SUEN WAH LING t/a KONG LUEN CONSTRUCTION ENGINEERING CO. v. CHINA HARBOUR ENGINEERING CO. (GROUP)

HCSD 3/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND
NO. 3 OF 2001

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D E C I S I O N

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Background

1. This is an application to set aside a statutory demand dated 15 January 2001 served on the Applicant. The Applicant had subcontracted with the Respondent to execute works in respect of two projects at the Chek Lap Kok Airport, namely Project PAA-535 and Project PAA-410 on 23 November 1995 and 20 March 1996 respectively. The works under Project PAA-535 were substantially completed in May 1997. In June 1998, the parties signed a Statement of Final Account prepared by the Respondent, in which the Respondent acknowledged a final balance of $2,679,458.43 net of $11,855,217.76 contra charges was due to the Applicant. The works under Project PAA-410 were completed in about November 1997. According to the Applicant, the works were inspected and accepted in full satisfaction by the Provisional Airport Authority and an amount of $14,223,714.53 was due to the Applicant. The above two amounts together with an amount of $223,022.21 being employee's compensation deducted by the Respondent from the Applicant's account totalled $17,126,195.17.

2. On 19 October 1999, the Applicant issued a writ of summons in High Court Action No. 16541 of 1999 against the Respondent to recover the above amount. The Respondent applied to court for a stay of the proceedings, pleading an arbitration clause in the two subcontracts. By consent, an order to stay the proceedings with costs against the Applicant was made by The Honourable Mr Justice Burrell. According to the Applicant, while he had been advised to consent to a stay he had never been advised by his then solicitors that he had to pay costs. In due course, an allocatur allowing costs in the amount of $79,749.00 was issued on 28 December 2000. The costs remained unpaid and on 15 January 2001 the Respondent issued a statutory demand against the Applicant for payment of the said costs.

Grounds for setting aside

3. The Applicant admittedly has cash flow problems. Mr Chow, on behalf of the Applicant, submits that the Applicant has a counterclaim, set-off or cross demand which exceeds the amount of the debt specified in the statutory demand; and further and in the alternative, that the said amount constitutes a security in respect of the debt claimed by the demand and Rule 44(5) of the Bankruptcy Rules has not been complied with. He also submits that in all the circumstances the demand ought to be set aside. On the background as outlined above, the Respondent is indebted to the Applicant in the amount of $17,126,195.17. If that is accepted, the Applicant has good grounds to have the statutory demand set aside.

4. The Respondent does not dispute that Project PAA-535 was substantially completed, or that the Statement of Final Account was correct. In his affirmation in reply, the Respondent's Project Manager, Mr So, alleged that under the terms of the subcontract, the Applicant was under an obligation to maintain the work for such period as the Respondent was liable under the terms of the main contract and that the Applicant neglected to rectify defective works. He also alleged that due to the Applicant's failure to supply sufficient labour and material, the Respondent had to purchase additional materials and tools and employ extra labour to catch up with the works. He said that the Statement of Final Account was subject to final confirmation by the Respondent's Senior Quantity Surveyor Mr Tse. Because of the defective works, the final confirmation was not forthcoming. As at 9 November 1999, a year after the above mentioned Statement of Final Account, the contra charge was increased to $15,552,722.79. The Respondent claims that as a result under that project, the Applicant owed the Respondent $2,636,762.40 instead.

5. As for Project PAA-410, Mr So said in his affirmation that under the terms of the subcontract, all materials and plant for the works shall be supplied by the Respondent who shall deduct the costs for the same from the Applicant's account as contra charges. He also alleged that the Respondent incurred further contra charges as a result of the Applicant's failure to rectify defective works. These contra charges totalled $15,295,522.16. He disputed that the Applicant was entitled to $14,223,714.53 and claimed that Applicant owed the Respondent $6,884,644.95. Thus, the Respondent's case is that in respect of the two subcontracts, the Applicant owed the Respondent $9,521,407.35.

6. As for the employee's compensation, the Respondent claims to be entitled to be indemnified by the Applicant of the compensation claim under the terms of the subcontract, but agrees to reimburse the Applicant when the compensation has been paid by the insurance company.

7. Mr Lam, on behalf of the Respondent, criticises the Applicant's delay in commencing arbitration proceedings in pursuit of his counterclaim and set-off. The Applicant attributes the delay to his health and cash flow problem. His health condition is to some degree supported by medical evidence, while his cash flow problem is obvious.

8. The Applicant alleged that there was some inability on the part of his legal and expert advisers to proceed with arbitration. Following his unhappy incident in connection with the consent order and costs, he switched to another firm of solicitors, Messrs Robertson, Double & Lee (hereinafter called "RDL") and promptly liaised with DCL Consultants Limited (hereinafter called "DCL") in order to continue with his claim by arbitration. In December 1999, DCL offered to act as his expert for a fee of $30,000 and an additional successful fee in an amount equivalent to 10% of the successful claim. Despite a number of meetings with DCL, DCL was of the opinion that the information he supplied was insufficient for them to prepare a detailed claim. As a result RDL delayed liaising with the Respondent's solicitors for commencing arbitration. Due to the down turn in business from 1999 to 2000 and the delay in payment under the two projects, the Applicant experienced cash flow problems. He had been continuously pressed for payment by his sub-contractors and material suppliers. The Applicant alleged that his cash flow problem eventually affected the attitude of his solicitors and expert. DCL then advised him to have a without prejudice meeting with the Respondent to settle the dispute.

9. Subsequently in early October 2000, the Applicant had a meeting with Mr Wong Boot and Mr Fong, both were General Managers of the Respondent, Mr So, the Project Manager (the deponent of the Respondent's affirmation) and Mr Law, a quantity surveyor. At the meeting, Mr Wong said that a final account would soon be agreed between the Respondent and the Airport Authority, after which the Respondent would prepare a final account between the Respondent and the Applicant. In anticipation of that arrangement, the Applicant did not pursue further steps with arbitration. Then in January 2001, he received the statutory demand from the Respondent.

10. Mr Lam submits that on 14 April 2000, well before the above meeting, the Respondent agreed to the Applicant's suggestion with regard to appointment of an arbitrator by the Hong Kong International Arbitration Centre and asked if the Applicant would lodge the requisite Form 2 for the appointment. The term offered by DCL to act as the Applicant's expert was not onerous, only $20,000 on appointment. Mr Lam therefore submits that the inaction on the part of the Applicant shows that he does not have a genuine counterclaim against the Respondent.

11. In summary, the Applicant asserts that he has a counterclaim or set-off which exceeds the debt which is the subject matter of the statutory demand. The Respondent disputes the said counterclaim or set-off and alleges, on the contrary, that the Applicant owed the Respondent about $9 million under the two subcontracts. In a hearing of this nature, I should not embark on a minute and protracted examination of the affirmations and documents and test the Applicant's account against the Respondent's and decide if the Applicant's account is true. For the purpose of the present proceedings, unless the Applicant's allegations are demonstrably wrong or unfounded, I have to proceed on the assumption that those are the facts.

12. In my view, the Applicant's account is credible. His claim under Project PAA-535 is supported by the Statement of Final Account signed by the Respondent, even though it is expressly subject to final confirmation by the Respondent's quantity surveyor. The statement was dated 6 November 1998, more than a year after completion of the works. Any defective work would have been rectified, if not by the Applicant, by the Respondent and its costs would have been taken into account in this statement. The Respondent's claim for further rectification works is not supported by any documentary evidence. Worst of all, the documents relied upon by the Respondent as evidence of the Applicant's failure to order material was dated 23 October 1995, before the subcontract was signed; while another document alleging the Applicant's failure to supply sufficient labour and material was dated 2 March 1996, more than two years before the Statement of Final Account was signed. This demonstrates that the allegation based on these documents are palpably untrue. The Respondent's claim about cost of remedial works under Project PAA-410 is not supported by any documentary evidence.

13. The Applicant's reason for failing to proceed with arbitration is also credible in the light of his cash flow problem. In view of his financial constraint, it is reasonable to wait for the final account from the Respondent before embarking on a course of expensive litigation. The meeting he had with Mr Wong Boot and Mr So and what took place at the meeting are not disputed by the Respondent. I must accept that as true and accept the Applicant's motive in waiting for the outcome of a final statement of account from the Respondent as genuine.

14. Lastly, the security in respect of employee's compensation withheld by the Respondent from the Applicant's account is far in excess of the amount in the statutory demand. If at the conclusion of the compensation claim, the employee is not entitled to compensation, the money withheld shall be returned to the Applicant. If the employee is entitled to compensation, the compensation will be indemnified by the insurance company. In either event, the amount withheld will also have to be released to the Applicant.

Conclusion

15. Having come to the conclusion that the Applicant's counterclaim or set-off is credible, I consider I have an unfettered discretion whether or not to set aside the statutory demand. The Applicant has taken prompt action to prosecute his claim, although he started on the wrong footing. I accept his explanation for the delay in commencing arbitration proceedings. In exercising my discretion I am entitled to take into account the size of the debt as compared with the cost of the bankruptcy proceedings; the size of the Applicant's counterclaim or set-off and its merit, if such a preliminary view is possible. In my view, the debt, the subject matter of the statutory demand, is a small debt. As I have found above, at least some of the reasons advanced by the Respondent in disputing the Applicant's counterclaim or set-off is palpably untrue. That casts doubts on the veracity of its other reasons for disputing the Applicant's counterclaim or set-off and whether the Respondent is acting bona fide in the dispute. All these considerations point in favour of the Applicant's application. In the circumstances, I am satisfied that the Applicant has a counterclaim, set-off or cross demand which exceeds the amount of debt specified in the statutory demand and the said counterclaim, set-off or cross demand constitutes a sufficient security for the debt. I have no hesitation to set aside the statutory demand.

16. So far as costs are concerned, they must follow the event and I make an order nisi that the Respondent shall pay the Applicant's costs, to be taxed if not agreed.