the Company was one of the leading building contractors in the trade and the Provisional Liquidators could have ascertained from its former officers the local practice on how retention money is kept.

61.  The Judge was correct in her view on the segregation question.  Nonetheless, this is a genuine legal question which the Provisional Liquidators are properly entitled to seek directions from the Court in the light of the conflicting authorities.

(3)     Answer to the first two questions

62.  The Provisional Liquidators asked whether the Retention monies held by CUHK for the NSCs are subject to a valid trust, and :

i)   if affirmative, the Retention monies should be paid to the NSCs and would not form part of the estate of the Company for distribution to the Company’s creditors; and

ii)  if not, the Retention monies should form part of the estate of the Company for distribution to the Company’s creditors.

63.  The answer is in the affirmative.

(4)     The Direct Payment Question

64.  This concerns the Non‑Retention monies.  The question framed is whether CUHK is entitled to make direct payment of the Non‑Retention monies to the NSCs, and :

i)  if affirmative, the Non-Retention monies should be paid to the NSCs and would not form part of the estate of the Company for distribution to the Company’s creditors; and

ii)  if not, the Non-Retention monies should form part of the estate of the Company for distribution to the Company’s creditors.

65.  The provisions for direct payment by CUHK to the NSCs are found in the following clauses :

‘ Main contract

Clause 29.7	“(2)  The Contractor shall pay each Nominated Sub-Contractor and Nominated Supplier the amount included for that Nominated Sub‑Contractor or Nominated Supplier in the Interim Certificate, less any amount properly deductible by the Contractor, within 14 days, or such other time as may be stated in the sub‑contract or supply contract, of the Contractor receiving payment from the Employer.”
Clause 29.8	“(1)  The Contractor shall, before an Interim Certificate is issued to him, if required by the Architect, provide the Architect with reasonable proof that he has paid each Nominated Sub‑Contractor and Nominated Supplier the amount included for that sub‑contractor or supplier in any previous Interim Certificate.
	(2)  The Contractor may withhold an amount from the payment included in an Interim Certificate for a Nominated Sub‑Contractor or Nominated Supplier if he provides sufficient substantiation to satisfy the Architect that:
		(a) he has good cause for doing so; and
		(b) he has informed the Nominated Sub-Contractor or Nominated Supplier of his reasons for withholding that amount being doing so.
	(3)  If the Contractor withholds an amount due to a Nominated Sub‑Contractor or Nominated Supplier and fails to satisfy the requirements under clause 29.8(2), the Architect shall issue a certificate to this effect stating the amount withheld, and the Employer shall be entitled to pay this amount to the Nominated Sub‑Contractor or Nominated Supplier direct and deduct it from any sum due or to become due to the Contractor.
	(4)  Neither the existence nor the exercise of the Employer’s power under clause 29.8(3) shall make him liable to pay a Nominated Sub-Contractor or Nominated Supplier direct.”

Nominated sub‑contract

Clause 33.1	“(7)  The Contractor is required to pay the Sub-Contractor the amount included for him in each Interim Certificate, less any amount properly deductible within 14 days, or such other time as may be stated in the Sub-Contract, of the Contractor receiving payment from the Employer.
	(8)  If the Contractor withholds an amount due to the Sub-Contractor and fails to satisfy the Architect that he has good cause for doing so, the Architect is required under clause 29.8 of the Main Contract Conditions to issue a certificate to that effect and the Employer will be entitled, but not obliged, to pay that amount to the Sub‑Contractor direct.” ’

66.  The Provisional Liquidators’ view is that the Company’s creditors should share pari passu in the available assets of the company in liquidation, in proportion to the debts due to each creditor.  The authorities showed that a direct payment clause will be held ineffective after the main contractor is put into provisional liquidation, since the exercise of such contractual right to make direct payment to the nominated sub‑contractors by the employer may violate the pari passu principle and anti‑deprivation principle : B Mullan & Sons (Contractors) Ltd v. Ross and Another (1966) 54 ConLR 163 (at 185) and Golden Sand Marble Factor v. East Success Enterprises Ltd [1999] 2 HKC 356 at (361I‑362A).

67.  The 4^th respondent took a different view.  While taking a neutral stance in this application, the 4^th respondent submitted that in this case the pari passu principle only operates after the winding up has been made and the NSCs’ entitlement both in respect of the Retention monies and Non‑Retention monies had arisen before the liquidation.

68.  As can be seen from Carswell LJ’s judgment in B Mullan & Sons (Contractors) Ltd, the distinction is whether the right of direct payment is exercised before or after the liquidation :

‘ Counsel for the appellant accordingly argued that the material property of the contractor which vested in the liquidators consisted of a chose in action, the right to sue the employers for payment of the moneys due to him, including that portion which he would have to pay over to the sub-contractor. It was subject to a contingency, namely that the employer might exercise his right to pay the sub-contractor direct. As Kerr J pointed out in his judgment, however, the provision in the contract permitting this was an enabling provision; the employers were entitled, but not obliged, to make such direct payments, which is a direct point of distinction between this case and Glow Heating Ltd v Eastern Health Board. In our opinion the matter is determined by the effect upon the operation of the pari passu principle of such exercise of the employers’ right after the commencement of the liquidation. Until the winding-up resolution was passed, the contractor’s interest may have been defeasible by the exercise of the employers’ right to make direct payment. Once the company went into liquidation, however, the exercise of the right would remove the sum so paid from the property which should come to the hands of the liquidator, so reducing the amount divisible among the general creditors, and such a result would offend against the pari passu principle. It therefore is in our opinion void and the employers have not been entitled to exercise the right of direct payment to the sub-contractor since McLaughlin & Harvey plc went into liquidation.’

69.  The same theme continues in Golden Sand Marble Factory Ltd where Re Mullan & Sons (Contractors) Ltd was cited.  Findlay J (at 360) observed :

‘ In the case where an employer acts unilaterally under cl 27(c) and pays a nominated subcontractor directly and deducts this payment from money due to the main contractor, it must be that, if the main contractor is liquidated after that payment is made, no right of property in that money was vested in the main contractor on the date of winding up. Where, however, the liquidation happens before the employer has made the payment, it must, on principle, that the right to receive the payment was still vested in the company in liquidation at the time of winding up.’

70.  On the facts of that case, Findlay J (at 360‑361) observed that the employer, the main contractor and the nominated sub‑contractor agreed that payments would be made directly to the nominated sub‑contractor a long time before the liquidation.  Consequently, the sub‑contractor acquired an enforceable right to have the payments made directly to it, and the main contractor lost any right under the main contract it might have had otherwise to insist that payment be made through it.  There was no question of the employer exercising a discretion to pay the nominated sub‑contractor directly.  It was a matter of rights under the agreement.

71.  In this case, as noted by the Judge, if the Company was eventually wound up, the commencement date of the winding up would be 27 August 2018 (the date of the petition).  We observe that before that date, there was no indication that CUHK was prepared to make the payments direct to the NSCs.  The issue of direct payment only arose in March 2019 which was after the date of liquidation.  On this basis, the view of the Provisional Liquidators is correct.  Further, any direct payment by CUHK is subject to the Architect issuing the relevant certificate.  None was issued in this case.

72.  The Direct Payment Question is not a difficult legal question.  Although the Judge in [22] of her judgment said that neither CUHK nor the NSCs disputed the view of the Provisional Liquidators, as seen above the 4^th respondent has put forward a different view. Since there is a dispute on the entitlement, in our view, the Provisional Liquidators have properly raised this question for the Court’s determination. Our answer to the Direct Payment Question is no.

IV.     Conclusion

73.  The appeal is allowed.  As a result of our judgment, the Retention monies are to be released to the respective NSCs according to the Schedule at [10], save that in the case of the 2^nd respondent the amount payable is $261.26.  As for the Non‑Retention monies, they are part of the estate of the Company to be distributed to the Company’s creditors.

V.     Costs

74.  As we are of the view that the application was properly brought by the Provisional Liquidators, we will set aside the costs order below.  The Provisional Liquidators’ costs of this appeal and the costs of CAMP 206/2020 (including the summons to amend the notice of appeal) and below is to be paid out of the assets of the Company with certificate for two counsel.

75.  As proposed by Ms Eu and accepted by Mr. Fung, there will be no order for costs for the 4^th respondent.