FAR EAST STRUCTURAL STEEL WORK ENGINEERING LTD. v. YET KAI CONSTRUCTION CO. LTD.

HCCW 853/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 853 OF 1999

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J U D G M E N T

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1. This is an application by motion to strike out a winding up petition for abuse of process. The petition was presented on 24 September 1999 and the ground upon which the petitioner seeks the winding up of the respondent is inability to pay its debts, and they rely on section 178(1)(a) of the Companies Ordinance, Cap 32, under which a demand was made by the petitioner for payment of a debt claimed to be due, and of which payment was not made.

2. It is not admitted that the respondent was solvent at the time of the demand. However, when the matter came before me on 28 January 2000, I made, by consent, a validation order upon undertakings by the respondent to pay into court the sum in dispute and to pay to the petitioner a further sum not in dispute. The solvency of the respondent is therefore not now an issue as far as their ability to pay the debt is concerned. Further, it is not in dispute that the sum claimed in the statutory demand is at least $96,824.00 too much, this sum having been overpaid by the respondent.

3. The ground upon which the respondent now seeks to have the petition struck out is that it is an abuse of process to present a winding up petition against a solvent company as a means of putting pressure on it to pay money which is bona fide disputed, rather than bringing proceedings against it in the usual way in the court and, if it is considered that there is no defence to the claim, making an application for judgment under Order 14.

4. The alleged debt arises out of a construction project in which the respondent, as main contractor, was engaged by a contract dated 21 November 1997 to carry out works in Siu Ho Wan, Lantau Island, to build a depot for Citybus Ltd (the employer). The petitioner was appointed as sub-contractor to carry out construction of the steel structure by a sub-contract dated 1 December 1997. Under the terms of the sub-contract, the petitioner was required to comply with the provisions of the main contract in so far as they related to the sub-contract works, and indemnify the respondent in respect of any claims, loss or damage arising out of the petitioner's breach of contract, breach of duty or negligence. They were likewise liable to the respondent for any loss or damage as a result of failure to complete the works within the specified time, subject to the architect issuing a certificate to that effect, and for the cost of any remedial work made necessary by reason of their defective work.

5. It is apparent that there were a number of delays in the progress of the steel works by the petitioner, and letters of instruction from the architects, LCT Associates Ltd, to the respondent, copied to the petitioner, complaining of the delay, were sent on five occasions between April and November 1998. By a letter from the architect to the employer dated 1 December 1998, it was estimated that the petitioner had overrun the allotted time for completion of the works by 58 days and that the employer was accordingly entitled to deduct $870,000.00 from the sums owed to the petitioner. The petitioner was notified of this deduction by a memo from the respondent dated 12 December 1998. Payments throughout were made by the employer direct to the respondent only, leaving it to them to settle any amount due on the sub-contract with the petitioner, consequently any amounts would be deducted from the sums payable to the respondent.

6. Meanwhile, the respondent raised a number of other complaints about the petitioner's work which were set out in a letter dated 2 December 1998, namely footing works due to variation of the petitioner's steel works, and damaged items and clearance works due to fire protection spraying works, and notified them of their intention to claim a total of $1,014,728.15. In addition the respondent held the petitioner liable for a fine on a summons for safety of $25,000.00, but, as they had been holding back the sum of $100,000.00 against this, they credited them with $75,000.00, leaving a total claimed of $939,728.15, including the costs of delays in the work.

7. Further correspondence ensued in which the petitioner denied liability for the sums claimed, and the respondent provided another detailed breakdown of their claims and the amounts payable in a letter of 18 December 1998. From then until August 1999, the matter was almost continually disputed in letters between the parties, the petitioner finally quantifying their claim against the respondent at $589,356.00 in a letter dated 9 August 1999, and threatening legal action, and the respondent, in a letter of 13 August, claiming $522,196.15 from the petitioner. However, a further breakdown of the account between the parties by the respondent dated 27 August 1999, after paying a total of $8,054,522.00 to the petitioner, showed a balance in favour of the respondent of $430,196.15. On 21 August 1999 the petitioner served on the respondent a statutory demand for the sum they claimed was due, namely $589,356.00. The respondent did not pay and on 24 September 1999 the petitioner issued a winding up petition.

8. The respondent now seeks to have the petition struck out on two grounds: first, that the statutory demand itself was invalid, being for an amount which exceeded the sum allegedly due by $96,824.00; and second, that, there being a bona fide dispute as to the alleged debt, the respondent cannot be said to have "neglected" to pay, and to issue a petition as a means of putting pressure on a solvent company to pay the disputed debt is an abuse of process.

The Statutory Demand

9. Section 178(1)(a) of the Companies Ordinance provides that a company shall be deemed to be unable to pay its debts if:

10. It is admitted by the petitioner that the sum of $96,824.00 included in the debt demanded should now be deducted, but does not concede that the demand is thereby invalid. The sum was an overpayment made by the respondent in respect of retention money which should have been held by the respondent but was paid prematurely. It appears to have been included in the demand as a result of an oversight, although the fact of the overpayment was pointed out to the petitioner in the respondent's letter to them of 18 December 1998.

11. Mr Kwok for the respondent, in contending that an overstatement of the sum allegedly due is fatal to the validity of the demand, refers me to In re A Company [1984] 1 WLR 1090, where, at p. 1095 Mervyn Davies J said, in respect of the corresponding section of the UK Act:

12. However, he goes on:

13. The petitioner has now conceded that this sum was wrongly included, and, in the absence of evidence that its inclusion was anything but an oversight, or an accounting error, I am not prepared to say that this alone is sufficient to say the demand was fatally flawed. Indeed, Mr Leong has put forward an argument for the petitioner that this was retention money, subject to final settlement, its inclusion in the demand was not necessarily wrong. I do not consider this carries a great deal of weight, but to find the demand was invalid I would require something much closer to a deliberate misstatement of the sum claimed. That is not the case here, and I am therefore not inclined to find the demand invalid on this ground.

Bona fide dispute

14. It is clear law that, where a company bona fide disputes the debt demanded, then it has not "neglected to pay" within section 178(1)(a) and the petition has no basis. As to what is a bona fide dispute, I can do no better than repeat the often-quoted passage from Palmer Company Law:

15. The onus is clearly on the respondent to show that the debt is disputed on substantial grounds, namely those which are not frivolous, or supported by bare allegations. Mr Leong submits that the respondent is unable to support its claims, which are therefore bare allegations, and points to the lack of any architect's certificates or meaningful detailed documentary evidence.

16. Apart from the matter of the overstatement of the claimed debt by $96,824.00, Mr Kwok has put forward two grounds for disputing the debt. First is the claim for $250,000.00 being the cost of abortive works, reinstatement of damage and clearance of waste. This specifically relates to defective footing and steel works, referred to in a letter from the employer to the petitioner of 22 January 1998, and in correspondence between the petitioner's solicitors and the architects in October and November 1999. There is no doubt that a longstanding dispute exists as to the petitioner's defective work, supported by the project architects. This is in turn supported by the respondent's calculation as to the amount of damage they have suffered. It may well be that their figures are in turn disputed by the petitioner, but they are not able to say that there is no dispute, or that the claim made is a bare allegation.

17. The second ground is as to the delay. The original estimate of 58 days was reduced over a period and the final agreed account between the employer and the petitioner put it at 9 days, with liquidated damages of $135,000.00. Mr Leong says the respondent cannot put this forward as a dispute as no architect's certificate was issued as required by clause 8(a) of the sub-contract. The architects deal with this point themselves in their letter to the petitioner's solicitors of 5 November 1999, where they say that architects' instructions issued were to the same effect. In any event, it is clear from the correspondence that the petitioner has accepted that there was delay to the extent at least of 9 days. The fact that the respondent is now claiming 36 days does not detract from the fact that there is a dispute based on delay.

18. It is not in my view necessary for the respondent, in claiming a dispute on substantial grounds, to have to justify precisely the sums claimed. It is sufficient to show some evidence of a bona fide dispute which, if they are successful, will extinguish a large part, if not all, of the debt claimed by the petitioner. Here there is not only evidence that a dispute exists, and had done so for some 8 months prior to the statutory demand, but that there is some substance in the dispute, supported by the architects, and the petitioner's own admissions. I accordingly have no hesitation in finding that there is a bona fide dispute between the parties on substantial grounds.

19. That alone is sufficient for me to find that the presentation of the petition was an abuse of process. However, before leaving the matter I am bound to comment on the course adopted by the petitioner here. Having what they believed was a good claim against the respondent, they had a choice of possible actions to take: they could bring an action in the Court of First Instance, with an application under Order 14 for judgment if they thought their claim was unanswerable; they could, and under the provisions of the sub-contract, should, have referred their dispute to arbitration; or they could, as they have done here, serve a statutory demand followed by a petition to wind up the respondent. There is no evidence that they thought that the respondent was insolvent, or otherwise unable to pay, and the first two options, should their claim prove good, would have accordingly resulted in payment being made. The option chosen, however, if allowed to proceed to its logical conclusion, would probably result in the destruction of the respondent as a viable entity. The presentation of the petition alone can do, and no doubt has done here, considerable damage to the respondent's business and the goodwill of its customers. It is for this reason that the courts regard the use of such a procedure as a debt collecting operation, to put pressure on a company to pay, or to settle on terms which it might not otherwise have to, as something which should be discouraged in the strongest terms. There has been no explanation given to me why the petitioner chose this course, with its potentially devastating effect on the respondent, rather than another course which would have recovered a debt, if properly owed, without affecting the respondent's other business.

20. While I am aware, on the authority of Bryanston Finance Ltd v. De Vries [1976] 1 Ch 63, that the fact that a petitioner is actuated by malice is immaterial if he has sufficient grounds for the presentation of a petition, I am bound to say that it is a matter of regret that the petitioner in this case, however strong he thought his case was, but knowing the debt was disputed, chose the path likely to do most damage to the respondent.

21. I accordingly have no hesitation in finding that there was an abuse of process here, that the petition must be struck out, and the there will be an order nisi that the respondent has the costs of these proceedings to be taxed.