RE WING FUNG CONSTRUCTION (HK) LTD

HCCW 807/2004

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 807 OF 2004

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D E C I S I O N

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1.  This is a summons for a validation order by the 1^st and 2^nd respondents for payments made out of the funds of Wing Fung Construction (HK) Limited (“the Company”) which is the subject of a winding-up petition.

2.  This is the 7^th application for a validation order made by the respondents.  A breach of the undertaking given by the respondents to the court on one of the applications has led to an application by the petitioner to commit them for contempt.  I found the contempt proved on 6 October 2005.  This is the 1^st application for a validation order issued after the contempt was found.  The summons was issued on 14 November 2005.

3.  The total amount sought to be validated in this instance is HK$2,990,725.32, as set out in the Schedule annexed to the summons.  A breakdown of this amount was given in the Schedule, it is divided into 10 items numbered A to J.  The petitioner takes no objection to items A to H, the total amount came up to HK$2,274,815.12.  Of the remaining items I and J, no breakdown was given in the Schedule.  Item J is reimbursement to the 1^st respondent for paying off “miscellaneous items” in the sum of HK$281,165.20.  Item J is reimbursement to the 1^st respondent for making cash payments for the Company in the sum of HK$434,745.00.

4.  56 pages of documents in support were provided by the respondents regarding items I and J, the total amount for which supporting documents were provided only came up to HK$42,225.07.  Hence, HK$673,685.13 is sought to be validated but without any supporting documents.

5.  The petitioner has set out in a list (exhibit 107 to his 14^th affirmation filed on 29 November 2005) which of the items he does not object to be validated, which are the ones objected to, and his reasons for objection.  The petitioner has agreed to validate certain “miscellaneous items” from February 2005 to September 2005 in the total sum of HK$15,057.07.

6.  As the 1^st respondent has indicated to this court that the respondents wish to file another affirmation exhibiting further supporting documents to items I and J, I propose to make a validation order today in respect of that part of items I and J not objected to in the sum of HK$15,057.07 and adjourn the rest of the summons that is in dispute to another date, to give an opportunity to the respondents to file further evidence.  So I will grant a validation order to items A to H and part of the amount for items I and J in the sum that I have stated.  The validation order that I make today is subject to a number of undertakings to be given by the respondents.

7.  There are some very unsatisfactory features about this case.  One is that the respondents have not properly accounted for the surplus funds in their hands.  It was not until the present summons was taken out that they disclosed to the petitioner and to the court there is now held by their former solicitors Messrs Paul Kwong & Company surplus funds in the total sum of HK$1,551,406.10, HK$992,244.35 of which came from sums validated by an order of Barma J on 5 January 2005, but not paid out because of direct payments made to the recipients by the principal contractor, and HK$559,161.75 came from the sums validated by an order I made on 1 February 2005 but was not paid out, again because of direct payments made to the recipients by the principal contractor. 

8.  No explanation was given by the respondents why the full amount as permitted in the various validation orders was withdrawn from the Company’s bank accounts when part of the money would not be utilized to pay employees and sub-contractors, as the principal contractor had already paid them directly.  Nor did they explain why, having withdrawn more than was needed, the surplus funds were not paid back into the Company’s bank accounts.

9.  Another unsatisfactory feature is that payments would appear to have been made by the respondents not in accordance with the validation orders granted.  Instances were given by the petitioner where payments made in respect of a particular item well exceeded the amount validated for that item.  There were also other instances where payments were made for items which had been objected to by the petitioner and were not validated by the court.

10.  To ensure that the payments made under the various validation orders would be under the proper supervision of the court, I would grant a validation order on this occasion subject to these undertakings of the 1^st and 2^nd respondents to the court:

(1)  to provide to the petitioner proof of such payments actually made to the relevant individuals or companies in a form as agreed by the parties and set out in the letter of the petitioner’s solicitors to the respondents’ former solicitors, Messrs Paul Kwong & Company, dated 17 October 2005, within 7 days of the payments being validated by the order to be made herein;

(2)  to file in court and serve on the petitioner within 14 days hereof an affirmation giving an account of the following matters and exhibiting all relevant documents in the possession, power or custody of the respondents:

(a)  the amounts withdrawn from the Company’s bank accounts pursuant to each of the validation orders made on all previous occasions in these proceedings; and

(b)  in respect of each of the amounts withdrawn pursuant to a validation order, stating how much of the amounts withdrawn was actually paid out by the respondents towards the payments validated in the order and how much was retained by the respondents; and

(3)  to pay back into the Company’s bank accounts any surplus amounts (other than the HK$1,551,406.10 now held by Messrs Paul Kwong & Company) withdrawn by the respondents from the Company’s bank accounts pursuant to a validation order but have not been utilised towards the payment of a validated amount.

11.  The 1^st respondent has informed the court that he and the 2^nd respondent are willing to give the three undertakings that I have mentioned.  On the basis of the above three undertakings, I make an order in these terms:

(1)     The summons is to be amended by adding the 2^nd respondent as an applicant.

(2)     The payment of HK$2,274,815.12, being items A to H set out in the Schedule annexed to the summons and HK$15,057.07, being part of the expenses set out in items I and J in the Schedule and as particularised as items not objected to in exhibit 107 to the 14^th affirmation of the petitioner, to be made by the Company be validated, notwithstanding the presentation of the winding-up petition against the Company.  The rest of the summons relating to the remaining amounts in items I and J in the Schedule is to be adjourned for argument to 5 January 2006 9:30 a.m.

(3)     Messrs Paul Kwong & Company are to be authorised to pay out HK$1,551,406.10 to the recipients listed in paragraph (2) hereof.

(4)     The Bank of China (Hong Kong) Limited is to be authorised to debit account no. 012-898-0-005347-4 the sum of HK$848,000.00 and transfer the said sum to Messrs Paul Kwong & Company to enable them to pay out to the recipients in paragraph (2) hereof.

(5)     Shanghai Commercial Bank Limited is to be authorised to debit account No. 333-82-06338-6 the sum of HK$591,391.22 and transfer the said sum to Messrs Paul Kwong & Company to enable them to pay out to the recipients in paragraph (2) hereof.

(6)     Any surplus funds not utilised for the payment of the amounts validated in paragraph (2) hereof are to be paid back into the bank accounts of the Company.

(7)     The 1^st and 2^nd respondents are to file and serve within 14 days hereof further affirmation in support of their application for a validation order regarding the remaining amounts in items I and J of the Schedule to the summons.

(8)     The petitioner is to file and serve evidence in reply within 14 days thereafter.

(9)     The costs of today are to be reserved to the adjourned hearing on 5 January 2006.