XCHRX Re Far East Structural Steelwork Engineering Ltd. (Company Number 91616)

HCCW554/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.554 OF 1999

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R E A S O N S

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1. At the hearing of the application by Far East Structural Steelwork Engineering Limited ("the Company") to strike out a petition presented by Reeson Crane and Engineering Limited ("the Petitioner") on 23 June 1999 based on the Company's non-compliance with a statutory demand dated 12 March 1999 for the payment of the sum of $1.5 million ("the Demand"), the petition was struck out. The reasons appear below.

2. The alleged debt upon which the Demand was founded is said to arise under an agreement ("the March Agreement") entered into between the Company and the Petitioner evidenced by the Petitioner's invoice dated 9 March 1998 for the sale and purchase of a 50-ton crane ("the 2nd crane") for $1.5 million. The invoice contained the following Note :

"1. After negotiation by both parties on the sale price, it was finally agreed that the above HK$1.5 million shall be the completion price. The sale and purchase agreement executed by both parties on 20th February 1998 shall be replaced.

2. In respect of the 100 ton Crane that [the Company] has fully satisfied the instalment payments, [the Petitioner] agreed to make all transferral arrangements for [the Company] at the same time with the current transaction not later than the end of March.

3. [The Petitioner] will arrange for the [2nd] crane to be delivered to [the Company] on 17th March 1998.

4. After [the Company] has arranged for mortgage of the [2nd] crane, the HK$100,000.00 deposit which has not yet been refunded will be repaid immediately."

As the Note can only be understood in the context of the prior dealings between the parties, I will briefly set out the relevant background facts, most of which also appear in a decision which I handed down on 19 March 1999 on an appeal by the Petitioner from the master's decision requiring the Petitioner to pay the sum of $1.575 million into court as a condition for granting leave to defend HCA14006/98 ("the Action"), proceedings brought by the Company against the Petitioner for damages referred to below.

Background facts

3. In January 1996, the Petitioner as lessor and the Company as lessee entered into an agreement ("the 1996 Agreement") in respect of a 100-ton crane ("the 1st crane"). At the date of the 1996 Agreement, the Petitioner was the hirer of the 1st crane under a hire purchase agreement with Citicorp. It is common ground that the deposit as well as the 18 monthly instalments totalling over $2.5 million due under the 1996 Agreement had been paid by the Company. Under that Agreement, the Company had a purchase option exercisable by the payment of $1 upon the expiry of the Lease Term on 28 July 1997. The Company sought to exercise the purchase option and one of the issues which arises in the Action (commenced in August 1998) is whether the option was duly exercised by the Company. The Company had entered into a sub-sale agreement with a third party in respect of the 1st crane and seeks damages against the Petitioner for the loss resulting from its inability to complete the sub-sale.

4. The Company's letters to the Petitioner seeking the transfer of title to the 1st crane and threatening legal action or damages went unanswered. The Petitioner's position was that the option was not duly exercised. Several months later, on 26 February 1998, the parties entered into a sale and purchase agreement ("the February Agreement") for the sale of the 2nd crane to the Company for $1.8 million, the delivery date being 1 March 1998. A deposit of $300,000 was payable before delivery with the balance to be paid after the Company had obtained a loan. In this connection, the February Agreement contained a provision to the effect that the Company would obtain a loan from Citicorp and that immediately thereafter, the Petitioner would redeem the 1st crane and obtain from the bank all the relevant documents for delivery to the Company. The February Agreement was superseded and replaced by the March Agreement.

Is there an undisputed debt due under the March Agreement?

5. It is trite law that a court refuses to allow winding-up petitions brought at the suit of alleged creditors whose debts are disputed bona fide on substantial grounds. See Re Perak Pioneer Ltd. [1984] HKLR 349, CA. It is the Company's case that the alleged debt is disputed in good faith and on substantial grounds in that it was the Petitioner who failed to perform the March Agreement.

6. I now turn to consider the provisions of the March Agreement.

7. It is common ground that the 2nd crane was delivered to the Company on 17 March 1998 pursuant to paragraph 3 of the Note.

8. Leading counsel for the Company submitted that it is abundantly clear from paragraph 2 of the Note that the obligation was upon the Petitioner to perfect the title to both the 1st crane and the 2nd crane. By agreeing to perfect the title to the 1st crane, it would appear that any dispute between the parties as to their respective rights and obligations under the 1996 Agreement had been settled by the March Agreement. More importantly, the $1.5 million payable under the March Agreement was thus consideration not only for the 2nd crane but clear title had also to be given to the 1st crane.

9. It is common ground that the 1st crane was repossessed by Citicorp in June 1998 and that the 2nd crane was itself mortgaged to Pacific Finance and the mortgage was only cleared off in December 1998. Thus, as at the end of March, the Petitioner did not have title to either crane. After repossession of the 1st crane by Citicorp in June 1998, the Petitioner was plainly no longer in a position to perfect title to it. It was submitted that therefore as at the date of the petition, i.e. March 1999, the Petitioner was not in a position to perform all its obligations under the March Agreement and cannot claim to be entitled to be paid $1.5 million. This submission is valid if the Company is not itself to blame for the Petitioner's inability to perfect title. In other words, that it was not itself in breach of the March Agreement .

10. On the question as to who was to blame for breach of the March Agreement, the arrangements relating to the payment of the purchase price is relevant. It is to be observed that although the purchase price was clearly stated, there was no express provision for its payment. However, it is clear from paragraph 4 of the Note that it was contemplated by the parties that the Company would mortgage the 2nd crane, that the financing obtained would be paid to or applied for the benefit of the Petitioner who would then refund to the Company the sum of $100,000. In the context, the financing contemplated by the parties could only have been for the purchase price, i.e. $1.5 million. As $100,000 was to be returned to the Company, the net cost was $1.4 million.

11. The 3rd Affirmation of Wong Yee Yin, filed on behalf of the Petitioner, reads as follows :

"4. Although not specifically set out in the invoice of the [Petitioner] dated 9th March 1998..., it was agreed between the [Company] and the [Petitioner] under the March Agreement that after delivery of the [2nd] crane to the [Company], the [Company] would arrange to obtain finance from Citicorp and a certain portion of the HK$1,500,000.00 purchase price would be paid by way of internal settlement of the accounts with Citicorp. Since the outstanding sums due from the [Petitioner] to Citicorp under different accounts were not ascertained at that time, the balance of the purchase price payable by the [Company] to the [Petitioner] could not be certain. Therefore, there was no provision in the said invoice in respect of the payment of the balance of the purchase price of HK$1,400,000.00

5. On 27th March 1998, the [Petitioner] sent a fax letter to Citicorp setting out the outstanding sums due to Citicorp by the [Petitioner] under different accounts. There is now produced and shown to me a true copy of the said fax letter dated 27th March 1998 marked 'WYY-9'. The [Petitioner] set out in the said fax letter in respect of the application of HK$1,400,000.00 (being the balance of the purchase price for the [2nd] crane). After some clarification from Citicorp, the [Petitioner] amended the payment schedule and sent another fax letter to Citicorp on 21st April 1998. A true copy of the fax letter dated 21st April 1998 is now shown to me marked 'WYY-10'.

6. In breach of the March Agreement, the [Company] refused and failed to pay for the purchase price for the [2nd] crane. I learnt from Citicorp that in fact the [Company] did not obtain a loan from Citicorp whether on hire-purchase basis or otherwise. By reason of the said failure of the [Company], the [Petitioner] did not have the required fund to pay off the debt due to Citicorp under the Hire-Purchase Agreement, which led to the repossession of the [1st] crane by Citicorp in early June 1998.

7. I would also crave leave from the Court to explain why there was a reduction of HK$300,000.00 of the purchase price for the [2nd] crane. Under the February Agreement, the purchase price of the [2nd] crane was HK$1,800,000.00. In consideration of the [Company's] agreement to deal with both cranes together in a 'combined' sale, the [Petitioner] agreed to reduce the purchase price from HK$1,800,000.00 to HK$1,500,000.00."

So, according to the Petitioner's own evidence, the reason why there was no express provision for the payment of the purchase price was that it was contemplated that the Company would obtain a loan from Citicorp which would be used to settle the indebtedness of the Petitioner to Citicorp. More importantly, it supports the Company's submission as to the significance of paragraph 2 of the Note.

12. On the evidence, I must reject the submission that the $1.5 million was the price due for the 2nd crane only. In my judgment, part and parcel of the March Agreement was the Petitioner's obligation to perfect the title to the 1st crane.

13. Which party is to blame for breach of the March Agreement? There is evidence that the Company made an application to Citicorp for mortgage finance for the 2nd crane on 21 March 1998 and paid the necessary deposit. It remains an issue between the parties as to why Citicorp did not proceed : each side seeks to put the blame on the other. Suffice to say that it is unclear from the evidence before me why Citicorp did not proceed with the Company's application. Unless and until that issue is resolved, it is impossible to conclude that the Company is indeed indebted to the Petitioner in the sum of $1.5 million as alleged. That issue is for resolution elsewhere. It must follow that the debt is disputed in good faith and on substantial grounds entitling the Company to the relief sought.

14. However, counsel for the Petitioner submitted that if the Petitioner were in breach of the March Agreement in not being able to satisfy Citicorp as to its legal and beneficial interest in the 2nd crane, that breach would have affected both cranes and the Company must elect by either affirming or repudiating the March Agreement. By June when Citicorp repossessed the 1st crane, the Petitioner ceased to be in a position to be able to perform the March Agreement. The Petitioner submitted that when that event occurred, it was no longer open to the Company to affirm the March Agreement : it could only repudiate which would have meant returning the 2nd crane and suing for damages.

15. In my view, that is not the correct analysis. If the Petitioner were responsible for the breach of the March Agreement, it would be surprising if the Company's rights and remedies could be cut down by subsequent events outside its control. Even if (contrary to my view) the Petitioner's submission is correct, I do not see how that would render the debt undisputed. At best it would mean a claim in damages for conversion.

16. It may well be that the parties have claims for damages against each other in respect of the 1st and 2nd cranes. So far as the Company is concerned, its position is that it has a valid claim against the Petitioner in respect of the 1st crane inasmuch as it has paid in excess of $2.5 million to the Petitioner but the 1st crane has now been repossessed by Citicorp. Although it has not 'paid' for the 2nd crane which it has retained, if the Company were to succeed in the Action, it could validly set off such damages as it may be awarded against what may be determined to be the value of the 2nd crane. In any event, for the reasons stated above, the value of the 2nd crane cannot simply be taken to be $1.5 million : it has to be less than that amount and its value is a matter that would require determination. If the Company has wrongfully and in breach of the March Agreement retained the 2nd crane, a claim in damages would lie against the Company. Again, a set-off would arise.

17. I am satisfied on the evidence that the debt is disputed in good faith and on substantial grounds. The cross-claims of the parties and the consequential right of set-off constitute an additional reason why the petition ought to be struck out. Having reached this conclusion, it is unnecessary for me to deal with the other grounds (i.e. that the issue of the petition was an abuse of process and that the Demand was not properly served and was ineffective) prayed in aid by the Company for striking out the petition.