TO KWAN CHAK AND ANOTHER t/a ELITE CONSTRUCTION CO v. CITY TOP ENGINEERING LTD

HCCW 1035/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1035 OF 2004

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J U D G M E N T

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1.  Three matters were heard together before me.  In the order in which they were presented or filed, they are as follows:

(1)     a petition to wind up City Top Engineering Limited (“the Company”) presented on 22 September 2004 by To Kwan Chak and Yim Kwok Keung trading as Elite Construction Company (“Elite”), on the ground that the Company is unable to pay its debts;

(2)     a notice of motion issued on 22 November 2004 by the Company to strike out the  petition aforesaid on the basis that there is a bona fide dispute of the petitioning debt on substantial grounds and/or the petition amounts to an abuse of the process of the court; and

(3)     an application made on the hearing of the petition on 4 April 2006 by Hoi Lee Aluminium & Glass Engineering Company Limited (“Hoi Lee”) to be substituted as the petitioner in the place of Elite and for leave to amend the petition, on the basis that it is the ultimate equitable assignee of the petitioning debt.

2.  The petition debt is in the sum of HK$402,271.04, being the outstanding price for work done by Elite for the Company in a construction project.

3.  Prior to the application for substitution, the Company and Elite have filed voluminous evidence, taking up seven box files.  Hoi Lee has not filed any evidence of its own and is content to rely on the evidence that has been filed by Elite and such evidence filed by the Company regarded as of assistance to Hoi Lee’s case.  Leaving aside the affirmation verifying the original petition, Elite has adduced two affirmations from its former quantity surveyor Li Chi Tong, four affirmations from its manager Lee Siu Fung, and one from its partner To Kwan Chak.  On the Company’s side, there are five affirmations from one of its directors Ng Tit Lung Edwin (“Edwin Ng”).

4.  In essence, the Company raises a cross-claim in the nature of a set-off in defence against the petition debt.  Hoi Lee alleges that most or all of the claims raised in the set-off are not sustainable; further or alternatively, there is a reverse cross-claim which exceeds the amount of the set-off.  The Company counters with the submission that Hoi Lee is not entitled to rely on any reverse cross-claim as a matter of law, where the Company has raised a set-off in defence to extinguish the petitioning debt.  As a fallback position, if the reverse cross-claim should be taken into account and netted off against the Company’s cross-claim, the Company contends that the net cross-claim would still exceed the petition debt.

The background

5.  I will first set out the relevant background matters.

6.  On 1 April 2000, the Hong Kong Housing Authority as the employer entered into a contract with Sun Fook Kong Construction Limited (“SFK”) as the contractor.  I shall refer to this contract as “Contract 149”; its name in full is the District Term Contract for the Maintenance and the Vacant Flat Refurbishment for Chuk Yuen District 2000/2002 – Contract No. 149 of 1999.  On the same day, SFK entered into a management agreement with the Company, by which SFK engaged the Company as the manager for Contract 149, to assist in the execution of, completing and maintaining the works under Contract 149.

7.  In anticipation of entering into a management agreement with SFK, the Company had issued a letter to Elite dated 9 March 2000, by which the Company was to appoint Elite as the manager of the Company, on the basis of the attached management agreement to be executed by the Company and Elite and on the terms as set out in that letter.  I shall refer to the letter as “the Appointment Letter”.  The partners of Elite signed on it to confirm acceptance on 30 March 2000.  One of the matters in dispute is the terms on which Elite was engaged as the Company’s manager for Contract 149.

8.  In about September 2002, Elite vacated all the sites of Contract 149.  There is dispute whether Elite had completed all the works.

9.  Disputes arose in November 2002 when the Company refused to issue interim payments to Elite for work done and sought to impose various contra-charges.

10.  In March 2003, Elite and the Company tried to settle their differences under the auspices of SFK.  There is dispute as to the terms of the settlement reached and which party was in breach of contract subsequently.  I shall refer to the settlement as “the March Agreement”.

11.  On 3 March 2004, Elite issued a writ against the Company in HCCT No. 19 of 2004 (“the writ action”), claiming damages for breach of contract in the estimated sum of HK$5 million, further or alternatively, reimbursement of unauthorised contra-charges of HK$1.4 million and HK$590,042.48 being the outstanding sum in respect of work which Elite had performed and completed.  The said sum of HK$590,042.48 included the claim of HK$402,271.04, which later formed the basis of the petition.

12.  On 29 June 2004, the Company served a defence and counterclaim with six annexure in the writ action.  The document ran into 85 pages.  The total counterclaim for loss and damage against Elite, calculated up to June 2004, is HK$2,802,025.68. The subject of the counterclaim made up in part the set-off relied on by the Company subsequently as a defence to the petition.  Elite served a reply and defence to counterclaim on 8 September 2004.  The writ action has not been resolved.

13.  After the writ action was commenced, Elite then served several demands on the Company under section 178 of the Companies Ordinance, Cap. 32.  They were all for the sum of HK$402,271.04.  The first such demand was dated 26 April 2004.  A second demand was sent on 7 June 2004.  The last demand, issued by Elite’s solicitors, was dated 20 August 2004.

14.  The Company replied by letters of its solicitors dated 29 June 2004 and 23 August 2004 that it has a valid and bona fide defence as set out in its defence and counterclaim and if Elite should present a winding-up petition, it would seek dismissal of such petition with costs on an indemnity basis.

15.  The petition was presented by Elite on 22 September 2004.  As mentioned earlier, the Company applied to dismiss the petition on 22 November 2004.

16.  By a notice of assignment dated 12 May 2005, Elite gave notice to the Company that it had assigned to Lee Siu Fung “all my [sic] rights and entitlements under or arising out of the said HCCT 19 of 04 and the Contract 149 of 99, including but not limited to my [sic] right to pursue and demand for damages or losses which we have incurred as a result of and in connection with the said HCCT 19 of 04.”

17.  By another notice of assignment dated 19 May 2005, Lee Siu Fung gave notice to Elite that by an oral agreement made on 17 May 2005 between him and Hoi Lee, he had further assigned to Hoi Lee “all my rights and interest into under or arising out of the said HCCT 19 of 04, including but not limited to my right to pursue and demand for damages or losses under the HCCT 19 of 04.” The assignment to Hoi Lee, which would apparently cover the petitioning debt, was only in respect of the rights and entitlement of Elite in the writ action and not any other rights and entitlement under Contract 149 which are not the subject of the writ action, unlike the earlier assignment by Elite to Lee Siu Fung.

18.  On 30 May 2005, Elite served both notices of assignment on the Company under cover of a letter dated 19 May 2005, together with a copy of a consent and acknowledgment dated 24 May 2005 signed by Elite in favour of Hoi Lee.  The application for substitution as petitioner was only made when the petition was eventually heard on 4 April 2006.

If a reverse cross-claim should be brought into account where a set-off is relied on

19.  It would be convenient to deal with first the point of law raised by Mr. Simon Ho on behalf of the Company.  Mr. Louie Chan for Hoi Lee and Elite has contended to the contrary that any reverse cross-claim should be brought into account in this situation.

20.  Mr. Ho’s argument is along the following lines:

(1)     The Company’s cross-claim would amount to either an equitable and/or legal set-off, the aggregate amount of which is more than sufficient to set off and wholly extinguish the petition debt.  Legal set-off is available as the claims on both sides are in respect of liquidated debts, or money demands which can be readily and without difficulty ascertained.  It is arguable that legal set-off is part of the law of Hong Kong, notwithstanding the provisions of the Application of English Law Ordinance, Cap. 88 (Re Finbo Engineering Co. Ltd. [1998] 2 HKLRD 695 at 701G to I and 702H to I).  Equitable set-off may be invoked where there is a cross-claim flowing out of and inseparably connected with the dealings and transactions which also give rise to the claim, such that it would be manifestly unjust to allow one claim to be enforced without taking into account the other.  In Finbo, where the company raised a claim for interim payment applications to set off the payment of wages made by the petitioner under section 43C of the Employment Ordinance, Cap. 57, it was held that the company also had an arguable case that equitable set-off applied.  Similarly, the various heads of cross-claim asserted by the Company here, for loss and damage suffered due to the breaches of contract by Elite, arose out of and were inseparably connected to the dealings and transactions which gave rise to the claim for interim payment applications that was the subject of the petition debt.

(2)     Where a company disputes the petition debt by raising a legal or equitable set-off exceeding the petition debt, and if the court is of the view that there is an arguable defence of set-off, the petition should be dismissed as an abuse of process of the court (Finbo, supra. at 704H to I; McDonald’s Restaurants Ltd. v. Urbandivide Co. Ltd. [1994] 1 BCLC 306 at 317g to 318b).  I shall call this the “disputed debt situation”.  Where the company does not dispute the petition debt but has a genuine and serious cross-claim it intends to pursue exceeding the petition debt though not amounting to a set-off, the court would, in the absence of special circumstances, exercise its discretion by dismissing or staying the petition (Re Bayoil SA [1999] 1 Lloyd’s Rep 211).  I shall refer to this as the “cross-claim situation”.  The present case is a disputed debt situation.

(3)     In Montgomery v. Wanda Modes Ltd. [2002] 1 BCLC 289, which held that the petitioner may rely on a reverse cross-claim to neutralise the company’s cross-claim where the reverse cross-claim is certain to become a definite debt because there is no realistic defence to it, the court was concerned with a cross-claim situation where the petition debt was not in dispute (see para [6] at 292d to h).  Thus, applying Bayoil, Park J asked whether there were any “special circumstances” which meant that, despite the company’s cross-claim, the court should wind up the company.  It was in that context he expressed agreement with the principle that “in exercising or refraining from exercising the power to order [the company] to be wound up which [he had] because of the existence of the debt, [he] ought to look at the entire relationship between [the company and the petitioner]”, and “if that relationship includes not just a cross-claim by [the company against the petitioner], but also one or more reverse cross-claims by [the petitioner against the company], [he] must take into account both aspects of it” (para [39] at 300g to h).

(4)    Insofar as Barma J has expressed a view in Re Jade Union Investment Ltd., HCCW No. 400 of 2003, 5 March 2004, that the principles in Montgomery regarding reverse cross-claims should apply whether the company has raised a set-off or mere cross-claim, such statements are obiter and should not be followed. 

(5)     There are conceptual and legal differences between a set-off and a mere cross-claim that does not amount to a set-off.  The latter does not give rise to a defence.  In an application for summary judgment, the existence of a mere cross-claim is not sufficient to prevent judgment being entered, although the court can exercise its discretion to stay enforcement of the judgment until the defendant’s counterclaim has been tried.  The general rule on costs is that if a defence of set-off is successful, the defendant will be entitled to costs of the action, whereas a counterclaim ordinarily results in two judgments so that the plaintiff is entitled to costs of his claim and the defendant is awarded the costs of the counterclaim.  An assignee of a debt takes subject to defences available to the debtor against the assignor before the debtor receives notice of the assignment, including the defence of set-off; whereas an assignee does not take subject to a debtor’s cross-claim against the assignor if this could not have been raised as a set-off.  In the context of arbitrations, a defendant with an equitable set-off would have a substantive defence to the claimant’s claim, so he could apply for a stay of the action and have both the claim and the cross-claim referred to arbitration; if the cross-claim does not amount to a set-off, the defendant would not be entitled to stay the claimant’s action and can only refer the cross-claim to arbitration (The Law of Set-off, by Rory Derham, 3^rd ed., paras 1.04 to 1.08).

(6)     The differential treatment between a set-off and mere cross-claim should be maintained.  If the court is of the view that the Company has an arguable set-off on its cross-claim that exceeds the petition debt, the petition should be dismissed without regard to any reverse cross-claim of Hoi Lee.  A reverse cross-claim should only be allowed to neutralise an undisputed petition debt.

21.  In Jade Union Investment, Barma J dealt with the question of reverse cross-claims in this way:

“11.   In the context of set-offs or cross-claims, the court will look at the evidence adduced by the company and reach a conclusion as to whether the set-offs or cross-claims relied upon by the company have substance.  If it is satisfied that such set-offs or cross-claims have substance, and exceed the amount of the debt on which the petition is based, the court will ordinarily dismiss or stay the petition.  It is arguable that there may be a further requirement in relation to cross-claims that the company should have been unable previously to litigate them, but even if that is a requirement, it was not suggested that it arises for consideration in this case.  Further, where cross-claims are raised, it is open to the petitioner to put forward reverse cross-claims in order to neutralise the cross-claims relied upon by the company, provided that each reverse cross-claim is either a debt or is certain to become a debt because there is no realistic defence to it (see Montgomery v Wanda Modes Ltd [2002] 1 BCLC 289, 300; Re Keen Lloyd Resources Ltd (unreported, CFI, Kwan J, 23 July 2003, at para 19 of the judgment).

12.    These principles were not challenged by either party.  Although Mr Harris, for the company, submitted that the disputes raised by the company were all either set-offs or equitable set-offs (arising, as they did, out of the contract which was the source of the debt relied on by the petitioner) rather than cross-claims in the strict sense, I did not understand him to suggest that this affected the application of the principles which I have summarised above.  In any case, I see no reason why they should, since it seems to me that the approach in the Montgomery and Keen Lloyd cases essentially involves a consideration of the overall relationship between the parties to see whether there is, at the end of the day, an undisputed or undisputable debt that is or will be due to the petitioner, so as to make it appropriate for the court to make a winding up order against the company.  If that is right, it should not make any difference whether the matters relied upon by the company as grounds for disputing its liability to the petitioner are set-offs or cross-claims.”

22.  Notwithstanding the conceptual difference between a set-off and a mere cross-claim, I do not see sufficient reason why, in the exercise of the discretion whether to wind up a company or to dismiss the petition, the overall relationship of the parties should only be considered where the petition debt is not in dispute.  I note that Finbo was decided before Bayoil and Montgomery, and although Montgomery was a cross-claim situation not a disputed debt case, there was no express statement in that judgment to the effect that a reverse cross-claim should not be taken into account where a set-off was raised in defence.

23.  Bayoil has re-affirmed that there should be no practical difference between a disputed debt case and a cross-claim situation in the exercise of discretion on a petition to wind up a company.  Both Nourse LJ and Ward LJ had referred to the dicta of Lord Edmund-Davies in a Privy Council case in this regard.  The relevant part of Ward LJ’s judgment reads as follows:

“The practice in the disputed debt case is well established.  I appreciate that in that case the petition is dismissed because the petitioner cannot properly claim to be a creditor.  That said, there seems to me to be little practical difference between the disputed debt and a cross-claim which does not constitute a set-off properly so called.  In this regard I am fortified by the opinion of Lord Edmund-Davies in Malayan Plant (Pte) Ltd v Moscow Narodny Bank Ltd [1980] 2 Malayan Law Jo. 53 at 55, where his Lordship said:

‘There is no distinction in principle between a cross-claim of substance (such as in the Wools case) and a serious dispute regarding the indebtedness imputed against a company, which has long been held to constitute a proper ground upon which to reject a winding-up petition.’ ” (supra. at 217)

24.  Although a set-off operates as a complete defence to a claim and so would deprive the petitioner of the status as creditor, the debt is not extinguished until judgment is given in favour of the defendant (Re Hiram Maxim Lamp Co. [1903] 1 Ch 70).  In that sense, a set-off is not a complete answer to a winding-up petition.  Where it can be shown the alleged set-off is genuine and based on a substantial ground, the practice of the court is to refuse to make a winding-up order in the exercise of its discretion, by analogy with the case of a debt which is bona fide disputed (McPherson’s Law of Company Liquidation, by Andrew R Keay, 1^st ed., para 3.69).

25.  With Bayoil, it is settled that a similar practice should apply where a genuine and serious cross-claim is raised.  It is a requirement that the amount of the cross-claim should equal or exceed the petition debt.  This is a shared characteristic with a set-off.  The rationale for the requirement is the same, namely that the court should exercise its discretion against winding up a company where it is shown that the petition debt is capable of being extinguished by the cross-claim.

26.  As the rationale for the exercise of discretion is the same whether a set-off or a cross-claim is relied on by the company, namely that the petition debt is capable of being extinguished by the set-off or the cross-claim, I fail to see why, in considering whether the petition debt is capable of extinguishment, a cross-claim would be netted off against any reverse cross-claim of the petitioner whereas a set-off would not.

27.  I am in agreement with the approach of Barma J in Jade Union Investment.  I find it an unattractive proposition that the court should refuse to look at the entire relationship of the parties where a set-off is raised and dismiss a petition only to have the petitioner come back with a fresh petition founded on another debt or an increased debt.  I hold that Hoi Lee may ask the court to take into account reverse cross-claims to neutralise the cross-claims raised in set-off by the Company, provided there is no realistic defence to such reverse cross-claims.

The Company’s claims raised in set-off

28.  According to the latest affirmation filed on behalf of the Company, its claims against Elite are in the aggregate of HK$4,341,670.64 and are made up of eleven items:

(1)     loss of profit due to the cancellation of 666 work orders – HK$85,309.00;

(2)     loss of profit due to liquidated damages charged by the employer – HK$310,101.00;

(3)     liquidated loss due to the issuance of the adverse report by the employer – HK$250,000.00;

(4)     management fee and handling fee from September 2003 to March 2005 – HK$1,251,995.50;

(5)     item of concession on management fee and handling fee from June 2002 to March 2003 – HK$399,161.50;

(6)     item of concession on interest – HK$304,509.39;

(7)     item of concession on the sum of HK$150,000.00 – HK$150,000.00;

(8)     item of concession of service charges for handling the Labour Tribunal proceedings – HK$15,000.00;

(9)     levies of the Construction Industry Training Authority (“CITA”) and the Pneumoconiosis Compensation Fund Board (“PCFB”) – HK$25,594.25;

(10)   restitution claim for HK$1,200,000.00 – HK$1,200,000.00; and

(11)   loss of interest on retention money – HK$350,000.00.

29.  Being the ultimate assignee of the petition debt, Hoi Lee would take subject to defences available to the Company against Elite before the Company received notice of the assignment, including the defence of set-off.  Mr. Chan for Hoi Lee did not contend if any of the items of claim raised by the Company should not be treated as a set-off but a mere cross-claim.  I am inclined to think that each of the above items of claim against Elite, if established, would amount to an equitable if not a legal set-off.

30.  Before I consider the basis of each item of the Company’s claims, and the arguments advanced by Hoi Lee that they are not sustainable, I should first take stock of the petition debt and the reverse cross-claim to arrive at a figure which the Company’s claims must equal or exceed to defeat Hoi Lee’s attempt to wind up the Company.

The petition debt and reverse cross-claim

31.  The petition debt, being a claim for interim payment applications, is HK$402,271.04.  The Company disputes the calculation of this figure and claims that it should be HK$394,095.06.  The Company accepts that but for its defence and counterclaim, the total correct figure of the sums originally payable to Elite should be HK$2,261,024.13.  This figure comprises four sums: HK$1,429,042.00, HK$642,501.96, HK$186,581.71 and HK$2,898.00.

32.  Mr. Chan submitted that the figure of HK$2,261,024.13 is the least amount of the claim and/or reverse cross claim which Elite had against the Company.  I propose to take this figure as a starting point, as it would appear to have been accepted by the Company but for the amounts raised in set-off, the said sum would be payable to Elite.  It would not be appropriate in my view to take as reverse cross-claims the figures of the claims for damages advanced by Elite in the writ action as mentioned earlier, as all that can be said about such claims is that they might or might not succeed, so they should not be used to neutralise the Company’s claims.

33.  The next matter I need to consider is whether Hoi Lee, as the ultimate assignee of the petition debt, would be entitled to payment of all the other sums that made up HK$2,261,024.13.  Mr. Ho drew my attention to the fact that the terms of the assignment of debt from Lee Siu Fung to Hoi Lee were different from the terms of the earlier assignment from Elite to Lee Siu Fung.  In the earlier assignment, Elite had assigned to Lee Siu Fung all its rights and entitlement in the writ action as well as under Contract 149.  In the assignment to Hoi Lee, only the rights and entitlement in the writ action were assigned.  Mutuality is required in the context of a reverse cross-claim.  Hoi Lee cannot pray in aid as a reverse cross-claim a claim against the Company that is available only to the assignor but not to it where the same has not been assigned.

34.  The writ in the writ action was issued on 3 March 2004.  Any right that accrued to Elite thereafter arising out of its contractual relationship with the Company has not been assigned to Hoi Lee.  I accept Mr. Ho’s submission the maximum sum Hoi Lee would have been allowed to rely on to neutralise the Company’s claims is HK$502,852.81, made up of the previous balance of monthly statement and the amount received from the employer up to May 2004 in the respective sums of HK$39,108.01 and HK$463,744.80.

35.  To summarise the position, the Company would need to show it has genuine and serious claims against Elite in an amount that equals or exceeds HK$502,852.81.

The contractual relationship between the Company and Elite

36.  As items (1) to (4) of the claims of the Company would turn on the terms of the contract entered into between the Company and Elite, I should first consider if there is a genuine and substantial dispute on this issue.

37.  The case of Elite, as adopted by Hoi Lee, is that the Appointment Letter, without any attached management agreement to be executed by the Company and Elite, formed the entire basis of the contract between the Company and Elite.  Elite denies that it was provided with a copy of the management agreement said to be attached to the letter at the time it confirmed acceptance and alleges that a copy of this agreement was supplied only a few months later.  Further, it had never signed any version of a management agreement with the Company.

38.  The Company’s case is that the terms of the unsigned management agreement between the Company and Elite were incorporated by specific reference in the Appointment Letter into the contract made between the Company and Elite when Elite signed on the letter confirming acceptance on 30 March 2000.  Further, about two weeks before Elite confirmed acceptance of the letter, the Company had a meeting with To Kwan Chak and Lee Siu Fung of Elite by which Elite was provided with the draft first management agreement to be signed between SFK and the Company, the draft management agreement to be signed between the Company and Elite, and the tender for project sent to the employer and prepared by SFK.  It is alleged that an oral collateral agreement was made at that meeting by which Elite agreed that the terms of the first management agreement between SFK and the Company would be applied “back to back” in the contract to be made between the Company and Elite, Elite should comply with all the terms in the tender and the contract to be entered into between SFK and the employer, the Company would not be responsible to provide any finance to Elite, and Elite was required to provide a management team of sufficient personnel to carry out the works.

39.  It is further alleged by the Company that during the course of the project, the Company and Elite had revised certain terms in the unsigned management agreement on several occasions.  The Company is unable to locate the final version of the unsigned management agreement as revised and agreed and is only able to find the second last version, which was substantially the same as the final version.

40.  I find there are substantial disputes if the Appointment Letter was subject to the terms of the unsigned management agreement between the Company and Elite that had been revised and the alleged collateral agreement.  I note on the one hand the absence of mention of the oral collateral agreement in any contemporaneous document and that none of the versions of the management agreement between the Company and Elite was signed.  On the other hand, Elite knew full well that the Company was to sign a management agreement with SFK and it would be reasonable to expect Elite to find out the specifications and requirements for the project even if it were not told, given the size and value of the project.  Common sense would also dictate that if Elite was to carry out the entire obligations as the manager for Contract 149, the Company would wish Elite to do so on the same or nearly the same terms as under the Company’s contract with SFK.  The disputes on this issue cannot be resolved without the benefit of cross-examination.

The March Agreement

41.  There is also dispute on the terms of the settlement reached between the Company and Elite in March 2003, which formed the basis of the Company’s claims in items (4) to (8) and (11).

42.  According to the evidence filed by the Company, at the meeting on or about 21 March 2003, the Company agreed to grant various concessions to Elite, in respect of the management fee and handling charge that the Company was entitled to deduct for the period from June 2002 to 31 March 2003, the interest the Company was entitled to charge up to December 2002, a loan made to Elite, and service charges for handling proceedings in the Labour Tribunal.  In consideration of the Company giving these concessions and releasing to Elite the retention money of HK$1,500,000.00 retained by the Company at the time, Elite agreed to the following: to provide a proposal for the Company’s approval on or before 7 April 2003 setting out all outstanding draft bills and final bills and how such bills would be finalized and submitted to the employer for payment; to take all necessary steps and provide all necessary information and documents for the finalization and submission of final bills; to provide a proposal for the Company’s approval setting out all items of foreseen liquidated damages that might be charged by the employer and how Elite would deal with the matter; and to take all necessary steps and provide all necessary information and documents for the purpose of dealing with all items of foreseen liquidated damages.

43.  It is alleged by the Company that Elite had totally failed to comply with its obligations under the March Agreement.  The time schedule forwarded by Elite to the Company on 11 April 2003 in purported compliance was worthless, as Elite had failed to take any step to prepare and submit the outstanding final bills to the employer and the Company had to work on its own subsequently without any assistance from Elite.  Hence, the Company is entitled to charge for all management fee and handling charge as from 31 March 2003, to seek restitution from Elite of the concessions granted, and to recover the loss of interest on the retention money released to Elite.

44.  The terms of the March Agreement, as alleged by Elite and adopted by Hoi Lee, are very different.  It is alleged that at the meeting on 21 March 2003, the Company had agreed with Elite that in consideration of the Company deducting HK$1.4 million from the account of Elite for work done, the Company would release all outstanding payment to Elite and not make further unauthorised contra-charges.  The Company had duly deducted HK$1.4 million from Elite’s account but had failed to make any payment to Elite and had imposed further unauthorised contra-charges, in breach of the March Agreement.  Elite denies that it had agreed at the said meeting to provide proposals for the approval of the Company or to undertake other obligations as alleged, rather it was only to make a report on the status of the bills preparation with proposed steps to be taken for the final bills.  Elite also denies that the Company was entitled to payment of any of the amounts for which concessions were purportedly granted.

45.  I find that substantial disputes are raised on the terms of the March Agreement.  It is not possible to find on the available evidence, without a full trial, which of the two versions is incredible.

46.  As I am of the view that there are substantial disputes on the two central issues I have identified, I propose to deal with each of the claims advanced by the Company briefly, taking note of the extensive submissions made by counsel.

Loss of profit due to the cancellation of 666 work orders

47.  It would appear not to be in dispute that 666 work orders were cancelled by the employer.  The loss of the contract sum in this regard would be HK$532,000.00.  The Company alleges that the cancellation was due to poor quality of work and/or delay of Elite and/or its agents.  If the work orders had not been cancelled, the Company would have been entitled to deduct 16% of the payments received as its profit, under the Appointment Letter.  The Company claims HK$85,309.00 as its loss of profit under this head.

48.  Mr. Chan made a number of points in contending that this claim is not sustainable.  Firstly, under the terms of the Appointment Letter, the Company’s entitlement to deduct 16% would only arise when payment was actually received from the employer.  As no payment was received due to the cancellation of the work orders, the Company is not entitled to claim damages for loss of profit in this respect.  Secondly, the Company was also responsible for the delay.  Thirdly, the reason for cancellation of these work orders was not due to any fault of Elite but due to the fact that Elite’s staff was unable to contact the individual occupiers of the affected premises for an appointment to carry out the repair works, despite several attempts.  Fourthly, the Company is not entitled to make any further charges, on the terms of the March Agreement as alleged by Elite.  Fifthly, under the management agreement between SFK and the Company, SFK would be entitled to deduct from the remuneration payable to the Company 8% of the certified value of the work orders, so the Company would only have received 8% of the value of the work orders if they were not cancelled.

49.  Except for the last point, I am unable to say that the Company would have no tenable argument against the above submissions.  I find that there is a genuine and serious claim in respect of half of the amount claimed, being HK$42,654.50.

Loss of profit due to liquidated damages charged by the employer

50.  The basis of this claim is that due to delay of Elite in completing various work orders, the employer had charged liquidated damages in the total sum of HK$1,938,131.75.  The loss of profit suffered by the Company in this regard, based on 16% of the said sum, is HK$310,101.00.

51.  For the same reason as in the above item, I find that the Company has established a genuine and serious claim for half of the amount, being HK$155,050.50.

Liquidated loss due to the issuance of the adverse report by the employer

52.  The employer had issued an adverse report dated 13 August 2002 to SFK, for poor and unsatisfactory performance of work.  Further, under the Maintenance Assessment Scoring System by which the employer evaluated performance of work, SFK had obtained a score below the Lower Threshold Score during the periods of January 2002 to March 2002 and from April 2002 to June 2002.  The Company alleges that the adverse report and the low score were due to the unsatisfactory performance of Elite.  The Company claims it is entitled to be compensated by Elite in the total liquidated sum of HK$250,000.00, under the terms of the unsigned management agreement between the Company and Elite as revised.

53.  I have taken the view that there is a serious dispute if the terms of the contract between the Company and Elite should be confined to the Appointment Letter or whether the position is as alleged by the Company.

Management fee and handling fee from September 2003 to March 2005

54.  Here, the claim is founded on the premise that Elite had wrongfully failed to provide management personnel to discharge its contractual duties since about June 2002.  As a result, the Company had to engage and pay for the necessary personnel when it took over the work in September 2003.  By the terms of the unsigned management agreement between the Company and Elite as revised, the Company was entitled to charge a handling fee of 4% on the management fee.  As Elite was in breach of the March Agreement, the Company was entitled to charge for all the management fee and handling fee incurred after 31 March 2003.

55.  Elite and Hoi Lee have challenged this claim on a number of grounds, apart from the dispute of the terms of the March Agreement and which party was in breach.  It is alleged that the Company was in possession of the original documents for the preparation of the final bills and that Elite was thereby precluded from undertaking this task.  It is contended that the Company had failed to mitigate its loss in choosing to perform the work by itself, it should have called for a tender from a third party to complete the unfinished work, alternatively it should have accepted Elite’s proposal in its letter dated 2 April 2004 to complete the unfinished work free of charge.  Further, the amount claimed for management fee is excessive and out of proportion to the work done; the charge should be no more than 1.5% to 2% of the final bill values.  Lastly, the claim of management fee and handling fee is not a claim of the Company but of its associated company, Masan Engineering Limited (“Masan”), and mutuality is lacking for this claim relied on by the Company.

56.  I do not think I can resolve questions of quantum regarding this claim of HK$1,251,995.50 on the available evidence.  On the part of the Company, it has adduced substantial evidence in an attempt to justify the personnel engaged to complete the unfinished work, the necessary work done, the time involved and the amounts charged by the respective personnel.  Even if this claim were to be reduced greatly, by one-third or even half, the claim would still be substantial.  I do not agree with Mr. Chan that this claim is a claim of Masan.

Restitution claim for various items of concession in the March Agreement

57.  I have taken the view that there is substantial dispute of the terms of the March Agreement.  In the event that the Company is able to establish its case, it should have a claim in restitution for the various items of concession granted to Elite in the March Agreement.

Levies of CITA and PCFB

58.  Elite has no objection to this claim.  Hoi Lee does not appear to have an independent position.

Restitution claim for HK$1,200,000.00

59.  On 16 November 2000, the Company issued a cash cheque to Elite in the sum of HK$2.2 million as a loan at the request of Elite.  The cheque was signed by the Company’s directors, Edwin Ng and Wong King Chau (“Wong”).  Edwin Ng left it to Wong to handle the collection of the cheque by Elite.  A few days later, Edwin Ng received a call from Lee Siu Fung that Elite had only received HK$1 million instead of the HK$2.2 million as promised.  Edwin Ng tried to contact Wong but could not locate him and circumstances suggested to him that Wong might have absconded.  Under the circumstances, he paid three separate sums to Elite in November and December 2000 to make up for the alleged shortfall of HK$1.2 million.

60.  The Company allegedly discovered, in April 2004, that the whole sum of HK$2.2 million was deposited into a bank account of Elite and that Elite was overpaid HK$1.2 million.  The Company therefore seeks restitution of this amount.

61.  Lee Siu Fung however pointed out that as shown on the reverse side of the cheque, it was Wong who had cashed the cheque.  He also produced the bank statement of Elite for the account in question, showing that only HK$1 million was deposited into that account on 16 November 2000.

62.  I agree with Mr. Chan the Company has failed to make out a genuine and serious claim for restitution.  The Company’s case is based on speculation that Wong might not have misappropriated the HK$1.2 million and Elite might have been received this sum somehow.  This would seem unlikely, as on Edwin Ng’s evidence, circumstances indicated that Wong might have absconded, shortly after the cheque was issued and cashed.

Loss of interest on retention money

63.  It is alleged by the Company that Elite had failed to refund the retention money to the Company after it was in breach of the March Agreement.  The Company claims loss of interest for being kept out of the retention money from 7 May 2003 up to present at the contractual rate of 8% per annum, under the unsigned management agreement between the Company and Elite as revised, assuming that the average prime lending rate during this period is 5%.  In the alternative, the Company claims interest for its loss of the use of funds at the commercial rate of interest.

64.  Mr. Chan submitted that under the terms of the Appointment Letter, the retention money should be released to Elite when the final certificate is issued.  He contended that the certificate of completion issued on 3 March 2003 was the final certificate under the Appointment Letter.  Further, it is denied that the release of the retention money had anything to do with the March Agreement alleged by the Company.  It is also asserted that the Company was entitled to deduct retention money of HK$1 million under the Appointment Letter, so there is no basis to claim loss of interest on retention money of HK$1.5 million.

65.  Mr. Ho pointed out that there was a one-year maintenance period after the issuance of the certificate of practical completion issued on 3 March 2003.  The term “final certificate” used in the Appointment Letter should refer to the final certificate under the General Condition, not the certificate of practical completion.

66.  Substantial disputes of fact and law are raised.  I am inclined to think there is a genuine and serious claim under this head.

Conclusion and orders

67.  I am satisfied that the total amount of claims raised by Company that I find to be of substance exceeds the amount of HK$502,852.81, being the total sum that Hoi Lee is entitled to rely on to neutralise the Company’s claims.  That being the case, the attempt to wind up the Company must fail.

68.  I make an order dismissing the petition and the application for Hoi Lee to be substituted as the petitioner.

69.  Costs should follow the event.  I make an order nisi in these terms:

(1)     Elite should pay the costs of the Company in the proceedings, excluding the costs of the hearing on 4 April 2006 when the application for substitution was made;

(2)     Hoi Lee should pay the Company’s costs of the hearing on 4 April 2006; and

(3)     the costs awarded to the Company should be assessed on an indemnity basis.

70.  I regard it appropriate to award costs on an indemnity basis, as Elite should not have presented the petition in the first place.  Extensive pleadings were filed in the writ action and issues were joined well before the petition was presented.  It should have been clear to Elite that substantial disputes are bound to be raised and they should have been resolved first in the writ action.