Re 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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REASONS  FOR  DECISION

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The application

1. This is an application by the Hong Kong Housing Authority ("HKHA") on 4 July 2001 under section 186 of the Companies Ordinance, Cap. 32, for an order that notwithstanding the winding-up order dated 18 April 2001, HKHA do have leave to commence proceedings against B+B Construction Company Limited ("the Company"), by joining the Company as a defendant in the High Court action being HCCT No. 39 of 2001, alternatively to commence arbitration proceedings against the Company pursuant to the contract between HKHA and the Company dated 7 March 1997, provided that no judgment or order obtained by HKHA in the High Court action or in the arbitration proceedings shall be enforced against the Company without leave of the court. The summons was issued on 4 July 2001 and the amended summons seeking leave in the alternative to commence arbitration proceedings against the Company was issued on 28 March 2003.

2. The summons was initially scheduled to be heard on 14 September 2001. The hearing was adjourned to 16 January 2002 and later to 19 March 2002 and eventually to 4 April 2003, for HKHA to ascertain the existence of insurance policies that may provide indemnity for the claim of HKHA against the Company and to obtain documents relating to such policies.

3. This is not the first occasion on which an application was made for leave to commence proceedings against the Company. On 12 June 2001, Yuen J (as she then was) granted leave, on the application of Union Charm Development Limited ("Union Charm"), to proceed with arbitration proceedings against the Company notwithstanding the liquidation. The issue of whether there is insurance cover for the claim of Union Charm, which is in the region of HK$1,100 million, was not raised by Union Charm or the provisional liquidators (who were subsequently appointed joint and several liquidators of the Company on 1 August 2001) at the hearing before Yuen J and I was not told the reason why this was not raised. At the hearing before me, the existence of insurance for the claim of HKHA and the indemnity that such insurance may provide for legal costs in resisting the claim assumed great importance. At the conclusion of the hearing, I made an order granting leave as sought. These are the detailed reasons for my decision.

The discretion under section 186

4. It would be convenient first to set out the legal principles on the exercise of the discretion under section 186. I have taken them from the submissions of Mr Bleach, SC, who appeared for HKHA. They are accepted by Mr Harris, who appeared for the liquidators.

5. The test as to the exercise of the court's discretion whether or not to grant leave is what is right and fair according to the circumstances of each case and this involves a balancing exercise (In Re Aro Co. Ltd [1980] 1 Ch 196 at 209E to H; Re Axona International Credit & Commerce Ltd [1985] 2 HKC 675 at 680A to 681F; Re King's Dyeing & Weaving Factory Ltd (No. 2) [1986] HKC 621 at 623E to H).

6. If the issue can be conveniently decided in the course of the winding up, leave will be refused in the absence of special circumstances, as there is a positive benefit in having the issue decided by the liquidator since this should be less expensive and quicker than an independent action and the liquidator is obliged to act even-handedly as between each class of claimant so prejudice would not normally be caused to any particular class of claimant (Re Exchange Securities & Commodities Ltd & Ors. [1983] BCLC 186 at 195h to 196e).

7. Proceedings will be allowed to be commenced or continued where an action is the most convenient method of trying a question, and specifically so when the questions would involve substantial issues of facts that are in dispute and also matters of law of complexity (Halsbury's Laws of England, 4th ed., Vol. 7(3), para. 2654; Re King's Dyeing and Weaving, supra).

8. Leave is more likely to be granted where the company in liquidation is insured in respect of the claim made against it as the judgment will be funded to the limit of the cover by the insurance company and the costs of the action will be borne by the insurance company (Bristol & West Building Society v. Trustee of the property of Back and another (bankrupts) [1998] 1 BCLC 485 at 488g to 489h, 490h to i).

The claim of HKHA against the Company

9. For present purpose, it is unnecessary to investigate the merits of the claim of HKHA against the Company, so long as the court is satisfied that the claim is "not clearly unsustainable" (Bristol & West Building Society, supra at 489a to d). There is no suggestion by the liquidators that this claim, which they have estimated to be in the region of HK$500 million, is unsustainable.

10. How the claim of HKHA arose, as taken from the supporting affidavit filed by HKHA, may be summarised as follows.

11. HKHA was the employer of a Home Ownership Scheme Project at Tin Shui Wai Area 31, Phase 1 ("the Project"), which involved the construction of six 41-storey blocks of flats. The Company was engaged by HKHA to design and construct the piling foundations pursuant to a contract dated 7 March 1997 for the contract sum of HK$77 million. HKHA appointed Hsin Yieh Architects Associates Limited ("HKA") and Joseph Chow & Partners Limited ("JMK") as, respectively, the architectural and engineering consultants for the Project. The Company carried out and completed the foundation works between September 1996 and June 1997.

12. In July 1999, with the superstructure almost completed, it was discovered that there was uneven settlement to the foundations and investigations revealed that the settlement was caused by irregularities in the construction of the piles accompanied by falsification of the piling records. The resulting scandal has attracted a great deal of publicity and public concern. HKHA brought proceedings in the High Court against HYA and JMK in May 2001, being HCCT No. 39 of 2001, shortly after the winding-up order was made against the Company. The Statement of Claim in that action ran into 69 pages with 14 appendices. The acts and omissions of the Company featured prominently in the Statement of Claim. From the pleading, it would appear that the claim for unliquidated damages against the Company would be founded in breach of contract in the design of the pile foundations and in fraudulent mispresentation and/or deceit as to the length of the as-built piles. The losses suffered by HKHA comprise, inter alia, the cost of remedial works and associated reinstatement works, the compensation payable to the superstructure contractor consequent upon the interruption to the superstructure works, and the loss of interest and other incidental costs arising from the return of deposits to purchasers and from delay in receipt of the completion monies.

13. On behalf of HKHA, it was submitted that the technical issues pertaining to the Company's liability and the quantum of damages are numerous and highly complex, and that it is not within the usual sphere of competence of a liquidator to resolve these issues when called upon to adjudicate HKHA's proof of debt. Further, as there are serious issues of fraud raised in the proposed proceedings, it would be more appropriate for such issues to be determined through the due process of law. It is not known if the allegations of fraud and dishonesty would be disputed by the Company.

14. HKHA has appointed engineering experts to investigate the cause and extent of differential settlement for the purpose of litigation and substantial reports have been prepared. A summary of the technical issues arising from the investigation was given in the first affirmation of the solicitor for HKHA. Some of the findings of HKHA's experts have been disputed by the experts for HYA in the High Court action. A thorough understanding of the theory of geotechnical and structural engineering, and of on-site testing procedures, will be required to evaluate the alleged liability of the Company for breach of its contractual duty of care. Further, to determine whether remedial works are required and whether the scope of the remedial work done is reasonable to mitigate its loss, extensive structural analysis has been carried out by the experts engaged by HKHA. The interpretation of such analysis will require an understanding of the mechanism of failure and the capacity of the individual parts of the structure to withstand stressing. Further, as the restoration works that have been carried out are novel and unprecedented in nature, an in-depth assessment of the efficacy of the remedial measures is required in the event that the need and the scope of the remedial work is challenged.

15. It is accepted by the liquidators that the above technical matters are not within their sphere of competence. There is no mechanism within the procedure for adjudication of proofs of debt by the liquidator in section 263 of Cap. 32 and Rules 79 to 105 of the Companies (Winding-up) Rules for any issues in respect of such technically complex matters to be resolved in a fully informed manner. What the liquidators have proposed is that they would call on their legal advisers and engineering experts to assist them in assessing the merits and quantum of the claim of HKHA. With this assistance, the liquidators claim that they would be able to make a credible determination.

16. It is not impossible for the liquidators to make a determination in the manner as proposed with the assistance of professional expertise. However, given the nature of the dispute and the complexity of the technical issues that may be raised, I am satisfied that these issues ought to be litigated, whether in the High Court action or in an arbitration, for the dispute to be resolved fairly on a fully informed basis, with the benefit of cross-examination and detailed submissions.

17. To date, almost two years after the winding-up order was made, the liquidators have not called on the creditors to lodge their proofs of debt. The reason for this delay, as I was given to understand, is that the liquidators have concentrated on their efforts to generate revenue for the Company instead of expending funds to adjudicate any claims, until they are satisfied that there will ultimately be funds available for distribution and they are able to adjudicate the claims of all creditors.

18. I should also mention that under rule 95 of the Companies (Winding-up) Rules, a creditor dissatisfied with the decision of the liquidator in respect of a proof of debt has an unrestricted right of appeal to the High Court. If this right of appeal were exercised by HKHA, the dispute could only be resolved after a full trial.

19. I mention the above matters because it does not necessarily follow that adjudication by the liquidators of the proof of debt would be a more expeditious and cheaper way of determining the claim of HKHA as compared to litigation in the High Court action or in an arbitration.

The financial position of the Company

20. As mentioned earlier, the court would need to do a balancing exercise in this situation and consider all the circumstances of the case to reach a decision of what is fair and right in the circumstances. Mr Harris has submitted that the liquidators are not taking an adversarial position and they are merely asking the court to exercise its discretion with regard to the best interests of the general body of creditors.

21. The financial position of the Company is one of the matters that should be taken into account. This is dealt with in two of the affidavits filed by the liquidators.

22. In summary, as at 28 February 2003, the liquidators have realised assets in the approximate sum of HK$26.52 million. Taking into consideration the estimated preferential claims, outstanding legal and professional bills received, and the liquidators' fees incurred as at that date, the liquidators estimated that the Company's net assets have been reduced to a sum of approximately HK$8.11 million.

23. The total claims against the Company are in the region of HK$2,500 million.

24. The liquidators have estimated the costs of contesting HKHA's claim (covering legal costs, liquidators' fees and expert's fees) to be in the region of HK$15.2 million, and the costs of adjudication of the proof of debt to be submitted by HKHA at HK$3 million. Leaving aside the question if these are realistic and reasonable estimates (which HKHA does not accept), the costs of contesting HKHA's claim in litigation would have exhausted the net assets of the Company as currently estimated. This is where the importance of insurance cover for HKHA's claim comes in.

The local insurance cover

25. HKHA has obtained a copy of a contractors "all risks" policy issued by the American Home Assurance Company on 9 October 1996 in respect of the Project covering inter alia the Company as an insured. Clause 4.3.1 of the policy provided for an indemnity of all costs and expenses of litigation recovered by any claimant against the insured. The period of insurance covered by this policy was in respect of a construction period of 12 September 1996 to 11 June 1997 and a maintenance period of 12 June 1997 to 11 June 1998. The limit of indemnity was HK$10 million for any one occurrence unlimited for the period of insurance.

26. There is evidence before the court that from January 1997, Bilfinger + Berger AG ("B+B Germany"), the ultimate parent company in Germany, arranged global third party liability insurance for its subsidiaries worldwide, for claims exceeding Duetsche Marks 1 million (which was then equivalent to about HK$5 million), up to a limit of DM 50 million (then equivalent to about HK$250 million) per occurrence. The global insurance covered Kin Ching China Limited ("Kin Ching"; then named B+B Asia Limited) and the subsidiaries of Kin Ching, which included the Company. The lead global third party liability insurer was Nordstern, Frankfurt, and Nordstern has become part of the AXA Group subsequently. The global insurance was arranged through the in-house insurance broker of the Bilfinger + Berger Group, known as Gesellschaft für Bau-Versicherungs ("GBV"), which is a wholly owned subsidiary of B+B Germany.

27. In consultation with its German head office, Kin Ching arranged for its Hong Kong insurance broker to obtain local third party liability cover of HK$5 million for Kin Ching and its subsidiaries, including the Company, to deal with claims under DM 1 million. Thus, according to a cover note issued by Union Des Assurance De Paris for the period of insurance from 1 January 1997 to 31 December 1997, insurance was provided to Kin Ching and its subsidiaries up to the limit of HK$4,965,000.00 (equivalent to DM 1 million) for any one occurrence unlimited for the period of insurance, subject to difference in limits cover under the global policy up to DM 50 million.

28. In November 1997, the Hong Kong insurance broker advised the Company that the global policy had been renewed for another year and that the renewal cover note and policies would be forwarded to the Company in due course.

29. The cover note for 1998 has not been obtained by HKHA but there was one for the period of 1 January 1999 to 31 December 1999 for the annual third party liability insurance, covering, inter alia, the Company to the limit of HK$5 million for any one occurrence with the number of occurrences unlimited during the period of insurance, and subject to difference in conditions and difference in limits cover under the global policy up to DM 50 million. The insurer was AXA Insurance Hong Kong Limited.

30. According to an internal memorandum of Kin Ching dated 8 February 1999 and distributed to, inter alia, the Company, it was stated that for the insurance for third party liability, such insurance was included into the "Bilfinger Berger Germany Global Program". For the limit of indemnity, it was HK$5 million for "Local Basic Coverage" and HK$250 million for difference in conditions and difference in limits coverage as part of the basic cover, and that the total coverage was HK$250 million per event in each case for bodily injury and property damage and/or financial loss. The insurers were stated to be AXA Hong Kong Limited for "Local Primary Cover" with "Co-insurance as arranged by BB Germany".

31. By a letter dated 19 February 1999 from the Hong Kong insurance broker to the German broker GBV, the latter was asked to confirm that if the deductibles for difference in limits and difference in conditions claims were applicable under the global policy as the Hong Kong broker had assumed that the local policy arranged for DM 1 million in Hong Kong "is the in-fill cover for the deductible applicable under the Global Policy". The Hong Kong broker also stated that the premium rate had been increased due to increase in indemnity from DM 50 million to DM 100 million (then equivalent to HK$500 million). A reply from GBV dated 4 March 1999 confirmed the matters raised in the letter of the Hong Kong broker. Further, McLaren Toplis was informed by the letter of the Hong Kong broker dated 22 March 1999 that it was appointed the loss adjuster for the global policy in the event that "the claim may hit the Global Policies in case the claim exceeds DM 1 million".

32. It is clear from the above that there was in place at the material time a local policy which provided a first tier indemnity of HK$5 million and a global policy which provided the second tier of indemnity up to the limit of HK$500 million for any one occurrence during the period of insurance, and that the indemnity would apparently cover the claim of HKHA against the Company.

33. It would also appear from the minutes of a meeting with the Hong Kong broker and the loss adjuster on 12 October 1999 that Kin Ching had reported that investigation was being carried out for the Project in respect of the piling measurement and uneven settlement and it was suggested that the potential claim should be reported to the third party liability insurers. That was done as appeared from a letter of the broker to the Company dated 21 November 2000. The broker had also stated in its letter to the solicitors for the liquidators dated 25 April 2001 that the potential claim had been notified to the interested global insurers.

The global insurance cover

34. HKHA has not been able to obtain a copy of the global policy from the liquidators, Kin Ching, the insurers that issued the local policy, the local insurance brokers or the loss adjuster. An application was made on 18 April 2002 by HKHA for letters of request to be issued to the proper judicial authorities of Germany for the examination in Mannheim of Mr Hubert Diederich, the managing director of GBV and in K?ln of Mr Frank Knipprath of AXA Versicherungs AG ("AXA Germany") in relation to the global policy. The application was granted on 25 April 2002.

35. The court in Mannheim arranged a hearing on 30 August 2002 and summoned Mr Diederich to appear. Mr Diederich applied for cancellation of the hearing on grounds that I need not go into. His application was granted by the court but on an application for review by HKHA, the higher district order set aside the order of cancellation on 22 January 2003. The letter of request was remitted to the Mannheim court and Mr Diederich was summoned to attend on 12 March 2003 and he was ordered to produce the global policies at the hearing. Although Mr Diederich did attend court on 12 March 2003, he did not produce the policies and he was fined 900 Euro dollars for disobeying the court order. It would appear from a letter of B+B Germany to GBV dated 13 February 2003 that the latter was requested to return copies of all policies of public liability insurance.

36. Mr Diederich was summoned to appear again before the Mannheim court on 26 March 2003 but the hearing was not held as he has filed a complaint seeking a review of the decision to fine him for not complying with the order to produce the policy.

37. As for the proceedings in K?ln, Mr Knipprath was summoned to attend on 22 October 2002 pursuant to the letters of request. He too applied for cancellation of the hearing. The matter was remitted to a higher court and on 16 December 2002, a decision was issued that there was no reason to object to the requested disclosure of the policies and the case was remitted back to the K?ln court which summoned Mr Knipprath to appear on 25 February 2003. Mr Knipprath attended court but refused to give evidence and produced a letter from his employers forbidding him to produce the policies to third parties and asking him to return such policies immediately. On 12 March 2003, the court gave a decision dismissing his plea that he is entitled to refuse to give testimony. He has been summoned to appear again on 8 April 2003.

38. I should mention that in the proceedings in Mannheim and K?ln, the liquidators have co-operated with HKHA in that they have written to HKHA's solicitors stating that the Company would have no objection to the global policies being disclosed for transmission to the Hong Kong court in connection with the present application. The letters were placed before the courts in Germany.

39. It is clear from the above that B+B Germany is concerned at all costs to prevent the witnesses from disclosing the global policy, perhaps because of the probable impact on premium if a claim should be made by the Company on the global policy.

40. Because of the intransigence of B+B Germany, a copy of the global policy is not made available. Although the exact terms of the global policy are not known, it must have covered the same risks as the local policy as it was meant to provide for the second tier of indemnity for any claim exceeding HK$5 million. Further, there is on the available evidence a document relating to the global policy prepared by GBV, from which it would appear that in respect of public liability, "the insurer's liability covers both the settlement of justified claims and defence against unjustified claims". I agree with Mr Bleach that it would be strange if the global policy, which provides for second tier indemnity, does not provide cover for legal costs unlike the local policy.

41. According to the decision of the K?ln court on 12 March 2003, there is a relationship of trust between AXA Germany and both the policy holder (i.e. B+B Germany) and the insured person (i.e. the Company). Under German law, an insured person who is not in possession of an insurance policy may dispose of its rights vis-à-vis the insurance company if the policy holder does not intend to pursue the claims under the insurance contract and, in particular, if there are no reasonable grounds for the policy holder's refusal. In this situation, the interest of the policy holder in ensuring confidentiality, which is detrimental to the insured person, is subordinated to the interest of the insured person.

The implication of the insurance cover

42. Mr Bleach submitted that as a matter of commercial reality, the first tier insurer would be unlikely to incur expenses towards legal fees that may exceed the limit of indemnity of HK$5 million, but would more likely than not pay over HK$5 million to settle the claim. Mr Harris submitted that even if HK$5 million were to be paid over, this would not have made a material difference to the recovery analysis of the Company, in view of the vast claims of the creditors to the tune of HK$2,500 million, and it would not be justifiable for substantial costs to be incurred in litigation which would be out of proportion with the amount that might be recovered by HKHA from the available assets of the Company.

43. I fail to see why the limited cover from the local insurance should be disregarded. The position ought to be looked at in the totality with the cover provided in the global policy.

44. As for the global policy, Mr Harris proposed that the court might wish to consider adjourning the present application for the liquidators to bring proceedings in Germany to obtain a copy of the policy, on the basis that the costs of such proceedings are to be underwritten by HKHA. This is not an alternative that would appeal to me, having regard to the proceedings that have already been taken by HKHA in Germany, which necessitated the adjournment of the present application for a year. I do not see any cogent reason for this application to be further delayed.

45. I am satisfied this is an appropriate case to exercise my discretion in granting leave to HKHA as sought to commence proceedings against the Company in the terms that I have set out in the earlier part of this decision. In respect of the hearing on 16 January 2002, I made no order for the costs of HKHA and for the hearing of 4 April 2003, the costs of HKHA are to be paid out of the assets of the Company. As for the costs of the liquidators, their costs of the hearings on 16 January 2002 and on 4 April 2003 are to be paid out of the assets of the Company.