CHEVALIER (HK) LTD. AND ANOTHER v. THE JOINT LIQUIDATORS OF RIGHT TIME CONSTRUTION CO. LTD.

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REASONS FOR JUDGMENT

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Clough, J.A.:

1. These are the reasons of the court for dismissing the appellants' appeal on the 9th January 1990 against the order of Jones J. made on the 23rd June 1989, on the application of the liquidators of an insolvent company, Right Time Construction Company Limited ("Right Time"), declaring certain payments made to the appellants void under section 182 of the Companies Ordinance (Cap. 32) and requiring the appellants to make repayment to the liquidators. No application had been made below for validation of the payments under section 182.

2. The facts, so far as they are undisputed, are as follows. Right Time, as its full name implies, was engaged in the business of a building contractor. A creditor's petition to wind up Right Time was presented on the 1st May 1987 and a compulsory winding up order was made on the 2nd June 1987. One of Right Time's projects was a construction contract ("the main contract") made with Reality Enterprises H.K. Limited ("Reality") under which Reality employed Right Time as the main contractor to carry out certain construction work at Tuen Mun. The first appellant, Chevalier (HK) Limited ("Chevalier") and the second appellant, Regent Engineering Co. ("Regent") were nominated sub-contractors under the main contract.

3. On the 28th April 1987 the Architect under the main contract issued Certificate of Payment No. 7 ("the certificate") which certifies that a sum of $6,433,408.35 was then due for payment under the main contract. The certificate contained the following particulars concerning nominated sub-contractors:

"GROSS AMOUNT INCLUDED FOR NOMINATED SUPPLIERS AND NOMINATED SUB-CONTRACTORS (subject to retention in accordance with the terms of the sub-contract) are as follows:-

4. By a letter dated the 29th April 1987 ("the confirming letter") to Reality, Right Time confirmed, at the request of Reality, that it had no objection to Reality "... paying direct nominated sub-contractors in Architect's Certificate No. 7 and in subsequent certificates." On the same day Reality drew cheques for $2,045,300 in favour of Chevalier and for $160,000 in favour of Regent respectively and receipts bearing the same date were issued by the respective payees to Reality. The cheques were cleared and Reality's bank account was debited with the sums of $2,045,300 and $160,000 on the 25th May 1987, i.e. after the commencement of the winding up of Right Time by virtue of the retrospective provisions of section 184 (2) of the Companies Ordinance. The amounts of these cheques represented part of the sum of $6,433,408.35 certified to be due from Reality to Right Time under the certificate.

5. On the liquidators' application to recover the payments thus made to Chevalier and Regent the judge, in a reserved judgment, held that the payments had been made with the consent of Right Time. He rejected the argument advanced by Mr. Yu on behalf of the appellants (and said by Mr. Yu to be supported by In re Leslie Engineers Co. Ltd. [1976]1 W.L.R. 292) that as the payments were made out of Reality's bank account they consisted of moneys which were never the property of Right Time and could not therefore have been the subject of a disposition by that company within section 182. The judge, in holding that the payments were void under that section, also rejected Mr. Yu's alternative argument that if the relevant payments were a disposition in that they effected a discharge of Reality's debt to Right Time, and if that disposition was rendered void by section 182, it followed that Reality remained indebted to Right Time, so that the liquidators could have no claim against Chevalier or Regent.

6. On appeal two preliminary matters arose. This court was concerned that , in a letter to the liquidators dated the 26th August 1987, Reality's solicitors had indicates that payments, including the payments made to each of the appellants, had been made by Reality –

7. Clause 27(c) is the standard provision in building contracts which provides machinery for enabling an employer (on the authority of the appropriate Architect's Certificate) to pay unpaid nominated sub-contractors direct and to deduct the amount of the payment from any sum due or to become due to the main contractor. This clause was referred to by the liquidators in their letter to Chevalier dated the 14th February 1989 in which they contended that the clause could not be relied upon in this case.

8. The appellants did not invoke clause 27(c) below and the judge made no reference to it. At the request of this court the main contract was produced. It had hot been included in the appeal bundle but the liquidators' counsel, Mr. Graham, had included in his list of authorities reports of decisions such as In re Tout & Finch Ltd [1954] 1 WLR 178 and Re C.G. Monkhouse Pty. Ltd. and the Companies Act [1965] 69 S.R. (N.S.W.) 429 (C.A.).

9. Although no ground of appeal relied on clause 27(c) Mr. Yu was asked by the court if the appellants wished to take any point on that clause. The opportunity was declined. Without expressing any view on the merits of any possible argument relying on clause 27(c) we think it desirable to record in these reasons that on appeal any such argument was expressly disclaimed on behalf of the appellants. We therefore considered the appeal on the footing that the appellants conceded that, as between Reality and Right Time, the latter was on the 29th April 1987 (the date of the confirming letter) entitled to payment by Reality of the respective sums which Right Time confirmed could be paid direct to the nominated sub-contractors in the certificate. Put another way it was, in effect, conceded by the Appellants (subject to the issue arising on the interpretation of the terms of the confirming letter) that Reality had made the payments to the appellants on the authority of Right Time and not by virtue of any Architect's Certificate under clause 27(c) of the main contract.

10. The second preliminary matter concerned the extent of the authority contained in the confirming letter. The appellants were given leave (unopposed by the liquidators) to argue, as an additional ground of appeal, that Right Time had not by the confirming letter authorised Reality to make any direct payment to Chevalier. It was contended that the judge's finding that the payment of $2,045,300 by Reality to Chevalier had been made with Right Time's consent was erroneous. On the footing that the payment to Chevalier was not authorised by Right Time it was further contended that Reality remained liable to Right Time for $2,045,300 in any event and that the judge had therefore erred in finding that the direct payment to Chevalier constituted a disposition of Right Time's property.

11. The short point taken by Mr. Yu on the meaning of the confirming letter was that (there being no evidence of any certificates subsequent to the certificate) the letter had the effect of only conferring authority on Reality to pay direct to nominated sub-contractors such sums as were specifies under the heading "Included in this certificate" appearing in the second column opposite the named nominated sub-contractors in the first column of the part of the certificate set out above. It would follow that no authority was given by the confirming letter for any payment to Chevalier because no sum appeared to be certified as due to Chevalier in the second column. It would also follow that the payment of $247,651.70 actually made by Right Time to another nominated sub-contractor, Wong Kwong Kee Engineering Co., at the same time as the payments to the appellants, was made without authority to the extent that it exceeded the sum of $143,825.85.

12. We were unable to accept this interpretation of the confirming letter. In our opinion the decisive factor is that the confirming letter refers to "nominated sub-contractors in" the certificate and not in terms, or by necessary implication, to nominated sub-contractors in respect of whom sums were expressed to be "included" in the certificate. The certificate contains, in the third and fourth columns respectively, references to sums included in previous certificates and to "Total included to date''. In both those columns a sum of $2,534,000 is shown as being due to Chevalier under previous certificates. The scheme of the certificate is to set out, not only the amounts being certified as due to nominated sub-contractors for work completed during the period of the certificate, but also the amount previously certified due, together with the total amount outstanding, to each nominated sub-contractor at the date of the certificate.

13. It seemed to us, in the absence of a context which constrained us to accept a narrower construction of the confirming letter, that the general reference in the letter to direct payment of "nominated sub-contractors in" a certificate of the kind before us was objectively to be understood to include authority to pay not only sums certified due for the first time under the certificate to any nominated sub-contractor named in the certificate but also sums indicated in the certificate as outstanding to that sub-contractor by virtue of previous certificates. We therefore upheld the decision of Jones J. that the relevant payments to both Chevalier and Regent had been made with the consent of Right. Time.

14. Section 182 of the Companies Ordinance provides as follows:

15. As Oliver J. (as he then was) observed in In re Leslie Engineers Co. Ltd. at p. 297G, in relation to section 227 of the Companies Act 1948 which formerly corresponded with section 182 of the Companies Ordinance, it is "wholly immaterial so long as one is dealing with the company's property, whether the purported disposition is made by the company or by a third party, or whether it is made directly or indirectly." The same judge drew attention, in the same case at p.298 B-D, to the fact that the section says nothing about recovery but merely avoids dispositions and leaves it to the general law to determine what is the appropriate remedy in respect of the invalidated dispositions.

16. Having disposed of the two preliminary matters in the manner indicated above we are left with a situation where, but for the effect of section 182, Reality had, with the authority of Right Time, discharged part of Reality's debt to Right Time by making payments by cheque to Chevalier and Regent respectively in discharge of a corresponding amount of Right Time's debt to Chevalier and Regent. As between Right Time on the one hand and Chevalier and Regent respectively on the other hand, again subject to the effect of section 182, Right Time had partially discharged its debt to Chevalier and Regent through a third party, Reality. For all practical purposes the result would, but for section 182, have been the same as if Reality had paid Right Time direct and then Right Time had paid Chevalier and Regent direct.

17. In such circumstances it would seem at first sight that as between Right Time and each of the appellants there had been an indirect disposition of Right Time's property in the form of the payment to each of the appellants of money to which Right Time was entitled and that section 182 had rendered each of the payments void. However Mr. Yu contended that this was not the position. He contended, as he had done below, that the payments made by Reality to each of the appellants were dispositions of Reality's property and not dispositions of the property of Right Time. Mr. Yu emphasised that the payments in question had been made out of the bank account of Reality and that there was no evidence that the credit balance in Reality's account on the 25th May 1987 represented funds belonging to or provided by Right Time, funds to which Right Time had any claim or funds ear-marred for the discharge of any debt owed by Reality to Right Time. On this latter point he cited Leslie Engineers at p.299 D-E.

18. Mr. Yu's other main argument on appeal, as below, was based on the distinction between, on the one hand, the debt owed by Reality to Right Time and, on the other hand, the debt owed by Right Time to each of the appellants. The argument was to the effect that insofar as Reality intended or purported to discharge (to the extent of the amount. of the payments to the appellants) the debt it owed to Right Time by making the relevant payments to the appellants, that intended or purported discharge of debt amounted to a disposition of Right Time's property which was rendered void by section 182. The contention was that the consequence of the avoidance of that discharge of Reality's. debt was that Reality has remained indebted to Right Time, but not that the payments made by Reality direct to the appellants were also void. It was further contended that section 182 conferred no right of recovery and that the general law conferred no right of recovery against the appellants in respect of the payments made to them by Reality.

19. However these arguments were not, in our opinion, based on a correct or a complete analysis of the situation. Ignoring for the moment the effect of section 182, when Reality (with the authority of Right Time) paid its own money to each appellant, the position was that Reality was entitled to, and no doubt did in its books, debit the Right Time account to the extent of the payments made to each of the appellants. This reduction in the debt owed by Reality to Right Time was a reduction made with the authority of Right Time and amounted to a disposition of Right Time's property within the meaning of section 182.

20. Furthermore there was also a disposition of Right Time's property effected when Reality made the payments to each of the appellants because, as between Right Tine and Reality on the one hand and each appellant on the other hand, Reality had acted, in effect, as the agent of Right Time and paid the sums of money to which Right Time was entitled (under the main contract) to the appellants in partial discharge of Right Time's debt to each of them.

21. Section 182 retrospectively renders both these dispositions void and produces the result that the liquidators of Right Time became entitled to recover the amount of the relevant payments from Reality, on the basis that the reduction in Reality's debt to Right Time under the main contract was made without lawful authority, or from the appellants as money paid to them by Reality to the use of Right Time. We consider that the liquidators acted properly in making their first claim oh the appellants who had received the money rather than on Reality: c.f. In re Gray's Inn Construction Co. Ltd. [1980] 1 WLR 711 (C.A.) per Buckley L.J. at p. 721F.

22. In our judgment the principles applicable to the situation which has arisen in this case are broadly the same as were applied in Bank of East Asia Ltd v. Rogerio Sou Fung Lam [1988] 1 HKLR 181 (C.A.) where another division of this court had to consider the effect of section 182 on a payment made by a bank to a payee when honouring a cheque drawn by an insolvent company between the date of presentation of a winding up petition and the date of the winding up order.

23. Mr. Yu was, we thought, justified in criticising the judge's reasoning when seeking to dispose of Mr. Yu's argument based on Leslie Engineers by saying that that case was irrelevant as Oliver J. had there rejected one of the liquidator's claims because he had found that the respondents had been unaware that the payment which was made to them by a cheque drawn on the joint account of the controlling director and his wife had been made after the company's moneys had been paid into the joint account to create a credit balance so as to meet that and other cheques. Whilst this finding was one of the reasons for the decision that the liquidator had no right of recovery in that case, Oliver J. also found, as the first stage in his decision at p. 299D that section 182 did not apply to the payment in question because the payment by the bank of the cheque in favour of the respondents was not a disposition of the company's property. It was on this point that Mr. Yu had relied on Leslie Engineers. We further accepted Mr. Yu's contention that the judge should not, with respect, have treated the awareness of the directors of Right Time of the insolvency of their company and the imminence of the winding up order as material to the question whether for the purposes of section 182 there was a disposition of the property of Right Time.

24. However having identified dispositions of Right Time's property in the manner indicated above Whilst accepting that Right Time had no proprietary interest in any part of the actual credit balance in Reality's bank account, we derive no assistance, on the facts of this case, from the findings of Oliver J. in Leslie Engineers upon which Mr. Yu relied, to the effect that, in the different circumstances of that case, the property of the insolvent company did not include the actual credit balance in the joint account of the controlling director and his wife which had been wrongfully fed from the company's bank account and mixed with moneys of the joint account holders.

25. Further arguments were directed to criticisms of the judge's conclusion that "... the moneys due to Right Time are identifiable as its property and amount to choses in action within the definition of section 182". With respect to the judge, we accepted that this is not really an apt analysis of the situation. However we were fully satisfied that the judge was right to reject the arguments advanced below on behalf of the appellants and that his decision was right for the reasons we have indicated above. We therefore dismissed the appeals of Chevalier and Regent without calling on counsel for the liquidators.