RE LUEN CHEONG TAI CONSTRUCTION CO LTD

HCCW 190/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 190 OF 2002

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D E C I S I O N

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1.  This is an appeal brought under rule 95 of the Companies (Winding-up) Rules, to reverse the decision of the liquidators of Luen Cheong Tai Construction Company Limited (“the Company”) in rejecting in its entirety the proof of debt submitted by Adrian Engineering Limited (“Adrian”).  Adrian was a sub-contractor of the Company.

2.  The amount of the proof of debt is HK$54,750,027.90.  On any view, this is a very substantial claim.  It is the second largest proof of debt submitted in this liquidation and represented 13.48% of the total amount of the proofs submitted.  The only evidence provided by Adrian in support of its claim with the proof of debt form was seven certificates issued by the Company called “Payment on Account Certificates” numbered 38 to 44.  I shall refer to these certificates as “POA certificates”.  According to POA certificate No. 44, which was for the period ending 25 June 2002, the amount due from the Company to Adrian was the amount claimed in the proof of debt.

3.  Adrian was notified by the liquidators on 7 February 2007 that the whole claim was rejected and the ground of rejection was that it had failed to substantiate its claim in the proof of debt form despite repeated requests under rule 82(3) of the Companies (Winding-up) Rules.

4.  The summons for this appeal was issued on 27 February 2007 with an affirmation in support made on the same day by Adrian’s director, Tam Kai Nin David.  Mr Tam also referred to and relied on his affirmation made in August 2003 in support of Adrian’s successful application to validate payments made to Adrian in the total sum of HK$13.3 million odd.

5.  An order was made by consent on 19 April 2007 for the liquidators to file evidence in opposition and Adrian to file evidence in reply.  Leave was given to set down the summons for hearing when the evidence has been filed.

6.  The liquidators filed evidence on 17 May 2007, raising a number of matters that should be addressed by Adrian.  No evidence in reply was ever filed, nor did Adrian’s solicitors set the matter down for hearing.  Having waited long enough, and having enquired with Adrian’s solicitors if they would file evidence in reply, in December 2007 the solicitors for the liquidators sought an appointment to set down the summons for hearing.

7.  I have no idea why, having launched this appeal, it was conducted by Adrian in such a half-hearted manner.  Given the state of the evidence filed, this appeal is doomed to failure.

8.  I will first set out the background matters, as helpfully given in the submission of the liquidators’ counsel, Mr Godfrey Lam, SC.

9.  On 24 September 1998, the Company was awarded the tender for contract no. KL 31/98 by the Government as employer (“the Main Contract”) in relation to works for the project known as South East Kowloon Development at Kai Tak Airport – Decontamination and Site Preparation (“the Project”).  On 28 September 1998, the Company entered into a sub-contract with Adrian (“the Sub-contract”).  Under the Sub-contract, the Company entrusted to Adrian the entirety of the works of the Project under the Main Contract.  Adrian was to be paid 98% of the certified contract price that the Company received from the Government and the Company was to retain only 2%.  According to the evidence of Adrian, in January 2002, it was agreed between the Company and Adrian to vary the extent of the fees kept by the Company out of the payments received from the employer from 2% to 10%.

10.  On 18 February 2002, a winding-up petition was presented against the Company and on 15 July 2002, the winding-up order was made.

11.  On 17 September 2002, a novation agreement (“the Novation Agreement”) was signed by the Government, the Company and Hang Kee Construction and Engineering Company Limited (“Hang Kee”), by which the Main Contract was novated to Hang Kee.  One of the directors of Hang Kee who signed the Novation Agreement on its behalf is the wife of Mr Tam.  According to the liquidators, Adrian continued to act as the sub-contractor of the Project after the Novation Agreement.

12.  The legal principles are not in dispute.

13.  As stated by the Court of Appeal in Trustee in Bankruptcy of Lo Siu Fai Louis v Toohey [2005] 4 HKC 51 :

(1)  The onus is for the proving creditor to prove on a balance of probabilities a real debt is due to him (at 56C, para 12).

(2)  In this appeal by a creditor to reverse the decision of a liquidator in respect of a proof of debt, the court is bound to decide the creditor’s rights in the light of all the evidence before it, and not merely to express a view as to whether the liquidators were right or wrong in rejecting the proof on the evidence available to the liquidators at the time (at 56B, para 11).

(3)  The position of a liquidator in adjudicating a proof of debt is the same as that of a trustee in bankruptcy, see In re Van Laun [1907] 1 KB 155 at 162 to 163 and on appeal [1907] 2 KB 23 at 30 to 32.  It is the right and duty of a liquidator when examining a proof of debt to require satisfactory evidence that the debt claimed is a real debt.  No judgment recovered against the debtor, no covenant given by or account stated with the debtor, can deprive the liquidator of this right.  He is entitled to go behind such forms to get at the truth (at 56D, para 13).

14.  Mr Lam advanced three reasons why Adrian’s proof of debt was rightly rejected by the liquidators :

(1)     There was and there still is not sufficient substantiation of the alleged debt.  Adrian has failed to discharge its onus of proving a real debt on the balance of probabilities.

(2)    No payment was in fact due to Adrian because the Company itself had not been paid by the employer.

(3)    Adrian is liable to the Company on cross-claims in relation to :

(a)   the sale proceeds of scrap materials belonging to the Company; and

(b)   the unexplained disappearance of a diesel generator from the site.

15.  Miss Kamina Lai for Adrian has no or no adequate answer to these reasons.  I will take them in the order as set out above.

16.  Adrian asserted in Mr Tam’s affirmation that it is unnecessary for it to substantiate its claim with further evidence for these reasons :

(1)    Save that the POA certificates were modelled on the certificates issued by the on-site engineer representing the Government as the employer (“the Engineer’s certificates”), Adrian is unaware of how the Company had arrived at the figures in the POA certificates.

(2)    Adrian could not exercise control or influence over the issuance or contents of the POA certificates or the Engineer’s certificates.

(3)    As between all the parties concerned in the Project, the Engineer’s certificates and in turn the POA certificates were considered as “definitive proof of money due on work done”.

(4)    POA certificate No. 44 is acknowledged by the Company that HK$54,750,027.90 was due.  It is also evidence that the Company accepted as accurate the other items stated in the certificate.

17.  These assertions do not avail Adrian.  There is no provision in the Sub-contract that any POA certificate would be “definitive proof of money due on work done”.  On the face of these certificates, there is nothing to indicate that they are intended to show what payment was finally due from the Company to Adrian.  In any event, the liquidators are entitled to go behind POA certificate No. 44 to get at the truth.  Any estoppel to which the Company might have subjected itself would not prevail against the liquidators.

18.  I consider it entirely reasonable for the liquidators to ask for further evidence in these circumstances.  As demonstrated in Mr Lam’s submission, Adrian has put forward different versions about the amount due which are contradictory.  The sum of HK$39,806,682.64 for “Claim & Variation Orders” in POA certificate No. 44 was not found in the Engineer’s certificate No. 44, so this item would appear not to have been certified by the engineer.  The items of “Materials Paid” and “Other Contra Charges” in POA certificate No. 44, for which no breakdown was given, did not feature in the Engineer’s certificate No. 44.  Conversely, an item of liquidated damages of HK$1,765,759.40 appeared in the Engineer’s certificate No. 44 but not in POA certificate No. 44.

19.  The above differences cast doubt on Adrian’s assertion that the POA certificates were simply modelled on the Engineer’s certificates.

20.  I am satisfied from the correspondence between the liquidators and Adrian from July 2006 to January 2007 that Adrian was given more than ample opportunity to provide further documents and information to the liquidators to substantiate its claim and it had chosen not to do so.  The only response given in Adrian’s letter dated 29 December 2006 was totally inadequate.

21.  I agree with Mr Lam it is disingenuous for Mr Tam to say in his affirmation that the queries raised by the liquidators to Adrian’s proof of debt “cannot be answered”, as under clause 15 of the Sub-contract, Adrian was obliged to provide the Company with an estimate of the value of the works it had completed, a priced list of materials delivered to the site for use in the permanent sub-contract works, and all further estimated sums which Adrian considered to be due.  The Company would then submit such information from Adrian for consideration and certification by the engineer under the Main Contract.  I note also that Mr Tam has admitted to the liquidators that even the tender documents submitted by the Company to the Government for the Project were prepared by Adrian.

22.  On the first ground alone, that Adrian had failed to substantiate its proof of debt despite repeated requests under rule 82(3) of the Companies (Winding-up) Rules, the liquidators were entitled to reject its proof in the entirety.

23.  In her oral submissions today, Miss Lai took a new point.  Instead of claiming the amount in the proof of debt allegedly due on POA certificate No. 44, she said the court could take into account the previous payments in the Engineer’s certificates up to certificate No. 43, which came up to HK$225,318,837.90, being the amount paid by the Government to the Company, and apply a percentage of 98% to this figure to arrive at the amount of HK$220,812,461.14, as payments that should be made by the Company to Adrian.  The court could then look at the previous payments that the Company had made to Adrian and the deductions up to certificate No. 43, which amounted to HK$201,489,474.04.  She submitted that Adrian should at least be entitled to the difference of HK$220,812,461.14 and HK$201,489,474.04.

24.  There are two difficulties about that.  Firstly, this is a new claim not made in the proof of debt.  It does not appear to me that on an appeal of a liquidator’s rejection of a proof of debt, the court can consider a claim not made in the proof of debt.  Secondly, as pointed out by Mr Lam, Miss Lai’s submission was made on the premise that the POA certificates are true, correct and self-explanatory.  But that is not so, as demonstrated in his submissions.  There is no short cut to Adrian in making its claim.  It must be supported by proper evidence, which is lacking in this instance as well.

25.  I turn to the second reason advanced by the liquidators.

26.  By virtue of clause 16 of the Sub-contract, it is only after the Company had received payment from the Government for each Engineer’s certificate that the Company would be obliged to pay Adrian 98% or, as later varied, 90% of the amount received.

27.  Under the Novation Agreement, the Government was entitled to deduct from the interim payment under the Engineer’s certificate No. 44 all sums owed by the Company to the Government under the Main Contract and other contracts.  Further, any balance due under the Engineer’s certificate No. 44 would be paid by the Government directly to Hang Kee.

28.  Hence, the Company would not and did not receive any payment under Engineer’s certificate No. 44 from the Government.  This should have been obvious to Adrian as Mr Tam’s wife was a director and shareholder of Hang Kee.  No information has been disclosed by Adrian as to what sums Hang Kee had received from the Government and what Hang Kee had in turn paid to Adrian, for Adrian had continued as a sub-contractor in the Project after the novation.

29.  For the above reason as well, the liquidators were justified to reject Adrian’s proof.

30.  The third reason advanced by the liquidators is a fallback position in the event that the Company is liable to Adrian.  The liquidators asserted that the amount claimed on the proof of debt should be reduced by the cross-claims of the Company in respect of :

(1)    the proceeds of sale of scrap materials admittedly received by Adrian in the amount of approximately HK$28 million; and

(2)    a missing diesel generator set purchased by the Company on hire-purchase terms at HK$1.82 million.

31.  Adrian has made no response to the evidence filed by the liquidators on the cross-claims.  I understand that on the rejection of the proof of debt, the liquidators have brought an action in the High Court to recover these amounts from Adrian and the action is pending.  There is no need to say anything further about this.

32.  There is no basis to reverse or vary the liquidators’ decision in rejecting the proof of debt.  I dismiss this application.

33.  Mr Lam seeks costs of this application on an indemnity basis, on the ground that the application is ill-founded and a complete waste of time.  There is no reason why the other creditors should suffer in respect of part of the costs of the liquidators that could not be recovered on a party and party basis. 

34.  I agree in these exceptional circumstances a case for indemnity costs is made out.  I order Adrian to pay the liquidators’ costs of this application, including the costs reserved on 20 March 2008, on an indemnity basis.