MODERN (INTERNATIONAL) SCAFFOLDING SYSTEM LTD v. CHEERISE ASIA LTD

HCCW 237/2021

[2022] HKCFI 932

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 237 OF 2021

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BETWEEN

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REASONS FOR JUDGMENT

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1.  This winding-up petition was presented by Modern (International) Scaffolding System Limited (“the Petitioner”) on 30 June 2021 to wind up Cheerise Asia Limited (“the Company”) pursuant to s. 177 (1) (d) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“the CWUO”) on the ground that the Company is unable to pay a debt of $2,937,362.31 (“the debt”). At the conclusion of the hearing a winding up order was made. My reasons appear below.

2.  2 weeks prior to the hearing, when the Company filed its skeleton submissions, it sought leave to adduce additional evidence, namely the draft 2^nd affirmation (“Yeung 2^nd”) of Yeung Yue Pui (“Mr Yeung”), its sole director and shareholder, the purpose of which was said to be twofold: to adduce and insert an overlooked document and to adduce documents to show that the Company is solvent.

3.  While the Petitioner had strong objections[1] to this last-minute application, despite the pressure of time it had prepared a draft 2^nd affirmation (“Chan 2^nd”) by its senior sales executive Chan Hang Fai (“Mr Chan”) in response and had no objection to both affirmations being read by the court on a de bene esse basis. The hearing proceeded on that basis.

Background

4.  The Petitioner is one of the largest scaffolding suppliers in Hong Kong. It leases propping and scaffolding components/systems.

5.  The Company is a registered contractor with the Buildings Department under the Register of Specialist Contractors (Sub-register of Demolition Works Category) that specialises in demolition works.

6.  On 22 September 2020, Mr Yeung made enquiries of the Petitioner about renting scaffolding materials for demolition works the Company was to carry out for a project (“the demolition works”) and spoke to Mr Chan. Email exchanges followed.

7.  On 24 September 2020, Mr Chan sent a quotation dated 22 September 2020 (“the Quotation”) to Mr Yeung for his consideration.

8.  On 16 October 2020, Mr Chan sent the Company a further quotation (“the Supplemental Quotation”) which is the document said to have been overlooked in Yeung 2^nd and exhibited.

9.  The Company signed the Quotation as well as the Supplemental Quotation on 19 October 2020.

10.  The Company began placing orders for various components from the Petitioner pursuant to the Quotation on multiple occasions between 29 October 2020 and 8 February 2021.

11.  Commencement of the demolition works required the prior approval of the consulting engineer which had not been obtained at the time the various orders were placed. Those matters were not made known to the Petitioner till these proceedings.

12.  The consulting engineer gave his approval to the commencement of the demolition works on 1 April 2021 but with restrictions, allowing only 7 tonnes instead of 10.5 tonnes of mechanical plants under the approved demolition plan (“ADP”).

13.  The Petitioner issued a series of monthly invoices between 31 October 2020 and 30 April 2021 being the debt. The Company has only paid a total sum of $365,000 as partial payment by the end of December 2020.

14.  As repeated requests for payment were met with excuses, on 26 May 2021, the Petitioner served a statutory demand on the Company.

15.  The petition was taken out on 30 June 2021.

Legal principles

16.  There is no dispute over the applicable legal principles set out in Re Neo Telemedia Limited, unrep., CACV 132/2015, 19 October 2015 at §3.1.

17.  Mr Benjamin Lam, counsel for the Company emphasised that the Companies Court must not be used as a debt collecting agency nor as a means of bringing improper pressure to bear upon a debtor company: Butterworths Hong Kong (WUAMP) Handbook at §178.07.

Whether a bona fide dispute on substantial grounds is shown

18.  The winding up order sought is based on an unmet statutory demand. Mr Alan Kwong, counsel for the Petitioner, submitted that the debt owed by the Company represented unpaid rental for ARM components supplied pursuant to orders placed by the Company.

19.  He invited attention to the fact that the Company has changed its case twice since the filing of the petition:

(a) in its letter dated 20 August 2021 to the Petitioner, apart from stating that the amount due was not agreed, the Company did not give specifics of the disputed amount and made no complaint about any lack of technical data and drawings;

(b) the letter dated 26 August 2021 from the Company’s solicitors then complained that the Quotation was provided “without sufficient technical data”; that despite repeated requests, “technical data” (essential for the consulting engineer’s approval for the propping system) was not provided until 17 March 2021 causing significant delay to the project; and

(c) Yeung 2^nd exhibited the Supplemental Quotation in aid of the Company’s (new) case on the “agreed scope of service” which the Company submitted included providing design, calculations and technical data. Prior to Yeung 2^nd the Company’s complaint was that the propping system was not suitable for its purpose.

20.  The Company maintains that there is a genuine dispute of the debt on substantial grounds. It is the Company’s contention that its acceptance of the Quotation and Supplemental Quotation on 19 October 2020 created a contract for the provision by the Petitioner of an ARM propping system (including its design and technical data) suitable or fit for the purpose of the demolition works.

21.  It placed reliance on the fact that the Quotation and a Metal Propping Layout Plan (“MPLP”) attached to it were prepared by the Petitioner after receipt of the ADP and the BD approved leg load[2] provided by the Company.

22.  As the Company’s contention has to be viewed in proper context, it is necessary to consider in greater detail the evidence leading up to 19 October 2020.

(a) Acceptance of the Quotation and Supplemental Quotation

23.  Following Mr Yeung’s enquiries on 22 September 2020, Mr Chan emailed Mr Yeung the Petitioner’s catalogue and a Chinese document with details of the ARM propping system (a pre-manufactured system tested to withstand different loads under the Petitioner’s Proprietary Arrangement (“Petitioner’s PA”)).

24.  Mr Yeung then asked about the price for renting the system but was unable to provide an estimated quantity of components.

25.  Later the same day, Mr Yeung emailed Mr Chan a copy of the ADP for the purpose of enabling the Petitioner to prepare a quotation. The copy received by the Petitioner and exhibited[3] by Mr Chan shows that while the plans of the site on which the structure to be demolished was situate were legible, the accompanying text containing the BD conditions was blurred and hardly legible.

26.  For quotation purposes, an estimated quantity of components based on the Petitioner’s PA could be calculated if 3 basic pieces of information were available, namely, the leg load, spacing and propping heights[4].

27.  The Company provided that information to the Petitioner on 23 September 2020 in part orally and, regarding the leg load, by email.

28.  On 24 September 2020. Mr Chan sent the Quotation together with the MPLP (on which the Quotation was based) to Mr Yeung. The Quotation showed the monthly rental cost for one set of scaffolding from the 1/F to 2/F (6.2m H) and one set from G/F to 1/F (5.6m H).

29.  The following provision appears in bold in the middle of the Quotation:

“Actual rental charge will be subject to actual quantity of components to be delivered. Unit rates of the component refer to the attached table rates.”

30.  Attached to the Quotation was a list of 43 different types of component showing inter alia the hire rate per item per month. Quantities were shown against only 9 of the 43 types on the list for the 2 sets described in the Quotation.

31.  Other terms worth noting include (i) the minimum hire period of one month and thereafter renting would be charged on a daily basis; and (ii) the delivery date was “to be confirmed”. There was no mention of the Petitioner providing services relating to technical data or anything else.

32.  Mr Chan’s evidence is to the effect that the Company was not bound to adopt the Petitioner’s PA nor was the Company required to make orders for the exact type/number of components as stated in the MPLP. It was free to arrange the components in any arrangement it deems fit and place orders accordingly. It was for that reason that rental rates for the different types of component were attached to the Quotation which made clear that actual rental charges depended on the actual number of components delivered[5].

33.  The Chinese document[6] sent to the Company at the outset with the catalogue provides an explanation of the “ARMS Propping System”. Under the heading “Economic Design”, an explanation is given as to how to achieve a required loading, concluding with the statement that “engineers are free to design a solution that is cost-effective”[7], corroborating Mr Chan’s explanation in the preceding paragraph.

34.  On 14 October 2020, unbeknownst to the Petitioner, the Company submitted the MPLP to its consulting engineer for approval. As earlier noted, such approval was a pre-requisite for commencement of the demolition works but was not made known to the Petitioner until these proceedings.

35.  On 16 October 2020, Mr Chan sent the Company the Supplemental Quotation for providing “design drawing & technical calculation for the scaffold”. In that event, there was an option to require the Petitioner “to provide ICE to endorse the design drawing & calculation” for a further fee. As with the Quotation, the delivery date was “to be confirmed”.

36.  The Company accepted the Quotation and Supplemental Quotation at one go on 19 October 2020 by signing and returning the same to the Petitioner.

37.  The Company’s case is that as a result of its acceptance, in addition to renting and supplying components for the ARM propping system, the agreement also required the Petitioner to design a system suitable for the demolition works and perform the technical calculations. Moreover, under the Supplemental Quotation, the Company had the option to require endorsement of the design drawing and calculation by an ICE for an additional fee.

38.  But prior to Yeung 2^nd and the production of the Supplemental Quotation[8], the Company was treating the MPLP as the system proposed by the Petitioner that would be suitable for the demolition works. On that basis the purpose of obtaining the Supplemental Quotation is not evident.

39.  The fact that the Company signed the Quotation did not mean that it was immediately liable for the price quoted. As a matter of construction, the Company was not obligated to rent anything at all from the Petitioner under the Quotation. If it did, the rental charges would be according to the rates stated in the accompanying list.

40.  It must follow that unless and until an order is placed, no rental would be due at the rates and on the terms stated. That construction accords with what appears in bold face on the Quotation itself.

41.  In so far as it is relevant, the Supplemental Quotation should bear a similar construction. Until an order is placed for the design, drawing and calculation and a delivery date specified, the Company would not be liable for the fees quoted. In fact, the Petitioner has never issued any invoice in respect of the Supplemental Quotation.

42.  The Petitioner posed the question that if the Petitioner’s contractual obligation was to supply a system fit for the purpose of the demolition works in accordance with the ADP, how was it agreed?

43.  Plainly, no express provision to that effect appears in the Quotation and Supplemental Quotation. There is also no evidence such as emails or oral conversations to that effect. In those circumstances, if such a term exists it must be an implied term, a term that would be obvious to any bystander.

44.  The Petitioner submitted that the evidence demonstrates that even Mr Yeung did not believe that there was such an implied term.

45.  The Company started placing orders 10 days after accepting the Quotation and Supplemental Quotation and before the consulting engineer had given the green light for the demolition works to commence. During the period from 29 October 2020 through 8 February 2021, multiple orders were placed engendering no fewer than 19 email and/or WhatsApp exchanges relating to those orders.

46.  Having perused the delivery notes exhibited[9], what is striking is that orders were also placed for components other than the 9 types required for the MPLP. This would suggest that the Company was placing orders in respect of a design other than the MPLP.

47.  Clearly, the Company would not have done so had it truly believed that the Petitioner was contractually obligated to design the system for the demolition works as approved by the ADP.

48.  That is reinforced by the matters considered in greater detail regarding the Company’s complaints below.

(b) The Company’s complaints

49.  They relate to the following matters: (i) withholding and/or insufficient technical data; (ii) non-compliance of the ARM propping system; and (iii) late provision of “technical data”.

(i) complaints concerning technical data

50.  On 22 October 2020, Mr Yeung asked Mr Yip about the erection and the load capacity of the ARM propping system. Mr Yip explained to Mr Yeung that the ARM propping system is a pre-manufactured system and has been tested to withstand different loads under the Petitioner’s PA. Mr Yip then sent Mr Yeung the ARM Scaffold catalogue[10] and testing report. There was no request made to Mr Yip on that occasion for the information considered under (iii) below.

51.  There were no further enquiries until 17 December 2020, a hiatus of some 2 months when, according to Mr Yip[11], he received a call from Mr Yeung. Mr Yip explained that any deviation from the Petitioner’s PA would compromise the tested load bearing capacity of the system and provided (by email) a more detailed sketch of the Petitioner’s PA for Mr Yeung’s reference[12]. There appears to be a conflict of evidence as to the sketch that was sent[13].

52.  Then on 23 December 2020 Mr Yeung sought Mr Yip’s comments regarding a specific area of the site shown on plans attached to his email. Those plans had modified the Petitioner’s PA[14]. As modifications to the Petitioner’s PA could compromise the load-bearing capacity of the system, Mr Yip was unable to comment on the plans submitted.

53.  Later the same day, out of goodwill, Mr Yip emailed Mr Yeung a plan to illustrate the use of the Petitioner’s PA for the specific area referred to with detailed calculations to show that the Petitioner’s PA could provide sufficient loading capacity but heard no more.

54.  Based on the email exchanges of 17 and 23 December 2020, the Company submitted[15] that the “technical data” was still insufficient for the consulting engineer’s assessment, and in particular that “the technical data for the load-bearing capacities of the connection components of the ARM Scaffold System”[16] had still not been provided.

55.  It is important to bear in mind that the Petitioner was not made aware of the involvement of the consulting engineer nor was the Petitioner privy to information the Company gave the consulting engineer.

56.  If, as is the Company’s case, “the technical data provided by the Petitioner on 22 October 2020 was found insufficient for the Consulting Engineer’s assessment”, why was there a hiatus of 2 months before reaching out to the Petitioner on 17 December 2020? Meanwhile, orders continued to be placed.

57.  No information is given as to the “insufficiencies” from the consulting engineer’s point of view. One would have expected an immediate follow up but that did not happen.

58.  What is also clear is that the Company was using its own design that did not comply with the Petitioner’s PA.

(ii) non-compliance of the ARM propping system

59.  The court was referred to an email from the consulting engineer dated 5 January 2021[17] in support of the Company’s contention that the Petitioner’s ARM propping system did not comply with the Code of Practice for Demolition of Buildings (“the Code”).

60.  That email was sent by the consulting engineer in response to the Company’s submission the previous day for approval of calculations[18] to justify the adequacy of the proposed props for demolition works by replacing diagonal bracing required by the Petitioner’s PA with perihelial[19] bracing.

61.  The consulting engineer’s response was made to the Company and not the Petitioner. The Company was asked to justify the loads which was in line with §3.5.2 of the Code since deviation from the Petitioner’s PA (replacing diagonal bracing with perihelial[20] bracing) required tests to be performed to establish the design capacity. There is simply no basis for the Company’s complaint set out in §59 above.

62.  If, as is the Company’s case, the Petitioner was under a contractual obligation to design, supply and deliver a system that was suitable for the demolition works, it is inexplicable that the Petitioner was not on the circulation list for the email exchanges of 4-5 January 2021.

63.  In fact, there were no exchanges between the Company and the Petitioner after 23 December 2020 until 10 February 2021 when the Company asked Mr Yip to confirm whether or not the Company’s calculations (prepared by an independent registered professional) using cross bracing to replace diagonal bracing were acceptable. Mr Yip’s reply made it clear that he could not comment on the Company’s design calculation which deviated from the Petitioner’s PA.

64.  This is yet another example of the Company using a design that was not prepared by the Petitioner.

(iii) late provision of “technical data”

65.  The Company submitted that on 17 March 2021 Mr Yip “ultimately” provided “technical data” (relating to the load-bearing capacities of connection components for the ARM propping system), “as the final attempt to show the compliance of the propping requirements as stipulated in the [ADP][21]”.

66.  In so far as it is suggested the Petitioner had delayed in providing the same, there is no evidence from Mr Yeung as to when he made the request for such “technical data”. The Petitioner’s evidence is that no request for that information was made until 17 March 2021.

67.  The document[22] Mr Yip provided was in standard form issued by the Petitioner on 2 October 2010. It contained information relevant to one of its products. There is no ostensible reason why the Petitioner would withhold such information which was clearly intended for its customers.

68.  Upon receipt of that document, on 18 March 2021, the Company engaged an independent registered professional structural engineer to carry out an independent analysis based on that information. That analysis was then sent to the consulting engineer who, later the same day, replied stating that “the loading is under-estimation” with reference to the calculation sent by the Company to justify the proposed props for demolition works.

69.  That analysis/calculation (performed by a 3^rd party) was never made available to the Petitioner.

70.  In the circumstances, the consulting engineer’s opinion set out in §68 above offers no support for the Company’s allegation that on 18 March 2021 the consulting engineer found that the MPLP “was not in compliance with the propping requirements as set out in the [ADP] i.e. the loading was an under-estimation”.

Conclusion

71.  In my view, as a matter of construction the Company’s interpretation of the contract is not remotely arguable:

(a) if its construction were correct, (i) why did the Company not make any request for the Petitioner’s design of the scaffolding system after 19 October 2020? (ii) if a request was not necessary (on the basis that the Supplemental Quotation had immediate effect), why did the Company not follow up and press for the provision of the design?

(b) the fact that the Company proceeded to place its orders for the various components between 29 October 2020 and 8 February 2021 which included components other than the 9 types of component identified in the list accompanying the Quotation can only mean that it was using some other design; that flies in the face of the contractual interpretation it presented to the court.

72.  For all the reasons stated above, I cannot accept that the Company has shown a bona fide dispute with the Petitioner on substantial grounds.

Solvency

73.  The evidence is overwhelming that the Company raised no objections to the monthly invoices rendered between October 2020 and April 2021. It even admitted liability on at least 10 occasions.

74.  The email and WhatsApp exchanges between the Petitioner and the Company concerning the overdue invoices show innumerable excuses given by the Company to delay payment with promises to settle them if given more time but none of the promises was honoured.

75.  The Company exhibited a printout of its bank account summary as of 10 March 2022 showing a balance of $2.28 million which is frozen as a result of the petition.

76.  Taking into account the payment of $365,000 referred to in §13 above, there is a shortfall of $331,000. The Company also exhibited a spreadsheet showing receivables of approximately $735,000. On that basis it was submitted that the Company is solvent and a going concern.

77.  It was submitted that if the court were minded to make a winding up order, the order should be stayed for 28 days as the Company could raise the amount of shortfall during that period and to pay the same into court.

78.  However, no evidence was given as regards the Company’s liabilities.

79.  In the circumstances, I was not satisfied that the Company is solvent and has the ability to pay its debts or that circumstances have been made out to justify a stay.

80.  Accordingly, for those reasons, a winding up order was made.