UNION CHARM DEVELOPMENT LTD. v. B+ B CONSTRUCTION CO LTD

HCCW 114/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 114 OF 2001

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DECISION

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1. This is an application by Union Charm Development Ltd ("the Applicant") for an order under s.186 of the Companies Ordinance that it may have liberty to proceed with arbitration proceedings against B+B Construction Co Ltd ("the Company"), notwithstanding the fact that the Company is now in liquidation.

The Company

2. The petition for winding-up was presented on 2 February 2001 by the Company's holding company on the ground that the Company was insolvent. On the same day, provisional liquidators were appointed. On 18 April 2001, the Company was wound up. The first creditors' meeting is scheduled for 21 June 2001. Presumably the contributories' meeting will also be held near that time.

3. According to the provisional liquidators' preliminary estimates, total realizable assets are in the region of $20-30m. and total liabilities are in the region of $1,100m., disregarding the Applicant's claim.

The Applicant

4. The Company is a building construction company and the Applicant was its employer under a contract made in 1996. The Company had undertaken to carry out foundation works in respect of a substantial development. Works commenced in 1996 and were completed in 1997.

The Arbitration

5. Defects in the piling works undertaken by the Company were discovered in 1998. In October 1998, the Applicant commenced arbitration proceedings against the Company pursuant to the contract. The Applicant's claim is for approximately $1,100m., i.e. equal to the provisional liquidators' estimate of the Company's total liabilities.

6. Mr Anthony Houghton, a practicing barrister who is also a qualified quantity surveyor, was appointed sole arbitrator in November 1998.

7. Over the past 21/2 years, the arbitration has progressed to the stage that the substantive hearing was due to commence on 25 June 2001, with 4 weeks reserved for the hearing.

8. It is common ground that the arbitration involves technically complex civil engineering issues. It is not disputed that Mr Houghton, with his dual professional qualifications and experience in construction law and practice, would be the most suitable person to adjudicate on the Applicant's claim against the Company.

Effect of appointment of provisional liquidators and liquidation

9. It was against this background that the petition was presented and provisional liquidators appointed in February 2001. The effect of the appointment of provisional liquidators was that the arbitration was stayed under s.186 CO, which provides:-

"When a winding-up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the Company, except by leave of the court, and subject to such terms as the court may impose."

In March 2001, the Applicant made the present application for leave to proceed with the arbitration. A master adjourned the application for hearing before the Companies Court. The Company was wound-up in the interim.

Provisional liquidators' position

10. The provisional liquidators have objected to the application. They have taken a "policy" decision that it would only be in exceptional circumstances that they would agree to a claim against the Company being dealt with by way of judicial (or in respect of an arbitration, a quasi-judicial) determination, rather than by way of proof of debt. Counsel for the provisional liquidators informed the Court that there are 12 other sets of legal proceedings against the Company (although presumably each would be in a different stage of progress).

11. Section 263 CO provides :-

"In every winding up (subject in the case of insolvent companies to the application in accordance with the provisions of this Ordinance of the law of bankruptcy) all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency or sound only in damages, or for some other reason do not bear a certain value".

12. The Applicant's claim, although only sounding in damages only, would therefore be admissible to proof against the Company. If the Applicant were to put in a proof, the liquidators would then have to make a "just estimate, so far as possible" of the value of the claim.

13. The provisional liquidators here say that as liquidators, they would be able to make a creditable determination of the value of the Applicant's claim. Although they would have to take expert advice, they estimate that this would cost less than the expenses of the arbitration, a matter which is dealt with below.

Principles governing exercise of Court's discretion

14. The issue on the application is whether the Applicant should be given leave under s.186 to proceed with the arbitration or whether it must proceed by way of proof of debt. It is well-established that such applications for leave are not restricted to applicants who claim to be secured creditors. In all cases, the Court has to try to do what is "right and fair". In the exercise of its discretion, the Court should see if the statutory scheme would serve the purpose of deciding the matter conveniently, with savings in time and cost (Re Exchange Securities & Commodities Ltd [1983] BCLC 186, 195). Understandable though it may be for liquidators to wish to have a hard and fast rule that may be applied in every case, the Court must perform a balancing exercise according to the discrete facts of each case.

15. No doubt in most cases, the statutory scheme would be a more convenient, more cost-effective and less time-consuming way of dealing with claims against a wound-up company. Liquidators have access to the company's books and documents, and would be able to call upon legal assistance (if required) in assessing the merits and quantum of a claim of a general nature.

16. There ought not to be any apprehension on the part of a claimant that liquidators would not act fairly in the adjudication of proofs of debt. Liquidators have a duty to distribute the assets in their hands or under their control amongst the persons truly entitled, and have been said to act in a "quasi-judicial" capacity (Tanning Research Laboratories Inc v O'Brien [1989-90] 169 CLR 332, 338-9).

17. Further, if a claimant is dissatisfied with the adjudication, he may appeal to the Companies Court under Rule 95 of the Winding-Up Rules, and the Court may reverse or vary the decision.

18. Therefore, one would expect in the usual run of things, that a liquidator should be left to adjudicate upon proofs of debt.

Circumstances of this case

19. However, one of the considerations of the Court in an application for leave under s.186 is the nature of the claim. It is recognized that the Applicant's claim in the present case is technically complex, and in the absence of professional expertise in building construction, the liquidators cannot be expected to speedily and relatively inexpensively perform a "just estimate, so far as possible" of the value of the claim by themselves. They would have to call upon expert advisors and in effect, the liquidators' estimate would be their technical and legal advisors' estimate.

20. Consequently, the costs of an adjudication in the present case would be significant. The provisional liquidators' solicitors have estimated those costs at $5m., although no grounds have been given in Mr Tollan's affidavit for this estimate.

21. More significantly, however, that might not be the end of the matter. If the Applicant is dissatisfied with the adjudication, there is an unrestricted right of appeal to the Court under Rule 95, and by the very nature of the claim, the Court would not be able to decide the appeal except after costly litigation which would be likely to be time-consuming. The pleadings in the Arbitration have run to more than 150 pages excluding appendices.

22. In other words, the estimated costs of an adjudication would be $5m. minimum.

23. This is to be contrasted with the Arbitration which has been in progress for 2 1/2 years now and has reached a mature stage. Importantly, as far as the costs of continuing with the arbitration are concerned, the parties have recently agreed that if the Arbitration is to proceed, it would be a "reduced" arbitration, conducted by way of documents only, without a hearing. Mr Houghton has obviously considered that to be feasible as he has on 22 May 2001 made an order of directions along those lines. He has estimated that he would be able to determine the matter and write an award within 28 days of commencement of the task.

24. Given that the hearing of the arbitration was anticipated to last 4 weeks, there would obviously be a substantial reduction in the saving of fees for the attendance at the hearing of leading and junior counsel, solicitors and experts. Without a hearing, the arbitrator's fees (based on a daily rate of $26,000 for the 28 days needed for the determination and writing of the award) would be less than $0.73m.

25. Of course the Company would still have to incur costs to prepare its case to be laid before the arbitrator. In September 2000, a cost estimate covering future fees was prepared by Baker & McKenzie (solicitors for the Company in the Arbitration) representing their "best guesses based on previous experience" of the cost of a full arbitration. That estimate came to a total of about $15m. (being the sum of nearly $11m and ￡400,000). They have since estimated the expenses of continuing with the full arbitration at $9.3m and ￡350,000 (a total sum of approximately $13m.). Unfortunately, a fresh estimate based on a reduced arbitration has not been obtained from them.

26. The Applicant through its counsel says that if the fees already spent and the fees for the hearing are eliminated from that cost estimate, the remaining costs would be reduced by $5m and ￡300,000, so that the reduced arbitration would cost about $5m. (to which there should of course be added the Company's contribution to the arbitrator's fees). On the other hand, the solicitors for the provisional liquidators, performing the same exercise, have estimated that even on the basis of a "reduced" arbitration, the costs would still be $7.5m.

27. Such differences are bound to arise because the cost estimate was not prepared for the present purpose, and it is by no means clear what work was intended to be covered by general work descriptions such as "work on hearing bundle".

28. However what is compelling is that the arbitrator's award would probably be the end of the matter. The award would not be judicially reviewable except on a question of law only, and then, only if the determination of the question of law concerned could substantially affect the rights of one or both parties to the arbitration (s.23 Arbitration Ordinance cap. 341). So, the estimated costs of a reduced arbitration would be $5m.- $7.5m (virtually) maximum.

29. Compared with the estimated costs of adjudication at $5m. minimum, I consider in the exercise of my discretion, that it would benefit both the Applicant and the general body of unsecured creditors to give leave to proceed with the reduced arbitration. The benefit of the near-final nature of the arbitrator's award would in this case outweigh any benefits of the adjudication process and the savings in costs of between $0 to $2.5m. (depending on whose estimate proves to be correct).

Order

30. Consequently I would order that the Applicant have liberty to proceed with the arbitration proceedings commenced by Notice of Arbitration dated 16 October 1998 on the basis of the conduct of the arbitration referred to in paragraph 2 of the document entitled "Order for Directions No. 7" dated 22 May 2001. Since no costs order was sought on the summons, I will not make any order nisi regarding costs but would give liberty to both parties to restore the summons should any directions or orders be sought.