MILESTONE BUILDER ENGINEERING LTD v. YAU KWONG CONTRACTING LTD

HCMP 143/2020

[2020] HKCFI 2669

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 143 OF 2020

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J U D G M E N T

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1.  This is the substantive hearing of the Originating Summons ("OS") dated 24 January 2020 concerning the application by the plaintiff (“Milestone”) for an injunction order restraining the defendant (“YK”), whether by itself, or its servants or agents or otherwise howsoever, from presenting any petition to this Honourable Court for the winding up of Milestone based on a statutory demand served upon Milestone on 14 January 2020 (the "SD") claiming the sum of HK$4,987,048.68 plus further interest.

2.  By a contract entered into between Spring Moon Investments Ltd (the “Employer”) and Milestone dated 4 August 2017 (the “Main Contract”), Milestone undertook to be the main contractor for alteration and addition works at 22 Wang Yip Street, Yuen Long, Y.L.T.L. No 374 (the “Site”).

3.  Pursuant to the “MVAC and Electrical Installation Nominated Sub-Contract” entered into between Milestone and YK on 23 June 2017 (the “NSC”), YK became a nominated sub-contractor in respect of MVAC (mechanical ventilation & air conditioning) and electrical installation works at the Site (the “Project”).  There were 3 other nominated sub-contractors in the Project responsible for different types of construction works.

4.  The relevant debts stated in the SD (“Alleged Debts”) concern four interim payments (“NSC IP-18, IP-19, IP-20 and IP-21”) plus interests owed by Milestone to YK pursuant to the NSC.  There is no dispute that Milestone has not made all or any part of these payments. Particulars of NSC IP-18 to 21 are as follows:-

Description	Date of Invoice	Invoice amount (HK$)
NSC IP-18	18 December 2018	643,000
NSC IP-19	4 January 2019	992,000
NSC IP-20	23 January 2019	1,201,000
NSC IP-21	25 February 2019	1,853,000
Total:		4,689,000

5.  Under the NSC Clause 33.1[1], payment for work done by YK is to be made in accordance with the following mechanism:-

(1)  The Quantity Surveyor under the Main Contract ("QS") is to calculate the amount owing to each of the nominated sub-contractors in each Interim Certificate, which is to be issued to Milestone by the Architect under the Main Contract (“Architect”) [sub-clause (6)].    

(2)  Milestone is then required to pay to each of the nominated sub-contractors, including YK, the amount included in such Interim Certificates, less any amount properly deductible [sub-clause (7)].   

(3)  The payment is required to be made to each of the nominated sub-contractors within 14 days of Milestone receiving payment from the Employer [sub-clause (7)].

(4)  If Milestone withholds an amount due to YK and fails to satisfy the Architect that he has good cause for so doing, the Architect is required under clause 29.8 of the Main Contract to issue a certificate to that effect and the Employer will be entitled, but not obliged, to pay that amount to YK direct [sub-clause (8)].

6.  On 5 March 2019, the Architect issued a notice of default to Milestone pursuant to the Main Contract (the “Notice of Default”)[2], stating that it had committed the following defaults (collectively, “Milestone’s Defaults”):

(1)  Not proceeding regularly and diligently with works under the Main Contract despite the Architect’s warning letters;

(2)  Persistent failure to complete the external façade lighting control and programming to specification requirements, causing material detriment to the Employer; and

(3)  Refusal or persistent failure to comply with the Architect’s written notices requiring procurement of specified materials and proprietary products for timely completion of the Main Contract works.

7.  Upon certification from the Architect, on 23 March 2019, the Employer served on Milestone a written notice to determine its employment under the Main Contract (the “Notice of Determination”)[3]. By the operation of NSC Clause 38.1, upon the determination of the Main Contract, the NSC was also terminated at the same time.

8.  YK has repeatedly demanded Milestone to make payments[4]. However, almost 5 months after the Notice of Determination was served, Milestone alleged that no outstanding payment was due to YK.  Instead, it alleged that because YK had caused delay and was in default, a balance of HK$11,121,000 was owed from YK.  In particular, it was alleged that YK was “provisional liable” for 224 days of delay (between 11 August 2018 – 23 March 2019) and hence liquidated damages in the sum of HK$15,680,000 (the “Alleged YK LD”)[5].  This was the first time since the Notice of Determination some 5 months earlier, that Milestone claimed that YK had caused delay and was in default.  It is relevant to note Clauses 24.3 and 28.5(1) of the NSC:-

“24.3 The Contractor shall at the earliest opportunity give reasonable notice to the Sub-Contractor that loss and/or expense and/or liquidated damages are being or will be incurred clue to failure of the Sub-Contractor to complete on time.

28.5 If in the Contractor's opinion he has incurred or is likely to incur direct loss and/or expense and/or damages because the progress of the Works has been delayed or disrupted by a breach of contract or other default by the Sub-Contractor or any person for whom the Sub-Contractor is responsible the Contractor shall give notice of this to the Sub-Contractor within a reasonable time after the delay or disruption becomes apparent.”

9.  Between 10 September 2019 and 9 October 2019, YK repeatedly denied that it had caused or contributed to Milestone’s Defaults, and stressed that Milestone had not given any notice of default to YK pursuant to NSC Clause 36[6].

10.  Milestone’s next responses on 30 September 2019[7] were that:

(1)  the Employer had set-off HK$12,110,000 as liquidated damages, so it did not receive full payment for NSC IP 18 – 21; and

(2)  Milestone had submitted a claim for extension of time (“EOT”) and requested the Architect to identify the cause of delay. It would thus pay YK only if:

(a)  Milestone had received payment from the Employer, or

(b)  delay is proven not to be the responsibility of YK.

11.  On the issue of whether the Employer had paid Milestone for NSC IP 18-21, YK relies on an email from the Employer dated 9 October 2019 to YK (“Employer’s Email”)[8] stating they had paid the following amounts to Milestone under the Main Contract:-

Main Contract IP nos.	Amount paid by Employer to Milestone	NSC IP nos. included thereunder	Remarks
MC IP-20	HK$2,302,000	NSC IP-18 of HK$643,000
MC IP-21	HK$1,083,000	NSC IP-19 of HK$992,000	Deduct LD HK$9,730,000
MC IP-22	Nil	NSC IP-20 of HK$1,201,000	Milestone had not yet submitted invoice. HK$11,200,000 had been cumulatively deducted as LD
MC IP-23	HK$5,304,000	NSC IP-21 of HK$1,853,000	HK$12,110,000 had been cumulatively deducted as LD. Further, HK$1,665,000 had been made as advance payment

12.  Upon YK’s inquiry and YK’s request for direct payment by the Employer, the Architect wrote to Milestone[9] stating that:-

(1)  YK’s request for payment was under NSC IP 18-21 which were under MC IP 20-23.  The Architect had issued certificates of payment for MC IP 20 – 23, which had been paid by the Employer to Milestone;

(2)  the Main Contract was determined due to Milestone’s Defaults; and

(3)  Milestone was obliged to pay YK under the NSC.

13.  In a letter dated 9 October 2019 from YK to Milestone, YK stated that they were not responsible for the LD deducted by the Employer against Milestones and that the Employer had already paid for MC IP-20 to MC IP-23.  YK also pointed out that Milestone’s application for EOT was irrelevant to Milestone’s payment obligation under the NSC.

Plaintiff’s case

14.  Milestone argues that there are bona fide disputes between them and YK for the following reasons:-

(1)  Firstly, the LD deducted by the Employer under MC IP-21 in the sum of HK$9,730,000 far exceeded the total amount of “work done by all nominated sub-contractors” which was assessed by the QS as HK$1,410,000[10].  Therefore, Milestone did not in fact receive any payment from the Employer in relation to YK’s work. The Employer progressively increased the LD up to HK$12,110,000 in MC IP-23 which covered all works done by YK under NSC IP-18 to 21.  As such, pursuant to Clause 33.1(7) of the NSC, starting from payment certificate no. MC IP-21, Milestone was not obliged to make any payment to YK because no corresponding payments were received from the Employer.

(2)  Secondly, Milestone made application for EOT[11] and there were disputes with the Employer on the culpability of the alleged delays in the works which, if ultimately found to be valid by the Architect and Employer or by an arbitrator appointed to deal with the disputes, entitled Milestone to extension of time beyond the date of termination of 23 March 2019, and hence no liquidated damages should be deductible against it.

(3)  Thirdly, the events leading to the delays involved works of YK as well.  There were in fact delays in YK’s works as much as Milestone’s works or those of other sub-contractors. In the event that YK is found culpable for delays, corresponding LD imposed by the Employer would then be deductible against YK pursuant to NSC Clause 33.1(7).  Milestone argues that YK could be liable for LD up to HK$15,680,000[12].

Defendant’s responses

15.  YK argues that there was no bona fide dispute on substantial grounds for the following reasons:-

(1)  Milestone had in fact received payment from the Employer.

(a)   The Employer’s Email categorically stated that they had already paid Milestone for MC IP-20 to IP-23.  It was merely the case that the Employer exercised a set-off using the LD.

(b)  This was independently confirmed by the Architect[13]. In performing his role of supervision and certification, an architect or engineer is required to act independently, honestly, impartially and fairly as between the employer and the contractor, forming and acting on his own opinion, and applying his professional skill: Keating on Construction Contracts (10th ed, 2016), §§5-062 – 5-063.

(c)  Based on Milestone’s own evidence, it had received payments for MC IP-21 to IP-23.  The Employer released payment of HK$1,083,000 under MC IP-21[14]. This was a net payment after deducting an LD sum of HK$9,730,000 evidenced by a cheque from the Employer and cashed by Milestone[15].

(d)  According to Milestone’s own “Statement of Final Account”[16] as of 28 October 2019, the amount previously received from the Employer is HK$162,024,200.23.  This should be compared with the Architect’s certificate dated 7 January 2019 stating that after payment of HK$1,083,000, the total amount paid by the Employer would have been HK$156,446,200[17].  By simple arithmetic, Milestone must have received a further net payment of HK$5,578,000 from the Employer sometime between January and October 2019.  In fact, if one adds up Milestone’s entitlements under MC IP-22 (HK$274,000)[18] and MC IP-23 (HK$5,304,000)[19], one arrives precisely at the figure of HK$5,578,000. This could not have been a sheer coincidence.  They are the clearest proof that Milestone also received payments from the Employer under MC IP-22 and IP-23.

(5)  Milestone is not entitled to any deduction under the NSC.

(a)  Milestone’s stance has been constantly shifting in its correspondence and affirmation evidence.  To date, Milestone has failed to make up its mind as to how many days of delay it accuses YK as being responsible for, or how much liquidated damages it is entitled to set off against YK.

(b)  On 12 July 2018[20], Milestone’s letter alleged that YK was liable for 18 days’ delay.  The relevant items included “hoisting proposal for radiator” and “installation of gondola system”.  However, the Architect has never certified this delay to be YK’s fault.  These items were also not mentioned in Milestone’s consolidated EOT claim.

(c)  On 13 September 2018, Milestone’s letter alleged further delay by YK for “MVAC & Electric Installation Works on 3, 6-8 Floors”.  This time, there were not even particulars of the number of days delayed or expenses allegedly incurred by Milestone as a result.

(d)  Milestone’s letters dated 15 March 2019[21] and 25 March 2019[22] are even more baffling.  They simply redirected respectively the Architect’s Notice of Default and the Employer’s Notice of Determination to YK.  These letters simply assumed that YK was somehow responsible for Milestone’s Defaults, without advancing any basis or explanation.  As subsequently confirmed by the Architect[23], the Main Contract was determined by the Employer upon Milestone’s Defaults.  This automatically led to the NSC being determined under NSC Clause 38.1[24].  The NSC was not determined by Milestone because of YK’s default.  There is no evidential basis to suggest any connection between YK’s Project works and Milestone’s Defaults.

(e)  In Milestone’s consolidated EOT claim dated 31 May 2019[25], none of the items therein[26] had anything to do with YK or indeed had any connection with the Project works.  There is no basis for Milestone to deduct any liquidated damages from YK.

(f)  Next came Milestone’s letter dated 22 August 2019[27] which was wholly unparticularized.  There is no evidential basis to arrive at the alleged 224 days’ delay which was in any event alleged as “YK is provisionally liable to…”.  Ridiculously, this calculation was apparently arrived at simply by counting the number of days between the extended completion date (11 August 2018) and the date of determination (23 March 2019) of the Main Contract.  This means that Milestone was “provisionally assuming” that YK was responsible for all delays.  This is plainly groundless.  No reason was put forward by Milestone even on a provisional basis.

(g)  Then in Milestone’s affirmation evidence, it was stated that pending the determination of its consolidated EOT claim, it has chosen not to carry out a detailed programme analysis to examine how the net delay may be attributed and apportioned between Milestone and its nominated sub-contractors (including YK)[28]. If that is the case, then Milestone clearly does not know how much delay YK may be liable for (if at all).  None of the previous bare allegations against YK can thus be taken as being prima facie accurate.

Applicable legal principles

16.  The principles which govern an application for an injunction to restrain the presentation of a winding-up petition were recently restated by DHCJ Maurellet SC in Quest Investments Ltd v Lee Wai Tung [2020] HKCFI 1516, §14:

“The applicable principles in this area of the law were recently and succinctly summarised by Deputy High Court Judge Keith Yeung, SC (as he then was) in Addchance Limited v Herojoy Trading Limited (unreported judgment dated 30 April 2019).

42. The law as regards an application for an injunction to restrain the presentation of a winding up petition was summarized by Chow J in Re Grande Holdings Ltd HCMP 2369/2017 (unreported, 22 December 2017) at paragraph 14, that:

‘(1) The court will grant an injunction to restrain the presentation of a winding-up petition which it considers would be an abuse of the court’s process.

(2) It is an abuse of process to present a winding-up petition based on a claim of which there is a bona fide dispute on substantial grounds.

(3) The threshold for resisting a petition (requiring proof of a bona fide defence) is higher than that for resisting an application for summary judgment (requiring proof of a fair probability of establishing a bona fide defence), but the difference between the two tests is, in most cases, likely to be more a matter of semantics than substance.

(4) Petitions are not meant for the purpose of debt collection and the winding-up jurisdiction of the court would be exercised only in clear cases. Where oral evidence is required to decide areal and substantial dispute of fact, the court will generally dismiss the petition.

(5) The onus is on the Company to put forward credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at the trial.’

43. On the court’s approach where a debt is said to be bone fide disputed on substantial grounds, Peter Ng J explained in Re Hong Kong Investments Group Ltd [2018] HKCFI 984 (at paragraph 13) as follows:

‘In the context of a winding-up petition, the court’s approach where a debt is said to be bona fide disputed on substantial grounds can be summarized as follows:

(1) The burden is on the Company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, ‘substantial’ means having substance and not frivolous.

(2) The court should look at the Company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularized assertions. It is incumbent on the Company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the Company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised by the Company.’””

Discussion

17.  Applying the above principles which are not in dispute between the parties, it is my judgment that Milestone has failed to discharge its burden of demonstrating a bona fide dispute on the Alleged Debts for reasons set out hereunder. 

18.  On Milestone’s first argument that it had not received payment from the Employer and hence is not liable to pay NSC IP-18 to IP-21, the Court is referred to NSC Clause 33.1(7) which reads:-

“The Contractor [Milestone] is required to pay the Sub-Contractor [YK] the amount included for him in each interim Certificate, less any amount properly deductible within 14 days, or such other time as may be stated in the Sub-Contract, of the Contractor receiving payment from the Employer.” [emphasis added]

19.  Mr. Li, counsel for Milestone referred me to Hong Kong Teakwood Works Ltd. v. Shui On Construction Co. Ltd. [1984] HKLR 235.  He argued that in that case, the phrase “receipt of payment” in a clause similar to NSC Clause 33.1(7) was interpreted to mean receipt of money and thus the exercise of a set off by the building employer did not amount to receipt of payment by the main contractor under that clause.  In that case, the relevant clause was clause 11(b) of that subcontract which read:-

“within 14 days of the receipt by the main contractor of payment from the employer against any certificate from the architect, the main contractor shall notify and pay to the sub-contractor the total value certified therein.” [emphasis added]

The matter before Hunter J was an Order 14 application taken out by the sub-contractor against the main contractor.  It was common ground that the main contractor received 2 certificates from the architect certifying the value of works completed by the sub-contractor.  The main contractor argued that it was not obliged to pay the sub-contractor because the building owner set up against those two certificates an alleged set off arising from a claim for liquidated damages clause under the main contract.  The main contractor argued that “receipt of payment” means cash or cheque, money and nothing else.  The sub-contractor argued that “receipt of payment” means cash or a mutual discharge of the obligation arising under the certificate, and that discharge can arise from the exercise of a set off.  In reply, the main contractor further argued that there could only be a discharge or payment if that set off is valid which they challenged.  Thus in order to show that payment is due to the sub-contractor under this clause, the sub-contractor has to satisfy the court that the set off is not only claimed, but validly claimed.  Hunter J held that the words “receipt of payment” should be given their normal meaning, which means receipt of actual payment, ie receipt of money. Hunter J held that whilst the word “payment” can be given an extended meaning, he could not give an extended meaning to the phrase “receipt of payment” to cover set off.  However, Hunter J expressly stated that he was not willing to make a final construction of clause 11(b) in that Order 14 proceedings.  It was unnecessary for his Lordship to do so.  Hunter J said:-

“For the plaintiffs to succeed here, they have to satisfy me that the construction for which they contend is really the only construction, the right construction of this contract. For the reasons I have already given I cannot accept that. I think the more probable construction is the natural meaning of the words that I have indicated, and I think that is the more probable construction in this particular clause which deals with interim provision. Now whether in fact on mature relection that is proved to be right, or whether that construction also governs 11(c) and (g) is not a matter with which I am concerned at this juncture. I think therefore for this purpose it is sufficient for me to say; my prima facie construction of this clause is adverse to the plaintiffs’ interest and that is sufficient to dispose of this appeal.”

20.  In my judgment, although the Teakwood case is relevant and helpful, it is not determinative nor can it be of direct application.  First of all, Hunter J did not make a final construction of clause 11(b) in that case at all.  His Lordship was aware that for a final construction, more in-depth consideration of other interconnected clauses in the contract would have to be undertaken.  His Lordship had not done so as it would not be necessary at an Order 14 stage.  His dictum was thus mere statements of his prima facie assessment.  Secondly, each contract has to be interpreted in its own terms and context.  The wordings of clause 11(b) in Teakwood case are different from that of NSC Clause 33.1(7).  Clause 11(b) in Teakwood case referred to “receipt by the main contractor of payment from the employer against any certificate from the architect”.  Whereas in NSC Clause 33.1(7), the operative words are: “[Milestone] is required to pay [YK] the amount included for him in each interim certificate…within 14 days…of [Milestone] receiving payment from the Employer”.  In my judgment, words “receiving payment from the Employer” must refer back to the particular interim certificate issued by Milestone to the Employer which included an amount for the sub-contractor’s work done.  This is distinctly different from clause 11(b) in Teakwood case in which the receipt of payment clearly referred to “payment against the architect certificate” which in Teakwood case was a reference to the architect certificate certifying the value of the works undertaken by the sub-contractor.  Thus, in Teakwood case, the fact that the employer imposed liquidated damages on the main contractor under terms of the main contract could not be taken to mean that the employer had made payment to the main contract against the architect certificate certifying the work done by the sub-contractor.  In the present case, in relation to NSC Clause 33.1(7), I am of the view that the words “receiving payment” refer to payment of the relevant MC IPs in which amounts under the respective NSC IPs had been included.  The crucial question is thus whether Milestone had received payment for the MC IP-20 to MC IP-23 which had included the sums claimed by YK under NSC IP-18 to NSC IP-21.  In my view, on the evidence presented, MC IP-20 to MC IP-23 had indeed been paid by the Employer albeit after exercising its right of using the LD.  As further explained below, it is clearly anticipated by NSC Clause 33.1(10) that the Employer can exercise a right of deduction “from monies due to [Milestone]”.  In other words, whilst an amount is due to Milestone under a certain MC IP, the Employer can make deduction either in partial or in total extinction of such amount due under the MC IP.  In that case, it cannot be said that the said MC IP had not been paid by the Employer, albeit through the exercise of a set off. 

21.  Be that as it may, Mr Lui, counsel for YK submitted that I need not base my decision on the above construction.  He submitted that on the evidence presented, Milestone had in fact received payment for MC IP-20 to MC IP-23.  Firstly, as pointed out in paragraph 15 above, both the Employer and the Architect considered that MC IP-20 to MC IP-23 had been paid.  Mr Lui further referred me to Milestone’s own documentary evidence showing that it had actually received payment for MC IP-20 to MC IP-23 as follows:-

(1)  In relation to MC IP-20, payment had been made by the Employer as per Employer’s Email at B2/452. HK$2,303,000 was paid and received by Milestone at least by the date of this email, i.e. 9 October 2019. The Employer’s Email made no reference of any deduction of LD.  The effect is, at least it covered NSC IP-18.  This was later confirmed by the Architect at B2/493.  Milestone has adduced no evidence to contradict this payment for MC IP-20 having been received.  At least, there could be no bona fide dispute in respect of the debt due under NSC IP-18.  The amount is already more than $10,000 which is sufficient to ground a winding-up petition.

(2)  In an Invoice dated 3 January 2019[29] issued by Milestone to the Employer, Milestone attached a “record of payment” showing that Milestone received payment of HK$1,083,000 on 23 January 2019. The imposition of LD only partially reduced the amount payable under MC IP-21. Milestone still received a net payment of $1.083m.  The making of “Net payment” is actual payment even under the Teakwood interpretation. The words “receiving payment from the Employer” in NSC Clause 33.1(7) cannot be interpreted as meaning "receiving full payment from the Employer".  This would be re-writing NSC Clause 33.1(7) which is wrong and impermissible.  Therefore, Milestone’s payment obligation kicked in 14 days after 23 January 2019 since Milestone did not purport to exercise any deduction within that 14 days period.  The sum due under NSC IP-19 is again an indisputable debt.

(3)  As for MC IP-22, Milestone’s said Invoice indicates it had not been paid as at the date of the Invoice, apparently due to the fact that no invoice had been submitted as one can see from the Employer's Email. YK can however demonstrate that MC IP-22 must have been paid.  According to Milestone’s own “Statement of Final Account”[30], as of 28 October 2019, the amount previously received from the Employer was stated to be HK$162,024,200.  Comparing this with the Architect’s certificate for MC IP-21[31], after the payment of HK$1,083,000, the total amount paid by the Employer was stated to be HK$156,446,200.  By simple arithmetic, Milestone must have received a further net payment of HK$5,578,000 from the Employer sometime between January and October 2019.  In fact, if one adds up Milestone’s entitlements under MC IP-22 (HK$274,000) and MC IP-23 (HK$5,304,000), one arrives precisely at the figure of HK$5,578,000.  This could not have been a sheer coincidence but must be the clearest proof (based on Milestone’s own documents) of Milestone having received actual payment from the Employer for MC IP-22 and MC IP-23.

(4)  In respect of MC IP-23, apart from the above deduction, one can again refer to Milestone’s Invoice dated 31 January 2019. The attached “record of payment” again referred to Milestone having received payment by a cheque in the sum of HK$5,302,000 on 4 February 2019. Milestone has adduced no evidence to the contrary.  Accordingly, both NSC IP-20 and NSC IP-21 (which were included under MC IP-22 and MC IP-23) had been actually paid by the Employer to Milestone.

22.  I accept the submissions of Mr Lui and conclude that Milestone has raised no bona fide dispute on the basis of its first argument.  Pursuant to NSC Clause 33.1(7), the amounts due under NSC IP-18 to NSC IP-21 had become due and payable by Milestone to YK unless Milestone rightfully exercised any right of deduction within 14 days of payment of each of MC IP-20 to MC IP-23.  Milestone clearly had not exercised that right of deduction within each respective 14 days period.  The first time Milestone purportedly justified its non-payment as “rightful deduction” was on 22 August 2019[32].

23.  In respect of Milestone’s second argument that it was entitled to make deductions, I again reject Milestone’s submissions and accept those of YK.  In my view, as seen from paragraph 15(5) above, Milestone has failed to put forward “credible evidence” or “sufficiently precise factual evidence” to substantiate its alleged entitlement to make deductions.  As mentioned above, Milestone did not attempt to make deduction within each respective 14 days period when MC IP-20 to MC IP-23 became paid. Milestone’s attempt to shift full responsibility of the delay onto YK by making a “provisional deduction of 224 days of LD” was baseless.  It also reflects that Milestone did not even have a clear case as to whether YK would eventually be held responsible for delay, and if so for how many days.  The same is reflected in the stance shown in Milestone’s affidavit evidence.  It has consciously chosen not to carry out a detailed programme analysis to examine how the net delay may be attributed and apportioned between Milestone and its nominated sub-contractors (including YK).  Milestone’s alleged entitlement to make deduction is no more than a bare allegation.

24.  Furthermore, it is also relevant to look at NSC Clause 31.1(10) which reads:-

“If the Employer has exercised a right under the Main Contract to deduct from monies due to the Contractor, to the extent that the deduction is due to a breach of contract or other default of the Sub-Contractor or any person for whom the Sub- Contractor is responsible the monies deducted may be recovered by the Contractor from any monies due or to become due to the Sub-Contractor or as a debt.”[emphasis added]

In my view, the interplay of NSC Clauses 33.1(7) and (10) is as follows:-

(1)  Milestone submits one MC IP to the Employer.  This MC IP includes an amount in relation to work done by YK under a NSC IP.

(2)  When the Employer exercises its right to charge LD and deduct such amount from that payable under the MC IP, the Employer is in law paying for the MC IP, albeit using the LD to set off the otherwise payable amount. Clause 33.1(7) therefore kicks in.

(3)  If Milestone is able to determine, within 14 days, that a certain extent of the deduction made by the Employer was due to a breach of contract or other default by YK, Milestone can make such extent of deduction.  This may extinguish wholly or in part the sum claimed by YK under the NSC IP.  This results from the combined effect of Clauses 33.1(7) and (10).

(4)  If Milestone does not exercise such right within 14 days, Milestone has to pay YK under the NSC IP.  Subsequently however, if Milestone is able to identify that a certain extent of the deduction made by the Employer was due to a breach of contract or other default by YK, Milestone can seek to recover that extent of deduction from YK.  This is the effect of Clause 33.1(10).

25.  In the present case, Milestone had not exercised any right to make deduction within 14 days from the respective payments made by the Employer for the MC IPs (albeit by way of set off using the LD).  The full amounts claimed under NSC IP-18 to NSC IP-21 became due and payable. Furthermore, up to now, Milestone has produced no credible or sufficiently precise factual evidence to identify and establish the extent of the Employer’s LD deduction which were due to YK’s breach of contract or default.

Milestone’s Reliance on the Lasmos Case

26.  In Re Southwest Pacific Bauxite (HK) Ltd, [2018] 2 HKLRD 449 ("the Lasmos case"), Harris J dismissed a petition to wind up a company on the grounds of insolvency by relying on a statutory demand for payment of a debt said to arise under a management service agreement which contained an arbitration clause.  He held that (in paragraph 31 on p 468 of the judgement) a petition for winding up should generally be dismissed:

(1)  if a company disputes the debt relied on by the petitioner;

(2)  the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and

(3)  the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and files an affirmation in accordance with r 32 of the Companies (Winding-Up) Rules (Cap 32H, Sub Leg) demonstrating this.

27.  Milestone submits that applying the above principles, the intended petition by YK based on the SD is bound to fail and an injunction should be granted because:-

(1)  Milestone clearly disputes the Alleged Debts.

(2)  The Alleged Debts arise out of the NSC which contains Clause 42 specifying that any dispute arising under or in connection with the NSC shall be referred to arbitration if the Designated Representatives Procedures and Mediation Process stipulated therein fail to resolve the dispute.

(3)  The arbitration clause is in broad terms and the disputes relating to the alleged debts are covered by the scope of the arbitration clause.

28.  The Lasmos case had subsequently been explained by the Court of Appeal in But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85 and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646 [DA#6].  It should now be clear that the Court retains a discretion under the insolvency legislation which should not be exercised only in one way by reason of the factor of arbitration although considerable weight should be given to this factor in the exercise of the Court’s discretion.  In But Ka Chon at §53, Kwan VP stated that an insolvency petition would not be dismissed or stayed on the mere existence of an arbitration agreement, when the debtor has no genuine intention to arbitrate. In Sit Kwong Lam, at §37, Kwan VP said that to show a genuine intention to arbitrate, the debtor must have taken the steps required under the arbitration clause to commence the process of arbitration, and file an affirmation demonstrating this.  In But Ka Chon, a letter stating that the debtor’s solicitors were instructed to initiate arbitration between the parties, without indication of when any “Notice of Arbitration” is to be sent, was not regarded as proper notice of an intention to arbitrate (see §52 per Kwan VP). A formal notice of arbitration must leave the recipient in no doubt of the applicant’s intention to resort to arbitration, and that some action is required of the recipient: Re Asia Master Logistics Ltd [2020] 2 HKLRD 423, §45 (per DHCJ W Wong SC).  In Re Asia Master Logistics, the debtor company’s inaction for 6 months, after its solicitors sent a letter proposing arbitration, negated any real intention to resolve the dispute by arbitration (see §§41-43, 50).

29.  Mr Lui submitted that on the evidence, Milestone had evinced no genuine intention to arbitrate. Milestone places reliance on its current arbitration with the Employer over Milestone’s consolidated EOT claims. However, this dispute simply has no connection with YK’s entitlement to NSC IP 18 – 21 owed by Milestone.  Further, if Milestone really thought that YK’s debts are “hotly disputed”, it could have applied to join YK to the arbitration with the Employer (which is permissible under NSC Clause 49.9(1)), seeking a declaration of non-liability in respect of YK’s debts, and then applied for a stay pending that arbitration: see Sit Kwong Lam, §39 (per Kwan VP).  The excuse proffered by Milestone that it was awaiting the results of its dispute resolution with the Employer, is plainly unacceptable.  Although the SD was served almost 9 months ago (on 14 January 2020), Milestone has not taken any steps to initiate any of the dispute settlement procedures under NSC GC Clause 42 (whether to appoint “Designated Representatives”, or to refer the dispute to mediation or arbitration).  Clearly, Milestone has failed to demonstrate any genuine intention to arbitrate vis-à-vis YK.  In the premises, the mere existence of an arbitration clause in the NSC cannot prevent YK from exercising its statutory right to petition for winding up Milestone on the ground of insolvency (following But Ka Chon).

30.  Mr Li effectively accepted that the 3^rd requirement set out by Harris J in Lasmos case has not been satisfied. He submitted that the 3^rd requirement is not a necessary requirement.  He submitted that Milestone wants to first proceed with EOT claim and that is why no step has been taken towards arbitration between Milestone and YK.  Mr Li submitted that it does not mean Milestone has no genuine intention to arbitrate.

31.  I do not agree with Mr Li. The evidence adduced by Milestone indicates that it has no present intention of instituting arbitration with YK.  At most, Milestone’s conduct amounts to reserving its position pending the resolution of its EOT claim under the arbitration between itself and the Employer.  I accept the submission of Mr Lui that Milestone’s attitude is not materially different from the mere existence of an arbitration agreement between Milestone and YK and I would exercise my discretion accordingly.

32.  Ultimately, the most potent factor affecting my exercise of discretion is the fact that I have earlier concluded Milestone has failed to discharge its burden of establishing bona fide dispute on the Alleged Debts for reasons set out in paragraphs 17 to 25 above.  Coupled with what I have stated in paragraph 31 above, I have concluded that I shall exercise my discretion to refuse the grant of injunction sought by Milestone.

33.  Accordingly, the OS is dismissed with costs against Milestone, to be taxed (if not agreed) on party-and-party basis with certificate for counsel.