HO YIP SHING v. HANDA CONTRACTORS LTD.

HCSD 10/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND
NO. 10 OF 2002

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REASONS FOR DECISION

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1. This is an application to set aside a statutory demand dated 7 March 2002. The applicant, Ho Yip Shing, was at all material times carrying on construction works under the name of Sun Cheong Shing Construction & Civil Engineering Works Company. He had signed a contract with the respondent, Handa Contractors Limited, in November 2000 to carry out construction works in relation to the West Kowloon Reclamation Remaining Roadworks Stage 2. The main contractor of the project was Chun Wo Construction & Engineering Company Limited ("Chun Wo"). The respondent was the sub-contractor of Chun Wo and the applicant was the sub-sub-contractor. The amount claimed in the statutory demand is HK$236,436.78, being an award made by the Labour Tribunal against the respondent on 9 January 2002 under Section 43G of the Employment Ordinance, Cap.57, by which a superior nominated sub-contractor is obliged to pay the wages of the employees of a nominated sub-contractor.

2. The relevant matters giving rise to this application may be summarised as follows.

3. On 28 May 2001, the respondent obtained an ex parte injunction from the High Court to restrain the applicant from remaining on the site. Thereafter, the respondent took over the site from the applicant and proceeded to carry out the works. The respondent brought an action against the applicant in High Court Action No. 2342 of 2001. The Statement of Claim was served on 8 October 2001. It is the respondent's case that the applicant was in breach of contract in that he had failed to complete the works by the original date of 28 January 2001 or by the extended date of 15 April 2001. Further, the work done by the applicant was of poor quality. The respondent is rendered liable to Chun Wo for liquidated damages from 16 April 2001 to 15 July 2001due to the delay in completion of the works. It had incurred expenses in taking over the site, completing the outstanding works and remedying the defective work of the applicant. After deducting the amount due to the applicant for the work done, the respondent claims HK$1,834,406.85 from the applicant for its loss and damage.

4. The applicant served a defence and counterclaim in the High Court Action on 30 November 2001. He alleged that possession of the site was delivered to him on a piecemeal basis, which accounted for the time he took to carry out the works. Further, he was not responsible for the prestressing work, which was done by another sub-contractor of Chun Wo. The applicant was required to carry out additional work or rectification work by the employer on various occasions because the respondent did not give proper instructions to the applicant in the first place, or because of defective work by the piling sub-contractor and the prestressing sub-contractor of Chun Wo. Due to the above reasons, the applicant was not liable for the alleged delay and the respondent had wrongfully repudiated its contract with the applicant by re-entering the site on 28 May 2001. The applicant counterclaims HK$827,304.84, being the balance due to the applicant for the work done for which he had issued interim payment debit notes in the amount of HK$4,515,843.35 and of which only HK$3,688,538.51 was paid by the respondent. He also counterclaims damages to be assessed because of the wrongful termination of his contract.

5. The respondent filed a reply and defence to counterclaim on 31 December 2001 denying the applicant's allegations.

6. In the meantime, eight workers brought a claim in the Labour Tribunal against Chun Wo, the respondent and the applicant in LBTC No. 6843 of 2001, claiming that the applicant had failed to pay their wages. On 9 January 2002, a presiding officer made the award that I have mentioned against Chun Wo and the respondent, jointly and severally, in favour of seven of the claimants. On 1 and 12 March 2002, the respondent paid to the Labour Tribunal the total amount of HK$236,436.78 being the award, interest and costs. The statutory demand was served on the applicant for the said sum on 7 March 2002.

7. It is not in dispute that the amount of HK$236,436.78 paid by the respondent to the applicant's employees under Section 43G, Cap.57 is a debt due from the applicant to the respondent, as is provided in section 43J(1). The applicant seeks to set aside the statutory demand under rule 48(5)(a) of the Bankruptcy Rules, Cap.6A on the ground that he "appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand", in that he has raised a substantial counterclaim against the respondent in the High Court Action in November 2001 in the sum of HK$827,304.84 as stated earlier.

8. The respondent, whilst denying the applicant's entitlement to the counterclaim in the High Court Action, would appear to have accepted that this court cannot resolve the merits or otherwise of the counterclaim at this stage and the matter would have to go to trial in the other action. It was, however, contended by Mr Patrick Tam on behalf of the respondent that the counterclaim in the High Court Action should not be taken into account because any liability of the respondent to the applicant under the sub-sub-contract was separate and distinct from the applicant's liability to the respondent by virtue of sections 43G and 43J(1) of Cap.57 and that the demand under the provisions of Cap.57 was not closely connected with the sub-sub-contract to enable the applicant to put forward a claim for set-off. He placed reliance on the decision of Jones J in Pysogea v. Rightfairs Development Ltd [1991] 1 HKC 341.

9. Pysogea was concerned with an application to strike out a petition to wind up a company. The company was the sub-contractor to the petitioner on a construction site and the petitioner was ordered by the Labour Tribunal to pay the arrears of wages, redundancy payments and holiday pay of the company's employees under section 43D of Cap.57. The petitioner having made payment presented a petition to wind up the company. There were also proceedings in the High Court brought by the petitioner against the company claiming damages and other relief for breaches of the sub-contract. The company had served a defence and counterclaim alleging wrongful termination of the sub-contract. It was contended by the company that the debt claimed in the petition was subject to its right of equitable set-off being its counterclaim in the High Court Action. This contention was rejected by the court. It was held that the sub-contract was a separate transaction form the liability incurred to the company's employees under Cap.57 and the demand under the Ordinance was not closely connected with the sub-contract to enable the company to put forward a claim for equitable set-off.

10. Pysogea was considered by Le Pichon J (as she then was) in Re Finbo Engineering Co Ltd [1998] 2 HKLRD 695, a decision I brought to the attention of the parties. As pointed out in the latter decision, Pysogea was concerned only with equitable set-off, not a right of legal set-off. The difference between the two is that a legal set-off is allowed in respect of debts which are liquidated, even if unconnected, whereas in equity a set-off is permissible for unliquidated debts provided they are connected. After a comprehensive review of the law, it was held in Re Finbo that at a minimum, it was arguable that the right of legal set-off remains available in Hong Kong, notwithstanding the enactment of the Application of English Law Ordinance, Cap.88, in 1966. The judge came to the view that the company "plainly" had an arguable defence based on legal set-off to render the debt in the winding-up petition "inarguably substantially disputed" on bona fide grounds. The debt in the petition was in respect of a payment made by the petitioner as the superior contractor to the company's employees under section 43C of Cap.57. The debt which the company sought to set-off was the balance of interim payment applications for work done under the sub-contract, being the subject of the company's claim against the petitioner in a High Court action.

11. In the present case, the applicant's counterclaim against the respondent for the balance of interim payment debit notes is clearly a liquidated claim. In view of Re Finbo, it seems to me it is plainly arguable for the applicant to rely on a right of legal set-off as a defence to the debt due to the respondent under the provisions of Cap.57. This is sufficient to dispose of the respondent's opposition to setting aside the statutory demand.

12. I should also mention that in opposing the application, the respondent's counsel has only focussed on set-off. Rule 48(5)(a) of Cap.6A provides for "a counterclaim, set-off or cross demand" as instances in which the court may exercise its power to set aside a statutory demand. A set-off is a monetary cross-claim which is also a defence to the claim made in the action whereas a counterclaim is any cross-claim which is not also a defence (see Hong Kong Civil Procedure, Vol 1, para. 18/17/2). In the instance where a counterclaim is asserted, which equals or exceeds the debt in the statutory demand, the court would have a discretion whether to set aside the statutory demand. The factors to be considered would include the extent of the connection (if any) between the admitted debt in a cross-claim, whether the proceedings in relation to the cross claim are pending or merely contemplated, whether the applicant has been guilty of any delay in seeking to have the cross-claim determined, the age of the admitted debt and the age of the cross-claim, and the nature and extent of any dispute in relation to the cross-claim (see Re Finbo, supra at 703J to 704B).

13. In the present instance, I would also exercise my discretion to set aside the statutory demand on the ground that the applicant appears to have a counterclaim which exceeds the debt in the statutory demand. As I have stated earlier, the merits of that counterclaim would have to be determined in the High Court Action. The applicant has not been guilty of delay in pursuing this counterclaim.

14. For the above reasons, I have set aside the statutory demand and awarded costs of the application to the applicant on a gross sum basis assessed at HK$12,000.00.