GOLDEN SAND MARBLE FACTORY LTD. v. EASY SUCCESS ENTERPRISES LTD. AND ANOTHER

1997, No. MP 3772

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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1. The plaintiff was a nominated subcontractor to the second defendant on a construction project. The first defendant was the employer. The dispute between the plaintiff and the second defendant concerns the sum of $381,364.55 (which includes a sum of $175,000 retention money) certified by the architect as due by the first defendant in respect of the plaintiff's work on the project. The first defendant takes no part in these proceedings, it having paid the sum concerned into court or into trust, and being content to abide by the decision of the court as to the disposal of the disputed money.

2. The practical completion of the works was on 8 May 1996. The defects liability period expired on 8 May 1997. On 30 May 1997, the architect settled the final account in respect of the plaintiff's work. The architect said that there were no defects for which the plaintiff was responsible, and that the sum due to the plaintiff was $381,364.55, which included retention money of $175,000. In the meantime, on 19 June 1996, the second defendant was wound up by order of the court.

3. The crisp point for my decision is whether or not, on 19 June 1996, the right to receive this money was the property of the second defendant. If it was, under section 250 of the Companies Ordinance (Cap.32), the money must be applied in the satisfaction of liabilities of the second defendant pari passu. If, on the other hand, the right to receive the money was vested in the plaintiff at the time of liquidation, the plaintiff is entitled to receive it now. The situation must be one or the other; the right to receive the money on 19 June 1996 cannot simultaneously have been vested in both the plaintiff and the second defendant. I emphasise that I am only concerned in this case with this question; no question of fraud or undue preference arises.

4. The contract between the defendants made the usual provision for payments to the plaintiff to be made through the second defendant, but there is also the standard clause (clause 27(c)) that permitted the first defendant, if the architect issued the required certificate, to pay the plaintiff directly and deduct this from sums due to the second defendant.

5. The procedure of paying the plaintiff through the second defendant was followed until February 1995. On 20 February 1995, the architect sent certificate number 9 to the second defendant, and said that -

". . . you will release payment already certified on Certificate No. 8 to [the nominated subcontractors] by February 22, 95 the latest. Should you fail to submit proof of release of payment to sub-contractors by then, the Employer reserves the right not to honour this certificate . . .".

6. On 4 March 1995, the architect said that it had not heard from the second defendant, asked for more information and said that, if the second defendant failed to comply, -

". . . we reserve the rights to release payment directly to Nominated Sub-Contractors as per the Contract Conditions clause 27(c) . . .".

7. My attention has not been drawn to any certificate issued by the architect under clause 27(c), and there is no evidence that the first defendant made any payments under this provision. What happened was that, after the architect wrote the letter of 4 March 1995, there were meetings of all the interested parties and, according to the plaintiff -

"it was agreed that all future payments in relation to the nominated subcontractors' works would be paid directly by the first defendant to the respective nominated subcontractors, and not through the second defendant."

8. Although the attitude of the liquidator seems to be that he does not accept that the second defendant entered into this alleged agreement, Mr Carolan concedes that, on the evidence, I should find that it did. Indeed, he could hardly do otherwise. The liquidator himself produces two documents that establish the existence of the agreement with the second defendant. On 29 March 1995, Schindler's lifts (Hong Kong) Limited, another of the nominated subcontractors, wrote to the first defendant purporting to set out the terms of the agreement, including a term that the first defendant "will pay all nominated sub-contractors directly". On the same day, the first defendant replied saying that the meeting had been convened -

"to facilitate the payment procedures, or effectively to put the operation of clause 27(c) by agreement between us as employer, Pentad as the main contractor and yourselves as a sub-contractor nominated by us and that there is no change as to the contractual relationship and the rights and obligations there-arised between us and Pentad under the main contract and between Pentad and yourselves under the nominated sub-contract."

9. The letter went on to say that, "Bearing this in mind" and referring to the statement by Schindler that it was agreed that the first defendant would pay all nominated sub-contractors directly, "yes, this is by agreement between the parties.". This letter was copied to the second defendant, and there is no suggestion by the second defendant that it ever disagreed with what was stated in this exchange of letters. The agreement was implemented by the first defendant making payments directly to the nominated subcontractors in April 1995, July 1995, September 1995 and March 1996. The first defendant was well aware of this, and made no protest.

10. So there is no doubt that the plaintiff and both defendants agreed that payments due to the plaintiff would be made directly to the plaintiff. Mr Carolan says that this agreement between the parties was only that the payment mechanism be varied and this was not binding on the liquidator. He draws attention to the statement by the first defendant that "there is no change as to the contractual relationship and the rights and obligations there-arised between us and Pentad under the main contract and between Pentad and yourselves under the nominated sub-contract", but this cannot be taken literally. There cannot be simultaneously an obligation on the first defendant to pay the money due to the plaintiff both to the plaintiff directly under the March agreement and to the second defendant under the main contract, and there cannot simultaneously be a right vesting both in the plaintiff under the March agreement and in the second defendant under the main contract to receive the money. Clearly, what the first defendant was saying was that, subject to what we have agreed, the contracts will remain the same. It was saying - "We have all agreed that I will make payments directly to the plaintiff, but, otherwise, the contractual relationships will remain the same.".

11. In the case where an employer acts unilaterally under clause 27(c) and pays a nominated sub-contractor directly and deducts this payment from money due to the main contractor, it must be that, if the main contractor is liquidated after that payment is made, no right of property in that money was vested in the main contractor on the date of winding up. Where, however, the liquidation happens before the employer has made the payment, it must be, on principle, that the right to receive the payment was still vested in the company in liquidation at the time of winding up.

12. But that is academic to this case. Here, there was no unilateral decision by the first defendant under clause 27(c). In the case before me the employer, the main contractor and the nominated subcontractor agreed that payments would be made directly to the nominated subcontractor a long time before the liquidation. So, whatever the position may be where there is a unilateral act under Clause 27(c), where there is an agreement such as here the sub-contractor acquires an enforceable right to have the payments made directly to him, and the main contractor loses any right under the main contract it might have had otherwise to insist that payment by made through it. Here, there is no question of the employer exercising a discretion to pay the nominated subcontractor directly. It is a matter of rights under the agreement of March 1995.

13. So that, as I see it, is the position on principle. I turn now to the authorities.

14. Mr Carolan relied strongly on the case of B Mullan & Sons Contractors Ltd v Ross 54 ConLR 163, and the cases cited in it. In the Mullan case, a decision of the Court of Appeal in Northern Ireland, the facts were that the subcontractor asked for direct payment to it before the liquidation of the contractor, but the employer did not decide to make such payment, nor did it actually make payment, before liquidation supervened. On that basis, the main contractor had a right to receive the money at the date of the liquidation, and any decision by the employer to pay the subcontractor after liquidation would be ineffective. That decision must be right on principle.

15. Although I do not doubt the correctness of the Mullan decision, there is a statement in it by Carswell, LJ that suggests that there is some wide principle affecting the validity of provisions for direct payments generally. At 183, he said -

"The effect of the British Eagle case has been to throw doubt upon the validity of provisions for direct payments to sub-contractors in the event of the insolvency of the main contractor."

16. I do not understand this to be the broad effect of the British Eagle case at all.

17. In British Eagle International Airlines v Cie Nationale Air France [1975] 1 WLR 758, there was no doubt that property was vested in the company in liquidation at the time of winding up.

18. In Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd (In Liquidation) [1985] Ch 207, Peter Gibson J discussed the British Eagle case at 226. He said -

"Thus the principle that I would extract from that case is that where the effect of a contract is that an asset which is actually owned by the company at the commencement of liquidation would be dealt with in a way other than in accordance with section 302 . . . then to that extent the contract as a matter of public policy is avoided.".

19. That, I think, is right, although I would, with respect, phrase the principle in this way -

Once property has fallen into the fund for pari passu distribution to creditors by being the property of the company in liquidation at the date of winding up, any contractual provision, or any action taken under any contractual provision, to remove the property from the fund, or diminish it, will be ineffective.

20. Thus I conclude that the British Eagle case is not inconsistent with the position I have reached on first principle.

21. In Mullan, Carswell, LJ referred to the cases of Re Wilkinson, ex p Fowler [1905] 2 KB 713 and Re Tout and Finch Ltd [1954] 1 All ER 127. In both these cases, nothing had been done in relation to making direct payments before liquidation supervened. It follows that the company in liquidation had a right to receive payment at the time of winding up. The decisions were that the employer had the right to make a direct payment. I agree, with respect, that the correctness of these decisions must be in doubt because they purport to allow dissipation of assets that had already fallen into the fund for distribution pari passu to all creditors.

22. I do not think that the cases of Ex p Mackay (1873) LR 8 Ch App 643 and Ex p Jay, re Harrision (1880) 14 Ch D 19, also referred to in Mullan, are inconsistent with the principle I have mentioned. They are both cases in which attempts were made to remove property from the fund that already fallen into it.

23. Carswell, LJ also refers to the Irish case of Glow Heating Ltd v Eastern Health Board (1992) 8 Const LJ 56. In that case, Costello, J said that the principle was -

"If a contract is one for the disposal of an asset belonging to the company . . . then, if the disposal was contrary to the pari passu principle . . . the contract can be avoided as being contrary to public policy."

24. He then went on to say that -

"Neither the main contract nor the sub-contract in this case can properly be regarded as a contract for the disposal of an asset of the company . . ."

25. That may be so, but any action taken under those contracts after the date of liquidation would have purported to dispose of those assets, and, to that extent, would have been ineffective. I do not understand, on that basis, how Costello, J could legitimately have found, as he did, that the subcontractor was entitled to money that had vested in the company at the date of liquidation.

26. Another case, not referred to in Mullan, but relied upon by Miss Cheng, is C. G. Monkhouse Pty Ltd (In Liq.) (1968) 88 WN 238. This is a case in which the principle was, in my view, correctly applied. In that case, the direct payment had been made under the original contract and the liquidation ensued some months later. It was held that the money paid to the subcontractor had never become due to the contractor and did not form part of its property at the date of liquidation. On principle, that must be right.

27. Two other cases were mentioned in Mullan.

28. AG v McMillan & Lockwood Ltd [1991] NZLR 53, was another case in which there was a finding of fact on different contractual provisions that the company had an existing proprietary right at the date of liquidation, although the time for payment had not arrived. That is not the position in the case before me.

29. In Administrator, Natal v Magill, Grant & Nell (Pty) Ltd 1969 (1) SALR 660, a decision of a strong court of the Appellate Division of South Africa (not just Natal, as stated by Carswell, LJ in Mullan 184), Ogilvie Thompson, JA said that the -

"defendant only exercised his election to pay the nominated the nominated sub-contractor direct after liquidation of the plaintiff company had already supervened. As at the date of liquidation, therefore, the plaintiff company's claim against the defendant for the full residual balance of the contract price had not been reduced. . . . [The plaintiff company's] claim against the defendant for the full residual balance of the contract price still remained entire at the date of liquidation.".

30. Botha, JA, Holmes, JA and Jansen, JA agreed with this conclusion. Wessels, JA dissented because -

". . . the amounts paid to [the nominated subcontractors] did not come from the fund which the concursus established for the benefit of the contractor's creditors or from any amount legally due and payable to the fund by the Administrator when liquidation supervened.".

31. So the majority in that case proceeded on the basis that, as at the date of liquidation, the company in liquidation had a right to receive the money because the employer had not then elected to pay the nominated subcontractors. That is a decision totally in accord with principle.

32. However, the facts in the case before me are quite different. Here, there is no basis on which it could be suggested that, at the date of liquidation, the second defendant had any right at all to receive the money in respect of the work of the nominated subcontractors. It is, in my view, not arguable on the facts of this case that any property in this money was vested in the second defendant at the date of liquidation.

33. Accordingly, I conclude, on the basis of principle and there being nothing in the authorities to the contrary, that, as at the date of liquidation of the first defendant, no property in the money in dispute was vested in that company, and, therefore, the money does not become part of the fund for distribution to creditors pari passu.

34. Even if that conclusion is wrong, there can be no doubt that the plaintiff is entitled to the retention money of $178,000. Indeed, originally the liquidator accepted that retention money due to the plaintiff remained its property. He was right to do so. The subcontract provides in clause 11(h) that the first defendant's interest in the retention money "is fiduciary as trustee for" the plaintiff. Mr Carolan says that the main contract makes a similar provision in favour of the second defendant, and this overrides the trust in favour of the plaintiff. This is not so. The trust provisions of the main contract and subcontract talk about different funds. There is no question of one overriding the other. The sum of $178,000 was trust money under the subcontract, and, if the second defendant had received it, it would have held it as trustee for the plaintiff. Accordingly, on any basis, the plaintiff is entitled to receive this sum.

35. In the result, I grant a declaration that the plaintiff is entitled to the whole sum of $381,364.55 immediately.

36. The matter of costs has not been argued, but there seems no obvious reason why they should not follow the event. I make an order nisi that the second defendant pay the costs of the plaintiff and the first defendant.