XCHRX Re Hon Seng Engineering Ltd.

HCCW 59/00

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) No. 59 of 2000

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DECISION

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1. This is an application by Wenden Engineering Service Limited ("Wenden") for leave to be substituted as petitioner in the Petition to wind up Hon Seng Engineering Ltd ("the Company").

2. Rule 33 of the Winding-Up Rules gives the Court the right, in the prescribed situations, to "substitute as petitioner any creditor ... who in the opinion of the court would have a right to present a petition and who is desirous of prosecuting the petition".

3. The Petition was presented last year by Jason Engineering Company. The Company disputed that it was indebted to Jason and in February 2001, evidence became available in support of the Company's position such that Jason had to withdraw as petitioner.

4. There was then an application by Lee Yu Kee Fire Protection Ltd to be substituted as petitioner, which was ordered on 9 February 2001.

Wenden's application

5. On 8 March 2001, the present summons was issued by Wenden for substitution as petitioner at the same time that Lee Yu Kee indicated it was withdrawing as substituted petitioner (Jason, Lee Yu Kee and Wenden having instructed the same solicitors). An affirmation of Chan Kwok Wa in support was filed on the same day. The summons was fixed for hearing on 15 March 2001.

6. On 13 March 2001 however the Company filed evidence denying its indebtedness to Wenden. Consequently, at the hearing on 15 March 2001, I gave directions as to the filing of further evidence. Further evidence has now been filed by Wenden and the Company which is dealt with below.

Approach on application for substitution

7. The first issue that has arisen for consideration is whether the Court should consider the evidence on the issue of indebtedness at this stage at all. Counsel for Wenden has submitted that a creditor who presents a petition initially (such as Jason) is taken to have established a prima facie case just by making the usual short verifying affirmation. A creditor who seeks to be a substituted petitioner should not have to shoulder a higher burden of proof.

8. Counsel for Wenden referred me to Boyle and Marshall's Practice and Procedure of the Companies Court p.293 paragraph 9.68:-

"in the vast majority of cases, a supporting creditor ... will make his application for an order for substitution orally in open court on the hearing or adjourned hearing of the petition when it becomes clear that the present petitioner ... is not pursuing his petition ... No formal application need be issued. ... Where there is only one supporting creditor and the petitioner does not pursue the petition, the court will not refuse substitution merely because the company contends that the alleged debt of the applicant for substitution is disputed: in such cases, the court will usually order substitution and give directions for the filing of evidence" [my emphasis].

9. The approach to be adopted does not appear to have been decided in any case in England or in Hong Kong. I have been referred by those appearing for the Company to the decision of the Court of Appeal in Re S. Zhong Shan International [1990] 1 HKC 90. However the Court of Appeal was not laying down any general principles but was dealing with a procedural position particular to that case. The judge at first instance had ordered the company to be wound up on the original petitioner's case, but the Court of Appeal held that the company's appeal against that order should be allowed. The application for substitution had not been adjudicated upon by the judge at first instance, but since the winding-up order had already been made, the Court of Appeal entertained the renewed application in the respondent's notice and determined the issues raised pursuant to s.13(4) of the High Court Ordinance and Order 59 rule 10(3).

10. In my view the approach that should be taken in an application for substitution is as follows. If all that the company does at the application for substitution is to contend, but without having adduced evidence, that it disputes the debt of the applicant for substitution, then the court may order substitution and give directions for the filing of evidence, so that the company may subsequently, if it wishes to, apply to strike out the petition on the ground that there was a bona fide disputed debt on substantive grounds.

11. However, if at the hearing of the application for substitution, the company has already adduced evidence seeking to show that it bona fide disputes the applicant's debt on substantial grounds, then that issue should be determined by the Court before making an order for substitution, because material has been placed before the Court for it to arrive at an "opinion" whether the applicant "would have a right to present a petition" under rule 33.

12. Procedurally, it would only be telescoping the steps that would be taken at subsequent stages if at the hearing of the application, the company had not yet adduced evidence disputing the debt. A saving in time and costs would also be effected.

13. There may be a concern that where a previous petitioner had withdrawn and an application for substitution was still pending, the company would be left in an uncertain position. I think however that that concern can be met by the Court ordering that the order for substitution, if it is made, should take effect from the date of the application.

Wenden's case for substitution

14. I now turn to the evidence. Wenden's application was supported by an affirmation of Chan Kwok Wa, its project manager, and a draft Re-Re-Amended Petition was exhibited.

15. In this draft petition, as in Chan's affirmation, Wenden's case is that it was a sub-contractor of Technic Construction Company Ltd ("Technic") for a building project. The sub-contract was oral.

16. In August 1995 when payment was due to be effected by Technic to Wenden, Wenden only received 95% of the payment and the payment was made, not by Technic, but by the Company.

17. Wenden was told by Tang Chuen Fook, a person with whom Technic apparently had a close connection, that the Company (which was controlled by Tang Chuen Fook and his son Tang Ka Wai) was used as a "vehicle" to receive 5% of the payment as "management charges". However, Tang Chuen Fook would personally guarantee payment to Wenden within 28 days after payment certification by the employer, irrespective of whether Technic had put the Company or himself in funds.

18. Chan says in his affirmation that in reliance upon that promise, Wenden raised no objection to what it regarded as a variation of the payment method in its sub-contract.

19. Thus, it would appear that Wenden's case is not that the Company was itself a sub-contractor, between Technic and Wenden.

20. Thereafter, payments were made by the Company to Wenden in the course of the building works. However, payments were not punctually made and in August 1997, Wenden sued Technic and Tang Chuen Fook in HCCT 120/97. The Company was not made a defendant, although it was mentioned in the Statement of Claim along the lines of the matters set out above.

21. In 1998 however, as a result of Wenden's persistent pressure for information and payments, 8 cheques were issued by the Company and delivered to Wenden. The 8 cheques amounted to $1.45m odd. In Chan's 2nd affirmation, he says that the cheques were "handed to and received by Wenden purportedly in partial discharge of the debt" of HK$17.5m due by Technic and/or Tang Chuen Fook to Wenden.

22. The 1st cheque was honoured. Three others (totalling $600,000) were however dishonoured upon presentation. Notice of dishonour was given and in the draft Re-Re-Amended Petition, Wenden claims that the Company is liable as issuer of the cheques.

23. In support of its case that the Company is indebted to it, Wenden has also pointed to the fact that Tang Ka Wai has on behalf of the Company admitted on affirmation that the Company is indebted to Wenden. In an attempt to show that the Company is solvent, Tang had in his 4th affirmation made on 14 December 2000 caused to be prepared a "simple account showing its [the Company's] debtors and creditors". The exhibited account showed that the Company was indebted to Wenden in the sum of $13,668,270.20. It has not been alleged by the Company that any of this has since been paid.

24. Wenden has also written to the provisional liquidators of the Company in relation to its intention to amend the pleadings in HCCT 120/97 to include the Company as a defendant. However, no steps have yet been taken to effect an amendment.

Company's case

25. The Company's case is contained in the 7th and 8th affirmations of Tang Ka Wai. Essentially, three points are raised.

26. First, in Tang Ka Wai's 8th affirmation, he seeks to restrict the Company's admission in his 4th affirmation and exhibit "TKW-40" that it was indebted to Wenden. He says that "it was admitted that Wenden was one of the creditors of the Company in TCD019 [the project], but it must be on the contractual relationship that Wenden was the sub-contractor to Hon Seng (as we constantly asserted). Wenden having denied such contractual relationship, is barred from relying on such admission".

27. Secondly, as for the dishonoured cheques, a total failure of consideration is relied upon as the Company was only a "vehicle" for the channelling of payment to Wenden.

28. Thirdly, it is alleged that the Company had not received any money designated for payment to Wenden. According to Tang Ka Wai, Technic or Tang Chuen Fook had withheld this money from the Company.

29. Although Tang Ka Wai's 4th affirmation was not explicit in defining the circumstances in which the Company accepted its indebtedness to the creditors listed in "TKW-40", I am prepared for the purposes of the present application to accept that that is so, and would therefore not take the admission into account.

30. However, there is the question of the dishonoured cheques. I cannot see how the Company can say that it has a bona fide substantial dispute based on total failure of consideration. The cheques were issued after Wenden had instituted HCCT 120/97. Chan says Wenden was pressing for payment and information, and these cheques were given by the Company in purported partial repayment of the claim against Technic and Tang Chuen Fook.

31. Tang Ka Wai accepts in his 8th affirmation that the cheques were issued by the Company to Wenden as a result of negotiations in which he (representing the Company) was involved. Forbearance (by Wenden) to enforce an existing claim against a third party (Technic or Tang Chuen Fook) is adequate consideration for a cheque: consideration need only move from the promisee (i.e. Wenden, the payee of the cheques), it need not move to the promisor (i.e. the Company, the drawer of the cheques). Wenden is therefore entitled to claim against the Company on the dishonoured cheques. Although Wenden has continued the action against Technic and Tang Chuen Fook for an amount including the amount of the cheques, there has not been any election yet.

32. Accordingly, I take the view that there is no merit in the Company's contention that it has a bona fide substantial dispute based on total failure of consideration.

33. As for the third point that the Company has itself not received the money, this is irrelevant to Wenden's case based on the dishonoured cheques. In any event, it would appear from the documents exhibited at "CKW-5" and "CKW-7" (at pages 105, 122, 129 and 130) that Technic had paid at least part of the money to the Company. I would also note that the Company has accepted in Tang Ka Wai's 8th affirmation that Wenden had not inflated its claims, so that there would be no reason for any money to be withheld from it.

Order

34. In the circumstances, I would order that Wenden Engineering Service Company Ltd be substituted as petitioner in the petition, such order to take effect from 8 March 2001 being the date of the summons. I would also give an order nisi that the costs follow the event, i.e. that the Company pay Wenden the costs of the application, save the summons and Chan's supporting affirmation which would have had to be filed irrespective of the Company's opposition and which should therefore be costs in the petition. I would direct that the amended petition be filed within 14 days.