XCHRX RE KWONG YUEN CONSTRUCTION CO. LTD.

HCCW 336/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO.336 OF 2001

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D E C I S I O N

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1. This is an application by Kwong Yuen Construction Company Limited ("the Company") for an injunction to restrain Craft Engineering Company Limited, the petitioner herein, from proceeding further with its petition to wind up the Company whether by advertising the petition or otherwise and for an order that the petition be removed from the file of proceedings. The application is made on the basis that there is a bona fide dispute of the debt on substantial grounds.

2. The test for determining whether an injunction of this kind should be granted is the same as that for determining whether a petition should be struck out on the ground that there is a bona fide dispute on substantial grounds as to the company's liability to pay the debt. The approach to be adopted is shown in the dicta in the following cases:

"If it could now be said that, on the available evidence, the presentation by the defendant of such a petition as is described in the injunction would prima facie be an abuse of process, the plaintiff company might claim to have established a right to seek interlocutory relief. Otherwise, I do not think it can. If it were demonstrated that such a petition would be bound to fail, it could be said that to present it, or after presentation to seek to prosecute it, would constitute an abuse ... (Bryanston Finance v. De Vries (No.2) [1976] 2 WLR 41 at 52, per Buckley LJ; emphasis supplied)

"... if I can see now that the petitions, if and when they come on for substantive hearing, are bound to be dismissed because the locus standi of the petitioners [as creditors of the company] is disputed, then it would be appropriate to strike out the petitions and not to leave them on file with a view to them coming back before the court at some future time, when the result will inevitably be the one that I have indicated. Of course if I am not satisfied that that is inevitably the result then the test is not satisfied and I ought not to strike out." (Re a Company (No.003079 of 1990) [1991] BCLC 235 at 237 g-h per Ferris J; emphasis supplied)

3. The jurisdiction of the court to strike out a petition to wind up a company or to grant an injunction to restrain the presentation of a petition is a jurisdiction to be exercised with caution (Re a Company (No.003079 of 1990), supra. at 236c). The reason for this is given by Buckley LJ in Bryanston Finance, supra. at 53 in these terms:

"It has long been recognised that the jurisdiction of the court to stay an action in limine as an abuse of process is a jurisdiction to be exercised with great circumspection and exactly the same considerations must apply to a quia timet injunction to restrain commencement of proceedings. These principles are, in my opinion, just as applicable to a winding up petition as to an action. The right to petition the court for a winding up order in appropriate circumstances is a right conferred by statute. A would-be petitioner should not be restrained from exercising it except on clear and persuasive grounds. I recognise that the presentation of a petition may do great damage to a company's business and reputation, though I think that the potential damage in the present case may have been rather exaggerated. The restraint of a petition may also gravely effect the would-be petitioner not only him but also others, whether creditors or contributories. If the presentation of the petition is prevented the commencement of the winding up will be postponed until such time as a petition is presented or a winding up resolution is passed. This is capable of far-reaching effects."

4. The background facts and the matters leading to the dispute between the parties may be set out as follows.

5. On or about 22 December 1999, the Company entered into a main contract with the Architectural Services Department for the construction of a recreational development of the District Open Space at North Ap Lei Chau Reclamation Phase II. The development comprised a spectator stand, a service building and the external works. The Company then entered into a sub-contract with the petitioner, which is a specialist contractor on roof system construction, for the design, supply and installation of roof cladding system and structural steel support for the development. The sub-contract was a lump sum contract and the contract sum was HK$2,968,000.00. The sub-contract works comprised mainly the construction of roof cladding including the structural support for the spectator stand and the service building. The sub-contract contained these material provisions:

(1) The programme of works of the petitioner must comply with the main contract work sequences and master programme or any revised programme of the Company. The sub-contract works fell within the main contract work section A1 and this was due to commence on 16 December 1999 and be completed on 14 December 2000 (clause 11).

(2) If the progress of works of the Company was delayed due to the petitioner's fault, the petitioner should be liable for ascertained and liquidated damages in the sum of HK$16,100.00 per day (clause 12).

(3) Interim payment should be calculated against actual work done to the satisfaction of the architect or the Company. Application for interim payment should be submitted monthly in a prescribed form and sheet and should be paid within 14 days upon receipt of payment in respect to that part of work by the Company from the employer. The payment was subject to the imposition of liquidated damages clause and deductions for any defective work (clause 13).

(4) The retention should be 10% of the total amount of work done and the maximum to be 5% of the contract sum or the total amount of works completed up to date including all variation works whichever was the highest and should be released after the issuance of maintenance certificate by the architect (clause 14).

6. According to the master programme of the main contract, work on the service building should commence on 28 April 2000 and be completed on 11 June 2000 and work on the spectator stand should commence on 28 June 2000 and be completed on 20 August 2000. However, the petitioner commenced work on the spectator stand only on 16 September 2000 and the work on the service building was also late in that it was commenced on 13 June 2000. On these commencement dates, according to the master programme, the spectator stand should have been completed on 9 November 2000 and the service building on 28 July 2000. It is the Company's case that as in May 2001, work on the spectator stand and the service building has still not been completed.

7. The petitioner had made five applications to the Company for interim payments under the sub-contract, the details of which were as follows:

Payment application number	Date of application	Amount claimed (HK$)
1	10/7/00	59,050
2	9/10/00	1,616,711
3	7/11/00	2,008,029
4	9/12/00	1,785,832
5	9/1/01	1,073,182

8. Of the applications for interim payment Nos. 1 to 4, the total amount of work certified by the Company was in the sum of HK$1,790,000.00, and of this total figure, only HK$1,451,000.00 had been paid to the petitioner. Leaving aside the 10% retention which the Company was entitled to retain from the amount of work certified, the Company would still have owed the petitioner HK$160,000.00 for the work which had been certified by the Company.

9. The Company did not issue a certificate for the amount of work assessed in respect of the application for interim payment No.5. According to the Company, the reason that they did not do so was because any amount that would have been payable to the petitioner covered in application No.5 would have been less than the amount of compensation that the petitioner should pay to the Company for the loss and damages caused as a result of the petitioner's delay in completing the sub-contract works. As for the substantial difference between the amount claimed in applications Nos.1 to 4 and the amount certified by the Company, the Company has alleged that this was due to the following reasons: the work actually done was far less compared to what was claimed by the petitioner; and there was deduction for liquidated damages because of substantial delay in completion of the sub-contract works and deduction for defective works. It is the Company's case that the petitioner is not entitled to any payment in respect of applications Nos.1 to 4 that was not certified by the Company and that it is not entitled to any payment in respect of application No.5.

10. The petitioner has disputed that applications Nos. 1 to 4 were only certified to the extent as alleged by the Company. According to the petitioner, the amounts claimed in these applications had been fully or substantially certified by the Company's site agent. Hence, the petitioner is entitled to the amounts as claimed and certified. It is the petitioner's case that the work relating to the spectator stand was practically completed on 27 March 2001 and the work relating to the service building was completed on 3 May 2001 and that it was the Company that had refused to inspect the completed works. The petitioner denies that it is liable for any liquidated damages for delay or that it is responsible for any defective work as alleged.

11. So much for the underlying dispute between the parties. The petitioner would appear to have accepted that if the matter had rested there, the Company might well have valid grounds to say that there is a genuine and substantial dispute about the debt. What the petitioner has relied on to found its debt on which the petition is based are a series of post-dated cheques given by the Company to the petitioner, the first of which was given in early January 2001 and the other nine were given on one occasion in early February 2001. I set out the amounts and dates of these ten post-dated cheques as follows:

	Cheque amount (HK$)	Date of cheque
1.	320,000	15/1/01
2.	160,000	15/2/01
3.	160,000	23/2/01
4.	150,000	2/3/01
5.	150,000	10/3/01
6.	160,000	18/3/01
7.	180,000	26/3/01
8.	180,000	3/4/01
9.	180,000	11/4/01
10.	210,000	19/4/01

12. Except for cheque No.2 dated 15 February 2001 in the amount of HK$160,000.00, the other nine cheques were dishonoured by the Company. The total amount of cheques Nos.2 to 10, in the sum of HK$1,370,000.00, with the total payment that had been made to the petitioner in the sum of HK$1,451,000.00, would make up a sum of HK$2,821,000.00, and that would have amounted to 95% of the contract sum under the sub-contract, bearing in mind that there would be a final 5% of the retention money. According to the Company, these cheques were issued to the petitioner as "advance payments" subject to the condition precedent that the petitioner was to complete the sub-contract works in April 2001. At the time the cheques were given to the petitioner, the petitioner was not entitled to any further payment under applications Nos.1 to 5 for the reasons as mentioned earlier. Although this was not mentioned in the evidence filed by the Company, it is submitted by counsel for the Company, Mr James Pong, that the effect of the Company's agreement to provide the petitioner with the nine post-dated cheques in February 2001 was to waive the Company's right to impose liquidated damages on the petitioner due to the latter's delay. All these allegations of the Company as to why the cheques were delivered are denied by the petitioner. The petitioner maintains that at the time the cheques were given, the petitioner was entitled to payment for work done covered by applications Nos.1 to 5.

13. On 15 March 2001, the petitioner's solicitors served a statutory demand on the Company and the material parts of that letter read as follows:

"... our client submitted applications for interim payment to your company on 10 July 2000, 9 October 2000, 7 November 2000, 9 December 2000, 9 January 2001 and 8 March 2001.

We are instructed that you are indebted to our client for the sum of HK$1,422,220.88 in respect of those applications for interim payment submitted by our client to you.

We are further instructed that our client has made various demands and requests for payment. You have provided to our client a number of post-dated cheques in relation to the outstanding debts which have not cleared ... The cheque dated 23 February 2001 was stopped and the cheques dated 2 March 2001 and 10 March 2001 were dishonoured due to insufficient fund in your bank account ...

Unless we receive payment of the said sum of HK$1,422,220.88 within 21 days of the date of this letter:

(a) you shall be deemed to be insolvent under the provisions of the Companies Ordinance ... and we are instructed to proceed under the Ordinance for a winding up order of your company by the Court; and

(b) consequently, we shall assume that you have no intention/ability to proceed with the Contract in which case our client shall terminate the same and stop work on the project immediately."

14. After receipt of this statutory demand, the Company wrote to the petitioner on 17 March 2001 stating its case that it had stopped payment of the post-dated cheques because the petitioner had failed to carry out completion of the work in full force and that the next cheque which was due for payment would also be stopped if the petitioner should fail to catch up with the site progress.

15. On 21 March 2001, the petitioner's solicitors replied to the letter dated 17 March 2001 and denied the allegations therein. The solicitors clarified that the petitioner had not actually submitted an application for interim payment dated 8 March 2001 so the amount demanded in the letter dated 15 March 2001 should be HK$1,233,182.00 instead. The petitioner's solicitors reiterated the demand of this sum of HK$1,233,182.00 within 21 days of the date of their earlier letter dated 15 March 2001 (i.e. on or before 6 April 2001), failing which the petitioner would petition for a winding up of the Company. I am given to understand by Mr Johnson Tan, who appeared for the petitioner, that the sum of HK$1,233,182.00 was made up of HK$1,073,182.00 being the amount claimed in application No.5 and the sum of HK$160,000.00, being the balance of cheque No.1 for HK$320,000.00 dated 15 January 2001 which was unpaid. The petitioner has alleged that cheques Nos.2 and 3 dated 15 February 2001 and 23 February 2001 were given to replace cheque No.1 which was dishonoured and as only cheque No.2 was honoured when presented for payment, this leaves an outstanding sum of HK$160,000.00.

16. The Company replied by a letter of its solicitors to the petitioner's solicitors dated 3 April 2001 stating that the post-dated cheques were advance payments of an ex gratia nature given on the basis that the petitioner was to complete its works in April 2001, and the petitioner was not entitled to payment because of its failure to complete the works according to the scheduled target dates. The Company reserved the right to sue for liquidated damages on account of the petitioner's delay and the petitioner was warned that a winding up petition would be an abuse of the process of the court and that the Company would apply to strike out the petition and seek costs on an indemnity basis.

17. On 10 April 2001, the petitioner presented a petition to wind up the Company based on the statutory demand served on 15 March 2001 as varied by the letter dated 21 March 2001. The debt that the Company was alleged to have failed to pay in the petition was HK$1,223,182.00 which I understand is a clerical error and that the amount should have been HK$1,233,182.00 as stated in the letter of 21 March 2001. On 4 May 2001, the Company issued the present summons for an injunction to restrain the petitioner from proceeding further on the petition.

18. It is the petitioner's case that the debt on which the petition is founded is in relation to the dishonoured cheques, and for that reason, it would not be necessary to look at the underlying disputes between the parties as to the amounts which the Company had failed or refused to certify in the applications for interim payment. On the part of the Company, it is argued that the debt in the petition does not relate to the post-dated cheques because the amount of the debt being HK$1,233,182.00 does not tally with the amount of the post-dated cheques. I reject the Company's submission on this. Although the amount in the statutory demand does not tally with the total sum of the cheques which were dishonoured, I think it is sufficiently clear from the statutory demand dated 15 March 2001 that the petitioner was alleging that the cheques were issued for the outstanding amounts that the petitioner should have received under its applications for interim payment and the complaint was about the dishonoured cheques. The Company could be in no doubt that the petitioner was seeking payment on the post-dated cheques issued by the Company to the petitioner. Some of these cheques were not due for payment at the time the statutory demand was served on 15 March 2001, so there may be an error in the amount of the debt claimed. However, an over statement of the debt does not invalidate the demand so long as a debt exceeding the threshold sum of HK$5,000.00 is due and is not bona fide disputed. Furthermore, the cheques which were dishonoured were clearly identified by their respective dates in the demand dated 15 March 2001. Even if the petitioner is unable to rely on the statutory demand in respect of the cheques which were dishonoured after 15 March 2001, the petitioner may still endeavour to satisfy the court by other means that the Company is unable to pay its debt.

19. I turn to consider the defence raised by the Company in respect of the petitioner's claim on the cheques. Cheque No.1 dated 15 January 2001 in the sum of HK$320,000.00 was issued in payment of the balance of an amount of HK$720,000.00, being the amount certified by the Company under interim application No.4, of which only HK$400,000.00 had been paid to the petitioner. There is no question of this cheque being in the nature of an "advance payment" as the Company has alleged in respect of the other post-dated cheques. What happened regarding this cheque was that on 6 January 2001, the Company wrote to the petitioner stating that it would stop payment of this cheque if the petitioner should fail to re-start work on 8 January 2001. On 15 January 2001, the petitioner wrote to the Company referring to a telephone discussion in which the Company had asked the petitioner to defer presenting the cheque until 18 January 2001. On 19 January 2001, the petitioner wrote to the Company referring to another request of the Company to defer presenting the cheque for two more days. The cheque was dishonoured when it was presented for payment on five occasions between 19 January 2001 and 7 February 2001. It is the petitioner's case that cheques Nos.2 and 3 dated 15 and 23 February 2001 in the amount of HK$160,000.00 each were given to replace cheque No.1.

20. It would appear from the Company's evidence that cheques No.2 and 3 were not given by it to replace cheque No.1 which was dishonoured, although this was not expressly denied in the Company's affirmations. Mr Pong has informed me that that is indeed the Company's position. As I understand the Company's case on the evidence filed, the Company has contended that it was not liable to honour cheque No.1 because this cheque was given by the Company to the petitioner on condition that the petitioner was to increase its manpower on the site to carry out the sub-contract works by having eight to ten workers there everyday. As this condition was not complied with, the Company countermanded payment of cheque No.1.

21. As regards the nine other cheques, it is the Company's case that they were given as advance payments in February 2001 on condition that the petitioner was to complete the sub-contract works in or about early April 2001. After cheque No.2 was paid, and as the petitioner had failed to make efforts to complete the sub-contract works by increasing the workforce on the site, the Company stopped payment in respect of cheques Nos.3, 4 and 5 dated 23 February 2001, 2 March and 10 March 2001 respectively. On or about 12 March 2001, the Company made another agreement with the petitioner that if the petitioner could meet specific completion targets for various sections of the work, the Company would pay the cheques issued to the petitioner in February 2001. The target dates and the work that the petitioner was required to complete were as follows:

22. It has been alleged that as the petitioner had failed to reach the specific completion targets as agreed, the Company was entitled to stop payment on cheques Nos.3 to 10.

23. On behalf of the petitioner, it is submitted that the grounds of defence are bound to fail and, in any event, they are clearly not supported by the facts.

24. Insofar as the Company has sought to adduce evidence that a condition precedent would have to be satisfied before any of the cheques was to be honoured, Mr Tan has submitted that such oral evidence is not admissible because this contradicts the unconditional written order for payment contained in the cheques. I have been referred to the cases of Great Sincere Trading Co. Ltd v. Swee Hong & Co. [1968] HKLR 660, Suen Ho Sun v. Kamenar International Limited [1989] 1 HKC 135, Neo-Concept Industrial Company Limited v. Sportex Industrial Limited [1992] 2 HKC 452, and Prosperity Lamps and Components Limited v. Rotegear Corp. Ltd [2000] HKC 638. Mr Pong has sought to distinguish these cases saying that the drawer of the cheque in these cases was obliged to make payment to the plaintiff pursuant to the original or underlying contract between them and as the drawer of the cheque had attempted to vary the condition to make payment by introducing oral evidence that the cheque was delivered subject to a condition precedent, this had offended the parol evidence rule and such oral evidence was not admissible. He has argued that the present case is different in that the Company was not obliged to make any payment to the petitioner when the cheques were delivered. Hence, the condition precedent alleged by the Company was not introduced for the purpose of varying an existing obligation to pay.

25. I do not think this is a sound argument. It seems to me that Mr Pong has conflated the underlying contract with the contract contained in the written instrument of the cheque which is a separate and distinct contract. The principle established by the above cases is that oral evidence to qualify the nature or tenor of the written instrument of the cheque, which is an unconditional order for payment expressed by the instrument itself, is inadmissible. In my judgment, the principle established by the above cases is applicable here. The effect of the various verbal conditions precedent is to operate in defeasance of the absolute undertaking to pay in the cheques by introducing a contingency into the unqualified contract created by the cheques. Such evidence is inadmissible. As for the alternative argument advanced by the Company that there was total failure of consideration, I cannot see how this could be a case of total failure of consideration in that on the available evidence work was done by the petitioner after the delivery of the cheques, notwithstanding that there was a dispute as to the extent of the work done and whether the petitioner had kept up with the progress in the master programme or revised programme as required by the Company. As I understand Mr Pong's submission, the defence of total failure of consideration was premised on there being a condition for the delivery of the cheques in that the petitioner was required to meet specific completion targets. As I have held that such evidence is inadmissible, there is no basis for arguing that there was total failure of consideration for the cheques.

26. Mr Tan has also submitted that in the event such oral evidence is admissible, such evidence should be rejected by the court as totally unbelievable. In respect of cheques Nos.1 to 3, Mr Tan submitted that the cheques were given for work done and certified by the Company, there was no question of the payment being in the nature of an "advance payment" as alleged and the Company was not entitled to impose any condition to the payment of the cheques, whether it be the condition that the petitioner was to re-start work on 8 January 2001 as stated in the letter of the Company dated 6 January 2001, or the condition that the petitioner was to increase its workforce to eight to ten workers as stated in the Company's affirmation and not mentioned in any contemporaneous letter. Further, other than the letter dated 6 January 2001, the Company had not replied to any of the petitioner's letters complaining of the dishonour and delay in payment of cheque No.1.

27. As for the other cheques which were dishonoured, there were no letters from the Company complaining about any delay on the part of the petitioner in carrying out the works from 15 January to 10 March 2001. It is pointed out that the Company had only made allegations about delay after the statutory demand was served on 15 March 2001. Further, the allegation that the parties had agreed on 12 March 2001 that the petitioner was to meet specific completion targets as condition precedent for the payment of the cheques would appear to be contradictory to the letter of the Company to the petitioner dated 17 March 2001 in which the Company referred to a meeting with the petitioner on 12 March 2001 to increase manpower to improve the progress and alleged that the petitioner had promised to provide the Company a mile-stone programme to match the payment schedule and that the petitioner had failed to do so by the date of that letter on 17 March. Mr Tan has submitted that if the parties had already agreed specific completion targets on 12 March 2001 as alleged in the Company's affirmation, it would be very odd for the Company not to mention this in the letter dated 17 March 2001 and odder still for the Company to complain of the alleged failure of the petitioner to provide a mile-stone programme to match the payment schedule of the post-dated cheques. Furthermore, it was alleged that in the letter dated 17 March 2001 that the petitioner had promised to complete the works by 11 April 2001 and this is different from the completion date allegedly agreed on 12 March 2001 as stated in the Company's affirmation.

28. Assuming that the evidence sought to be introduced by the Company regarding the delivery of the cheques is admissible (which I have held to be otherwise), the burden is on the Company to establish a defence on substantial grounds. In my judgment, I am not satisfied on the evidence before me that the Company has discharged that burden.

29. Lastly, I turn to the alleged counterclaim of the Company which is to constitute a set-off. The total amount of the cross-claim put forward in the Company's affirmation was HK$5,744,346.00, made up of liquidated damages calculated up to 4 May 2001 in the sum of HK$2,833,600.00; defective works in the sums of HK$367,866.00 and HK$1,467,680.00; and acceleration costs being additional sums that the Company might have to incur to catch up with the delay caused by the petitioner in the sum of HK$1,075,200.00. In the submissions of Mr Pong, he has stated that the amount claimed for liquidated damages, if calculated up to 4 May 2001, should be for 280 days and not 176 days as calculated by the Company. The result is that the claim for liquidated damages should be revised from HK$2,833,600.00 to HK$4,508,000.00 and the total amount of the cross-claim would be HK$7,418,746.00 instead.

30. As I have mentioned earlier, the allegations of delay and defective work are refuted by the petitioner. I have reservations whether the Company has made out a case of a bona fide dispute on substantial grounds in relation to the claim for liquidated damages on account of delay, having regard to the fact that no deduction for liquidated damages was made in the second, third or fourth applications for interim payment when the service building should have been completed by 28 July 2000, according to the Company's case. There may also be an element of exaggeration in the claim for defective work. Even if the Company should be able to establish a cross-claim to some extent, a free standing cross-claim would not have constituted a reason why the petitioner should not be paid on the cheques (see Yuen Chak Construction Co. Ltd v. Tak Son Contractors Ltd [1997] 3 HKC 294). If there are valid cross-claims against the petitioner, they may still be pursued by the Company in liquidation. It does not appear to me there are exceptional circumstances here in which the court might have granted a stay of execution if judgment should be obtained on the cheques, pending the determination of the Company's counterclaim (see Re Safe Rich Industries Limited, Civ App No.81 of 1994).

31. For the above reasons, I have come to the view that the Company has failed to establish that if and when the petition should come on for substantive hearing, it is bound to be dismissed because the debt is disputed on bona fide and substantial grounds. I dismiss the Company's application and make an order nisi that the petitioner is to have its costs in this application.