Re Hon Seng Engineering Ltd.

HCCW 59/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 59 OF 2000

----------------------------------------

Coram: Hon Yuen J in Court

-------------------------------------

REASONS FOR DECISIONS

-------------------------------------

1. On 26 June 2001, at the hearing of the Re-Amended Petition, a submission on a preliminary point was made by counsel for the respondent company Hon Seng Engineering Co Ltd ("the Company") that the petition should not be heard because it had not been re-advertised by the newly substituted petitioner.

2. After hearing submissions from counsel for the Company and counsel for the substituted petitioner, I took the view that re-advertisement was not required, and I allowed the hearing of the petition to proceed, although as it turned out, an adjournment was granted to enable evidence to be adduced. Due to time constraints on that date, I did not give reasons for my decision. I do so now.

No need for re-advertisement

3. The facts of this case were that in January 2000, a company called Jason Engineering Co ("Jason") presented a petition to wind up the Company. The Company disputed the debt. There were then various interlocutory battles which are not relevant to these Reasons for Decisions.

4. In February 2001, Jason had to withdraw the petition because the position taken by the Architectural Services Department ("ASD"), the employer in the series of contracts and sub-contracts involving the Company and Jason, had the effect of supporting the Company's dispute of the debt on which Jason had based its petition.

5. At the same time as Jason's withdrawal, another sub-contractor called Lee Yu Kee Fire Protection Ltd applied to substitute as petitioner. Rule 33 of the Winding-Up Rules provides:-

"When a Petitioner is not entitled to present a petition or whether so entitled or not, where he (a) fails to advertise his petition within the time by these rules prescribed or such extended time as the Registrar may allow or (b) consents to withdraw his petition, or to allow it to be dismissed or the hearing adjourned, or fails to appear in support of his petition when it is called on in court on the day originally fixed for the hearing thereof, or on any day to which the hearing has been adjourned, or (c) if appearing, does not apply for an order in the terms of the prayer of his petition, the court may, upon such terms as it may think just, substitute as petitioner any creditor or contributory who in the opinion of the court would have a right to present a petition, and who is desirous of prosecuting the petition. An order to substitute a petitioner may, where a petitioner fails to advertise his petition within the time prescribed by these rules or consents to withdraw his petition, be made in chambers at any time".

6. On 9 February 2001, an order was made substituting Lee Yu Kee as petitioner. Directions as to the filing of evidence were given.

7. In March 2001, however, Lee Yu Kee decided to withdraw. At the same time, Wenden Engineering Service Co Ltd ("Wenden") applied to substitute as petitioner. I should add that there was no time lag between Jason's withdrawal and Lee Yu Kee's application to substitute, and between Lee Yu Kee's withdrawal and Wenden's application to substitute, because they were represented by the same firm of solicitors.

8. Wenden's application was made in chambers under rule 33. The Company disputed Wenden's debt and challenged its application. After a hearing on this issue, I made an order on 26 April 2001 substituting Wenden as petitioner.

9. Wenden's summons did not ask for an order dispensing with re-advertisement. The skeleton submission of its counsel did suggest such a direction, but such a direction was not given.

10. The petition was duly amended and came on for hearing on 26 June 2001. Counsel for the Company submitted that rule 24 of the Winding-Up Rules provides that every petition shall be advertised 7 clear days before the hearing. Since no order had been made for re-advertisement to be dispensed with, that requirement had not been complied with.

11. Counsel for Wenden referred the court to the decision of the Full Bench in Re Kason Engineering and Construction Co Ltd [1969] HKLR 406. In this case, the court at first instance had made an order for substitution and a winding-up order immediately thereafter, without notification of the company. The Full Bench held that the company should have been notified so that it could, if it wished, oppose the winding-up.

12. Although this decision focused on the failure to notify the company, Rigby SPJ (as he then was) agreed with an observation in the 13th edition of Buckley on the Companies Acts at p1033 that upon an order for substitution being made, the petition should be served on the company but it need not be re-advertised. The rule considered in the 13th edition of Buckley was similar to our present Rule 33. (I should add that the English rules have since been amended to state expressly that every petition need only be advertised once).

13. Counsel for Wenden submitted that since Kason was a decision of the Full Bench, it is binding on this court. I did not agree because it was quite clear upon reading that judgment that it was concerned with the failure to notify the company before the winding-up order was made. Therefore the approval of the passage from Buckleys could only have been obiter dictum.

14. Although this court was not bound, that judgment is support for the view that re-advertisement was not required. Apart from Rigby SPJ's agreement with the observation in Buckleys, Huggins J (as he then was) referred to Re Invicta Works [1894] WN 39 which held that no adjournment was required between an order for substitution and an order winding-up the company, so long as the company had been notified in advance to enable it to oppose the winding-up if it wished. If no adjournment was required, it must mean that re-advertisement was not required.

15. Further, that re-advertisement is not required can be deduced from an examination of the purpose of advertisement of the petition in the first place. Advertisement of the petition is for the purpose of informing the creditors and contributories of the company that one of their number has invoked the class remedy of winding-up the company. Upon seeing the advertisement, creditors and contributories may appear at the hearing of the petition to support or oppose it. They could choose to support or oppose not the petitioner, but the petition. The identity of the petitioner is not relevant because winding-up is not a lis between the petitioner and the company.

16. Accordingly, once the petition had been advertised (in this case, by Jason), the creditors and contributories of the Company were already made aware that this class remedy had been invoked. Subsequent changes in the identity of the petitioner do not affect the matter. Different considerations would of course apply if the original petition had been dismissed or withdrawn, and a new petition presented by Wenden.

17. By reason of the above, I took the view that re-advertisement was not required and I allowed the hearing of the Petition to proceed which was however adjourned.

Costs as between the Company and Jason

18. At the resumed hearing on 3 July 2001, the Company no longer opposed the winding-up. However, there was a dispute between the Company and Jason as to certain costs as between the Company and Jason.

19. Having heard counsel for the Company and counsel for Jason, I ordered that other than the costs of the original petition and the costs of advertisement, Jason should be ordered to pay the Company's costs.

20. In re Bostels Ltd [1968] 1 Ch 346, a petitioner presented a petition based on a debt which was paid by the company soon thereafter. A supporting creditor was then substituted as petitioner and a winding-up order was made. It was held by Pennycuick J (as he then was) that so far as the activities of the original petitioner (in our case, Jason) had been conducive to obtaining the winding-up order, the costs referable thereto, i.e. the petition and the advertisement, ought to be included in the costs of the petition. However the costs of preparing the original petitioner's affidavit and its appearance on the petition had, as regards the creditors as a whole, been wasted as they had not led to the winding-up order. These costs should therefore not be costs in the petition.

21. Further, in Jason's case, the Company had expended costs in opposing the petition which opposition had succeeded as it had led to Jason's withdrawal. It may be, as counsel for Jason submitted, that Jason had considered itself justified in pursuing the petition until ASD's position in February 2001 effectively frustrated it. Be that as it may, the reality of the situation was that if it had not been for the substitution of Lee Yu Kee and Wenden, the petition would have been dismissed on the basis of the disputed debt, a dispute which was fuelled by ASD's position. Since as a general rule, costs should follow the event, Jason should bear the Company's costs, save that Jason's costs of petition and the advertisement should be costs in the petition.

Representation:

Mr Ling Chun Wai instructed by Siao Wen & Leung for Wenden Engineering Service Co Ltd on 26 June 2001 and for Wenden Engineering Service Co Ltd, Jason Engineering Co Ltd and ASC (Hong Kong) Ltd on 3 July 2001.

Miss Elizabeth Yang instructed by Macksion Chan & Chan for Company at both hearings.

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

---------------------------------------------------------

--------------

DECISION

--------------

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.

HCCW 59/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO. 59 OF 2000

_______________

R U L I N G

_______________

1. This is an application for two orders, the first being for the rescheduling of the length of hearing of the petition and secondly for the appointment of provisional liquidators. The background position is as follows.

2. There has been an Interim Payment Order made by the Court against the Company in favour of the Petitioner. An application for a stay of execution of that Interim Payment Order has been refused by Suffiad J. The Interim Payment Order was on the basis of money payable by the Company to the Petitioner which is one of the sub-contractors of the works done in relation to an ASD contract.

3. ASD is now in the process of assessing the value of those works. In this process of assessment of the value of those works, there are two possible scenarios.

4. The first possible scenario is that if the final result in the assessment is that ASD has overpaid, then the money which has been paid by ASD to the Company should be repaid by the Company to ASD, and the Petitioner would have no locus standi to press for the payment of money by the Company to it, subject to the Petitioner's argument that the costs orders may be subject to a different consideration.

5. The second possible scenario is that if there has been no overpayment by ASD, then it is common ground apparently that the Company is unable to pay its debt to the Petitioner.

6. There is some dispute before me today as to whether ASD's present assessment shows a downward adjustment or an upward adjustment, although I am inclined on reading those documents briefly that there has not been a substantial downward adjustment. Although there may be said to be an arguable case on behalf of the Company, I am satisfied that in this respect, the Petitioner has a good prima facie case on winding-up.

7. As to the estimate of the length of the hearing, the matter appears sufficiently crystallised for me to re-estimate the length of hearing, and I would therefore reschedule it with an estimate of one day, but not to be heard before the end of January 2001 by which time it is hoped ASD would have provided a final determination of the assessment of value of the works.

8. As far as the appointment of provisional liquidators is concerned, I am concerned with the fact that the directors of the Company have not applied for a section 182 order and yet has taken money due to the Company from another contractor and spent at least part of the money on apparently personal expenses, or at least on entertainment when the Company is admittedly only undergoing minimum operations.

9. There has been no proper explanation furnished even in the last affirmation provided to me this morning to say what has happened to the rest of the money that apparently had been due by this contractor to the Company, nor has there been a proper explanation as to why this means of processing the money from the contractor has been used.

10. Accordingly, I am concerned with the assets of this Company which may come into its hands and I am therefore going to order the appointment of provisional liquidators, the Official Receiver having indicated that they do not have the resources or the time to take up the provisional liquidation of this Company and there being no objection as such to the two persons who have been nominated as a provisional liquidators.

11. I would order that Mr Kennic Lai Heng LUI and Mrs Lauren LAU WU Kwai King of Messrs Kennic L H Lui & Co., be appointed as provisional liquidators of the Company.