YAT KWAI CONSTRUCTION CO LTD

HCCW 716/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 716 OF 2002

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J U D G M E N T

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1. This is a petition to wind up Yat Kwai Construction Company Limited ("the Company") presented by Shun Shing Construction and Engineering Company Limited on the ground that it is unable to pay its debts.

2. The debt in the petition is HK$203,049.04, being the taxed bill of costs with interests thereon in HCA No. 1907 of 2001, which has since been re-numbered as HCCT No. 51 of 2001 ("the High Court Action"). The order for costs in the petitioner's favour was made on 4 May 2001 upon the petitioner's application for an interlocutory injunction to restrain the Company from remaining on the building site in respect of a project at Aberdeen Inland Lot No. 435 ("the Shum Wan project"). Costs awarded in the petitioner's favour were taxed at HK$183,112.00 and an allocatur was issued on 5 June 2002.

3. On 11 June 2002, the petitioner served a demand for HK$203,049.04, being the amount of the taxed costs with interest from 4 May 2001 to 11 June 2002. As no payment was made by the Company, the petition was presented on 3 July 2002.

4. Leave was given by the court for a director, Mr Mak Yat Kwai, to represent the Company in the winding-up proceedings, as the Company has no funds to arrange for legal representation.

5. On behalf of the Company, Mr Mak has filed two affirmations in Chinese opposing the petition.

6. On 18 November 2002, notice was given by a former employee to appear on the hearing of the petition and to support it. The Company owed this employee, Mr Mark Tak Sheung, an amount of HK$7,082.00, which was awarded by the Labour Tribunal in November 2001. On the day before the adjourned hearing of the petition, the Director of Legal Aid, who has been acting for this employee, wrote to the court stating that the judgment debt has been paid in full to this employee and he therefore withdrew his support for the petition.

7. Thirty-seven other creditors have given Notice of Intention to appear as supporting creditors, somewhat belatedly one or two days before the adjourned hearing and nine of them have appeared in person at this hearing. The total amount owed to these thirty-seven supporting creditors, who are all former employees, is based on Labour Tribunal awards in the aggregate sum of HK$453,492.04.

8. On 24 September 2002, the Company issued a summons in the High Court Action seeking a stay of execution on the allocatur issued on 5 June 2002, which formed the basis of this petition. I understand that the application for stay for execution has been adjourned sine die by a master on 28 October 2002, as the Company had not by then obtained leave to be represented in the High Court Action by a director. It would appear that no further steps have been taken by the Company to restore the application for stay of execution.

9. The Company has opposed the petition on three grounds.

10. Firstly, it is stated that the interlocutory injunction granted by the court with costs to the petitioner was made in the absence of the Company. It is claimed that the Company was unable before the hearing of that application to give details of its opposition and that the petitioner had obtained the injunction without providing to the court all material information. Hence, it would be unfair to make the Company pay the petitioner's costs of the application before the merits of the substantive proceedings have been adjudicated.

11. There is no substance in this ground. The order made by the court was that the costs of the application by way of an inter partes summons, the ex parte application and the execution of the order granted ex parte, are to be to the petitioner. There is no appeal from this order and nothing more need be said.

12. Secondly, it is claimed that the petitioner had already deducted the sum due on the allocatur from various amounts due from the petitioner to the Company on three other projects in Tin Shui Wai (HK$163,200.00), Tsz Ching Estate (HK$43,235.00) and Homantin (HK$28,536.20), in the total sum of HK$234,971.20, which exceeded the debt due in the allocatur.

13. There is no substance in this ground either. The Company has adduced evidence showing that it had sought payment in respect of the Tin Shui Wai project on 10 August 2002, being the final sum due on completion of the project in the sum of HK$163,200.00. However, the documents adduced by the petitioner have shown that the final sum had been withheld by the petitioner since 2000, well before the liability to pay costs on the allocatur arose. The final sum was withheld not for the reason as alleged by the Company but because of the rectification of defective work that the petitioner had caused to be carried out by another sub-contractor in the sum of HK$192,000.00, as evidenced by a letter and invoice of that sub-contractor in November and December 2000.

14. As for the other two amounts allegedly deducted by the petitioner, there is no document in support produced by the Company that the petitioner has applied these amounts (which are insufficient to set off the sum due on the allocatur) in discharging part of the amount due on the allocatur. Further, there is a dispute by the petitioner whether the sum withheld by the petitioner in respect of the Tsz Ching Estate project should be HK$43,235.00 or merely the amount of HK$19,185.00 which was the retention money. As for the amount withheld by the petitioner in respect of the Homantin project, this was withheld by the petitioner since October 2000, again well before the Company's liability to pay costs in the High Court Action arose.

15. The third ground of opposition raised by the Company is that it has a genuine and serious cross claim against the petitioner in that the Company has made a counterclaim in the High Court Action in the sum of HK$16 million odd, being the balance of the sums due and owing from the petitioner to the Company for work done in the Shum Wan project.

16. The High Court Action was commenced by the petitioner against the Company in April 2001, alleging that the Company was in breach of three contracts in respect of the Shum Wan project, in that there was delay in completion and defective works and that the petitioner had accepted the Company's repudiatory breach and terminated the Company's employment in April 2001. It is alleged that the Company is liable to the petitioner for liquidated damages in the total sum of HK$10 million. The petitioner further claims damages for breach of contract; HK$1 million odd being sums paid by the petitioner to the Company's employees and sub-contractors for monies owed to them by the Company; and HK$1.9 million odd being payments made by the petitioner regarding wages to employees of the Company and its sub-contractor under s. 43C of the Employment Ordinance, Cap. 57.

17. The Company filed a defence and counterclaim in September 2001, in which it is pleaded that the Company was not responsible for any alleged delay and defects and that the provision for liquidated damages is not enforceable as a penalty clause. It is further asserted that the termination of the Company's employment was unlawful, and that the Company's inability to pay employees and sub-contractors was due to the petitioner's wrongful failure or refusal to pay the Company. The Company counterclaims HK$16 million odd, being the value of works done under the three contracts in the sum of HK$66 million odd, less payments received and retention money of HK$49 million odd.

18. The petitioner filed a reply and defence to counterclaim in October 2001 denying the Company's allegations and asserting that the total balance due to the Company was only HK$554,606.15, nowhere near HK$16 million as claimed by the Company.

19. No information has been provided by the petitioner as to what steps, if any, were taken by the petitioner to pursue the High Court Action since October 2001. According to the Company's affirmation, the Company is waiting for the High Court Action to be set down for trial. I have had no explanation from the petitioner why no further steps have been taken to bring the action to trial.

20. Mr Jonathan Wong, who appeared for the petitioner, accepted that clearly there are issues between the petitioner and the Company in the High Court Action that cannot be resolved on the hearing of the petition. He has not suggested that the counterclaim brought by the Company in the High Court Action is not a genuine and serious cross-claim. Further, there is no suggestion that the Company has not pursued its counterclaim in the High Court Action with any degree of seriousness. The Company has been acting without solicitors in the High Court Action and I was told by Mr Mak at this hearing that he has recently obtained leave from the court permitting him to act for the Company in defending the High Court Action. The Company has exhibited some of the documents in the winding-up proceedings to support its contention that it does have a meritorious claim against the petitioner and that the petitioner's allegations of delay and defects attributable to any fault of the Company were unfounded.

21. I find that the Company does have a genuine and serious cross-claim in its counterclaim in the High Court Action that exceeds the petitioning debt.

22. Mr Wong also appears to accept that the petitioner may not rely on its "reverse cross-claim" to counter the argument that the Company has a genuine cross-claim. The reverse cross-claim in this instance is the petitioner's claim against the Company in the High Court Action, being the claim for liquidated damages, the claim for amounts paid to the Company's employees and sub-contractors, and the claim for unliquidated damages for breach of contract. This seems to me to be a correct concession in that it cannot be said that the Company would have no realistic defence to the reverse cross-claim, which on the available evidence is strongly opposed by the Company, and may or may not succeed against the Company (Montgomery v Wanda Modes Ltd [2002] 1 BCLC 289 at 300g to 301e).

23. Where the court has come to the view that a company does have a serious and genuine cross-claim not less than the petitioning debt, there is a prima facie rule that the court would exercise its discretion not to wind up the Company but would dismiss or stay the petition in the absence of special circumstances (Re LHF Wools Ltd [1970] 1 Ch. 27 and Seawind Tankers Corporation v Bayoil SA [1999] 1 Lloyd's Report 211).

24. Some of the matters are not regarded as constituting special circumstance for this purpose, such as the finality and unappealability of the judgment debt that formed the basis of the petition, the concern as to the potential commercial insolvency of the Company, and the absence of any real evidence that the petitioning debt could be paid (Bayoil, supra. at 216).

25. As for the absence of an order for stay of execution of the allocatur on which the petition is founded, I do not think I should take a harsh view against the Company for not restoring its application for stay of execution. The Company was acting without legal advice and might not have appreciated the importance of restoring that application when it was occupied with the filing of evidence to oppose this petition.

26. The Company has asserted on affirmation that if a winding-up order is made, the Company would be forced to stop pursuing its counterclaim against the petitioner for HK$16 million, just because it is unable at the moment to pay a much lesser debt demanded by the petitioner in the sum of HK$200,000.00 odd. It is submitted that it would be unfair to the Company if winding-up proceedings are used to stifle the counterclaim of the Company. I think there is substance in this complaint.

27. The Company has not provided details of its financial position, but there is no suggestion that it is flush with assets. Indeed, all indications are to the contrary. The Company has sought leave for it to be represented by a director in the winding-up proceedings and in the High Court Action, because it could not afford to engage lawyers. Evidence of its financial status would have been adduced by the Company before the Master hearing the application for the court to be satisfied that the financial position is such that the Company could not afford to employ solicitors. According to the various notices filed by the thirty-seven supporting creditors, an amount of over HK$450,000.00 is owing from the Company to these former employees.

28. The petitioner has terminated the Company's employment in the Shum Wan project since April 2001. As for the other three projects mentioned by the Company being work undertaken as the petitioner's sub-contractor in Tin Shui Wai, Tsz Ching Estate and Homantin, work on these projects had been completed for some time. There is no suggestion from the petitioner that the Company is still engaged in any other projects for the petitioner. There is no evidence before the court that the Company is actively trading.

29. The petitioner has carried out a litigation search which showed that apart from the High Court Action, a bank has commenced mortgage proceedings against the Company in 1999, 2000 and 2001 for possession of mortgaged properties. Further, there would appear to be two fairly substantial claims against the Company in the sum of HK$2 million odd in each instance, and one of these claims was brought by Hsin Chong Construction Company Limited ("Hsin Chong") being payments made to the Company's employees under s. 43C of Cap. 57. The petitioner has deposed on affidavit that the Company is "hopelessly insolvent".

30. On the evidence, the Company had difficulty in paying its workers since July 2000.

31. There is no information of any assets likely to be realised by the liquidator on a winding-up, other than the Company's cross-claim against the petitioner and amounts likely to be received from Hsin Chong as a result of the verification and checking of the final accounts. On the available evidence, it is entirely possible that the liquidator may find himself without funds to pursue the cross-claim against the petitioner even though the liquidator may have formed a favourable view of the merits of this claim. As things now stand, there does not appear to be any problem about funding the litigation in the High Court Action with one of the directors acting for the Company.

32. Are there any special circumstances in this instance to depart from the rule in LHF Wools and Bayoil in dismissing or staying the petition where there is a genuine and serious cross-claim? I am unable to see any. I reject the submission that the Company is trading or that it has assets likely to be dwindled away if there should be a delay in the winding-up proceedings, I do not think I can draw such inferences on the evidence. I reject the submission that there is a need for liquidators to be appointed to investigate into allegations of unfair preference merely because the Company is the process of verifying and checking final accounts with Hsin Chong.

33. I have been referred to a number of cases in which the court has exercised its discretion in making a winding-up order or in granting a stay or dismissing the petition where there is a genuine cross-claim. I do not propose to refer to these authorities, as whether special circumstances are established to justify a departure from the rule that I have mentioned would depend on the circumstances of each case.

34. For the above reasons, I decline to exercise my discretion to make a winding-up order on this petition. As there are thirty-seven supporting creditors, what I would do is to adjourn this petition for two weeks to 7 April 2003 9:30, to give the supporting creditors an opportunity of seeking legal aid for the purpose of making an application to substitute Shun Shing Construction and Engineering Company Limited as a petitioner in this petition on the adjourned hearing.

35. As for the costs on this hearing, I have ascertained from Mr Mak that he does not wish to seek any costs against the petitioner. I therefore make no order as regards the Company's costs in this petition. I would reserve the costs of the Official Receiver on this petition to the adjourned hearing on 7 April 2003.