RE UNIVISION ENGINEERING LTD

HCCW 487/2021

[2022] HKCFI 702

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO 487 OF 2021

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JUDGMENT

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Introduction and Background

1.  There is before this court an application by the Respondent company, Univision Engineering Limited (“Company”) for a validation order by summons dated 24 January 2022 (“Summons”) in respect of various payments made or intended to be made by the Company.[1] The application is made on the basis that the Company is solvent and has continued to carry on its business despite the presentation of the Petition.  The Company also has outstanding contracts to complete.

2.  The winding up Petition against the Company was presented by T & P Solutions Limited (“Petitioner”) on 28 December 2021.  The Petition is presented on the basis that the Company is unable to pay a debt of HK$5,955,760 arising from a series of invoices in respect of the supply of services and goods by the Petitioner.  The Petitioner was a sub-contractor and supplier of certain CCTV system at a number of work sites of the Company in Hong Kong, engaged pursuant to inter alia a main contract between MTR Corporation Limited (“MTRC”) and the Company (“MTR Main Contract”).  The Petition is opposed by the Company on the basis that there are bona fide disputes over the invoices. 

3.  Following the presentation of the Petition, the Company’s bank accounts were frozen, including the HSBC Accounts referred to below which are the primary accounts used by the Company for conducting its ordinary trade and business, thereby causing serious disruption to the Company’s normal operations. 

4.  By way of background, the Company is engaged in the business of supply, design, installation and maintenance of CCTV and surveillance systems, and the sale of security related products.  Over the years, its major clients included MTRC, Electrical and Mechanical Services Department (“EMSD”), Hong Kong Police Force, Correctional Services Department, City University of Hong Kong and CLP Engineering Limited.

Deliberation

5.  The Company’s position has varied somewhat from the Summons.  According to the latest Draft Order supplied by the Company at the hearing, as orally modified by Ms Chan (“Draft Order”), the payments sought to be validated are:

(1)     All outgoing payments in relation to the HSBC Accounts[2], including but not limited to cheques, autopay and electronic fund transfers from 29 December 2021 to 10 January 2022.  (Para 1(a) of the Draft Order)

(2)     Payments out of the HSBC Accounts of an aggregate sum not exceeding HK$3,409,364.70 for accounts due and payable by the Company to the relevant sub-contractors, suppliers and/or service providers as per Schedule 2 thereof.  (Para 1(b) of the Draft Order)

(3)     Payments out of the HSBC Accounts of an aggregate sum not exceeding HK$188,580 for the purpose of paying and settling the insurance premiums to C&L Associates Company Limited as per Schedule 3 thereof.  (Para 1(c) of the Draft Order)

(4)     Expenses incurred in the ordinary course of the business of the Company for the salaries to its staff members and the relevant MPF contributions, reimbursement of expenses and overtime payment to its staff members, medical insurance and other insurances for its staff members, payments of prescribed levy fees, rental payments for leased properties or leased assets, repayment of bank term loan, import loan and/or finance leasing, utilities payments and payments to the Company’s service providers, provided that the total of such payments or dispositions do not exceed HK$3,000,000 in each calendar month.  (Para 1(d) of the Draft Order)

(5)     Payment of reasonable legal expenses incurred by the Company in these proceedings not exceeding a sum of HK$100,000 in each calendar month.  (Para 2 of the Draft Order)

6.  According to the 2nd affirmation of Yip Kwok Fai dated 21 January 2022 (“Yip 2”), the payments at para 1(a) of Draft Order have already been made while the intended payments at paras 1(b) to (c) of Draft Order were all incurred in the ordinary course of business of the Company before the presentation of the Petition. 

7.  The Official Receiver’s position is neutral. 

8.  The Petitioner’s initial position is set out in Mr Wong’s skeleton submissions and the 2nd affirmation of Peng Qing (“Peng 2”)[3]. Its latest position, as set out in his Supplemental Submissions and a draft Order supplied after the hearing, is that:

(1)     it objects to paras 1(a) to (c) of the Draft Order;

(2)     it does not oppose to the payment of expenses incurred in the ordinary course of the business of the Company as per para 1(d) of the Draft Order, provided that the total of such payments do not exceed HK$2,400,000 in each calendar month, and subject to the condition that the Company do: (i) provide to the Petitioner’s solicitors, until further order of the Court, a schedule on the 21st day of every calendar month, giving details of all payments or dispositions made by the Company pursuant to the Court’s validation of the same in the preceding period, stating in respect of each such payment its date, amount, payee (name and address) and purpose, and listing out any and all supporting documents to justify each payment; and (ii) permit the Petitioner to inspect, on 7 days’ notice, any and all such supporting documents;

(3)     it does not oppose the payment of legal expenses as per para 2 of the Draft Order.

9.  At this juncture, it is important to note that the Petitioner is not suggesting that the Company should cease trading completely or that it should not be allowed to pay expenses incurred in its ordinary course of business.

10.  The Court’s general approach to validation orders is not in dispute. 

11.  While the discretion conferred by section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“CO”) has been said to be entirely at large and not fettered by any statutory criteria, it is well established that the court is guided by the purpose of the section that the unsecured creditors are to be paid pari passu.  The court has to do its best to ensure that the interests of the unsecured creditors will not be prejudiced.  The court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors in the absence of special circumstances making such a course desirable in the interest of the creditors generally.  If, for example, it were in the interests of the creditors generally that the company’s business should be carried on, and this could only be achieved by paying for goods or services already supplied to the company when the petition is presented (but not yet paid for) the court might exercise its discretion to validate payments for those goods or services: Re Luen Cheong Tai Construction Co Ltd [2004] 1 HKLRD 735 at [6]; Re Hsin Chong Construction Co Ltd [2021] 1 HKLRD 582 at [25].

12.  As per the Company’s audited financial statements for the year ended 31 March 2021 (“2021 audited accounts”), its issued and paid up capital was £3,890,257 or approximately HK$55,033,572.  As at 31 March 2021, its total current assets, including trade and other receivables, contract assets and cash and bank balances which formed the bulk of its current assets, were £12,016,427 while its total current liabilities were £7,355,911.  Its profits for the year were £563,354.  The 2021 audited accounts were unqualified. 

13.  As per the Company’s interim results for the 6 months ended 30 September 2021 (“2021 Interim Results”), as at 30 September 2021, its total current assets, including trade and other receivables and contract assets which formed the bulk of its current assets, were around HK$152 million while its total current liabilities were around HK$115 million.  Its profits for the period were around HK$1.5 million. 

14.  Hence, on the face of these figures, the Company is solvent. 

15.  In Mr Wong’s skeleton submissions at section D, he submits that the Company’s solvency is highly questionable.  He does not however go so far as to submit that the Company is clearly insolvent.  A number of reasons have been put forward by Mr Wong.  Suffice it for this court to mention the following.

16.  First, Mr Wong pointed out the Company recorded in the 2021 Interim Results a negative cash and bank balance of around HK$4.25 million.

17.  Second, the Company’s statements of Cash Flows showed that its operating activities generated a net cash deficit of HK$17,961,000, its investing activities generated another net cash deficit of HK$10,352,000 and its overall negative cash and cash equivalent of HK$4,253,000 was largely due to “new bank loans raised” in the sum of HK$23,912,000. 

18.  Third, the contract assets, which formed the bulk of the Company’s current assets, primarily related to the Company’s right to consideration for work completed but not billed because the rights are conditioned on the Company’s future performance in achieving specified milestones at the reporting date: see the definition at note 22 of the 2021 audited accounts.  In relation to these contract assets, the Company has failed to disclose any timeline or evidence for the successful and satisfactory completion of such works, or whether and if so when those fees are due.  If these contract assets were disregarded, its total current liabilities would exceed its total current assets.  Having said that, this court notes that there is no suggestion by the auditors of the 2021 audited accounts that it was inappropriate or even doubtful that contract assets should count as part of the Company’s current assets.  Otherwise, the 2021 audited accounts would have been qualified.

19.  In light of the above, while this court is of the view that the Company’s solvency is somewhat precarious, it is not satisfied that its solvency is highly questionable or that it is clearly insolvent. 

20.  In these circumstances, this court does not consider it appropriate to adopt the approach to validation order applications in the case of clearly solvent companies as explained in the authorities eg Re Burton & Deakin Ltd [1977] 1 WLR 390; Re Mi Fung Beads Company Ltd unrep, HCCW 224 of 2004, 19 April 2004, Barma J (as he then was) at [22]; Re Emagist Entertainment Ltd [2012] 5 HKLRD 703 at [5] and [6]. 

21.  Rather, this court is minded to adopt by analogy the approach in Re Century Group Ltd unrep, HCCW 59 of 2004, 18 March 2004, Barma J (as he then was) as follows[4]:

“6. It is well established that the basic principle of law in respect of liquidations is that the assets of the insolvent company should be distributed amongst its unsecured creditors pari passu. But it is also recognized that there are times when it will be for the benefit not only of the Company, but also of its unsecured creditors, that it should be able to dispose of some of its property after the petition has been presented but before the winding-up order is made.

7. In such cases it may be, in the case of a trading company, that it might be beneficial for the Company and its creditors that the Company should be permitted to carry on its business in the ordinary course pending the making of a winding-up order against it. But as is pointed out in the English cases, the desirability of the Company being able to carry on its business is often a matter of speculation and in each case the court must carry out a balancing exercise and consider where the interests of the unsecured creditors lie.

8. In general, the court will be more disposed to the making of a validation order in respect of an insolvent company where it is satisfied that the carrying on of the business is likely to generate net cash or net assets for the benefit of the creditors, and thus to reduce any deficiency that might otherwise exist on the winding up of the Company.

9. In the present case, it is accepted … that the Company is insolvent, and has a substantial deficit of liabilities over assets. In these circumstances, the court should grant a validation order to enable the Company to carry on trading only if it is satisfied that the continuation of trading is likely to generate net income for the Company.” (emphasis added)

22.  On the available evidence ie Yip 2:

(1)     The Company is entitled to trade receivables of about HK$12.36 million after the presentation of the Petition, out of which HK$10,506,573.14, being the amount due and payable by MTRC to the Company under Interim Payment Certificate No. C4988-16E/PC/028 dated 10 January 2022, have yet to be paid.  It is the practice of MTRC that by presenting each interim payment certificate, it would settle the same in a month.

(2)     The Company is currently engaged in various construction contracts with MTRC, Hong Kong Police Force, EMSD, the City University of Hong Kong etc with a total aggregate contract sum of over HK$563 million. For these contracts, the outstanding aggregate contract sum is about HK$333 million.

(3)     The Company has also engaged a number of sub-contractors, suppliers and service providers in its ordinary course of business in connection with the performance of the above contracts. 

(4)     The total value of the MTR Main Contract was about HK$489 million as stated in the 2021 Interim Results, of which HK$184.5 million have been billed, with the outstanding contract value of about HK$305.2 million over the remaining years of the contract ie up to around 2024.

23.  To sum up the position,

(1)     the Company’s 2021 audited accounts and 2021 Interim Results up to 30 September 2021 showed that the Company had been trading profitably, albeit its profits were dwindling;

(2)     for the 6 months ended 30 September 2021, the Company was able to raise new bank loans of around HK$24 million to support its trading activities which resulted in a modest profit;

(3)     the Company still has outstanding contracts to complete, including inter alia a substantial contract with MTRC ie the MTR Main Contract with a remaining contract value of about HK$305.2 million; it also has contractual obligations to its sub-contractors, suppliers and service providers;

(4)     the Company has at least trade receivables of HK$10,506,573.14 which are already due and payable by MTRC;

(5)     last but not least, even the Petitioner is not suggesting that the Company should cease business immediately or that it should not be allowed to pay expenses incurred in the ordinary course of its business.

24.  Taking all of the above matters into consideration, this court is satisfied that the carrying on of the Company’s business is likely to be beneficial to the Company and its creditors, by generating net cash or net assets, by reducing the risk of the Company defaulting on its existing contracts and incurring further liabilities and hence by reducing any deficiency that might otherwise exist in the event of the winding up of the Company.  In principle therefore, this court, in the exercise of its discretion, is minded to grant a validation order to enable it to continue its business, subject to the Company being able to justify the individual items sought to be validated and subject to an appropriate safeguard to ease the concern of the Petitioner.

25.  Regarding para 1(a) of the Draft Order, Mr Wong objects inter alia on the ground that it is unsubstantiated by evidence as to what those “outgoing payments” were, save for a one-liner assertion in Yip 2 at paragraph 32 that the payments sought to be validated were “legitimately made in the ordinary course of business of the Company” and were “beneficial not only to the Company but also to its creditors”.  On such meagre evidence, this court cannot and will not grant para 1(a). 

26.  Regarding para 1(b) of the Draft Order, the Company’s explanation is that the sum represents undisputed account payables which are currently due and payable to the relevant sub-contractors, suppliers and/or service providers and are evidenced by the invoices issued to the Company between 29 October and 29 December 2021.  The nature of the work or services involved are self-explanatory from the invoices themselves. 

27.  In his Supplemental Submissions, Mr Wong does not dispute the authenticity of these invoices or that these liabilities were incurred in the Company’s ordinary course of business.  His objection is that Yip 2 at paragraph 34 contains no explanation or proof that the payments would bring a benefit to the creditors and that the payments would prefer some creditors at the expense of the others. 

28.  In this court’s view, the benefit of the payments can readily be inferred: if it is beneficial to the Company and its creditors to continue carrying on its business, which this court rules it is, then the Company must be allowed to honour its existing liabilities to its sub-contractors, suppliers and/or service providers.  A default by the Company would risk the termination of further supplies of goods or services to the Company which in turn would jeopardise the Company’s ability to complete its existing contracts with its clients such as MTRC etc.  It would also hamper the Company’s ability to secure further contracts in the course of its business.  In other words, the Company’s ability to continue carrying on its business will be thrown into doubt.  For these reasons, this court will grant para 1(b). 

29.  As for para 1(c) of the Draft Order concerning insurance premium payable in relation to the Company’s construction projects ie contractors all risks and employees compensation, they are evidenced by the premium debit notes dated 24 November and 28 December 2021.  Importantly, the periods of insurance are stated to last until 23 or 30 November 2022.  Mr Wong’s objection is the same as stated in the paragraph above in relation to para 1(b) of the Draft Order and it seems to this court that the objection is even less meritorious.  If the Company is to continue its business, which is beneficial to the Company and its creditors, then contractors all risks and employees compensation insurance cover (and perhaps other insurance cover) is an indispensable expense for as long as it carries on business.  If so, para 1(c) should and will be granted. 

30.  Regarding para 1(d) of the Draft Order, Mr Wong does not object to this item as such but suggests a monthly cap of HK$2,400,000 and certain disclosure/reporting obligations on the part of the Company as a safeguard. 

31.  As far as the safeguard is concerned, this court is of the view that it is reasonable.  Such safeguard has been made in cases where there was no allegation that the company in question was insolvent see for instance Re King Fung Construction Work Co Ltd unrep, HCCW 829 of 2004, 9 December 2004, Kwan J (as she then was) at [7] – [8]. A fortiori in the present case where there is some doubt about the Company’s solvency.  In any event, there is no serious resistance by Ms Chan.

32.  As far as the monthly cap is concerned, the Company, at paragraph 36 of Yip 2, estimates its monthly operational expenses in the ordinary course of business to be HK$2,900,000 per month but the actual figures provided in that paragraph for (i) staff salaries and MPF contributions, (ii) reimbursement of expenses and overtime payments to staff members as well as (iii) medical and other insurance for staff members only add up to around HK$2 million.  There are however other items of expenses eg prescribed levy fees, repayment of bank loans for which no figures are provided. Given the Company’s estimate of HK$2,900,000, by deduction, its provision for such items for which no figures are provided would be around HK$900,000.  Mr Wong, seizing upon the actual figures of HK$2 million for items (i), (ii) and (iii) above, is only prepared to provide for another HK$400,000 and hence his suggested cap of HK$2,400,000. 

33.  As this court sees it, there is nothing scientific as to whether HK$2,900,000 or HK$2,400,000 is the “correct” estimate. Since we are concerned with the Company’s own operational expenses, naturally, the Company would be in a better position to estimate its monthly outlay than an outsider like the Petitioner.  But the Petitioner need not be too concerned with the figure for 2 reasons.  First, the HK$2,900,000 estimate provided by the Company is only a cap - the Company is not seeking validation of the actual payment of that sum every month.  Second, the expenses incurred and the payments made must be in the ordinary course of its business.  As long as there is a mechanism for the Petitioner to monitor the payments made, then any “unauthorised” payments would be open to challenge either by the Petitioner or, in the event of the Company being wound up, by the liquidator on the basis that the payment is outside the scope of the validation order: Re Mi Fung Beads Company Ltd supra at [25] - [28].

34.  For these reasons, this court would accept the Company’s figure of HK$2,900,000[5] and include the safeguard suggested by  Mr Wong that para 1(d) should be subject to the condition set out in his own draft.

Disposition and costs order nisi

35.  This court hereby grants the validation order sought by the Company in terms of paragraphs 1(b), (c) and 2 of the Draft Order.

36.  This court also grants the validation order in terms of 1(d) of the Draft Order save that the figure HK$3,000,000 be replaced by HK$2,900,000, and subject to the condition that the Company do: (i) provide to the Petitioner’s solicitors, until further order of the Court, a schedule on the 21st day of every calendar month, giving details of all payments or dispositions made by the Company pursuant to the Court’s validation of the same in the preceding period, stating in respect of each such payment its date, amount, payee (name and address) and purpose, and listing out any and all supporting documents to justify each payment; and (ii) permit the Petitioner to inspect, on 7 days’ notice, any and all such supporting documents.

37.  Liberty to apply.

38.  There be an Order nisi that costs be in the cause of the Petition.[6]