SUN FOOK KONG (CIVIL) LTD v. MULTIPIPE RENOVATION LTD

                             HCA 2504/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2504 OF 2008

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R E A S O N S  FOR  J U D G M E N T

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1. On 24 December 2008 after hearing arguments on the plaintiff’s application by summons dated 3 December 2008 I made the following orders :

(1)             that the Defendant do forthwith deliver or cause to be delivered or take steps to deliver all construction plant, machineries and equipment directly or indirectly purchased by the plaintiff under the subcontract in relation to the drainage, maintenance and construction works in the Mainland South Districts under the Main Contract No. DC/2007/11 (“the subcontract”) as set out in the list attached to the draft order handed up to the Court in Appendix I (“the Equipment”);

(2)             that unless and until the defendant has delivered or caused to be delivered or taken steps to deliver all the Equipment to the plaintiff, the defendant whether by itself, its directors, officers, servants, agents or otherwise howsoever be restrained from selling, causing or permitting to sell or taking steps to sell any of the Equipment unless with the plaintiff’s prior written consent;

(3)             that the defendant do forthwith deliver or cause to be delivered or take steps to deliver all pipe lining materials directly or indirectly purchased by the plaintiff under the subcontract which has not yet been used in the subcontract (the “Material”);

(4)             that unless and until the defendant has delivered or caused to be delivered or taken steps to deliver all the Material to the plaintiff, the defendant whether by itself, its directors, officers, servants, agents or otherwise howsoever be restrained from selling, causing or permitting to sell or taking steps to sell any of the Material unless with the plaintiff’s prior written consent.

2. Appendix 1 is the list of the Equipment consisting of 8 items.

3. I indicated at the time that reasons in writing would be given later.  These are my reasons.

4. The application before me was the adjourned hearing of the plaintiff’s summons whereby the plaintiff sought a mandatory injunction for the delivery up by the defendant to the plaintiff of the Equipment and the Material.

5. By an order made by Suffiad J on 5 December 2008 a prohibitory injunction was granted against the defendant prohibiting the defendant from in effect selling or taking steps to sell the Equipment and the Material until after the adjourned hearing of the plaintiff’s summons on 12 December 2008 or further order.

6. On 12 December 2008 Deputy Judge Mayo continued the prohibitory injunction granted by Suffiad J on 5 December 2008 until after the adjourned hearing of the plaintiff’s summons on 24 December 2008 and he also gave directions for the filing of evidence in relation to the plaintiff’s summons.

7. The plaintiff is the main contractor of a drainage project in respect of the drainage maintenance and construction works in the Mainland South Districts under the Main Contract No. DC/2007/11.  The employer is the Drainage Services Department of the Government.

8. The defendant is a specialist subcontractor in pipe lining works.

9. The defendant was a subcontractor of the plaintiff in respect of the works under the subcontact being subcontract No. 002111S006 which subcontracted works commenced in around January 2008.

10. Chan Wah Tat is the sole shareholder and the sole director of the defendant.

11. Apart from engaging the defendant as the plaintiff’s subcontractor for the works under the subcontract, the plaintiff had also been negotiating with Chan Wah Tat a share acquisition plan for the plaintiff to purchase 60% shareholding of the defendant since about November 2007 subject to a satisfactory due diligence result.

12. The plaintiff’s case is that it was not satisfied with the defendant’s financial position and that it decided not to proceed with the share acquisition plan.  It is the plaintiff’s case that at a meeting on 5 November 2008 Chan Wah Tat was informed that the plaintiff would not proceed with the share acquisition plan.

13. The defendant’s case on the share acquisition plan is that the plaintiff did in fact agree to go ahead with the share acquisition plan.  In his affirmation Chan Wah Tat said that in January 2008 Mr Patrick Lee of the plaintiff told him that the plaintiff’s Group was in the final stage of its application for listing at the Hong Kong Stock Exchange and that they did not want any agreement to be signed for the share acquisition for the time being but that the acquisition was to go ahead.  Chan Wah Tat also said that in reality a joint venture was formed between the plaintiff and the defendant to work on the relevant jobs under the main contract.

14. There was no written share acquisition agreement ever signed between the parties.  Whether the share acquisition plan was ever finalized or not is a matter of dispute between the parties.  Be that as it may, it is important to bear in mind what the main issue in this action and in the application before me is.  It is important to bear in mind that this action and the application before me is about the ownership of the Equipment and the Material.  The plaintiff asks for the return of the Equipment and the Material which on the plaintiff’s case is owned by it and not owned by the defendant.  The main issue is whether it is the plaintiff or the defendant who is the owner of the Equipment and the Material.

15. The plaintiff accepts that before granting an interlocutory mandatory injunction the Court has to be satisfied to a high degree of assurance that at trial it will appear that the injunction was rightly granted.

16. The plaintiff’s case is that it was agreed between the plaintiff and the defendant that the plaintiff would purchase certain plant, machinery and equipment and pipe lining materials for the defendant’s use during the subcontract while the ownership of such plant, machinery and equipment and pipe lining materials would remain vested in the plaintiff.  As Mr Wong, for the plaintiff, demonstrated by reference to the evidence, the plaintiff paid for the equipment and pipe lining materials and from time to time deductions were made from payments due to the defendant from the plaintiff in respect of works under the subcontract.  Once deductions were in fact made by the plaintiff, the plaintiff no longer claimed ownership of the equipment in respect of which deductions were made.

17. By letter dated 26 November 2008 the plaintiff originally claimed the return of 15 items as listed in the enclosure to the letter.  As deductions had been made in respect of 7 of those items, the plaintiff no longer pursued the claim for those 7 items.  Hence the application was for the return of the 8 items listed in Appendix 1 as well as for the Material which is the pipe lining materials which has not yet been used in the subcontract.

18. The defendant does not dispute that the plaintiff purchased and paid for the Equipment and pipe lining materials for the defendant’s use under the subcontract.

19. In the course of his submissions Mr Cheung, for the defendant, submitted that the defence to the plaintiff’s claim to ownership of the Equipment and Materials was that deductions had in fact been made by the plaintiff from payments due to the defendant for all of the Equipment.  He relied on the plaintiff’s documents produced in exhibit CKM-1 to the affirmation of Chan Kwok Mun made on 2 December 2008.

20. In my view, the documents relied on by the defendant to show that deductions had in fact been made for all of the Equipment do not assist the defendant.  At paragraph 43 of the third affirmation of Chan Kwok Mun he made it clear that the sums paid for the Equipment and Materials have not been deducted from the contract sum certified to be payable to the defendant.  This is supported by exhibit CWT-11 which contains all the deductions made by the plaintiff.  The total deductions made under the subcontract was in the sum of $2,007,978.07 and these do not include the deductions for the 8 items of the Equipment listed in Appendix 1 and the Material.

21. The defendant has been unable to adduce any documentary evidence showing that the ownership of the 8 items in Appendix 1 and the Material no longer remained with the plaintiff because deductions for those 8 items and the Material had in fact been made by the plaintiff.

22. According to the plaintiff, since about 16 November 2008 the defendant has abandoned the subcontract works and evinced an intention not to be bound by the subcontract and the plaintiff has accepted the defendant’s repudiation of the subcontract.

23. By letter dated 19 November 2008 from the plaintiff to the defendant the plaintiff referred to a meeting with Chan Wah Tat on 18 November 2008 and said :

“  We note with grave concerns that all your sites were left idle since 16 November 2008.  During the above meeting, you expressed that you are incapable to carry out the outstanding lining works as listed below due to your financial problem.”

24. After listing out the 14 works order numbers in the letter, it went on to state :

“ As agreed in the meeting, your subcontracted works will be terminated with effect from 18 November 2008.  We will arrange another subcontractor to execute the above outstanding works.  All expenses properly incurred will be recoverable by us from you.”

25. In the letter of demand for the return of the Equipment dated 26 November 2008 from the plaintiff to the defendant, the plaintiff said :

“  We refer to our meeting with your Mr Chan Wah Tat on 18 November 2008 at our office.

 As you will recall, you had abandoned the Sub-Contract works since 16 November 2008 and therefore had repudiated the Sub-Contract.  We accepted such repudiation at the meeting and the Sub-Contract came to end.  You agreed that such termination took effect from 18 November 2008 as recorded in our letter dated 19 November 2008.”

26. Although the defendant denies that it has repudiated the subcontract, the defendant did not reply to the letters dated 19 November and 26 November 2008.

27. There can be no doubt that the subcontract has been terminated.  What I am concerned with is the ownership of the Equipment and the Material.

28. On the material before the Court the plaintiff has satisfied me that it has a strong case in establishing that it rather than the defendant is the owner of the Equipment and the Material.

29. As regards the balance of convenience, it seems to me that this clearly lies in the plaintiff’s favour.

30. There is no doubt that the subcontract has been terminated and that there have been delays in the subcontract works.  Because of delays in the subcontract works it is likely that the plaintiff will have to pay liquidated damages under the main contract.  The plaintiff anticipates that liquidated damages of about $570,000 up to 9 December 2008 will be charged by the Drainage Services Department with further liquidated damages for the outstanding works left incomplete by the defendant.

31. To prevent further loss, on the evidence the plaintiff needs to have the Equipment and the Material as soon as possible to complete the works order left incomplete by the defendant.  Although the plaintiff may be able to order the Equipment and the Material from other specialist suppliers overseas this no doubt will take time.  The plaintiff estimates that it would take about two and a half months before the Equipment would arrive at the site for the incomplete subcontract works.

32. The plaintiff will also suffer further loss if new works orders are issued by the Drainage Services Department and the plaintiff is unable to complete these because it does not readily have the Equipment and the Material to do so.  The plaintiff estimates that there may be 5 to 10 new works order issued each month.  Such further loss is difficult to quantify.

33. There is the also the question of the impact of continuing delay on the incomplete subcontract works on the reputation of the plaintiff.  Although there is no evidence that this has yet occurred, there is a real risk that if there is further delay in the incomplete subcontract works, the plaintiff’s performance rating with the Drainage Services Department will be adversely affected and if so, damages would not, in my view, be an adequate remedy.

34. The defendant’s case is that it has been using and would use the Equipment in jobs recently awarded by other main contractors (paragraph 17 of the affirmation of Chan Tat Wah).  This, however, is a bald assertion with no particulars provided as to the other jobs or the other main contractors.  No documentary evidence has been provided in support of this bald assertion.  Be that as it may, damages would, in my view, be an adequate remedy for the defendant if the defendant should succeed at trial.

35. I have also considered the relative financial strength of the parties.  There can be no dispute that the plaintiff is a substantial company.  According to the audited accounts of the plaintiff for the year ended 31 March 2008 the plaintiff made a gross profit of $121,513,897.  The plaintiff is, in my view, good for the cross-undertaking in damages and would be in a strong financial position to pay damages to the defendant in the event that the defendant should succeed at trial.

36. On the other hand, the defendant is in a precarious financial position and is unlikely to be able to pay damages to the plaintiff.  The defendant is a small company with a limited capital of $10,000.  According to the audited accounts for the year ended 31 December 2007 the defendant had a loss of $3,365,069.01 for the year.  In the auditor’s report dated 5 May 2008 when auditing the accounts of the defendant for the year ended 31 December 2007, the auditor commented on this and the fact that the defendant’s current liabilities exceeded its current assets by $9,246,994.46 and a deficiency in assets of $4,154,160.12.  The auditor was of the view that there was “the existence of a material uncertainty which may cast significant doubt about the [defendant’s] ability to continue as a going concern”.

37. In addition to the purchase of the Equipment and the Material by the plaintiff it appears on the evidence that the plaintiff has also granted loans to the defendant in order to finance the operation of the defendant under the subcontract.  I was referred to the loan agreements in exhibit CKM-9 to the third affirmation of Chan Kwok Mun of the plaintiff.  The loans were personally guaranteed by Chan Wah Tat.

38. According to the plaintiff, up to the time of the affirmation of Chan Kwok Mun of 2 December 2008 the defendant still owes the plaintiff a total sum of $5,800,000.  Although the defendant disputes this amount and the state of the accounts between the plaintiff and the defendant, Mr Cheung, for the defendant, conceded in his submissions that when proper accounts are taken between the plaintiff and the defendant, it is probable that the defendant will owe money to the plaintiff.

39. I am satisfied that there is a high degree of assurance that at trial it will appear that the mandatory injunction was rightly granted.

40. For those reasons, I made the order set out at paragraph 1 above with costs of the application to be costs in the cause.